Dinner With Labor Secretary Robert Reich

I never resist a dinner invitation from Bill Clinton’s Secretary of Labor, Robert Reich. A Rhodes Scholar who dated Hillary Clinton at Yale, he unsuccessfully ran for governor of Massachusetts against Mitt Romney, and authored 13 books. Bob is never without an original thought, nor a stranger to controversy. Today he didn’t disappoint. On top of that, he is about the funniest guy I have ever met, not far behind Groucho Marx, but well ahead of the rest of the world. A funny intellectual, imagine that.

Bob says that the US has entered a “replacement economy” where people buy just what is absolutely necessary, and then, only when the things they own fall apart. Such economies are characterized by chronic slow growth. That is why US car sales have recovered to 14.5 million units a year, the precise number of vehicles we scrap each year, but won’t go much beyond that. Still, that is well up from the annualized 9 million units we saw at the 2009 low.

Consumers and corporations are so reluctant to spend because the scars of the 2008 crash are fresh. That year saw the most dramatic collapse in consumption in 80 years. Normally, the economy rebounds strongly after such sharp draw downs. Not this time. Bob describes the current lethargic 2% growth rate as “disturbing.”

The real problem is that so few consumers are now participating in the economy. Of course, the 14.5% of the broader U-6 don’t spend beyond bare essentials. But much of the working middle class has also seen their purchasing power pared to the bone, thanks to 30 years of wage cuts and cost of living increases. Real purchasing power has dropped by half and explains a GDP growth rate that is little more than half of the long term trend growth rate of 3%. Without a middle class, you don’t have a United States. Needless to say, this does not bode well for equity prices, as low growth only justifies low multiples.

If you raise growth to 4%, then all of the country’s deficits go away by themselves over time. A major government investment in the country’s rotting infrastructure would accomplish this. Good luck getting that through a gridlocked congress.

Franklin Delano Roosevelt’s great accomplishment was to provide the means for more people to join the economy, creating an unprecedented 40 year boom. While many blame high taxes for our current problems, America’s golden age of the 1950’s, during the Eisenhower administration, took place with a maximum tax rate of 91%. Growth then was double what it is now.

Last fall, when Obama was trailing badly in the polls, he briefly considered bringing on Hillary Clinton as a running mate to shore up the ticket. He has since pulled into the lead, thanks to a bruising Republican primary and a series of strategic missteps by the GOP, and that plan has been put on a back burner. Hillary isn’t interested anyway because she can’t stand working for Obama.

Not only have the Republicans offended every minority, including Hispanics, women, and the young, they are on the wrong side of the country’s broad demographic trends. They are just not making white conservatives anymore as fast as they used to, except in Utah.

Obama has wisely made “fairness” the hallmark issue of the current campaign. Since 1990, the top 1%’s share of national earnings has soared from 23.5% to 40%. The last time it was that high was in 1928. CEO earnings have grown especially fast, rising at 400 times the rate of blue collar workers over the last three decades. The concentration of wealth at the top stagnates the economy by redirecting savings into Treasury and municipal bonds, away from job creating direct investment. This is why ten year Treasury bond yields are a subterranean 1.55%, despite massive monetary growth.

The generation of the “Occupy” movement has suffered the most from the lack of new job creation. In days past, many of these kids would have gone into domestic manufacturing or other union jobs, which no longer exist. Entry level jobs are now scarce, as are the career ladders that follow, as cost cutting companies no longer invest in training the young. “Occupy” has focused a great spotlight on the issue, which the wealthy and the right would much rather avoid, and helps to define the national debate.

Money in politics is a huge problem. He is glad he lost the Massachusetts election because if successful, he would have had to have spent 70% of his time fund raising, as do most politicians today. Democracy only works when people get involved in large numbers. Otherwise, they get overwhelmed by big money.

I took two of Bob’s economics classes at the University of California at Berkeley, and know too well his wry humor, acid wit, and preference for backing up arguments with mountains of empirical data. Entering students are obliged to buy 400 pages of photocopied charts, tables, and other raw data about the labor market, which they are expected to commit to memory by the end of the semester. These are not basket weaving classes by any means.
Bob warned me not to take his investment advice, as he bought his home in north Berkeley at the 2006 market top, just before it dropped in value by half. On top of that, he has had to eat two 10% cuts in his Berkeley professor’s salary forced on him by drastic state budget cutbacks. UC Berkeley is the crown jewel of public education. However, the state has little choice but to starve it to death. This is not good for the long term future of the Golden State, which has to create the educated class to earn the wealth to pay the taxes.

Every time I walk away from one of Bob’s dinners I find my mind churning from his out of the box thinking and alternative viewpoints. I’ll let you know the next time I make the invitation list.