Corrections and Amplifications: On Andrew Mellon, Sebastian Mallaby, and General Motors

1. A group calling itself “Stand Up For America” says I took Herbert Hoover’s treasury secretary Andrew Mellon’s words out of context in my post “Republican Economics as Social Darwinism” (September 26); and that, in any event, today’s Republicans who call for small government at a time of sky-high unemployment aren’t anything like Hoover or Mellon; and besides, many Democrats are calling for small government, too.

“Stand Up For America,” whoever they are, seem blissfully ignorant of American history. Beginning with the Great Crash of 1929, Hoover and Mellon called for a balanced budget and argued that what came to be known as the Great Depression was due to excessive spending by government and individuals. (Many industrialists and most classical economists of the time agreed.) Hoover’s and Mellons’ their efforts to cut spending and allow market forces to “purge the rottenness out of the system,” in Mellon’s immortal words, only prolonged and deepened the Great Depression.

2. Former Washington Post reporter Sebastian Mallaby wrote a generally favorable review of my book “Aftershock” for the New York Times Book Review. But Mallaby began his review by attacking me for something I don’t assert in the book.

Reich insists instead that American consumers, and particularly the middle class, have been buying too little.” Mallaby proceeds to argue this can’t be right because “For years, the United States has consumed more than it has produced; the excess demand has sucked in products from abroad, which is why the nation has run a trade deficit. The idea that the economy has suffered from a lack of demand is, shall we say, eccentric.

My argument is just to opposite. For three decades American consumers managed to maintain demand despite flat real wages. They did this by sending women into paid work, working longer hours, and then borrowing to the hilt. But all these coping mechanisms have come to an end. So it’s only now that we have to face the reality that most Americans have not shared in America’s prosperity.

In addition, Mallaby is confused about the trade deficit. As economists at the Center for Economic and Policy Research said:

Actually, there are few economists who would say that the United States had excess demand throughout most of the last decade, so Robert Reich is exactly right on this point and Sebastian Mallaby is completely wrong. The trade deficit was the result of an over-valued dollar.

This is actually very basic economics. The value of the dollar determines the relative price of foreign and domestic goods. If the dollar is sufficiently over-valued then the United States could be running a trade deficit even when demand is grossly inadequate — as is the case at present. The high dollar makes imports very cheap for people in the United States, which causes us to consume large amounts of imports. It also makes U.S. exports expensive to people living in other countries, which means that we will have weak exports. It is remarkably that Mallaby is apparently unfamiliar with this basic logic and that his mistake was apparently not caught by the editor.

3. My September 22 post, “GM Has No Business Using Our Money on Campaign Contributions,” summoned a rejoinder from Bob Ferguson, Vice President for Government Relations. He tells me “no corporate dollars are used in these contributions. No taxpayer funds were involved.”

Mr. Ferguson explains that the contributions have come from GM’s employee-funded PAC. Of course, even when PACs are funded by employees – that is, executives – the money often comes from the corporation, because executive pay packages are negotiated with an understanding that the executive will pay a certain amount into the corporate PAC. When I asked Mr. Ferguson whether anything like this happened at GM, he said ”this is not done at GM. Our code of business conduct would prevent any link between compensation and PAC participation.”

I stand corrected.

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