Friday, January 18, 2013

From the Empirical Archives: Considering "The Seven Biggest Economic Lies"

Considering "The Seven Biggest Economic Lies"
Olav Bryant Smith

ILLUSTRATION: Steve Ferchaud

Originally Published in the May 2012 Issue of Empirical

One of the leading progressive voices in contemporary economics is Robert Reich, the former Secretary of Labor from the Clinton Administration and Chancellor’s Professor of Public Policy at the University of California, Berkeley. Recently, he launched a YouTube video that went viral. The reason for its popularity is clear. In seven simple steps, or in just two and a half minutes as Dr. Reich proudly announces at its commencement, this video entitled “The Seven Biggest Economic Lies” directly confronts the dubious claims we are most likely to hear from what he calls the “regressive forces” at work in our country. What faster way could there be to gain some enlightenment in economics? Ah, the blessings of YouTube.

“Big lies,” Professor Reich begins, “begin to be believed unless they are rebutted with the truth.” So, one dubious claim at a time, he counters with the facts. Please check out his video sometime. But in the meantime, this summary can get you started, and may be useful in remembering his points.

“Tax cuts for the rich trickle down to everyone else.”

The facts:
  • Taxes were cut under both the Reagan and first Bush administrations.
  • Median hourly wages stagnated and dropped.
Reich calls this trickle-down claim “boloney” and “a cruel joke.” It should be remembered, too, that the senior George W. Bush, when campaigning against Ronald Reagan, called this approach “voodoo economics.”

“Higher taxes on the rich would hurt the economy and slow down job growth.”

The facts:
  • The top tax rate was over 70% between World War II and 1981.
  • Taxes have decreased considerably since 1981.
  • The economy grew faster prior to 1981 than it has since.
  • Most jobs are created by small businesses.
  • Fewer than 2% of small business owners are in the top tax bracket.
On his blog, considering the same topic, Reich lays out in more detail that “From the end of World War II until 1981, the richest Americans faced a top marginal tax rate of 70 percent or above. Under Dwight Eisenhower, it was 91 percent. Even after all deductions and credits, the top taxes on the very rich were far higher than they’ve been since. Yet the economy grew faster during those years than it has since.” Also, so many of our neighbors who are small business owners need help. They do not need higher taxes right now. The conversation about higher taxes does not include them.

“Shrinking government generates more jobs.”

The facts :
  • Smaller government actually translates into fewer teachers, firefighters, social workers, police officers, and other deliverers of social services.
  • Indirectly, smaller government then results in fewer contracts to private companies that help to build our infrastructure.

On his blog, Reich further explains that “According to Moody’s economist Mark Zandi, a campaign advisor to John McCain, the $61 billion in spending cuts proposed by the House GOP will cost the economy 700,000 jobs.”

The fact is that when the economic players who have the big money, like many of our banks and major corporations, are unwilling to spend due to lack of confidence in our economy, the government is more important as a spender than at any other time. If the government stops spending money and lays off employees, less money gets to our communities. Just ask anyone, for example, who lives in a university town.

“Cutting the deficit now is more important than boosting the economy.”

The facts :
  • The real long-term goal should be to reduce the percentage of debt in relationship to economic production.
  • Jobs are most important right now, because without job and economic growth, the debt, in proportion to the overall economy, will only get worse.
  • We need more job creation before we can bring the deficit down.
If the government were to make cutting the deficit its priority, this would lead to fewer jobs. Adding to the already high unemployment our nation is experiencing exacerbates the problem by reducing the number of tax payers. And, as noted above, when the government cuts back on the employment of government workers and private contractors, less money reaches our communities.

“Medicare and Medicaid are killing the budget.”

The facts :
  • Medicare and Medicaid costs are rising because health care costs are rising.
  • Health care costs can be curtailed by using Medicare’s bargaining power to get lower prices on drugs, medical supplies, and hospitals.
  • Medicare can also bargain for a transition from fee-for-services to fee-for-health-outcomes.
  • Medicare has lower administrative costs than private health insurance.
  • The Medicare model, given these assets, should be opened to everyone.
So, not only does a single-payer model make more sense morally, it also makes more sense economically.

“Social Security is a Ponzi Scheme.”

The facts :
  • Social Security is currently estimated to be solvent for the next 26 years.
  • It would be solvent for the next century if we lifted the ceiling on Social Security taxes from its current income level of $106,800.
  • A “Ponzi Scheme” is a plan to defraud investors; under such a plan, it is known in advance that there will be no money left to pay the investors back. This cannot be said of Social Security if it is still solvent. And it will only become insolvent if the political will to support it collapses.

“It’s unfair that lower-income Americans don’t pay income tax.”

The facts :
  • Low-income Americans pay a much bigger proportion of their income in social security taxes, sales taxes, user fees, and tolls.
This fact is what is truly unfair, insists Reich.

These facts transcend distinctions between liberals and true conservatives—as opposed to “regressive forces” Reich has spoken of. They are facts that independently-minded voters need to know and consider. And there is nothing truly conservative in the destruction of the middle class or in huge transfers of wealth to the richest among us. Nor is there anything truly conservative about running the large deficits that accompany a dogmatic stance on taxes. It is time to learn from our mistaken adherence to such “lies.”


  1. Thank you for your input. We also recommend you read "The Tale of Two Crashes Part 1 and 2" By Emmanuel Stoakes in our blog archive.