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).

The Problem with the US Economy

In his latest Op-Ed column in the New York Times, Paul Krugman makes the point that the US needs to continue transfer payments and extension of unemployment benefits to those who are suffering the worst of this economic recession (the poor AND jobless). Krugman is right that engaging in "austerity" by cutting these transfer payments is "penny-pinching in the midst of a severely depressed economy" and "is no way to deal with our long-run budget problems."

Krugman is addressing that group of Republicans who dogmatically oppose everything that the Democrats bring to the table (including financial regulation) simply because they are Republicans and that is what Republicans do (oppose the democrats) and not because they have any genuine understanding of what "Austerity" is. That word has been bandied about too much and has been misunderstood and conflated (wrongly) with genuine fiscal conservatives (like Roubini) who understand that releasing life support too quickly will plunge the economy back into depression (unlike the phony republican 'austerians', who ran massive budget deficits during times of prosperity with their misguided wars, and who pushed for the kind of deregulation that got us into the GFC in the first place). It is unfortunate that the Republicans have hijacked and adulterated the fiscal consolidation argument to further their dogmatic agenda (and have fooled many people in the process), but at least in the context of this blog post we can call them out on their bullshit.