Reich holds court with Las Vegas businesspeople

By Nicole Lucht

Friday, Feb. 6, 2009 | 2 a.m.

What a different world this could be were it former Labor Secretary Robert Reich who delivered the $700 billion bailout bill rather than former Treasury Secretary Hank Paulson.

Reich, who serves as an economic adviser to President Barack Obama, was former President Bill Clinton’s Labor secretary during his first term.

Reich implemented the Family and Medical Leave Act and successfully advocated raising the minimum wage and creating the Pension Protection Act.

In this newspaper, we have a weekly question-and-answer feature with leaders in the business community. The questions are developed by the reporters and editors, and by all accounts, it’s a popular feature.

This week in my column, I’d like to share with you excerpts of a Q&A session I sat in on between Las Vegas businesspeople and Reich. The businesspeople had Reich as their captive audience, the chance to ask him any question. Their primary concern: banks and the taxpayer-funded bailout.

Reich held a 40 minute question-and-answer forum during the Las Vegas Chamber of Commerce’s annual Preview event.

Reich was on the receiving end of the questions. He started the forum with a simple message: “I don’t want to be too dismal. It’s very important to be realistic about how bad things are. They are not good, but it’s also very important to understand that this is temporary.”

Business: Why isn’t there more regulation and control over taxpayer money going to Wall Street?

Reich: The rhetorical question is absolutely right. There should be, there should have been. I personally think it’s an outrage. What does Wall Street think it’s doing? This is public money, and many of these banks wouldn’t be in existence if the public had not come to their aid ... The whole thing is weird and a continuation, I’m afraid, of the same kind of irresponsibility and otherworldliness of that much of Wall Street has been living in for years. My hope in that the second tranche of the original $700 billion that is now going to be under the auspices of (Treasury Secretary) Tim Geithner will come with many, many more strings attached and we will not see this kind of irresponsibility.

Business: What about the availability of credit? The TARP program was intended to free up the credit market. It hasn’t worked so well so far. Can you tell us what you think about the next half of TARP may help that, and if not, what will?

Reich: I don’t think our banking system is going to get out from under its current problems until it writes down its assets to approximately what they’re worth. Although nobody knows what they’re worth, but something realistic. And then it (the banking industry) undertakes what might be called a kind of broad-based industry reorganization that we won’t use the term bankruptcy — we’ll call it something else ... I don’t see how, in other words, the entire financial sector is going to work if the balance sheets are not cleaned up. I don’t see any way in which TARP, if it’s being used to recapitalize the banks, is going to clean up those balance sheets.

Maybe having a bad bank ... that absorbs some of these toxic assets under the auspices of taxpayers. That’s the point ... That’s called lemon socialism, where taxpayers get left with bad assets and everybody else gets left with the good assets. Even that is going to be difficult to pull off.

Business: Why regulate the banking industry?

Reich: A lot of regulation comes from the 1930s when many people lost a lot of money, by not only putting their money in the banks, because there really wasn’t any controls over ratio of capital and lending. There were runs on banks ... The problem is, beginning in the late 1990s, all of these regulations that followed on the Great Depression started to become dismantled. Why were they dismantled? ... We got rid of a lot of the oversight mechanisms. Why did we do that? I think largely, because things were going so well and so much money was being made that Wall Street convinced Congress — Wall Street’s lobbyists are not unpowerful — all of these regulations are unnecessary.

Hank Paulson came into the Treasury two years ago saying he was going to deregulate. He thought that we had too much regulation and it was hampering with the financial market from being competitive. The problem is, if you do not have enough of the right type of regulation, then a panic gets much worse because everybody fears that their money is not being used appropriately.

Business: If you could wave a magic wand, how would you make an economic stimulus program so that it benefits a business owner?

Reich: Keynes had a theory which has never been refuted and is coming back into fashion very rapidly ... The theory was that government must always stand ready to be the buyer of last resort because there’s always a tendency of businesses and consumers to not quite buy enough to utilize the full capacity of the economy.

Keynes (theory) is making a comeback because the biggest problem is not inflation, it’s recession. It’s inadequate demand, or it’s deflation, which is even worse.

According to Keynesian theory, it really doesn’t matter what government does to create jobs, because as long as people have more money in their pockets, and then can turn around and buy things, it’s fine.

The best thing would be to get a twofer: No. 1, create jobs with government money, but No. 2, create the kind of jobs that actually rebuild the economy.

Business: But how does that help me and my business?

Reich: Here’s the idea, because consumers don’t have enough money to spend. Business is not going to buy anything if there’s not consumers out there to buy the products of the businesses. You want to get more money into circulation, put more money into people’s pockets so they can go to your small business and buy (the products). Well, how do you do that? ... One is tax cuts for average-earning people. The lower their earnings, the bigger the impact of the tax cut. The second is government spending.

Business: Couldn’t I employ more people if I were to get a tax cut?

Reich: Yeah, you probably could, but the chances are if there aren’t consumers out there buying what you have to offer, you probably would not take that tax cut and hire many people. You’d say to yourself, “Wait a minute, I’m going to wait until I know there are consumers out there because I can’t afford to invest in more people and more training.”

Business: Do you think it’s better for the economy to raise taxes as opposed to cut spending, and also, at what point do you switch from the supply to the demand side?

Reich: It depends on where you are on the business cycle ... If in a deep, deep hole, you probably don’t want to raise taxes because it adds to the expenditures of businesses or individuals, that makes everybody more reluctant to buy. It’s a bad time to raise taxes. At the same time, you don’t want to cut government spending, because if you cut spending, you’re cutting jobs. Your also reducing vital services.

I’m not suggesting what Nevada ought to be doing, but it seems to me, in my humble opinion, that the last thing you want to do is cut education ... It’s like shooting yourselves in the feet because education is the most important investment that any state makes in terms of future productivity.

Business: Why bail out the auto or banking industries? Doesn’t that take away the incentive for them to change?

Reich: I couldn’t agree with you more. We believe in capitalism. We believe that the failures have to fail. And if the failures don’t fail, then what’s the incentive to succeed? Although I can understand when it comes to individuals and people (who) fall on bad times and bad luck ... But businesses that are doing badly and failing, why would we bail them out? We have something called, and I want to emphasize this, bankruptcy. But it’s not necessarily liquidation. It’s Chapter 11 (reorganization). The auto industry, it seems to me should be going through a form of Chapter 11. Just like the financial industry should be going through a form of (bankruptcy). ... There’s no reason for taxpayer money to be at risk.

Business: I don’t see housing addressed in the new stimulus package. Housing creates jobs. I don’t know how many businesses are here that are servicing the housing industry, but there’s zero incentive, and I would like to see them take the capital gains tax and drop it to 8 percent.

Reich: Look, let’s all stipulate, let’s all agree, that we had a housing bubble ... because there was excessive lending, (and) nobody in the middle of that housing bubble knew what was happening ... How do you get the housing construction industry back on its feet when it really is responsible for a lot of jobs? Well, you can’t really (bail it out) if you have arguably overbuilt because that would just lead to another housing bubble. Then somewhere down the road you’ll still have the problem of too much supply than demand.

My concern about TARP is that it didn’t really do anything about what is now the 10 percent of American homeowners who are either in arrears on the mortgage payments or basically in ... danger of losing their homes. I think that is where we have to start. That new TARP program has to have in it several programs to restructure those loans, to make it easy for people to restructure those loans and to basically to get the bank lenders and the mortgage lenders to accept X amount back on every dollar, because let’s face it, it’s better to have somebody in a home paying a mortgage than people out of homes paying nothing as the community’s values going down.

The housing market and the construction industry will come back. The population is growing, it’s just a matter of time.

• • •

Maybe they were already familiar with Reich’s stance on labor issues, one unpopular among the business community and the chamber, and wanted some consolation on the Treasury’s highly scrutinized bailout program.

He supports the Employee Free Choice Act, and I asked him what his view on it is, and I got a miniseminar on union history before he gave his succinct answer: Yes.

He does make a valid point. Unions have raised wages not only for the shops its members are employed in, but also those of nonunion, competing shops as well.

A good, local, example of that theory in work is the Culinary Union, which collectively raised wages on the properties it represents. In turn, other gaming properties had to raise their wages to stay competitive.

In other news:

The nationwide gross domestic product fell 3.8 percent from the third to fourth quarter of 2008, meaning that fewer workers are needed to produce the fewer goods demanded.

The drop is because of reduced exports, fewer purchases by consumers, including equipment and software, and lower home prices. Some positives that partially offset the drop were from private inventory investment and federal spending. Imports, which lower the gross domestic product, also decreased.

The point here is: Consumers need money to buy goods, they need jobs to get that money, and we all need to consider buying American whenever possible.

If anything, consider the philanthropic aspect of buying American. Yes, it may cost more in the short term. But the more money America has, the more good it can do in the U.S. and elsewhere. When was the last time you heard of China giving no-strings-attached aid to Africa? (Hint: China wants the continent’s oil.)

• • •

The state’s unemployment claim center has expanded its phone hours to Saturdays because of increased demand.

Nevada’s jobless rate jumped an unprecedented 1 percentage point to 9.1 percent in December from the previous month.

The center will accept calls from 9 a.m. to 1 p.m. until further notice.

Regular call hours are 8 a.m. to 5 p.m. Monday-Friday.

Claims can also be filed through the Internet by visiting www.expressclaim.org. The phone number is 486-0350.