A Rebuttal to Robert Reich's "Great Decoupling"

Former US Secretary of Labor Robert Reich has recently written a piece titled "The Great Decoupling of Corporate Profits from Jobs" - asserting that the US is entering into a jobless recovery which will see profits being created but not jobs.

There are several problems with Reich's analysis.

In his blog post, Reich is hypersensationalising America's structural weakness in manufacturing, and conflating it with the cyclical unemployment associated with the credit cycle. He is also (wrongly) demonising the Automakers' foreign capital investments and blaming it for the lack of job creation in the US.

As regards the credit cycle - what we are seeing now in the US economy is the deleveraging of the consumer. This deleveraging is going to take some time before it bottoms and stabilises or resumes its upward trend. Meanwhile, companies which underwent restructuring to minimise excess capacity during the downturn, are still sitting on excess capacity which are adequate to meet current levels of demand. The deleveraging of the consumer puts a downward pressure on aggregate demand. And as long as demand stays at levels that does not exceed existing production capacity, companies will not invest in new capacity (and new jobs).

Eventually, however, consumer deleveraging will plateau and start moving upwards again.The actions of the treasury and the fed have put a floor on the debt deflation process, and will eventually reflate the American economy - the issue is when, not if, this reflation occurs. When the reflation occurs, existing production capacity will eventually be maxed out and companies will have to reinvest and rehire in order to meet the growth in demand for their products. This will naturally create jobs and bring down the unemployment rate. Because in an economic recovery, companies take time to reach capacity constraints before they resume hiring again, this means that employment numbers are a lagging economic indicator which trail corporate profits during a recovery. Conversely, when the economy enters a recession, we will see corporate profits fall, before unemployment rises.

Robert Reich has ignored this natural credit cycle process and is unfairly hammering corporate america for not hiring. The re-hiring will eventually resume - it has happened every time America has emerged from a recession, and there is no reason why it will not happen again.

Reich has also ignored the fact that the returns to foreign investments in China will eventually line the pockets of American investors, who will in turn consume out of these profits. Dividends and share buy backs are ways that companies return profits to shareholders, which they can use to spend on goods and services. Furthermore, corporate shareholders include mom and pop main street investors and pension holders.

This consumption out of returns on overseas investments will help the US to return to economic growth and will also eventually help to create jobs. So it is wrong for Reich to criticise the decision for GM and other manufacturers to reinvest their retained earnings in China where demand is booming, the cost of production is low, and profits are high.

Finally, the most inaccurate of Robert's statements is that investment in productivity will prevent job creation. The evidence (and logic) is clearly to the contrary - investments in innovation and productivity are the greatest and most sustainable contributor to income and jobs growth. Witness Germany's autosector, which is fueling booming German exports even amidst a Euro-area meltdown. For example, superior German technology in its automaking (BMW, Mercedes Benz, Audi, Porsche etc.) means that Germans not only keep jobs but create jobs as exports to emerging markets continue to boom, because these emerging markets do not have the superior technology that Germany has and has to import it from Germany. A similar argument can be made for high-tech companies like Apple and Google, which are able to maintain their superior competitive advantage during the general economic downturn, and both retain and create jobs in the US.

Hence, where America does have a genuine structural problem, is that its economy has in years past depended on an oversized financial sector to fuel its economic growth. This fundamental imbalance means that Americans have been living too much on easy credit to sustain consumption, rather than genuine growth in incomes brought about via gains in the productivity of goods and services. This imbalance has greatly exacerbated the impact of the economic downturn because the ponzi credit which fueled consumption has now dried up. What America needs to do is to restructure the economy away from financial services and focus more on growing the rest of the economy. America needs more engineers, scientists and technically skilled people, and far less commercial and investment bankers.

This structural imbalance in the American economy is the real drag on the economic recovery process. A lack of focus on innovation and productivity growth in non-financial goods and services, means that America has an economy that is more susceptible to booms and busts. What America needs to do is to put a leash on its banking sector (which the latest finreg has largely failed to do), and instead re-allocate resources (both labour and capital) in the productive sectors of the economy like manufacturing, technology, agriculture etc. It needs to clamp down on the wanton destruction brought about by investment bankers and send a firm message to these financiers that their glory days are over. Unfortunately the US does not have the political will to take these drastic measures to restructure the economy and put it back on a firm foundation. So what we are likely to see in the future is more booms and busts a la Hyman Minsky.

Brace yourselves for yet another stock market reflation and yet another bust, some time in the future. History will repeat itself again.