The Doctor of Doom?

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Is Robert Reich the New Dr. Doom? -- Seeking Alpha

The Commonwealth Magazine featured a recent Robert Reich speech, in which he seems to be auditioning for Nouriel Roubini's "Dr. Doom" title. Mr. Reich predicts that the unemployment rate will reach double-digits and the Dow will be "languishing around 7,050." Of course, Mr. Reich is no dummy--he conditions his predictions on a supremely vague qualifier--"without effective government action." Mr. Reich believes at least $900 billion is necessary to be effective--which isn't too far off from the $787 billion package actually passed. After almost $800 dollars, it's hard to believe another $100 billion would make a massive difference either way.

It appears that some Democrats and some Democratic supporters like Reich and Krugman see this crisis as a way to get more money distributed to the middle class and poor. There's nothing wrong with taking that policy position, but it may explain why so many pundits are advocating for more stimulus. Even if no stimulus money reaches the mid- to lower-income classes directly, the more money the government prints, the less burdensome consumer debt becomes. In other words, assuming the poor and middle class hold most consumer debt, printing money creates inflation, which temporarily reduces the debt burden by spurring inflation. Inflation, at moderate rates, isn't all bad--it reduces the value of savings but also debt. If anything, the resulting inflation will hurt Chinese and Japanese investment holdings the most, because they hold the most dollar-denominated assets.

Still, it's important to understand why so many Democrat-linked economists are calling for more stimulus. It's quite simple, really. Mr. Reich and Mr. Paul Krugman view the last 25 years as an unconscionable transfer of resources/income from the poor and middle class to the rich--and the numbers seem to support their conclusions, at least where net assets are concerned. Mr. Reich even coins a funny phrase for this phenomenon: "DINS--double income, no sex," to demonstrate how badly the non-rich have fared. (Mr. Reich wants us to believe the poor and middle class are so overworked, they don't have time for basic things, such as sex.) Mr. Reich ends his speech on a safe note: he says that economic recovery is "likely to be [here] in two or three years."

I disagree. My main issue is with Mr. Reich's view that the last 25 years were a terrible time for the middle class and poor. Economics is not a zero-sum game. First, although the rich have gotten richer, the middle class is now enjoying an unprecedented quality of life. To be poor in America in 2009 is to be the envy of 90% of the world's population, many of whom work for less than $2 a day. I don't need economic statistics to prove this point--you can just look at how many foreign citizens apply for asylum here every year, or who are willing to risk their lives to cross America's border.

Second, it is true that other countries have more equitable distributions of income--but almost all those populations are smaller, less diverse, and declining. In large, diverse populations, including China and Brazil, income distribution is usually heavily concentrated at the top. The most notable exceptions are Canada and Australia, which have massive stores of natural resources and smaller military budgets. Unless America becomes energy-independent and more willing to cut defense spending, income equality will probably persist. This won't be because of a conservative Republican plot--it's just that too many Americans appear unwilling to advocate for a smaller military budget and, in recent history, too willing to go to war. That's a terrible combination, because as Californians are starting to learn, you can't have it all. At some point, the piper comes calling, and the bills become due. If we want more income equality, we have to be willing to cut services and the size of government.

In fact, Democrats like Reich and Krugman are stealing a page from the GOP's playbook. In the old days, Republicans would spend trillions of dollars on wasteful defense projects and then scapegoat poor single mothers on welfare. Now, Democrats are demonizing bankers and Wall Street to divert the public's focus on their own act of generational theft (America's future generations will be paying for the recent stiumulus package). So while Republicans ran up deficits to increase the military, Democrats are running up deficits to send taxpayer money to their core constituents--education, local and state governments, and unionized interests. In the end, government gets bigger under either administration--it's just a matter of where the dollars go.

Meanwhile, fiscal conservatives like me are left screaming in the dark and wondering when Ron Paul will make a comeback. I hear Estonia's a nice place for anti-war libertarians like myself (see the incredible film, The Singing Revolution, to understand where I'm coming from). I might just go on a visit and not come back till Congress learns some fiscal discipline. If I do leave, however, it won't be because I think the rich in America have it out for the middle class, or that America's poor have terrible lives--it'll be because our two-party system has failed the average American who saves money, lives modestly, and tries to create a future where American children will be better off than their parents. Politics aside, I'll leave you with a philosophical question: if a dollar gets printed and no one hears the printing press, does inflation still happen? I'd love Mr. Reich and Mr. Krugman to answer that one.

Never let a good crisis go to waste.