Robert Reich's F Minus In Economics: False Facts, False Theories

Forbes has an amazing column from economist Paul Roderick Gregory: who points out that Robert Reich isn't an economist or a good historian :

Reich draws conclusions without checking the facts first. If he had googled Historical Statistics of the United States 1789-1945 on line, he would have discovered that wages rose sharply from 1915 to the Great Depression. Moreover, Simon Kuznets, in his pioneering statistical studies at the NBER, found that labor’s share of national income was on the rise and capital’s share falling in the roaring twenties. In short, Reich uses false facts to support his proposition that the Great Depression was caused by corporations taking too much and paying their workers too little. Making up statistics to prove a theory is an automatic F. Sorry, but that’s the way it is.

Turning to the present, Reich warns that we are repeating the errors of the 1920s. Corporations are again taking too much and leaving workers with too little: “Nothing fundamentally has changed. Corporate profits are up largely because payrolls are down. Even Ford Motor Company is now paying its new hires half what it paid new employees a few years ago.” Reich sounds the alarm: The share of corporate profits is at an all time high of 11 percent…Without enough American consumers, their profitable days (of business) are numbered…. In order to create jobs, businesses need customers.”


Reich may be excused for getting his facts wrong on the lead-up to the Great Depression. After all, he is a busy man. But the basic facts of the business cycle are known to all bankers, corporations, business persons, and economists: During economic downturns, corporate profits fall (often dramatically), while compensation of employees rises but more slowly. Simple arithmetic and the statistical facts confirm, indeed, that the corporate profit share is low during recessions and rises during recoveries, as it is now.



Anyone who bothers to check government data from 1964 to the present can see that the employee compensation share of national income rose immediately preceding and during recessions. If anything, the long-term trend in labor’s share of the pie is slightly upward, not downward as Reich implies.



Reich disputes these irrefutable facts. According to him, recessions are caused by corporate profits taking too much, leaving too little for their employees to buy what corporations are producing.

You'll want to read the whole article. Here's Robert Reich angry response.