"PC Demand ‘Falling off a Cliff’" It's going to be hard to have recovery on FOOD STAMPS, unemployment, and poverty.
Rich get richer; rest of U.S. gets Great Recession
Date published: 7/25/2010
BERKELEY, Calif.
--Wall Street's banditry was merely the proximate cause of the Great Recession. Even if the Street is better controlled, 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 again began to widen, 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 can produce.
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 buying power is to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has limits. When the debt bubble 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 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.
SPECULATION FEVER
Robert Reich, a former labor secretary, is a professor of public policy at the University of California at Berkeley.
A second parallel links 1929 with 2008: When earnings accumulate at the top, people on the summit 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, 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 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 "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, 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.
ROCKET BOYS
Meanwhile, as the pay of most workers flattened or dropped, the pay of well-connected graduates of prestigious colleges and MBA programs--the "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 workers 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.
Also with the gains from economic growth, the nation could have provided Medicare for all, better schools, early childhood education, more affordable public universities, and 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 U.S. jobs.
Also, 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--ensuring that all citizens shared in gains from trade and creating a new global middle class to buy more U.S. exports.
180 degrees WRONG
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.
Meanwhile, America boosted sales and payroll taxes, taking 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). They busted unions and threatened workers who tried to organize. The biggest companies went global with no more loyalty or connection to the United States than a GPS device.
Meanwhile, Washington deregulated Wall Street while insuring it against major losses, turning finance--which until recently had been the servant of American industry--into industry's master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation's profits.
Nothing was done to impede CEO salaries from skyrocketing to more than 300 times that of the typical worker (from 30 times during the Great Prosperity of the 1950s and '60s), while the pay of financial executives and traders rose into the stratosphere.
YOU, TOO, DEMS
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.) As money has risen to the top, so has political power. Politicians are more dependent than ever on big money for their campaigns.
In the Gilded Age, 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 basic reform, just as did the Great Depression. But the financial rescue reduced immediate demands for broader reform. In reassuring the public that the economy would return to normal, Obama missed a key opportunity to expose the longer-term scourge of widening inequality and its dangers.
Containing the immediate 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 left smaller fires simmering all over town: housing foreclosures, job losses, lower earnings, less job security, soaring pay on Wall Street and in executive suites.
Legislation to improve America's health care system illustrates the paradox. Initially, the nation was strongly supportive. But the president and Democratic leaders failed to link health care reform to the broader agenda of widely shared prosperity. So as unemployment rose through 2009, the public naturally focused its attention on the loss of jobs and earnings, to which health care appeared tangential.
SITTING DUCK
Consequently, the nation was not as actively supportive of reform as it needed to be 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 had the deals not been cut.
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.
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--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.
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 interests 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.
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