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net ) Introduction The Pendulum At the G20 meeting in September 2009, Treasury Secretary Tim Geithner stated that the Great Recession was caused by “for too long, Americans were buying too much and saving too little.”He wanted an economy in which Americans consume less and China consumes more and we borrow substantially less for a “re-balanced” global economy. Reich thinks that Geithner misstated the fundamental problem- Americans don’t spend beyond their means-their means have not kept up with what they should be able to afford. Too large a proportion of wealth had gone to the people at the top. This is our economic, social and political predicament. The benefits of the economy need to be shared more. The first stage of American capitalism (1870-1929) involved increasing concentration of income and wealth. The second stage (1947-1975) more broadly shared prosperity. The third stage (1980-2010) increasing concentration. We need a fourth sage in which broad based prosperity is the norm. Our history is more like a spiral than a pendulum-we don’t exactly return to a previous point but arrive at those points with different attitudes and perspectives. We ask questions about inequality: who is supported and who is cut adrift, when are there political consequences , what and for whom is the economy for? Technically, the Great Recession has ended, but its aftershock has just begun. Economies always rebound from declines. What happens next? If fundamentals are in order, we can expect healthy and stable growth; if not, economies as well as societies become imperiled. Reich argues that the fundamentals are profoundly skewed. We will have to choose between deepening discontent and nastier politics and fundamental social and economic reform. Reich believes we will and must choose the latter. The recovery will be anemic with large numbers remaining jobless or with lower wages. Therefore, consumers will not be able to keep the recovery going and businesses will not have the impetus to invest. Foreign markets will not buy enough American exports because they are concerned about their own unemployment. The US government cannot run sustained deficits or sustained money cheapness to fill the gap. Therefore the economy will be weaker than during the “phantom” recovery of 2001-2007, when consumers had drained their savings and were borrowing against the rising value of their homes. The recovery before that through the 1990‘s was fragile and ended
when families could not work longer hours and the dot.com bubble burst. The problem emerged around 1980 with global competition and labor-replacing technologies. Instead of strengthening measures to support the US workforce, political leaders embraced deregulation and privatization, attacking labor unions, cutting taxes on the wealthy and shredding social safety nets with resultant stagnant wages, job insecurity, widening inequality. In 1970‘s top 1% took 9% of total income. In 2007, top 1% took 23.5% of income. As the economy grows, people in the middle want more, but if wages don’t rise, they borrow. But this cannot last. The government interprets these episodes as temporary crises because of excessive debt, and tries to fix them by flooding financial institutions with enough money to avoid runs on banks. The high debt is actually a symptom, not a cause of the crises. Politicians opt for short term fixes that do not disturb moneyed interests on whom they have become dependant. The rich defend their disproportionate affluence as related to their talent and essential role. The meltdown of 2008 was ameliorated only by lowering interest rates to near zero and bailing out Wall Street, cutting taxes and spending huge amounts on infrastructure and unemployment benefits as had occurred with the Great Depression. These efforts removed the pressure for fundamental reform. Aside from expanding health care, little was done to overcome the inequalities. Declaring the recession to be over, the moneyed interests said the system worked and lobbied against changes to improve the imbalance. Other countries with less inequality were hurt by the financial crisis also. America’s bad debt was parceled around the world and exports to America were dropping. Without enough purchasing power, we will not be able to sustain a strong recovery. Politics will become a contest between reformers and demagogues.
Part I THE BROKEN BARGAIN 1. Eccles’s Insight The Federal Reserve Board is housed in the Eccles building in Washington, DC. Marriner Eccles was chair from 1934-1948. He analyzed the economic stresses of the Great Depression. He was from Utah, of Scottish Mormon descent. Mariner was initially a Mormon missionary who became a businessman and made a fortune- a bank president who became a tycoon-director of railroad, hotel and insurance companies as well as head of a bank holding company, president of lumber, milk, sugar and construction companies. He survived the crash but was shaken when the economy didn’t quickly rebound. He found that his thinking was profoundly incorrect and that he did not know anything about the commercial effects on the economy and social structure and he despaired
When his depositors began demanding their money he reduced lending and called in loans to increase reserves. a federal minimum wage. He proposed relief for the unemployed. Henry Morganthau jr was a balance budget advocate. who never the less asked Eccles for advice and eventually to join his administration. Eccles appeared before the Senate Financing Committee just before FDR was sworn in. He suggested a program “to bring about. government re-financing of mortgages. Eccles opposed tight money and high interest rates.” Despite being a Scottish banker he arrived at his conclusions by logic and experience. We had wasted instead of saving and we had inflated values. “seeking individual salvation we were contributing to collective ruin. where his ideas eventually began to be accepted. FDR followed the advice of the business world. Others had advised reducing the national debt and balancing the federal budget. without a climate of prosperity with purchasing power increasing demands for higher living standards. to keep the economy afloat but do little for anyone else.” Economists and business leaders tried to balance the federal budget and thought that lower prices and interest rates would spur investment. rather it was the result of the siphoning off of purchasing power . Eccles saw that men with great economic power had undue influence in the economic rules and the government that enforced them. He concluded that excessive spending had nothing to do with the depression.climbing from the bottom of the pit. When the governor of the Federal Reserve Board unexpectedly resigned. But Eccles thought investment in a disabled economy wouldn’t occur. ending the famine. Eccles became one of the architects of the economy through the depression and the Great Prosperity after WW2. Initially. by Government action. The explanation was that we had been spendthrifts and wastrels in the roaring 20's. like those in the biblical story of Joseph and the Pharaoh who dealt with lean and prosperous years sent by God. Those who had been prudent and thrifty would reinvest at the right time in new production. FDR’s treasury secretary. but only on condition that the Washington Fed had more power over the money supply than the NY Fed (Wall street). federally supported old-age pensions and higher income taxes and inheritance taxes on the wealthy to control capital accumulation and avoid excess speculation. Eccles retired to Utah in1950 and wrote a memoir. The power shift was accomplished by new supportive legislation. an increase in purchasing power on the part of all the people. Many leaders thought that the depression was a result of God given economic laws. Eccles realized that the economic game was not being played on a level field but was tilted towards wealth and power. Eccles thought this was nonsense. But then small businesses couldn’t get loans. Eccles got the job.it was really resistance to change that might benefit all the people but could be disadvantageous to the powers of the status quo. But Eccles (anticipating Keynes) said that the government had to go deeper into debt to offset the lack of consumer and business spending. Millions couldn’t satisfy their barest needs let alone buy more elaborate technology. government spending on public works.
the deeper problem of growing imbalance between earnings and consumption. Also. The economy had increased 60%. The biggest differences between the two eras was what happened after the bubbles burst. The top 0. People are born into these classes. schools. there was further expansion of technology. Bad Latin debt was repackaged as new securities which were sold to gullible investors. mortgage debt tripled and credit ran out in 1929. with ever widening gap. with lopsided incomes played a role. In 1929. The working class went into debt to raise their living standards. who have to rely on public services which are of lesser quality and lesser funding. promoting services and ideas). Speculation lured gullible investors. Marriner Eccles proposed programs that FDR eventually instituted. These were financed initially through public borrowing. Wages did not increase from 1970‘s -2000‘s-they dropped. largely backed by mortgaged homes. public universities. The debt bubble had to burst. Same pattern for top 10%. Sociologists divide work patterns into working (production and service) and business class (selling. infrastructure. Savings were down from9-10% from the 1950‘s to 3% in the mid 2000‘s.1% had 11% of the income at both peaks. Pre-depression private credit doubled. privately provided. such as social insurance. widening inequality was the m ain culprit. leading to an explosion of values.” (Mark Twain). After WW2. In the 1920‘s similar ballooning occurred in stock and real estate bubbles. However much the daredevil antics of speculation were the proximate causes of the bubbles. Debt rose from 55% of household income to 138% in the same period. Had the rich received a smaller share. the affluent used their soaring incomes and higher credit to speculate in a limited range of assets. then it gradually rose. isolating themselves from the less affluent. When people’s credit ran out they borrowed in the form of mortgage debt. the reduced demand brought unemployment and a vicious cycle.from the majority to a tiny minority. . and when it did.” 2.5:1. infrastructure improvements. Family incomes were only slightly higher. The unemployed couldn’t purchase. Ratio is2. The volume of production went beyond military needs. Mass production has to be accompanied by mass consumption which means that purchasing power has to be available to most people. “History does not repeat itself but sometimes rhymes. “For Eccles. The buoyant economy helped to pay the debts. The economy has to be reorganized when income gets out of whack. The share of income going to the top 1% peaked in 1928 and 2007 at 23%. in both periods. defense spending. worker productivity. Between the two peaks was a valley the floor of which for the top 1% was 8-9% in the 1970‘s. This led to the dot com and housing bubbles bursting in 2006 and 2007. There was a widening economic divide which produced economic insecurity. Parallels. Social cohesion caused by shared suffering produced the political will to make reforms. they would not have speculatively raised the costs of assets so high. installment debt and foreign debt. getting almost 50%of the income. The affluent secede geographically into high tax base communities and therefore higher levels of service. therefore people were laid off which contracted spending further. the economy plunged into a vicious cycle.
therefore growth will be hard to sustain and unemployment will persist. Keynes did not see unemployment as a moral failing either. This fit into “social Darwinism” of the era. Aside from improving health care access. however continued to use their increased earnings to speculate. Until these are corrected. increase government spending to create jobs to make up for consumer shortfall in demand. the successful averting of economic collapse reduced the urgency of the greater challenge-reducing the widening economic inequality. from which will emerge either a backlash against trade. John Maynard Keynes (b. Unemployment would cause wages to drop until it became profitable to hire again. vulnerable to booms and collapses. The rich. However. The Basic Bargain Ford paid his workers unusually well-the higher wages turned his workers into customers who could eventually buy his cars. with inadequate purchasing power.. Keynes used macroeconomic policy to maintain full employment.” Eccles thought that people in power were justifying the status quo by invoking a dubious morality.”people will work harder. Productivity gains outpaced most earnings. He saw it as a failure of demand. Andrew Mellon cautioned against government action after 1929 crash. Joblessness would make them accept lower wages. 3. little has been done to redistribute wealth. Expand money supply to lower interest rates and stimulate loans. Wall street and government itself-or large scale reforms which reverse the underlying trend. The middle class will not be able to buy enough to keep the economy going. This is the aftershock. Ford was exceptional in letting his workers share the bounty. fails to provide full employment 2. immigration. lead a more moral life. but two faults: 1. Government needs to work to correct these faults. the economy produces more than can be purchased. foreign investment. Unemployment was considered to be secondary to stubborn resistance to lower wages even though workers didn‘t work hard enough to deserve the higher wage level. Hoover’s secretary of treasury. Keynes gave a theoretical basis for what Eccles thought government should do: maintain aggregate . if this is not so. highly unstable. The government curtailed the economic slide by rescuing the business world with bail-outs. The problem was too little demand not too little savings. Classical economists had viewed the markets as self correcting.The Great Recession didn’t produce any economic gains. arbitrary and inequitable distribution of wealth and incomes. big business..Keynes argued that growth depends on the rich investing and saving. Median incomes will remain flat or decline and economic insecurity will persist.. He recognized that workers are also consumers who recycle their earnings. Cambridge 1883) thought capitalism the best system. but unless there was full employment extra savings were harmful because they reduce the demand for goods and services. stimulus packages and expansion of the money supply. Let wages and prices be allowed to fall clearing away waste and lassitude.
total spending would have been greater. If 2000 people had taken home $50.000/day. There would be greater consumption of goods and services as well as education. they hoard. domestic investment is lessened because there is little profit in investing.000 (50. Many of America’s rich have been generous-Carnegie. How Concentrated Income at the Top Hurts the Economy The rich do not spend nearly all they earn. Another is CEO of Bank of America Kenneth Lewis who earned 100 million in 2007. There are many examples of high earning-high spending rich people but they only spend a small portion of their yearly incomes. The lure of wealth is certainly an incentive to entrepreneurial zeal.000 and spent 150. which produces less incentive to invest. An example is Warren Buffet with 2008 net worth of 68 billion dollars.000 in savings) total spending would be 75 million. The 19th century ethical philosophy “utilitarianism” founded by Jeremy Bentham thought that the law should provide the greatest happiness to people equally.000 the money would have been almost all spent and there would have been less debt. If the broader middle class took a greater proportion. If Ken Lewis had managed to spend 25 million. leaving 75 million unspent. Gates. recreation and the arts-useful and pleasant.00/minute in a twelve hour. Give workers a proportionate share of the economic growth.” Eccles was not criticizing the rich. Buffet et al. but they don’t generate as many jobs and economic growth as would occur if a larger percentage of people had more wealth. The advantage of a fortune lies more in its cachet than in its spending power. Economic policy makers believe that Wall street’s financial health is a precondition for a . Every dollar spent has a multiplier effect. If 500 people took home 200.Taxing the wealthy to help the poor increased the sum of happiness. Most rich people can’t spend the money they earn.that’s $380. If there isn’t enough consumer demand for a higher living standard.demand so that production doesn’t outrun the capacity to buy. invest and speculate. 5. How much is necessary for motivation? Keynes said that “lower stakes will serve the purpose equally well. Overall. Before 2008. rich people do not spend enough. he would have to spend $274. To spend it. This is the basic bargain in a balanced economy. that money would not have gone into the economy. 7 day week. Rockefeller.his viewpoint was pragmatic. Why Policy Makers obsess about the Financial Economy instead of About the Real One. 50% of spending was done by the top 20% (40% by the top 10%). 4. Eccles and Keynes had a broader economic justification for redistributing wealth.
most Americans could have afforded a good life-style and still saved for a rainy day-they wouldn’t have needed to borrow so much. Wall street just issued stocks. The biggest banks and the insurer that backed them (AIG) were baled out in 2008. But the real economy on main street worsened. they borrowed from local banks and savings & loans institutions. Productivity also grew. when the middle class could save more. There was mass production and mass consumption. defying the predictions of those who said top executives needed the incentive of outsized earnings. The bailout of the street as well as massive lending to the banks by the Fed is the policymakers response to financial threat-"stabilizing and re capitalizing” the system. Had the share of the economy’s gains been distributed more evenly. Japan. Officials viewed this as a result of risky lending rather than the effect of greater borrowing to meet a decent standard of living. but its reliance on Wall street is a recent phenomenon. It’s like a masquerade ball. Financial officials viewed these rescues as exceptions to the assumption that rational investors aren’t threatened by financial crises because they evaluate and weigh all risks beforehand. oil producing countries) invested in this country did make it easier for Americans to afford the costs of borrowing.The locus of the problem was in the real economy. not just the top 1-10%. The basic bargain had been broken-earnings had not kept up to reasonable expectations of what they could afford. Previously. This changed Wall street into a casino with high stake bets.prosperous real economy. ie saving the assets and the asses of bankers. Long Term Capital Gain management had to be baled out. Policy makers viewed the debt load as the problem to be remedied-splurging (saving too little and borrowing more than one could afford). After the dot-com crash and Enron’s plunge. The Great Prosperity:1947-1975 The nation provided enough money to workers so they could buy what they produced. Germany. East Asia’s crisis demanded capital infusions. Everyone’s wages grew. Savings from other countries (China. the betting houses keeping a percentage of the wins for themselves and fob off losses on others including taxpayers. but this doesn’t mean that the answer to long term problems is to borrow less and save more and spend within our means. The wages of lower income people grew at a faster rate than higher income people. capital markets needed assistance. Mexico’s “Peso crisis” required financial rescue in 1997. . not the financial economy. The situation changed when the law separating investment from commercial banking was repealed in 1999. The real economy does need to borrow money from the financial economy.
Some examples are small transistors. A new global assistance and trade system was . Time and 1/2 for overtime created additional incentive for hiring new workers. The Great Prosperity reorganized work. shopping malls. The national debt equaled 120% of the entire economy. In mid 1950‘s. The GI bill paid for vets. health and pension benefits were not taxed. hard plastics. Government increased the bargaining leverage of workers-the right to join labor unions. There was a requirement for minimum wages and unemployment benefits. Post war. New jobs were created and the debt shrank as a percentage of GDP. and in 1965 health insurance for the elderly and the poor. even the Internet. partly justified to speed troops to war.How did this change? The US government did not directly redistribute income from the rich to the poor . Government subsidized the cost of electricity and water in some parts of the country and it built roads to connect homes with commercial centers-the most ambitious public works program yet. The road building program generated suburbs. A lot of university research was under written by the government-cold war defense spending. people had the means to buy and produced a huge demand for things that been unavailable during the war. but spilled over into commercial production. The government sponsored low cost mortgages and interest deductions on mortgage interest. Government widened access to higher education. the government. There was an expansion of public universities with average tuitions 4% of mean income instead of 20% in private universities. building up social security and a safety net. “Income is determined by functional role in the bureaucracy. not owners. keeping Communism at bay. optical fibers.all were employees. Higher wages meant greater buying power. the trucking industry and reduced the costs of transport and transit. Truman wanted development based on fair dealing “The old Imperialism-exploitation for foreign profit-has no place in our plans. The New Deal was relatively small. if need be. A 1956 college textbook called The American Class Structure described changes from the class divisions of the 1920‘s because of the new corporate organization of production. instead of economic collapse. disability insurance. but the spending of WWII was huge. College enrollment surged-3/4 in public universities and colleges. 1/3 were in unions. labor and. jet aircraft and engines. boosted auto sales. creating a progressive income tax. as well a baby boom. Corporate bureaucracies tended to level incomes-the bottom elevated and the top constrained by job categories.it created the conditions for the middle class to share the prosperity.Economic security was part of prosperity and enabled sharing the costs of adversity as well as consuming the fruits of labor. enhancing the bargaining power of workers. pension funding.” There was security against the economic risks of life: Social Security unemployment benefits. Even executive pay was a result of bargaining between business. computers. lasers.Executives didn’t take home disproportionately large packages. The nation also found the time and money to rebuild Western Europe and Japan. enlarged the construction industry. indirectly.” We gave technological assistance to developing nations and shared in the world’s economic growth.It pushed the economy towards full employment.
Globalization was blamed for the flattening of incomes. However. This was paid for by revenues from an expanding middle class as well as upper class.we were all in it together. richer and happier life for all our citizens of every rank. which lowered job rates within the USA. which permitted American corporations to expand and prosper. wages were directly related to productivity. the result was most people came out ahead. attempts at universal access to health care. Alan Greenspan insisted on cutting the federal budget rather than deliver more supports. emergency leave support instituted. The problem was not just loss of jobs. including the top. At the same time. uniformity and materialism that many people hated. Widely shared income gains were essential to economic growth. The historian James Truslow Adams coined the phrase “the American dream. rising or falling. and there were new markets for export. but increasing automation.created. 91% during the fifties and dropped to 77% in 1964. After 1975. family incomes were lower. refundable tax credit for low-income workers. the minimum wage was raised. however. When the economy cooled. blacks and women. even though the economy expanded. Middle class wages stopped climbing. access to college. But the high tax rates didn’t reduce economic growth-middle class prosperity enabled economic growth. which then invested with larger returns producing a surplus in tax receipts) which helped a strong recovery. Joseph Stiglitz disagrees and says interest rates were increased. not just globalization.. However. There was temporary rise in middle class wages in the late 1990‘s because of an upturn in the business cycle. During the Great Prosperity (1947-1975). 7.. Income taxes were as high or higher post WWII. which increased the profits of lending institutions. which produced a sense of common purpose.” There were many inequalities. in particular. tying of executive compensation to performance. However. In the Clinton administration. Why was so little done to spread the wealth? We could have expanded our educational system . since jobs were outsourced. and lowered interest rates ( nb. There was also a blandness. The pendulum began to swing back towards the conditions before The Great Depression in the late 1970‘s and worsened during the next few decades. as well as investments from abroad in the USA. (top marginal rates were 79-94% during the war. The government’s new role came out of The Great Depression and WWII. with the benefits going to the top. trade and technology have not really reduced the number of jobs available-the new jobs don’t pay as well. the two directions diverged. creating jobs. the pay of the well connected has soared. Millions of jobs were lost to automation. although there was much more opportunity. Even after deductions and credits. which eventually improved. but no stable change in the economic structure. high income taxpayers paid over 50% taxes on their earnings. How We Got Ourselves Into the Same Mess Again.” “ a better. imported goods were cheaper.
This argument equates the stock market with the . universal health care. demanding short-term profit over longterm growth. benefits. we could have given workers more bargaining power. cut public transportation. allowed the infrastructure to corrode. In 2009. just as before the Great Depression. finance became the fastest growth part of the economy. health care to employees. The super rich were top financial and business executives. restaurants.(early childhood and public universities). It increased the cost of public higher education. linked the minimum wage to inflation. transition assistance.5% of earners. but it did the opposite-it de-regulated and privatized the economy. with no more than 15% taxes. like unemployment insurance for part-time work. child and elder care. We failed to raise taxes on the rich and to cut them for the poorer people. the 25 best paid hedge fund managers earned an average of $1 billion each! The financial economy took over the real economy. Wall St banks and financial managers got billions in bonuses. less than 8% of private workers were unionized). hotel chains. reduced job training. shifting risks for pensions. We allowed companies to break the basic bargain.such as retail stores. financial and insurance companies made more than 40% of American corporate profits. Also.Both before and after the bubble burst. and shrank inheritance taxes that affected the top 1. Nothing impeded CEO salaries from sky-rocketing to more than 300 times the average worker. The pay of financial executives and traders rose into the stratosphere.By 2007. It halved the top income tax rate from range of 70-90% that prevailed during the Great Prosperity to 25-39%. The Federal Government de-regulated Wall St while insuring it against major losses. allowed the rich to treat their income as capital gains.That turned finance from a servant to a master of American industry. The expectations of bond and stock traders became the measure of success. We could have expanded public investment in research and development with the requirement that new jobs be created in the USA from the results. taking more out of the pockets of the middle class and poor. We could have required severance pay from employers laying off workers. At the same time. compared to thirty times during the Great Prosperity. We could have enlarged safety nets. reduced aid to jobless families with children. sales and payroll taxes were increased. restricted eligibility for unemployment insurance. Government could have enforced the basic bargain. especially in personal services industries. We failed to attack overseas tax havens by threatening loss of citizenship to those who evaded taxes this way. wages. Between 1997 and 2007. Why did the pendulum swing back? When will it swing in the other direction? Some argue that there was no need for government intervention. Unions were busted (by 2010. wage insurance. slashing jobs. They say the economy did better on its own with lower taxes on the rich. They blame the Great Recession on too much middle class debt and too many unsubstantiated mortgages. American companies became global companies deriving most of their revenues from overseas. We could have insisted that foreign trade nations establish a minimum wage that’s 1/2 their median wage. created more job retraining and made more extensive public transportation.
They saw the apparent failure of government and the success of the market. both professionally and non-professionally.”The tax revolts in the late 1970‘s were against paying more taxes on flattened income. the average market holdings of the middle class were small compared to those of the rich. The real reason for the pendulum swing was the concentration of economic power with its “undue influence in making the rules “ as Marriner Eccles described in the twenties. This transition has been one of the most important social and economic changes in many years. They put pressure on companies to perform. The inflation of the 1970‘s wasn’t due to excess government spending-there was a 12x increase in oil prices and a drop in dollar value. then dumped the company on the market at a higher price. which had “been living too well. Their choice was between free markets and big government. The Dow Jones average rose 10x between 1980 and 2000. 2. no sex. reducing benefits. cutting corporate payrolls. there were three coping mechanisms: 1. DINS=double income. Contraception helped plan families. where the middle class can’t buy what it produces.” pumped up profits by firing workers. The value of middle class pensions did rise. Typical American worker put in 350 more hours per year than European workers and even Japanese workers.6%. They had no memory of a society in which people were all in it together. Draw down savings and borrow to the hilt. the former the solution. laws against discrimination and wider educational opportunities became available. middle class saved 9% after taxes. 8. The rich and powerful also conditioned people’s attitudes. 3. but one in which we were increasingly on our own. How Americans Kept Buying Anyway: The Three Coping Mechanisms To mitigate the pendulum swing. books media. since they were dependent on the stock market. lowering taxes for themselves and de-regulating Wall st. the latter. Everyone works longer hours. They financed think tanks. paid with high risk “junk bonds.including union busting. the problem. Instead of a minority of women working.economy and doesn’t address the basic bargain. Women moved into paid work. sometimes multiple jobs. by 2006. there was a majority. Debt had averaged 50-55 % of annual after tax . They had no memory of the great Depression experience of a fallible and unreliable market offset by a strong and reliable government. ads to persuade that free markets were best. the proportion was 2. lobbyists and public relations organizations pushed through legal changes for the rich. How could the public be so gullible? There was loss of generational memory-the children of prosperity took it for granted and so did the grandchildren of prosperity. However. pushed leveraged buy outs.limited only by the hiring cost of running a household or child-rearing. Some think that the pendulum swing related to declining confidence in the government. Campaign contributions. During the Great Prosperity.
Reich thinks this reasoning is specious. mortgage loans. Even though replacements for worn out things will be forced. which lowered interest rates too much. viz. because the 10% at the top were taking home 50% of the income. research. re-financing on inflated home values. Reich says Tyson was correct. the long term trajectory will not be good. but it . with subsequent widening of income disparity. The Future Without Coping Mechanisms Paul Volker (former chair of Federal Reserve) told Obama that Americans had been living beyond their means. Bank of America and Merrill Lynch analysts predict that the top 10% of Americans. The coping mechanisms are exhausted-there aren’t enough jobs or hours to go around. At the same time tens of millions of boomers will be retiring with shrunken nest eggs. 9. and wages will continue to erode. In 2009. the Federal Reserve. Borrowing vehicles were credit cards.Americans are paying off. There will not be a sufficient demand without a buoyant middle class to justify new equipment. who accounted for 40% of the spending would have the spending power to fuel a recovery.income in prosperity-it reached 138% by 2007. People could no longer live as they had been or thought they should or could be living. paying down or walking way from outstanding loans-de-leveraging. etc. Housing will not gain its speculative peak for a long time. others fault banks for careless loans. There will be less middle class consumption. The great Recession accelerated structural changes that began in the late 70‘s.many will put off retirement.Borrowing will be curtailed-tighter standards. with poor oversight. Even if and when the stock market returns to its peak. Over the long term the challenge is pay. It is theoretically possible that a new product or software application could be so revolutionary that every business would be forced to buy it (as did the Internet and dot-com booms of the 1990‘s. because their assets were mostly in stocks rather than in homes. products. auto loans. Although much of the blame is justified. Obama was faced with the immediate challenge of rescuing the financial system-fragile banking system and massive debt. Laura Tyson said the problem was that their means hadn’t been growing. factories. and a recovery can’t be fueled by 40% of prior spending. automation and outsourcing. buildings. Some blame consumers for borrowing too much. boomers will have lost years of economic gain. regulators. college loans.it will take years to make up for the lost jobs. making it harder for younger people looking for work. foreign lenders. It is an economic and moral challenge-concentrated wealth and income threatens the cohesion and integrity of society and undermines democracy. 2008. this is not enough for a vigorous recovery. bank regulations and oversight. the real cause was the lack of growth of middle class income. Government can fill the gap for a while. In November. 50 million workers lost at least one trillion in their 401k plans. Re-hiring will be associated with lower pay and benefits.) but without that kind of jolt. services. not jobs.
Investment rose from 35% to 44% of the economy during this period. the yuan would be more valuable). so assets are part of the marriage bargain. roads. therefore money is being saved to support the elderly. appliances (the country will become the largest shopping bazaar in history). including cars. 10. Why China Won’t Save Us In September. and if they don’t find it. factories. since many millions of people are looking for better paying work. China’s export policy is also its social policy. retirement. which undervalues its currency (if its value floated. The share of national income going to households in wages and investment is dropping as the share going to companies increases. Reich thinks this is wishful thinking. where it had been 50% in 1999. Chinese society is aging quickly because population growth has been limited. Obama says the USA has to sell to China. not just China sell to the USA based on credit supplied by China.would lead to deficit spending and printing more money. That way. Job creation. China wants American know-how. . cell phones. clean energy technologies. Most new jobs were in production. so it allows Americans to sell to China. China’s capital spending will dwarf ours. but its consumer spending is only 1/6 of ours. not sales or service as in the USA. risking job shortages. The long term fix is for Americans to save more and Asians like the Chinese to spend more. sewers. ie Chinese consumers will substitute for American former spenders to keep the American economy going. New technologies will be produced here and exported. cars. its exports are cheaper and more saleable. leading to a resurrection of manufacturing in the USA. 2009 the Group of Twenty had a summit in Pittsburgh. Some people think the answer will come from consumers outside the USA but Reich believes they are wrong. power grids. Obama spoke of “rebalancing” world growth especially between the economic colossi of China and the USA. consumer goods. The hope is that the Asian market is potentially huge and its middle class is growing.the government stimulus package in 2009 was $585 billion dollars. Chinese consumer spending is growing slower than its overall economy. China’s market is growing very fast for computers. It also makes the cost of Chinese imports artificially high and encourages Chinese foreign investments through the sale of yuan when the dollar drops in value. education. there will be social unrest. provided that the goods are produced in China. the US dollar will decline and they will buy more from us and we will buy less from them. geared to railways. There are more young Chinese males than females. even at the cost of subsidizing foreign buyers is preferable to allowing the yuan to float. In 2009 personal consumption was 35% of the economy. What China produces goes mostly to other nations. aircraft. That way. The larger reason for low spending is the orientation to production rather than consumption. Profits are being plowed into production. However.a larger proportion of China’s economy than our stimulus spending was to our economy. including a wish to lead in technology. The yuan has a fixed relationship to the dollar. China acquires American technical expertise and also produces jobs. Why is Chinese consumer spending relatively low? Inadequate social safety nets (health care.
a freeze on legal immigration. Slow growth has the reverse effect and produces a “vicious cycle. It isn’t the excessive debt.”as each group fights against additional burdens. If other nations respond to a declining dollar by buying more from the USA. Anyway. 11. International Monetary Fund. the problem is a disproportionate share of income going to the wealthy. PART II BACKLASH 1. World Bank.Growth is not an end-it is a means to better our lives individually and communally. even though they were reckless. and then we’d become poorer because imports would cost more. Obama brought the economy back from the brink with bank rescues and stimulus packages. Both China and the USA are capable of producing much more than their consumers can buy. No Return to Normal The underlying problem is not the recklessness of institutions. our export sector would have to grow immensely to make up for jobs lost. WTO. There is a disconnect between production and consumption in both countries. they are more willing to pay taxes. although that too occurred. withdrawal from the UN. in which an Independent party pulls enough votes from the Democrats and Republicans to win by a plurality in the White Housed and the Congress. Its platform is: no illegal immigration. How to move from a vicious to a virtuous cycle? How to produce widespread prosperity which is necessary for growth and vice versa. a ban on American outsourcing. The fundamental problem is that Americans no longer have the purchasing power to buy what we are capable of producing. thereby generating more American jobs. There is persistent high unemployment with flat or declining wages. In the USA. and political unrest in the USA. because too much of our income has been going to the top. combined with low interest rates. Pay and production are no longer linked. In China.The health reform legislation of 2010 was a small step in the right direction. which would be unpopular. there might be fewer jobs in those nations.Re-balancing trade is very complicated and not so easy to achieve. end involvement in foreign countries. The 2020 Election Imagine the year 2020. with the threat of civil unrest in China. There are economic and political ramifications. the disproportionate share goes to capital investment. increased tariffs on all imports. refuse to pay interest on . Economic prosperity produces a “virtuous cycle” with the wealthy accepting a smaller share because they still come out ahead and when the less wealthy get a larger share. It is risky to rely on currency regulation as a major jobs policy since it would lead to competitive devaluation of currency. a ban on foreign investments in the USA.
Profitable companies will be prohibited from laying off workers.our debts to China. 65%. 55%. We have taken our freedom back from the politicians.000 are taxed at 80%. Germany. “The people of this country need a . Just before the Great Recession. Any American sheltering income in a foreign nation will lose citizenship. they have to make do with less. it was 62% in the USA.philosophy of living. We need a better understanding of the confluence between economics. Why Can’t we be Content With Less? America has a cultural obligation to consume. business world. stupid. but it was tempered previously by thrift and selfsufficiency. Poor families with minimal education are hardest hit. the hypothetical scenario presented above would relate to voter frustration and anger as well as economics. The presidential victory speech of the Independent party candidate would indicate that the people have taken America back from big government. of happiness. Investment banking will be prohibited. provide for defense and pay our national debt. buy more private labels and generics. James Carville “It’s the economy. Even then. 2010-2020 Politics is bound up with economics.000 will be taxed at 2%/year. do one’s own repairs. consumption was 70% of GDP in USA. from foreigners robbing us of our jobs. not having. Earnings above $250. The Federal budget must be balanced and the Federal Reserve abolished. In order for the government to balance the budget. Japan. During the Great Prosperity. Even after mass production and mass marketing. Search for bargains. not wealth. All net worth above $100. The middle class adapts: live with parents and delay marriage and children. By contrast. fewer vacations. Earnings above that are 100% taxed. in Britain.000/year. Permanent frugality will not come naturally to the USA. Banks will only be allowed to take deposits and make loans. The result would be chaos in the stock market. personal income will be capped at $500.”Jobs and economy are almost always at the forefront of voters’ minds. 3. 52%. How could this have happened? 2 The Politics of Economics. politics and behavior. influence peddlers.” said John Ellsworth Jr in The North American Review of . lower grades of meat. The simple life has been viewed a honorable. from immigrants. from the money manipulators and corporate greed masters. give up 2nd cars. political world. big business and big finance. pork peddlers. America for Americans. materialism was eschewed. insider frauds will face prison for at least 10 years. from the elites... grow their own food. stop trade with China unless it floats its currency. from the rich. There is a perception that presidents are responsible for economic events.
shelter.October. a psychologist surveyed the Forbes wealthiest 100. The harder we work to buy things. self-actualizationour yearning to find meaning in our lives and to express ourselves. status and personal attractiveness. sex and sleep. The Protestant virtues of hard work and deferred gratification were at odds with a market which instructed us to have instant gratification and indulge ourselves.. according to a researcher who examined 256. an impossible contradiction. a form of deprivation that created a new industry of sleep related services-twice as much spent on this compared to a decade before. The process was fueled by anxieties over aging.000 people in 17 countries and found little connection between money and happiness. for which he sacrifices a real tranquility. then safety and security.” It is not implausible that Americans will find more contentment as we consume less. even as the stock market and home values soared. affiliation and esteem. At the bottom were food. In mid 2009.pursues the idea of a certain artificial and elegant repose which he may never arrive at. above a subsistence level. But that day never seems to arrive.. Once these needs are met. we will be satisfied. happiness is less about getting what we want than appreciating what we have. the less time and energy we have to enjoy them-a mixed message: Work like mad but enjoy life to the fullest. People were coping with declining wages by sleeping 1-2 hours less before the Great Recession. the putative father of market economics. Even Adam Smith. The argument for hard work has always had a lie for its premise: one day. if not in the work. Trying to purchase them actually robs them of their emotional sustenance They include love. our higher needs can’t be satisfied in the market. Sociologist Daniel Bell identified this cultural contradiction years ago. and even that was temporary. One could argue that with less paid work and money to spend people could enjoy simpler lives. Behavioral scientist Abraham Maslow in 1943 wrote a “Theory of Human Motivation” in which he posited a hierarchy of human needs. What money buys has diminishing returns as long as we are not destitute. The Archives of General Psychiatry released a study showing that 10% of Americans were on anti-depressants within the course of a year-the most prescribed medication in the country.It is this deception which rouses and keeps in continual motion the industry of mankind. 4 The Pain of Economic Loss .People in other countries are much the same. then in the accumulation of what we desire. The proportion on anti-depressants doubled in the decade before 2007.. Years ago... who had only slightly greater happiness than the average American. Much of what people want can’t be bought anyway. acceptance. writing in the 18th century in his Theory of Moral Sentiments (not in his Wealth of Nations) described the typical worker who “through the whole of his life. but we will have to make painful adjustments. 1932 during the Great Depression.
The concept of “conspicuous consumption” was noted by economist-sociologist Thorstein Veblen and “demonstration effect” by economist James Duesenberry-the social pecking order. The disappointments involved are akin to having a serious illness. hyperinflation and widespread unemployment. but they still had $1. Behavioral research shows that losses are more painful than gains are pleasurable. after WWI. Wall st awarded bonuses as if the crash hadn’t occurred.it isn’t just a matter of envy. The despair could make people angry at themselves and/or at the economic system or political or business leadership. rebuilding was difficult because of reparations.3 million. 5. we feel poorer. we retain its memory and regret the loss.when people at the top do better. When we lose something of value. linked to profitability and stock performance.We compare ourselves. People could become angry reactionaries. Adding Insult to Injury The second painful adjustment is the realization that the standard of living will be below that of the rich. Suicide rates go up if people remain jobless. the share going to the top will increase and the share everywhere else will decrease. .27 trillion. America’s rich took a hit in the crash of 2008-the Forbe’s 400 lost $300 billion. Wall st resisted efforts to tie its hands. most Germans became poorer. The 25 leading hedge fund managers did even better than investment bankers and corporate executives. Value is often figured as its relation to what other people have. When the top earners do better. Inequality produces dissatisfaction. ie not only the indispensable to support life but the perceived necessities which are not really indispensable. at $1 billion each on the average. In Germany. Most of their assets were in financial instruments whose value rose as companies cut costs and payroll and expanded global operations. the social norms change upwardly. Germany became eager for an easy solution and a scapegoat as presented by Adolf Hitler. most of the rich had bounced back. The major assets of the middle class were their homes which lost value. If this continues. especially if we relied on it or depended on it. The median pay of CEO’s dropped 15% to $ 7. and did so in the USA consistently during the Great Depression.There will be a lower standard of living. but would be shameful not to have.Twenty-five % of top executives had increases in their retirement plans-their contracts guaranteed fixed returns. Pay and benefits at Wall st big banks dropped 11%. experience more stress than societies which never had as much to begin with. The hardest loss for middle-class America will be loss of expectations that the future will be materially better for themselves and for their children. but not necessarily. By the end of 2009. Societies whose living standards drop. although 5000 of Wall st “top performers” received multi-million dollar bonuses. and the gap was widening again. because what we possess sets the standard for how we see our subsequent well being. Compensation packages continue to soar. A year after the crash.Gains and losses aren’t symmetrical.
revolutions and mass violence. The . test preparation services. lowering of our standard of living.” He cites insider and junk bond trading scandals with Ivan Boesky and Michael Milken. But the situation is changing. In 2008. Here. many feel poorer and frustrated. medical care. Other corporations cooked their books including Adelphia. who attend private schools of high quality. 6. junk bonds and private equity deals that flipped companies like cards. The rich sequester themselves from the public and take their tax money with them. Reich also cites the Savings and Loan bank bailout. However. We often aspire to become rich. Nearly every major investment bank defrauded investors by urging them to buy stocks that the bank’s analysts thought were “junk”. costing taxpayers 125 $billion. He cites the corporate looting scandals where CEO’s of Enron and Worldcom padded their nests at the expense of investors. Global Crossings. things in limited supply are becoming less available to the middle class. The best health care facilities have become available only to the rich. we don’t like wealth exercising political power. beautiful property. who continued to reward incumbents on the upswings and punish them on the downswings. Entry to prestigious universities is easier for the wealthy . coaches and who donate large amounts of money. Sunbeam and Imclone. slashed payrolls and benefits. wider financial inequality.During the Great Recession. As a result of these deprivations. with corrupt practices by bank owners like Charles Keating donating $300.” (economists Perotti and Alesina) which increase the probability of coups.000 to 5 senators “who greased the skids with federal regulators. the fall of Lehman Brothers caused panic among banks who had made bad bets. lobbying credit rating agents to give them high ratings. He cites Goldman Sachs creating bundles of mortgage debt and selling them as good investments. Reich cites union busting. Outrage at a Rigged Game Americans might accept low wages and employment. have access to tutors. Wall st made large and risky bets with other people’s money before the crash of 2008. The rich have bid up the price of desirable private modalities and reduced the quality of public modalities. Tyco. Major accounting firms admitted negligence or paid fines without admitting guilt. The game is tilted towards wealth and big business. Education. burdened them with debts and forced mass layoffs. This hasn’t happened in the USA so far. then selling them short when the bottom fell out of the mortgage market. “Income inequality increases social discontent and fuels social unrest. This didn’t change the voting records of Americans. but we won’t tolerate a rigged economic system. conspicuous consumption became unseemly. opulence has provoked more ambition than hostility. resplendent pay packages of corporate and financial executives and traders. cutting of marginal taxes on the rich and de-regulation of Wall st.
today. “Deep wellsprings of empathy are commonly found in the troughs of anticipated employmnt” The banks were saved from bankruptcy and they used some of their winnings to essentially bribe lawmakers. but appeared to do neither-the banks were solvent as a result and could do new deals. being dependent on them for money. Reich points out that there is a revolving door between the business world and jobs at the Treasury Department and banking committees of the legislators. a former CEO) and Blankfein was CEO. After the bailout.47 billion in 2009. It is difficult for legislators to hold Wall Street and big business accountable while at the same time. since there is vagueness about who registers and enforcement is casual. the banks were profitable again including mortgage profits. despite the internet process of harnassing small donors. political corruption is not as overt. but businesses couldn’t get loans. Paulson and Geithner argued that the Wall Street banks were too big too fail because the rest of the financial system had become dependent on them. When AIG bailout was considered AIG owed 13 billion to Goldman-Sachs.nation was warned of economic collapse by Paulson (Bush Treasury Sec’y) Bernanke (Fed Res chmn) Geithner (Fed res NY) and 700 $ billion bailout was given to banks (in secret deals). Wells Fargo. At the turn of the 20th century. Also. Within a year. Goldman-Sachs would have collected far less.44 billion in 1998 to $3. sacks of money were deposited on the desks of friendly legislators. there has been an enormous surge in lobbying from $1. The government was subsidizing bank’s mortgage loans. This was billed as saving Main st and jobs. no anti-trust laws were invoked to break them up. JPMorgan Chase) to help them merge with weaker institutions. Had AIG been forced into bankruptcy. The Supreme Court fostered this even more with the Citizens United decision making corporations equal to individuals. These facts were not publicly disclosed or acknowledged for many months. Paulson and Geithner consulted with Blankfein. few people could renegotiate mortgages. homeowners couldn’t declare bankruptcy.Goldman-Sachs and Citigroup were among the biggest bailout beneficiaries. (mortgage rates were not cut). Also. but the savings weren’t being passed on to homeowners. but the proposed rules were filled with loopholes. Paulson and Geithner had connections at Goldman Sachs ( respectively. homeowners were not allowed to declare bankruptcy to avoid forfeiting their homes. As the costs of campaigns have escalated. helping to engineer the bailout.-this is an underestimate. there was talk about regulation to avoid similar problems in the future. despite the plea that the banks were too big to fail. and appointed by Rubin. Later on.. political contributions from wealthy people become more important. At the same time. The game was fixed. several of the big banks were made even bigger by providing subsidies ( to Bank of America. The photo of an executive in the company of a legislator .Banks could value their bad loans however they wanted and the Federal Reserve kept their interest rates so low that the banks borrowed essentially free. former CEO. It began to look like an insider deal for Wall st at the expense of others.
Meanwhile. isolationism. these people will give money also and ask that others do so. Social mobility is being limited by economic circumstances. the situation could still be tolerated. Bush lowered the estate tax and scheduled its repeal in 2010. In order to be enacted. .they buy his mind. because of lower revenues. major legislation usually requires payoffs to powerful corporations and industries. Obama had to guarantee the health care industry that they would come out ahead with his proposed health care legislation.in time. rather than the financial assets of the wealthy. giving government contracts. Starting salaries for lobbyists have balooned to about $500. The middle class has become more sensitive to the government’s advancing corporate interests. Some legislators are even pushing a national sales tax to replace the federal income tax. opening foreign markets. more than 30% had done so.The politician may or may not get a contribution.commands attention to the power liaison between the two. If Americans feel they can get ahead despite the tilted playing field. He is not immersed in the lower economic echelons because he is immersed in the culture of the comfortable. former chairs of committees were getting $2 million or more to influence legislation in their former committees. This produces anger and could usher in the Independence party as hypothetically described previously. congress had to promise subsidies for the nuclear industry. In 2001. The market for trading permits would be open to speculators and derivatives. The politician is relatively isolated from the concerns of less influential people. state and local governments increase regressive sales taxes. on the richest 2% of the country and as a result it will drain $485 billion dollars during the next decade. Politicians rarely speak of this problem. The Center for Public Integrity says that between 1998 and 2004 (both Democratic and Republican years in power) more than 2200 former federal officials registered as lobbyists and so did more than 200 former members of congress. but access to wealth is stacked against the middle class.a large source of revenue for Wall st. all raising their share prices. Obama and the Congress didn’ t restore this tax. The wealthy do not buy the politician’s vote. Similarly. by 2009. and agribusiness ethanol and so-called clean coal. but he gains access to a network of wealthy people. 3% of retiring congress people became lobbyists. to get caps on greenhouse gases and allow permits to pollute within the caps. local property taxes fall on the shoulders of homeowners. The perceived entree to the legislator’s influence is useful in dealing with the executive’s contacts. At the same time. In the 1970‘s.000. intolerance and paranoia. bringing with it nationalism. using tax-payer dollars to subsidize R&D. The middle class is also noting the regressive direction of tax policy. who are represented by polls and occasional political appearances. Another example is the low tax paid by certain money managers (hedge funds and private equity funds) because their fees are treated as long-term capital gains-the reason was that both Senate Republicans and Democrats need their campaign donations.
it cannot consume what the nation produces. Economic anger was evident when the government bailed out AIG with $150 billion. What Should be Done: A new Deal for the Middle Class Reich states that he could have grounded his argument in morality-it is unfair that some have such a large share of the income while others struggle to make ends meet. if they believed the people at the top would have greater losses than those lower down.. Anger at the bailout produced political losses for some politicians who had voted for it. Reich refers to a Russian folk tale about a peasant whose neighbor becomes wealthy enough to have a cow. Backlash can be seen in the turn against international trade and immigration. At a national convention of “Tea Party Nation” the “cult of multiculturalism” was denounced and shouts of “Take back our country” were heard.The “Tea Party” has derided establishment Republicans.000 spa resort holiday. elites. even if that were to discourage investment. intellectuals.” PART III The Bargain Restored 1. The peasant’s response is to pray that the cow be killed. Reich thinks that the Independence party or its facsimile will kill the cow. There are attacks on “the elites. because that would hurt the rich most of all. and threatens them with defeat.” Talk radio and yell TV emit vitriol towards races. foreigners. There were death threats against AIG executives. He states that he could have based it on traditional American values-lopsided distribution is at odds with our history and the ideal of equal opportunity. Instead.”Kill the cow populism.Tariff reduction and trade agreements have been put on hold. The first is economic-unless the middle class gets its fair share.who think they are above everybody else. There has been increasing virulence and shrillness in politics. some would slash investment and trade with other countries despite the subsequent loss of cheaper goods from abroad. and the firm gave its executives $165 million in bonuses and a $440. Richard Hofstader (historian) described a recurring strain of paranoia in American politics. They would support confiscatory taxes on the wealthy. Reducing unfair winnings is almost as important to people as getting a modest share for themselves. and anger was directed against people who had great wealth and connections and were considered to have abused them. Laws have been passed encouraging racial and ethnic profiling and baning ethnic studies. he bases his argument on two threats that such inequality poses for everyone.. The Politics of Anger. politicians. They would opt to kill the cow.7. For example. . executives.
Important steps to reverse these trends-Some steps would be costly. top 2% pay 50% over 260.widening inequality with the perception that big business. creating more jobs. when added to the taxes from the 50-160. Supplement the wages of the middle class-add money to their payroll checks.000/yr) pay 55% on marginal income. The surplus could be used for other initiatives and for reducing the federal deficit. and because they would generate sustainable growth. Wall st and the government are in cahoots.000 and 160.000 or less income would receive a supplement of $15.000/year and zero for $50.000 pay 40% on marginal income. which would gradually increase to encourage less use of carbon. A carbon tax would encourage reduction of greenhouse gases through use of alternative energy sources.000/year (no matter what the source of income) would be cut to 10% of earnings. $5000 for $40. We provide this for low income workers (Milton Friedman’s idea) through the earned income tax credit (EITC). would raise $600 billion more than our present tax system. This would more than pay for the income supplements and tax cuts proposed. and could help develop cheaper sources. Reich suggests that full time workers with $20. between 90.The tax rate for full-time workers between $50. EICT was the largest anti-poverty program.000/year. but could be paid for so they wouldn’t increase the national debt.000 and top 5% over 160.. over 24 million households receiving benefits. $10. They gain power by turning public anxiety into resentment against particular people and groups. The public would pay this tax indirecly as the price of goods rose in proportion to its carbon use. Reich proposes top 1% of earners (more than 410.000 the taxes would be 20% of earnings. A reverse income tax. Add the $210 billion carbon tax for the first year and total is $810 billion .000 for $30.00/metric ton. Lost revenues would be compensated for by a carbon tax on fossil fuels. which would decline incrementally as income increased. . These taxes . In 2009. The other threat is political.000. the carbon tax would increase energy demand.000-90. The cost of tax cuts to the middle income families would be billions more.00/metric ton . Higher Marginal Taxes on the wealthy. the tax would raise $210 billion the 1st year and rise to $115. By stimulating such investments.000 group. gives fodder to the demagogues on the extreme right and extreme left.and the result would be slow economic growth and boom and bust economies.000/yr. yielding $600 billion. they would shrink the debt as a proportion of the GDP. If the initial tax was $35. The yearly cost of wage supplements to the federal government would be $633 billion. This reduces poverty and also increase the incomes of families that will spend the money. Those at the top should pay a higher tax on their incomes.
which should improve overall performance and give purchasing power to lower and middle income families. between 20-25%. The rich would receive a smaller share of the economy’s overall gains. growth rate was 3%. This would infuse billions of dollars to upgrade plants and equipment and to hire better teachers.000 even if it were from capital gains would be taxed at 10%. richer Americans would likely come out ahead as they did during the Great Prosperity. for a finite period (eg 2 years). the schools would have to compete with other schools for the revenue. Higher taxes have not produced slower growth. the top rate has been 40% and after deductions. The costs would drop as the skills were acquired and the rate of long-term unemployment decreased. Hence. average growth rate was 3. However. School Vouchers based on Family Incomes Improving the earnings in the bottom half requires improving education and skills. someone with income of several million dollars would pay 55% on all income.) >From 1936-1980. Reich estimates the cost of a re-employment system to be $3 billion above the 2. There would be higher growth and profits.income taxpayers with an average income of over $300 million dollars. For job retraining. unemployment worked because there were similar jobs to go back to. This isn’t a “Robin Hood” re-distribution. the top marginal rate was 70% or more.35 billion now spent on unemployment insurance /year. The middle class would spend more and move the economy toward full capacity. 90% income support would be provided for one year during re-training. ( he mentions that the 400 highest. Now. He expects that wealthy suburban school districts would compete for these children and the vouchers they bring. This would stimulate movement into new jobs that pay less. saving cost of unemployment benefits. top rate was 70-92%. but the overall gains would be larger than they would be otherwise. Income between 50 and 90. The schools would be either private “charter schools” or public schools. A reemployment system rather than an unemployment system. $20 billion/ . There should also be vouchers for early childhood education.Income from capital gains would be treated as wages or salaries.Any shortfalls would be made up for by a severance tax on profitable corporations that lay off workers. including capital gains. when the income tax rate was 35-39%. we have to re-train for new jobs. During 1951-1980. paid 17% of total income in taxes in 2007-this is not a progressive tax. Wage insurance could be part of this process. Previously. Since 1987. Spending on public schools should be replaced by vouchers inversely related to family income that can be cashed in at any school meeting standards. Reich proposes that after three years. and adds revenue from income taxes.Between 1983 and the Great Recession. People would be eligible for 90% of the difference between old wages and new wages.7%. This would introduce competition into the school system.
. To attend private higher education. generous financing of elections. museums and libraries. The savings from extending Medicare to all would be $60-400 billion/year.These public goods make up to some extent for stagnant or declining wages and would provide more jobs. Medicare for All The next stage toward health care reform should be Medicare for All. but the percentage should be geared to be self-funding. federal loans should be available. Tuition should be free at public colleges and universities. whose social contribution is useful and desirable. especially in lower paying professions. says Reich-it’s the most efficient way. for profit insurers. enough to subsidize the coverage without more taxes. Expanded public transportation would reduce traffic congestion and carbon emissions. twice the cost in Canada. free of charge. The pay back should be a fixed percentage of taxable income. only on including a public option. We need strong campaign-finance laws. Medicare administrative costs are 2% compared to 11% with Medicare Advantage (private Medicare). Over 30% of health care spending goes for administrative costs. This way. money coming from the reverse income tax.) Public Goods Reich suggests an increase in public transportation. we depend on private. parks. that is not a comment on single-payer preference. Reich points out that 3/4 of people polled said that it was important to give people a choice of both a public and private plan. Many are concerned about their eventual ability to pay back these loans. After that. Money Out of Politics Money increasingly distorts political decisions. without additional federal revenues. stricter limits on contributions and “issue advertising” which is partisan. with student loans. loans would be considered fully paid. separating quid from quo. Reich thinks that the financing of higher education should be changed. College Loans linked to Subsequent Earnings Education is financed increasingly. eg 10% for their first 10 years of full-time work. Ten percent may not do it. recreational facilities.year should be devoted to vouchers for early childhood education. lower income graduates would be subsidized by higher income graduates. (However. paid into a fund that finances public higher education and provides loans for private education. The claim of support would not be supported by a public record. We should require that all campaign contributions go through blind trusts to hide the origins of the contributions and thereby help avoid quid pro quo political favors. Allowing Medicare to bargain with drug companies for cost of drugs would lower costs even more. and would require subsidies for middle and lower income families.
which could come from a major crisis in society. Housing foreclosures. in order to get reforms started. restrict immigration and limit global investment. Barack Obama had a similar situation early in his administration. languishing wages and slow growth may not be enough to upend vested interests “that can too readily hold onto their power and increasingly anachronistic views” as Marriner Eccles described them in the 1920‘s and early 1930‘s. Only the most globalized American firms can create profits abroad. In reassuring the public that jobs would return. less economic security. Reich states. There will be an increasing number of bills to raise tariffs and reduce trade. An aftershock with a deep recession might spur reform. The major fault line in politics will not be between Republicans and Democrats. Health care reform appeared tangential to these other more immediate problems and the public was not as actively supportive of reform as it needed to be to weaken the hold of vested interests. The same happened with reforms for the financial system. There will be attempts to limit firing of employees and outsourcing abroad. break up cartels and constrain investments.2 How It Could Get Done The agenda is realistic and doable. Instead. Theodore Roosevelt and Woodrow Wilson tried to institute reforms. A strong middle class is necessary to purchase products and services. but a slower aftershock. the White House had to broker profitable deals for the health insurance and pharmaceutical industries. cap earnings. they defined the goals narrowly. They should have been described as efforts to change the bestowing of outsized rewards on a few at the risk and extraordinary cost of almost everyone else. It became a technical fix on conducting business and the public lost interest once the worst had passed. political support for large scale reform diminished. The resulting legislation is inadequate. but the postponement cannot last for long. and a backlash of political control via political contributions. it will be between . widening inequality. We were left with diffuse economic problems that seem unrelated and inexplicable. he failed to expose the long term trend and its dangers. continued high unemployment. with some success. with negative effects on the business world’s earnings. The Obama administration postponed the day of economic reckoning. To implement it would require cooperation at all levels of society. with years of high unemployment. soaring pay for the elite produce bewildered and angry responses. to reduce risks to the financial system. There will be increasing public anger. limit wealth and impose confiscatory taxes. lower earnings. says Reich. The early stirrings of backlash may yet convince established interests that reform is needed to forestal worse repercussions. but major reforms had to await FDR presiding over the Great Depression. As a result. Sooner or later the powers that be will become concerned about the lackluster economy. uniting the grassroots to seek reform rather than reactionary “kill the cow” politics. but when the immediate crisis was contained.
America has lots of resilience and common sense.” When the establishment sees where this is heading.with reforms that widen the circle of prosperity or with demagoguery that isolates us from the world. When faced with a crisis. income and opportunity. The question is how will the pendulum swing back in our economy. there will likely be a realization that the alternative to change is worse and support reforms leading to fairer distribution of wealth. The basic bargain is fairness and the need for stability will promote reform in that direction. we have become pragmatic and risen to the occasion.establishment and angry populace to “take back America. shrinks the economy and sets Americans against each other. . The lopsidedness of our economic situation not only diminishes economic growth but tears at the fabric of society.