Realist, not conformist analysis of the latest financial, business and political news

Surprise! Robert Reich Sure Doesn’t Understand The US Economy

As Robert Reich keeps telling us allowing the Republicans to have any political power at all means entire doom for the US economy, only when Democrats control all will there be sweetness and light. It would help a little if this analysis was actually informed by any knowledge of economics but that’s not something in evidence. Reich is a political performer, not an informed one.

But, you know, Donald Trump, he’s going to drive us all into another Great Depression. Because, well, he’s a Republican isn’t he, just giggling as he grinds the faces of the workers into the dust. Hey, Reich says it so it must be true AmIrite?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]The US is on the edge of the economic precipice – Trump may push it over
Robert Reich[/perfectpullquote]

So, where’s the evidence for all this?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] All this brings us closer to the economic precipice. It worsens America’s most fundamental economic problem. Economies depend first and foremost on spending. Otherwise, there’s no reason to produce goods and services. In the US, consumer spending constitutes about 70% of total demand. The rest comes from government and exports. [/perfectpullquote]

Ah, Reich is bloviating through ignorance. For we most certainly couldn’t even surmise that a tenured professor at Berkeley was lying to us so it must indeed be simple lack of knowledge. So, what does in fact make up the economy?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The four major components The four major components that go into the calculation of the U.S. GDP, as used by the Bureau of Economic Analysis, U.S. Department of Commerce are: Personal consumption expenditures
Net exports
Government expenditure [/perfectpullquote]

OK, that personal consumption expenditure, or as Reich has it, consumer spending, about right, 70% or so. Given that government spends around 29% (all levels added up, local to the Feds) this would seem to leave not much for anyone else. But that government number there is actual government spending on stuff, not transfers. So, all the things like food stamps, welfare, Section 8, all transfers that is, are counted over in consumption. It’s very much more the cost of government rather than the amount that government moves around.

It’s not exports, it’s net exports. Which, given that the US runs a trade deficit, is a negative number. This leaves quite a lot for that other bit, investment. This isn’t quite the right number in this chart but it’s close, gross private domestic investment:

A rather important part of GDP here

Note how we seem to have an association with a fall in such investment and recession (the grey bars there). Actually, it’s business investment which varies more – generally that is – over the economic cycle than does that consumer spending. You know, that Keynes thing about animal spirits?

And yes, there’s an importance to this, it’s not just a Gee! Gotcha!

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]America’s wealthy, meanwhile, have been taking home a growing portion of the nation’s total income. But the rich spend a small fraction of what they earn. The economy depends on the spending of middle-, working-class and poor families.[/perfectpullquote]

That’s the bunkum we’re being sold.

For how is that investment financed? From savings of course. Who saves? The richer among us. So, those rich b’stards not spending all their money on consumption, does this kill off the US economy? Nope, not in the slightest, it goes off to finance that other 15% or so of the economy, private sector investment.

Do note something important. In the absence of people leaving gold in the basement a la Scrouge McDuck all savings do get invested. Because there’s nothing else you can do with money, you can spend it or you can invest it and that’s it. Even just sticking it in a checking account – the bank then lends that out to other people who either spend or invest it. There is no sink here marked “money not being used”.

So, to Reich’s claim here. The rich don’t spend all they earn therefore the US economy is about to go around the u-bend. And here’s reality, the rich don’t spend on consumption all they have, the balance gets invested. Private sector investment is as much a part of the economy as consumer spending is and thus Reich is spouting bunk.

Leaving us with the only interesting question. Does Robert Reich really not understand this? That’s our belief around here, sure, he’s simply ignorant of the subject he’s pontificating upon. The alternative, the only viable alternative, is too awful to contemplate, which would be that Reich does know this but is lying about it all for party pris reasons. And no, we don’t think he is so lying – on the very reasonable basis that we do think he’s ill informed enough to believe his own mistakes about basic economics.

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