Aftershock – by Robert B. Reich

There are many ways to learn about Reich’s views on the economy.  He starred in a recent documentary, in theaters last September http://inequalityforall.com/.  A lengthy interview with Reich regarding the movie is here.  He has also been interviewed in many places; I recently heard him on the Commonwealth Club radio program.

I suggest you read his book.  It is current (copyright 2010, 2011, 2013) and, especially in the appendix, has informative graphs that present well on my e-reader.  The short book (136 pages in the main body) is so packed with information that it makes for a long review.

Reich says the basic bargain of America is that workers receive a proportionate share of economic growth; that wages correlate with productivity.  He disputes Fox News’ Bill O’Reilly who called him a communist who secretly adores Karl Marx: “I’m not, and I don’t” Reich says.  “Inequality is inevitable and desirable.  It gives people incentive… But at some point inequality of income and wealth becomes so wide as to harm society.”

“The fundamental problem is that Americans no longer have the purchasing power to buy what America produces” and neither does any other nation.  The link of pay to production is broken.  “It is both an economic challenge and a moral challenge; concentrated income and wealth will threaten the integrity of our society, and will undermine democracy.”

Reich spends a lot of the book comparing the Great Depression era to our current Great Recession.  The many parallels are interesting and are combined with a short history of Marriner Eccles, a millionaire by age 24 and the first chairman of the Federal Reserve.

Eccles thought he understood the economy of the 1920s, but realized “I knew less than nothing about [finance’s] economic and social effects.”  Common wisdom among business leaders of the time was that the federal government’s only role was to balance the budget, and if individuals who were “spendthrifts and wastrels” would do the same, the economy would rebound on its own.  Years before John Maynard Keynes, Eccles thought this was nonsense because “the economic game was not being played on a level field.  It was tilted in favor of those with the most wealth and power.”  Eccles advised the U.S. Senate to offset the lack of consumer and business spending with federal spending, and to go into debt to provide relief for the unemployed, public works, government refinancing of mortgages, a minimum wage, government old-age pensions, and higher taxes on income and inheritance.

Following the Great Depression, America entered the Great Prosperity of 1947 through 1975.  Mass production and mass consumption balanced, prosperity was widely shared, and productivity grew.  In the subsequent Great Recession we got ourselves into the same 1920s mess again.  Middle class wages (Reich defines the middle class as 80% of the country) have stagnated since 1975 despite productivity increases.  Income increasingly has gone to the top 10% and especially the top 1%.  Reich shows disdain for the “much-vaunted Wall Street ‘talent’ that plunged the nation into financial crisis.”  He places blame on increased power of the wealthy elite, exercised through campaign contributions, lobbyists, think tanks, and public relations campaigns.

Americans have compensated for stagnant wages with two income families, longer work hours, and credit, but those mitigations have run out.  Reich sees the current situation not as a moral failure of the middle class, but as a failure of the economy.  If Americans’ incomes had kept pace with the economy’s gains, they could have afforded the modern lifestyle, just as they did during the Great Prosperity.  Americans today are left “bewildered, anxious, and, in many cases, angry.”

To regain prosperity, we must understand what is wrong.  Reich acknowledges many factors contribute, such as globalism, out-sourcing, automation, and the “daredevil antics” of Wall Street.  But he feels that, at the core, America’s problem is the falling income of the middle class.

Reich suggests a “practical, doable”, and “commonsensical” agenda.  He claims his argument could be based on fairness or traditional American values. Instead he chooses pragmatism:

• Economic – If the middle class does not receive enough income to purchase what America produces the economy will slow and be subject to severe booms and busts.
• Political – The perception that big business, big government, and Wall Street are in cahoots gives fodder to extremists on the left and right.  This can “cause great harm.”  Reich is not alone in this view.

Reich recommends:

• Expanding the Earned Income Tax Credit (reverse income tax) into higher income levels until it peters out at $50,000.  This would address the current lack of purchasing power and the political perception that the game is rigged in favor of the rich and powerful.
• Imposing a carbon tax.  Using the revenues from this tax to offset the expanded reverse income tax would leave lower-income Americans far ahead despite resultant higher costs for energy.
• Taxing capital gains as earned income, and raising the top marginal tax rates.  This would lead to a budget surplus to reduce the deficit and/or pay for other public programs.  Reich provides a lot of justification for this.  He reminds us that the top 10% take home almost 50% of the nation’s total income.  He thinks the wealthy will eventually see that a more prosperous economy will benefit them; that a bigger economic pie will ultimately give them more.  Graphs in the appendix show that high marginal tax rates have accompanied strong economic growth in the past.
• Creating a “reemployment” rather than “unemployment” system.  The current system was created to be a short bridge between similar jobs.  In today’s economy, most people will never get another job like their old job.  Reich offers details of how to offer retraining and encourage people to take lower paying jobs rather than remain unemployed.
• School vouchers based on family income, since education and skills offer the best long-term way to boost income.
• College loans paid back by a fixed percentage of subsequent earnings for a specific number of years.  Reich feels this would encourage people to enter lower-paying professions that benefit the country overall.
• Medicare for all.  Reich thinks our health care system is still broken.  He notes that half of Americans already receive public health care, through Medicare, Medicaid, Children’s Health Insurance, Veterans Health Administration, and government employment, so it is a less sweeping reform than people might think.
• Public goods such as transportation, parks, museums, and libraries.  These resources improve quality of life and help make up for stagnant wages.
• Take the money out of politics.  On the Commonwealth Club, Reich said this would be his “what to do in ten words or less” recommendation.  He has several suggestions, like campaign contributions going into blind trusts so candidates do not know who they are beholden to.  “Money is the quid pro quo for political favor.”

If you would like to learn about America’s economy since 1920, this is a fine place to start.  If you agree with Reich, you can become a better advocate.  If you disagree with him, you’ll be able to do a better job refuting his arguments.  Things are going to change and we should all be part of the debate.  Reich says “America has an enormous reservoir of resilience and common sense.”

I recommend this book.