Former Labor Secretary Robert Reich

Tom Sweeney, Star Tribune

Robert Reich: 'Government is the spender of last resort'

  • Article by: LORI STURDEVANT
  • Star Tribune
  • September 12, 2011 - 9:22 PM

The United States is "on the verge of a double-dip" recession, former U.S. Secretary of Labor Robert Reich told the Star Tribune Editorial Board last Friday.

Avoiding another downturn, said the economics commentator and public-policy professor at the University of California, Berkeley, would likely require a job-creating stimulus from the federal government that's twice the size of the one President Obama delivered Monday to Congress.

Excerpts of the conversation:

1. What did you hope to hear from the president, vs. what you did hear?

On style and on story, I thought he did extremely well. My disappointment is with the scale of the package.

If you subtract the extension of the unemployment benefits and of the Social Security tax cut -- because they are already there, so they won't affect aggregate demand -- you are left with something on the order of $300 billion, more than half of which are tax cuts.

Tax cuts, we know, don't have a huge multiplier effect because people in times of economic stress tend to use tax cuts to pay off debt or to save, rather than to spend.

So we're talking about an actual net spending increase of around $150 billion. ... [That compares with] a gap of $750 billion between where we are now and what the economy should be producing. I would have rather [had] him come up with a jobs plan large enough and bold enough to actually make a difference.

2. Wouldn't a larger stimulus package lead to a larger national debt, which is also bad for the economy?

Not right now. The real issue is the ratio of the debt to GDP (gross domestic product). If we don't grow, that long-term ratio will get worse and worse.

The best thing we can do is restart growth, restart jobs, so not only do you have more revenues coming in, but five years from now, the ratio of debt to GDP is far more manageable.

3. Shouldn't growth come from the private sector?

The main motivation for businesses to hire is customers. Consumer spending is 70 percent of the economy. If consumers are holding back because they are under water with their mortgages and they are worried about losing their jobs, they don't have the cash to spend.

If you've got the private sector, businesses and consumers, unwilling to spend, where do you look? Government is the spender of last resort. ... If government can't do it, we are not going to have a recovery.

4. How big should President Obama's package have been?

It should have been closer to $800 or $900 billion. Most of that should have been directed at the kind of spending that would be as immediately job-creating as possible.

Certain kinds of infrastructure expenses, such as on school buildings, could be done right away. It makes a lot of sense to help states.

States are still laying off workers, and that's a huge drag on the economy. I'd like to see a WPA [the New Deal era's Works Progress Administration] and a Civilian Conservation Corps for the long-term unemployed.

5. How would you fund a package that large?

It would have to be borrowing. Given the low cost of borrowing -- the 10-year treasury (bond interest rate) is 2 percent -- that makes a lot of sense. We can increase our long-term targets for deficit reduction to accommodate what we do now.

6. What changes, if any, should we be making to enhance our global competitiveness?

The question that must be examined first is: Who is "us?" Big global corporations headquartered in the United States are hiring like mad abroad. They are making a lot of money abroad.

They are global. They don't have any necessary connection to the United States. If you equate our competitiveness with their success, you are missing the big story.

This is a deep structural problem. So much money is inundating Washington now from big corporations and Wall Street that have no particular unique dependence on the success of the U.S. economy.

Decisions coming from Washington are tilted toward global corporations. They are not necessarily tilted toward American workers.

7. You've argued that the biggest long-term threat to the nation's prosperity is widening income inequality. What ought the nation be doing about that?

What's happened in the United States in the past 30 years is that the economy has grown, but almost all of that gain has gone to the top.

We are losing ground [to other countries] on education. We're losing ground on labor unions. And we have a politics that has been quite regressive, favoring privatization and deregulation. ...

The only way out of this is not only a sufficiently high stimulus, but also addressing inequality through stronger education, stronger labor unions and tax reform.

We need to have more tax brackets and a higher rate at the top, and we've got to enlarge the Earned Income Tax Credit [for the working poor].

This isn't a zero-sum game. A lot of wealthy people are beginning to understand that they would do better with a smaller percentage of a rapidly growing economy than with a big chunk of an economy that's dead in the water.

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Compiled by Lori Sturdevant, Star Tribune editorial writer.

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