Friday, September 03, 2010

Robert Reich's Rational Plan to End the Great Recession

Reich is right.  The fundamental economic disorder so miserably afflicting America's (and the developed world's) economy is inequality.  Income inequality to be precise.  The bottomless wealth chasm that has opened up between the richest of the rich and the now distant and reeling middle class.

In today's New York Times, Reich explains how America blundered into the Great Recession and the only way it can dig itself out.  The path to ruin:

This crisis began decades ago when a new wave of technology — things like satellite communications, container ships, computers and eventually the Internet — made it cheaper for American employers to use low-wage labor abroad or labor-replacing software here at home than to continue paying the typical worker a middle-class wage. Even though the American economy kept growing, hourly wages flattened. The median male worker earns less today, adjusted for inflation, than he did 30 years ago.

But for years American families kept spending as if their incomes were keeping pace with overall economic growth. And their spending fueled continued growth. How did families manage this trick? First, women streamed into the paid work force. By the late 1990s, more than 60 percent of mothers with young children worked outside the home (in 1966, only 24 percent did).

Second, everyone put in more hours. What families didn’t receive in wage increases they made up for in work increases. By the mid-2000s, the typical male worker was putting in roughly 100 hours more each year than two decades before, and the typical female worker about 200 hours more.

When American families couldn’t squeeze any more income out of these two coping mechanisms, they embarked on a third: going ever deeper into debt. This seemed painless — as long as home prices were soaring. From 2002 to 2007, American households extracted $2.3 trillion from their homes.

Eventually, of course, the debt bubble burst — and with it, the last coping mechanism. Now we’re left to deal with the underlying problem that we’ve avoided for decades. Even if nearly everyone was employed, the vast middle class still wouldn’t have enough money to buy what the economy is capable of producing.

Where have all the economic gains gone? Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income.

...The rich spend a much smaller proportion of their incomes than the rest of us. So when they get a disproportionate share of total income, the economy is robbed of the demand it needs to keep growing and creating jobs.

What’s more, the rich don’t necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe where they’ll summon the highest returns — sometimes that’s here, but often it’s the Cayman Islands, China or elsewhere. The rich also put their money into assets most likely to attract other big investors (commodities, stocks, dot-coms or real estate), which can become wildly inflated as a result.

This is precisely what author and Republican, Kevin Phillips, described in his 2005 book, American Theocracy.  Phillips chronicled how every Western superpower over the centuries has caused its own downfall by outsourcing manufacturing in a quest for cheap-labour driven profits, thereby using its wealth to grow its successor's economy.
How can America, caught in this bind, dig itself out?  Not by eating the rich, not really:
"...THE Great Depression and its aftermath demonstrate that there is only one way back to full recovery: through more widely shared prosperity. In the 1930s, the American economy was completely restructured. New Deal measures — Social Security, a 40-hour work week with time-and-a-half overtime, unemployment insurance, the right to form unions and bargain collectively, the minimum wage — leveled the playing field.

In the decades after World War II, legislation like the G.I. Bill, a vast expansion of public higher education and civil rights and voting rights laws further reduced economic inequality. Much of this was paid for with a 70 percent to 90 percent marginal income tax on the highest incomes. And as America’s middle class shared more of the economy’s gains, it was able to buy more of the goods and services the economy could provide. The result: rapid growth and more jobs.

By contrast, little has been done since 2008 to widen the circle of prosperity. Health-care reform is an important step forward but it’s not nearly enough.

...Policies that generate more widely shared prosperity lead to stronger and more sustainable economic growth — and that’s good for everyone. The rich are better off with a smaller percentage of a fast-growing economy than a larger share of an economy that’s barely moving. That’s the Labor Day lesson we learned decades ago; until we remember it again, we’ll be stuck in the Great Recession."
Reich's evaluation of the American problems and solutions should resonate with Canadians also.   Thanks only to an economy more heavily weighted on resources that manufacturing (at least compared to the U.S.), Canadians benefitted from having a greater hunk of our economy that couldn't be shipped overseas.  That said, we have also allowed a potentially debilitating wealth gap to grow in Canada.   As demonstrated in the book The Spirit Level, income inequality is a scourge to every country, every society - at least those within the developed world.
Curiously, however, income inequality, the widening gap between rich and poor, is an issue that never passes the lips of Stephen Harper or Michael Ignatieff.   For Harper that's predictable.   For Ignatieff it's worrying.


Anonymous said...

Swell post, DL.

Worrying, indeed.

A while back a friend compared the Libs and the CPC saying that Libs struck her as being far less frightening because they were merely(?) opportunists.

Perhaps succinct statements (such as yours) of the stage on which these players make their entrances and their exits will lead to a more demanding electorate.

A opportunist can be relied upon to give the crowd what it wants.

Hammer on!

The Mound of Sound said...

The wants of a people or society matter little if they're not balanced by their actual needs. The voting public are as blameworthy as those who pander for their votes when they reject that balance. Yet it is the responsibility of those who would lead to do just that - lead rather than pander or cater.

Yes, we're worried about healthcare and, yes, we're worried about our pensions but those issues could be rendered all but irrelevant if we don't tackle the hard issues such as climate change and inequality. There are so many of these hard but unavoidable issues arriving and yet to come that we may require a very special breed of leadership if we're to meet them and retain a viable, functioning democracy.