We're in a Recession Because the Rich Are Raking in an Absurd Portion of the Wealth

[one...two...tree 2,762]

Robert Reich

Wall Street's banditry was the proximate cause of the Great Recession, not its underlying cause. Even if the Street is better controlled in the future (and I have my doubts), the structural reason for the Great Recession still haunts America. That reason is America's surging inequality.

Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation's total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the circle of prosperity. By the late 1970s the top 1 percent raked in only 8 to 9 percent of America's total annual income. But after that, inequality began to widen again, and income reconcentrated at the top. By 2007 the richest 1 percent were back to where they were in 1928—with 23.5 percent of the total.

Each of America's two biggest economic crashes occurred in the year immediately following these twin peaks—in 1929 and 2008. This is no mere coincidence. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don't have enough purchasing power to buy what the economy is capable of producing. America's median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class can boost its purchasing power is to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn't pay their bills, and banks couldn't collect.

China, Germany and Japan have surely contributed to the problem by failing to buy as much from us as we buy from them. But to believe that our continuing economic crisis stems mainly from the trade imbalance—we buy too much and save too little, while they do the reverse—is to miss the biggest imbalance of all. The problem isn't that typical Americans have spent beyond their means. It's that their means haven't kept up with what the growing economy could and should have been able to provide them.

A second parallel links 1929 with 2008: when earnings accumulate at the top, people at the top invest their wealth in whatever assets seem most likely to attract other big investors. This causes the prices of certain assets—commodities, stocks, dot-coms or real estate—to become wildly inflated. Such speculative bubbles eventually burst, leaving behind mountains of near-worthless collateral.

The crash of 2008 didn't turn into another Great Depression because the government learned the importance of flooding the market with cash, thereby temporarily rescuing some stranded consumers and most big bankers. But the financial rescue didn't change the economy's underlying structure. Median wages are continuing their downward slide, and those at the top continue to rake in the lion's share of income. That's why the middle class still doesn't have the purchasing power it needs to reboot the economy, and why the so-called recovery will be so tepid—maybe even leading to a double dip. It's also why America will be vulnerable to even larger speculative booms and deeper busts in the years to come.

The structural problem began in the late 1970s, by which time a wave of new technologies (air cargo, container ships and terminals, satellite communications and, later, the Internet) had radically reduced the costs of outsourcing jobs abroad. Other new technologies (automated machinery, computers and ever more sophisticated software applications) took over many other jobs (remember bank tellers? telephone operators? service station attendants?). By the '80s, any job requiring that the same steps be performed repeatedly was disappearing—going over there or into software. Meanwhile, as the pay of most workers flattened or dropped, the pay of well-connected graduates of prestigious colleges and MBA programs—the so-called "talent" who reached the pinnacles of power in executive suites and on Wall Street—soared.

The puzzle is why so little was done to counteract these forces. Government could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service: big-box retail stores, restaurants and hotel chains, and child- and eldercare, for instance. Safety nets could have been enlarged to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay drops, transition assistance to move to new jobs in new locations, insurance for communities that lose a major employer so they can lure other employers. With the gains from economic growth the nation could have provided Medicare for all, better schools, early childhood education, more affordable public universities, more extensive public transportation. And if more money was needed, taxes could have been raised on the rich.

Big, profitable companies could have been barred from laying off a large number of workers all at once, and could have been required to pay severance—say, a year of wages—to anyone they let go. Corporations whose research was subsidized by taxpayers could have been required to create jobs in the United States. The minimum wage could have been linked to inflation. And America's trading partners could have been pushed to establish minimum wages pegged to half their countries' median wages—thereby ensuring that all citizens shared in gains from trade and creating a new global middle class that would buy more of our exports.

But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It increased the cost of public higher education and cut public transportation. It shredded safety nets. It halved the top income tax rate from the range of 70–90 percent that prevailed during the 1950s and '60s to 28–40 percent; it allowed many of the nation's rich to treat their income as capital gains subject to no more than 15 percent tax and escape inheritance taxes altogether. At the same time, America boosted sales and payroll taxes, both of which have taken a bigger chunk out of the pay of the middle class and the poor than of the well-off.

Companies were allowed to slash jobs and wages, cut benefits and shift risks to employees (from you-can-count-on-it pensions to do-it-yourself 401(k)s, from good health coverage to soaring premiums and deductibles). They busted unions and threatened employees who tried to organize. The biggest companies went global with no more loyalty or connection to the United States than a GPS device. Washington deregulated Wall Street while insuring it against major losses, turning finance—which until recently had been the servant of American industry—into its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation's profits. And nothing was done to impede CEO salaries from skyrocketing to more than 300 times that of the typical worker (from thirty times during the Great Prosperity of the 1950s and '60s), while the pay of financial executives and traders rose into the stratosphere.

It's too facile to blame Ronald Reagan and his Republican ilk. Democrats have been almost as reluctant to attack inequality or even to recognize it as the central economic and social problem of our age. (As Bill Clinton's labor secretary, I should know.) The reason is simple. As money has risen to the top, so has political power. Politicians are more dependent than ever on big money for their campaigns. Modern Washington is far removed from the Gilded Age, when, it's been said, the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. Today's cash comes in the form of ever increasing campaign donations from corporate executives and Wall Street, their ever bigger platoons of lobbyists and their hordes of PR flacks.

The Great Recession could have spawned another era of fundamental reform, just as the Great Depression did. But the financial rescue reduced immediate demands for broader reform. Obama might still have succeeded had he framed the challenge accurately. Yet in reassuring the public that the economy would return to normal, he missed a key opportunity to expose the longer-term scourge of widening inequality and its dangers. Containing the immediate financial crisis and then claiming the economy was on the mend left the public with a diffuse set of economic problems that seemed unrelated and inexplicable, as if a town's fire chief dealt with a conflagration by protecting the biggest office buildings but leaving smaller fires simmering all over town: housing foreclosures, job losses, lower earnings, less economic security, soaring pay on Wall Street and in executive suites.

Legislation to improve America's healthcare system illustrates the paradox. Initially, the nation was strongly supportive. But the president and Democratic leaders failed to link healthcare reform to the broader agenda of widely shared prosperity. So as unemployment rose through 2009, the public understandably focused its attention on the loss of jobs and earnings, to which healthcare appeared tangential. Consequently, the nation was not as actively supportive of reform as it needed to be in order to weaken the hold of Big Pharma and private health insurers, who demanded that any so-called reform improve their bottom line. The resulting law is fodder for the right, because it won't adequately control future costs and requires Americans to pay more for health insurance than they would have had the deals not been made.

Much the same has occurred with efforts to reform the financial system. The White House and Democratic leaders could have described the overarching goal as overhauling economic institutions that bestow outsize rewards on a relative few while imposing extraordinary costs and risks on almost everyone else. Instead, they defined the goal narrowly: reducing risks to the financial system caused by particular practices on Wall Street. The solution thereby shriveled to a set of technical fixes for how the Street should conduct its business.

Even the disaster in the Gulf of Mexico could have been put into the larger frame of how giant corporations use their influence to capture regulators and impose risks and costs on the broader public, and the central importance of public health and environmental safety to widespread prosperity. But here again, the administration and Democratic leaders failed to connect the dots. The disaster morphed into a technical question of how to plug the gusher and a policy discussion of how best to regulate deepwater drilling.

If nothing more is done, America's three-decade-long lurch toward widening inequality is an open invitation to a future demagogue who misconnects the dots, blaming immigrants, the poor, government, foreign nations, "socialists" or "intellectual elites" for the growing frustrations of the middle class. The major fault line in American politics will no longer be between Democrats and Republicans, liberals and conservatives. It will be between the "establishment" and an increasingly mad-as-hell populace determined to "take back America" from them. When they understand where this is heading, powerful interests that have so far resisted reform may come to see that the alternative is far worse.

A virtual pendulum underlies the American political economy. We swing from eras in which the benefits of economic growth concentrate in fewer hands to those in which the gains are more broadly shared, and then back again. We are approaching the end of one such cycle and the start of the next. The question is not whether the pendulum will swing back but how it will swing—whether with reforms that widen the circle of prosperity or with demagoguery that turns America away from the rest of the world, shrinks the economy and sets Americans against one another.

None of us can thrive in a nation divided between a small number of people receiving an ever larger share of the nation's income and wealth, and everyone else receiving a declining share. The lopsidedness not only diminishes economic growth but also tears at the social fabric of our society. The most fortunate among us who have reached the pinnacles of economic power and success depend on a stable economic and political system. That stability rests on the public's trust that the system operates in the interest of us all. Any loss of such trust threatens the well-being of everyone. We will choose reform, I believe, because we are a sensible nation, and reform is the only sensible option we have.

Robert B. Reich has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He also served on President Obama's transition advisory board. His latest book is Supercapitalism.

[IndigoSkies 168]

I always argued for more consumerism and less saving by those who have the money. We won't recover from this recession unless people spend. If people spend more, then there will be demand. Demand will create the environment for more jobs. Yes. My argument is rudimentary but I'm usually shunned when I mention consumerism as it is some sort of terminal disease.

People were buying vuvuzelas. This created hundreds of jobs in Sud Africa. Think vuvuzela seller, reseller, distributor, etc. And in China, hundreds of people were employed making these horns of devil. And the cycle of life was complete. When people horde wealth and don't spend it, the economy tastes bitter. Those who can afford to spend should be encouraged to spend. Say whatever you want about Mr. Bush, the 41 president of America, but he did encourage people to go out and have dinner and spend that $20 (US) right after 9/11. He didn't want people to go into a shellshock of not spending. Noone has advocated consumerism recently.

I'm doing my part by trying out different fast food chains. I'm sure you're aware of my previous excursion with Taco Bell, Chick-fil-a, Subway, etc.

[IndigoSkies 168]

-dp-

-Why do I always get dp?-

Edited July 13, 2010 by IndigoSkies

[Ban Hammer 13,427]

-dp-

-Why do I always get dp?-

you've been infected with the almaty bug.

[SMR 368]

The problem isn't that typical Americans have spent beyond their means. It's that their means haven't kept up with what the growing economy could and should have been able to provide them.

The author clearly see the economy from an entitlement mentality. The economy is not supposed to provide Americans with something. Americans can produce and earn things.

The puzzle is why so little was done to counteract these forces. Government could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service: big-box retail stores, restaurants and hotel chains, and child- and eldercare, for instance. Safety nets could have been enlarged to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay drops, transition assistance to move to new jobs in new locations, insurance for communities that lose a major employer so they can lure other employers. With the gains from economic growth the nation could have provided Medicare for all, better schools, early childhood education, more affordable public universities, more extensive public transportation. And if more money was needed, taxes could have been raised on the rich.

Big, profitable companies could have been barred from laying off a large number of workers all at once, and could have been required to pay severance—say, a year of wages—to anyone they let go. Corporations whose research was subsidized by taxpayers could have been required to create jobs in the United States. The minimum wage could have been linked to inflation. And America's trading partners could have been pushed to establish minimum wages pegged to half their countries' median wages—thereby ensuring that all citizens shared in gains from trade and creating a new global middle class that would buy more of our exports.

Thinking that this is going to work is simply ignorant. Year long severance pay, for instance, just insures that companies won't hire permanent positions. You can see this in all European countries that have such laws. It takes an act of providence to become a full-time employee.

[one...two...tree 2,762]

The author clearly see the economy from an entitlement mentality. The economy is not supposed to provide Americans with something. Americans can produce and earn things.

Robert Reich is saying that income should be more adequately dispersed so that all boats are lifted instead of just those in the top income bracket. There's no logic as to why most American's incomes have remained relatively stagnant over the last 40 years, while the upper 1% income has gone up exponentially. As he pointed out - the two largest income gaps in our history were followed by the two worst economic crisis and there is a correlation. With stagnant wages, most Americans have had to borrow their way to make ends meet. The rich don't pay high credit interest rates or ever have to resort to payday loans.

Edited July 13, 2010 by El Buscador

[Obama 2012 1,714]

I always argued for more consumerism and less saving by those who have the money. We won't recover from this recession unless people spend. If people spend more, then there will be demand. Demand will create the environment for more jobs. Yes. My argument is rudimentary but I'm usually shunned when I mention consumerism as it is some sort of terminal disease.

People were buying vuvuzelas. This created hundreds of jobs in Sud Africa. Think vuvuzela seller, reseller, distributor, etc. And in China, hundreds of people were employed making these horns of devil. And the cycle of life was complete. When people horde wealth and don't spend it, the economy tastes bitter. Those who can afford to spend should be encouraged to spend. Say whatever you want about Mr. Bush, the 41 president of America, but he did encourage people to go out and have dinner and spend that $20 (US) right after 9/11. He didn't want people to go into a shellshock of not spending. Noone has advocated consumerism recently.

I'm doing my part by trying out different fast food chains. I'm sure you're aware of my previous excursion with Taco Bell, Chick-fil-a, Subway, etc.

No, you're right on the point above, BUT that spending is only meaningful if you buy American products. For instance, you can shop at Best Buy, Wal-Mart, etc. all day long, but if you're buying products made in China all day long, then that's only helping Wal-Mart and Best Buy, not the rest of the economy.

If you buy American products, then you're helping the retailer AND the producer at the same time and all of the money stays here and the cycle goes 'round and 'round.

A consumer based economy is fine, so long as the good you are buying in a vast majority are made within your own nation. If you buy goods from another nation, and that nation doesn't buy the same back amount from you, then you're literally sending them money and never seeing it come back. It's a negative effect and possibly one of the greatest arguments for raising tariffs ridiculously high....

[Fandango 1,439]

Robert Reich is saying that income should be more adequately dispersed so that all boats are lifted instead of just those in the top income bracket. There's no logic as to why most American's incomes have remained relatively stagnant over the last 40 years, while the upper 1% income has gone up exponentially. As he pointed out - the two largest income gaps in our history were followed by the two worst economic crisis and there is a correlation. With stagnant wages, most Americans have had to borrow their way to make ends meet. The rich don't pay high credit interest rates or ever have to resort to payday loans.

'more adequately dispersed' wow.

[Obama 2012 1,714]

Robert Reich is saying that income should be more adequately dispersed so that all boats are lifted instead of just those in the top income bracket. There's no logic as to why most American's incomes have remained relatively stagnant over the last 40 years, while the upper 1% income has gone up exponentially. As he pointed out - the two largest income gaps in our history were followed by the two worst economic crisis and there is a correlation. With stagnant wages, most Americans have had to borrow their way to make ends meet. The rich don't pay high credit interest rates or ever have to resort to payday loans.

Nor does the middle class if they manage their money appropriately.

There was a lot of stupidity with the housing market and the mentality they we were invincible. If the middle class would stop living paycheck to paycheck and stop feeling that just because they make X amount of money today, they can afford to live to the maximum of their income, then we'd solve a lot of problems. Why in the world would you buy a $400,000 home just because you could afford it today and have no savings, when you can buy a $300,000 home and have substantial savings. It's mind-boggling really, but that's what it has become to be an American. Let's 'borrow' and hope for the best instead of taking responsibility and planning ahead for those rainy days.

People need to learn to live responsibly at every income level.

[one...two...tree 2,762]

Nor does the middle class if they manage their money appropriately.

There was a lot of stupidity with the housing market and the mentality they we were invincible. If the middle class would stop living paycheck to paycheck and stop feeling that just because they make X amount of money today, they can afford to live to the maximum of their income, then we'd solve a lot of problems. Why in the world would you buy a $400,000 home just because you could afford it today and have no savings, when you can buy a $300,000 home and have substantial savings. It's mind-boggling really, but that's what it has become to be an American. Let's 'borrow' and hope for the best instead of taking responsibility and planning ahead for those rainy days.

People need to learn to live responsibly at every income level.

Add up the median cost of housing, health insurance, food, clothing and transportation, and you'll have a better sense of why so many Americans have borrowed their way to get by.

[one...two...tree 2,762]

'more adequately dispersed' wow.

Yes - a company can pay all it's employees wages that are more fair than continuously paying higher ratios to their executives which has contributed to the widening income gap. Or do you think the income gap happened because of other reasons?

[Obama 2012 1,714]

Add up the median cost of housing, health insurance, food, clothing and transportation, and you'll have a better sense of why so many Americans have borrowed their way to get by.

Yeah, it's called being irresponsible.

[^_^ 5,021]

There's no logic as to why most American's incomes have remained relatively stagnant over the last 40 years, while the upper 1% income has gone up exponentially.

Incomes shouldn't go up "just because". You should earn more if you add more value. If you do the same job year after year, the exact same way, doing the same thing and never learning doing anything new (a new technique, a new strategy, a new methodology, etc), then your income should stagnate because you are stagnating too.

[one...two...tree 2,762]

Incomes shouldn't go up "just because". You should earn more if you add more value. If you do the same job year after year, the exact same way, doing the same thing and never learning doing anything new (a new technique, a new strategy, a new methodology, etc), then your income should stagnate because you are stagnating too.

Following that logic, executives' jobs have not become more valuable than they were 40 years ago, yet their pay has continuously gone up while other wages have remained stagnant. I guess you'd have to look at a specific job in a company and adjusting for inflation, see how that job pays less now than it did 40 years ago.

Edited July 13, 2010 by El Buscador

[^_^ 5,021]

Following that logic, executives' jobs have not become more valuable than they were 40 years ago...

Of course, you say this based on your extensive knowledge of what executives do?

...you'd have to look at a specific job in a company and adjusting for inflation, see how that job pays less now than it did 40 years ago.

I have news for you. If you can find me a job at a company that exists today in the exact form it existed 40 years ago, I'll show you a company that is dead or should be.