Robert Reich Over-Reaches By Blaming Investing and Shopping for Income Inequality

Soon after I finally posted my review and critique of Robert Reich’s book on income inequality titled “Aftershock: The Next Economy and America’s Future,” Reich published commentary which extended his analysis of income inequality to blame investors and shoppers for the problem. The concise argument appeared in an editorial in the Financial Times called “We are all going to hell in a shopping basket” and then reappeared embedded in a Huffington Post piece called “The Biggest Risk to the Economy in 2012, and What’s the Economy for Anyway?” (all quotes come from the second piece). Reich’s basic premise is that technology has transmitted excessive efficiencies to the efforts of return-seeking investors and deal-seeking shoppers. Profits arecoming at the expense of the environment and low prices are coming at the expense of wages and employment:

“Modern technologies allow us to shop in real time, often worldwide, for the lowest prices, highest quality, and best returns. Through the Internet and advanced software we can now get relevant information instantaneously, compare deals, and move our money at the speed of electronic impulses. We can buy goods over the Internet that are delivered right to our homes. Never before in history have consumers and investors been so empowered.

Yet these great deals increasingly come at the expense of our own and our compatriots’ jobs and wages, and widening inequality. The goods we want or the returns we seek can often be produced more efficiently elsewhere around the world by companies offering lower pay, fewer benefits, and inferior working conditions…

…As a result, consumers and investors are doing increasingly well but job insecurity is on the rise, inequality is widening, communities are becoming less stable, and climate change is worsening. None of this is sustainable over the long term.”

The technologies enabling this behavior are moving too fast and spreading too broadly across geographic boundaries for governments to control them:

“But technologies for getting great deals are outpacing the capacities of democratic institutions to counterbalance them. For one thing, national rules intended to protect workers, communities, and the environment typically extend only to a nation’s borders. Yet technologies for getting great deals enable buyers and investors to transcend borders with increasing ease, at the same time making it harder for nations to monitor or regulate such transactions.”

Reich has now over-reached from his original premise that income inequality is born from the increasing ability of a few to obtain an increasing share of the gains from economic growth – that workers are not getting sufficiently paid for production. By now blaming everyone, Reich dilutes his ideas and isolates his remedies in the realm of the impractical.

Reich offers generalized and indirect ideas for further regulating commercial enterprise, but he does not offer any ideas on how the government should control investor or consumer behavior. This omission is crippling because it leaves the reader left to assume Reich would prefer significant increases in trade barriers and tariffs, and perhaps consumption restrictions that would be antithetical to our democratic ideals.

I am left assuming that Reich is trying to establish some moral imperatives for adjusting behavior, but it comes without offering any practical principles for personal change. Reich’s additional “blame blanket” is also devoid of specific data, further undermining his argument. The ACTUAL data suggest that Americans spend remarkably little of their money on goods made in foreign countries, not to mention China (one of the implicit target in Reich’s criticism of chasing cheap deals).

Economists Galina Hale and Bart Hobijn from the Federal Reserve of San Francisco published a paper last year titled “The U.S. Content of ‘Made in China’” which sought to allay concerns that higher inflation rates in China would transmit inflationary pressures in the U.S. (the Fed is always looking for ways to demonstrate that inflation is not a threat). It turns out that in 2010 only 2.7% of U.S. personal consumption expenditures (PCE) went to goods and services made in China. Of that money, less than half of it was attributable to the actual costs of Chinese production with the rest being spent on things like transportation, distribution, marketing and the profit margins that go to U.S. companies. These numbers also account for the Chinese content of intermediate goods. A whopping 82% of PCE goes to products and services made in the U.S. from U.S.-made parts. Here is the complete chart from Hale and Hobijn’s paper (sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, and authors’ calculations):

Geography of U.S. PCE, 2010
Geography of U.S. PCE, 2010

One reason for the dominance of “Made In U.S.A.” is that 2/3 of the U.S. economy is service-oriented. Ninety-six percent of this service economy is made in the U.S., none of it from China. China makes it biggest impact on durables (mostly furniture and household equipment), clothing, and shoes. According to Hale and Hobijn’s calculations, the share of PCE spent on “Made In China” is 20% on furniture and household equipment and 36% on clothing and shoes. After taking into account actual Chinese cost of production, the Chinese content reduces to 12% and 15% respectively. Here is the complete chart (sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, and authors’ calculations):

Import content of U.S. personal consumption expenditures by category
Import content of U.S. personal consumption expenditures by category

While these data certainly challenge a lot of conventional wisdom about the dominance of Chinese goods in American consumption, it IS true that China has increased its share of U.S. consumption of imported goods. These absolute and relative gains are likely shaping Reich’s impression of the economic dynamics. In 10 years, China doubled its share of the import content of U.S. PCE. Meanwhile, the overall share of all countries barely increased over this time period. Again, from the paper (sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, and authors’ calculations):

Import content of U.S. PCE, 2000–2010
Import content of U.S. PCE, 2000–2010

In other words, even if Reich realized his desire to get democratic institutions caught up with investing and shopping technologies, the resulting restrictions and regulations over access to foreign markets and goods would have an overall small impact on domestic job creation. Such regulations would certainly help a small segment of people but likely at tremendous cost to the rest us. In a well-functioning economy, the savings accrued to consumers from cheaper goods should go to increased consumption of other goods and services which in turn creates demand for additional workers. Reich would be much better served understanding and resolving the obstacles impeding this flow of money from productivity and efficiency into entrepreneurial renewal.

Moreover, as a good friend of mine noted in our one point of agreement regarding Reich’s expansion of blame for income inequality: “Reich or anyone else who blames everyone, makes no friends.” And with no friends, one cannot make progress…even if the intentions are presumably targeting the “greater good.”

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