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The annoyance of Robert Reich

Recall that 70% of the US economy depends on consumer spending. So if the economy is to function well, Americans need to spend enough money to buy most of the goods and services they’re capable of producing.

But incomes haven’t nearly kept pace with productivity. Over the past 40 years, most people’s wages have basically stagnated, while worker productivity has soared.

He might even believe this. But it’s not one of those things which actually matters.

The equation is Y = C + I + G + (X-M).

Sure, the C is consumption and is around 70%. G is government consumption (no, not transfers) at 17/18%. Net exports are a drag on the US economy (maybe 5%). The balancing item is business investment at 18% or so.

Given the absence of Scrooge McDuck I does equal S over time. So, Richer Americans save, that gets invested, business investment increases. And our problem here is what?

6 thoughts on “The annoyance of Robert Reich”

  1. My wages from building an MRI scanner will never be enough for me to buy an MRI scanner, wah! wah! unfair!!!!!

  2. The “wages have stagnated” argument doesn’t fly. Aside from what the numbers exclude (increased benefits such as healthcare), it fails the “look out the window” test. The middle class today has a standard of living that’s a wee bit posher than it was 40 years ago – iPhones weren’t around in 1981, nor the internet. Go into a grocery store in a middle class neighborhood and you’ll notice all kinds of items that would have been luxuries in 1981 (lobster, fresh salmon, etc.).

    More than once I’ve heard someone make a similar claim & when you ask them to compare their home to the one they grew up in, their vacations to those of their parents, their cars, electronic toys, etc. most shuffle off quietly. A few seem a bit angry for having their grievance destroyed.

  3. @Esteban
    It does make sense. The period would naturally be one of deflation. Due to steadily rising factor productivity the dollar would be able to buy more & more goods & services. It’s countered by government policy increasing money supply. But the new dollars don’t all end up being paid in wages. What Reich seems to objecting to is all the things government does that Reich demands it does.

  4. I confess: I have no idea what “70% of the US economy depends on consumer spending” means. It can’t mean anything that’s both obvious and precise if Mr Tim then mentions, for instance, business investment – because that will presumably be devoted to generating stuff that consumers buy too.

    There’s no purpose served by pointing me at some tautology, the components of which cannot be independently measured.

    I’d settle for knowing what he means by a consumer – an individual American resident who buys stuff? Or at least buys stuff that registers in data-gathering? Or maybe buys stuff that’s not real estate. Or maybe …

  5. Incedentally, I presume Reich’s “stagnant wages” exclude all the non-wage benefits USians now accrue. But include the taxes they pay to fund them. I presume because I can’t imagine him doing anything else.

  6. The decoupling of wages and productivity is one of those myths that’s repeated so often many people – even academics who should know better – believe it’s real.

    However, the largest parts of the apparent deviation are little more than a) using different deflators for growrh and inflation, b) not counting non-wage benefits properly and c) differences between mean wages and median wages.


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