aftershock summary reich

7/31/2019 Aftershock Summary Reich

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AFTERSHOCK- THE NEXT ECONOMY AND AMERICAS FUTURE

Robert Reich 2010

Summarized by Milton Masur ([email protected] )

IntroductionThe 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 dont 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 politicalpredicament. 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 dont 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 whomis 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 1990s was fragile and ended


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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 de-

regulation and privatization, attacking labor unions, cutting taxes on the wealthy and shredding

social safety nets with resultant stagnant wages, job insecurity, widening inequality. In 1970s top1% 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 dont 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. Americas 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. Eccless 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

didnt 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


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climbing from the bottom of the pit.

When his depositors began demanding their money he reduced lending and called in loans to

increase reserves. But then small businesses couldnt get loans. seeking individual salvation we

were contributing to collective ruin.

Economists and business leaders tried to balance the federal budget and thought that lower prices

and interest rates would spur investment. But Eccles thought investment in a disabled economy

wouldnt occur, without a climate of prosperity with purchasing power increasing demands for

higher living standards. Millions couldnt satisfy their barest needs let alone buy more elaborate

technology. Many leaders thought that the depression was a result of God given economic laws,

like those in the biblical story of Joseph and the Pharaoh who dealt with lean and prosperous years

sent by God. The explanation was that we had been spendthrifts and wastrels in the roaring 20's.

We had wasted instead of saving and we had inflated values. Those who had been prudent and

thrifty would reinvest at the right time in new production, ending the famine.

Eccles thought this was nonsense- it was really resistance to change that might benefit all the

people but could be disadvantageous to the powers of the status quo. Eccles saw that men with

great economic power had undue influence in the economic rules and the government that enforced

them. Eccles realized that the economic game was not being played on a level field but was tilted

towards wealth and power.

Eccles appeared before the Senate Financing Committee just before FDR was sworn in. Others had

advised reducing the national debt and balancing the federal budget. But Eccles (anticipating

Keynes) said that the government had to go deeper into debt to offset the lack of consumer and

business spending. He suggested a program to bring about, by Government action, an increase inpurchasing power on the part of all the people. Despite being a Scottish banker he arrived at his

conclusions by logic and experience. He proposed relief for the unemployed, government spending

on public works, government re-financing of mortgages, a federal minimum wage, federally

supported old-age pensions and higher income taxes and inheritance taxes on the wealthy to control

capital accumulation and avoid excess speculation.

Initially, FDR followed the advice of the business world, to keep the economy afloat but do little

for anyone else. FDRs treasury secretary, Henry Morganthau jr was a balance budget advocate,

who never the less asked Eccles for advice and eventually to join his administration, where his

ideas eventually began to be accepted. When the governor of the Federal Reserve Board

unexpectedly resigned, Eccles got the job, but only on condition that the Washington Fed had more

power over the money supply than the NY Fed (Wall street). Eccles opposed tight money and high

interest rates. The power shift was accomplished by new supportive legislation. Eccles became one

of the architects of the economy through the depression and the Great Prosperity after WW2.

Eccles retired to Utah in1950 and wrote a memoir. He concluded that excessive spending had

nothing to do with the depression, rather it was the result of the siphoning off of purchasing power


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from the majority to a tiny minority. Mass production has to be accompanied by mass consumption

which means that purchasing power has to be available to most people. When peoples credit ran

out they borrowed in the form of mortgage debt, installment debt and foreign debt. The debt bubble

had to burst, and when it did, the reduced demand brought unemployment and a vicious cycle. For

Eccles, widening inequality was the m ain culprit.

2. Parallels.

History does not repeat itself but sometimes rhymes. (Mark Twain). The economy has to be

reorganized when income gets out of whack. Wages did not increase from 1970s -2000s-they

dropped. Family incomes were only slightly higher. The economy had increased 60%. The share of

income going to the top 1% peaked in 1928 and 2007 at 23%. The top 0.1% had 11% of the

income at both peaks. Same pattern for top 10%, getting almost 50%of the income. Between the

two peaks was a valley the floor of which for the top 1% was 8-9% in the 1970s, then it gradually

rose. Sociologists divide work patterns into working (production and service) and business class

(selling, promoting services and ideas). Ratio is2.5:1. People are born into these classes, with ever

widening gap. The affluent secede geographically into high tax base communities and thereforehigher levels of service, privately provided, isolating themselves from the less affluent, who have

to rely on public services which are of lesser quality and lesser funding. The working class went

into debt to raise their living standards. Savings were down from9-10% from the 1950s to 3% in

the mid 2000s. Debt rose from 55% of household income to 138% in the same period, largely

backed by mortgaged homes.

Pre-depression private credit doubled, mortgage debt tripled and credit ran out in 1929. Also, in

both periods, the affluent used their soaring incomes and higher credit to speculate in a limited

range of assets, leading to an explosion of values. This led to the dot com and housing bubbles

bursting in 2006 and 2007. In the 1920s similar ballooning occurred in stock and real estatebubbles. Speculation lured gullible investors. Bad Latin debt was repackaged as new securities

which were sold to gullible investors.

However much the daredevil antics of speculation were the proximate causes of the bubbles, the

deeper problem of growing imbalance between earnings and consumption, with lopsided incomes

played a role. Had the rich received a smaller share, they would not have speculatively raised the

costs of assets so high.

The biggest differences between the two eras was what happened after the bubbles burst. In 1929,

the economy plunged into a vicious cycle. The unemployed couldnt purchase, therefore people

were laid off which contracted spending further. There was a widening economic divide which

produced economic insecurity. Social cohesion caused by shared suffering produced the political

will to make reforms. Marriner Eccles proposed programs that FDR eventually instituted, such as

social insurance, infrastructure improvements, schools, public universities. These were financed

initially through public borrowing. After WW2, there was further expansion of technology,

infrastructure, defense spending, worker productivity. The volume of production went beyond

military needs. The buoyant economy helped to pay the debts.


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The Great Recession didnt produce any economic gains. The government curtailed the economic

slide by rescuing the business world with bail-outs, stimulus packages and expansion of the money

supply. However, the successful averting of economic collapse reduced the urgency of the greater

challenge-reducing the widening economic inequality. Aside from improving health care access,

little has been done to redistribute wealth, therefore growth will be hard to sustain andunemployment will persist. Median incomes will remain flat or decline and economic insecurity

will persist. The middle class will not be able to buy enough to keep the economy going.. This is

the aftershock, from which will emerge either a backlash against trade, immigration, foreign

investment, big business, Wall street and government itself-or large scale reforms which reverse

the underlying trend.

3. The Basic Bargain

Ford paid his workers unusually well-the higher wages turned his workers into customers who

could eventually buy his cars. He recognized that workers are also consumers who recycle theirearnings; if this is not so, the economy produces more than can be purchased. Ford was

exceptional in letting his workers share the bounty. Productivity gains outpaced most earnings. The

rich, however continued to use their increased earnings to speculate.

John Maynard Keynes (b. Cambridge 1883) thought capitalism the best system, but two faults: 1.

fails to provide full employment 2. arbitrary and inequitable distribution of wealth and incomes.

Until these are corrected, highly unstable, vulnerable to booms and collapses. Government needs

to work to correct these faults.

Classical economists had viewed the markets as self correcting. Unemployment would causewages to drop until it became profitable to hire again. Unemployment was considered to be

secondary to stubborn resistance to lower wages even though workers didnt work hard enough to

deserve the higher wage level. Joblessness would make them accept lower wages. This fit into

social Darwinism of the era. Hoovers secretary of treasury, Andrew Mellon cautioned against

government action after 1929 crash. Let wages and prices be allowed to fall clearing away waste

and lassitude...people will work harder, lead a more moral life.

Eccles thought that people in power were justifying the status quo by invoking a dubious morality.

Keynes did not see unemployment as a moral failing either. He saw it as a failure of demand, with

inadequate purchasing power. Keynes used macroeconomic policy to maintain full employment.

Expand money supply to lower interest rates and stimulate loans; increase government spending to

create jobs to make up for consumer shortfall in demand.Keynes argued that growth depends on

the rich investing and saving, but unless there was full employment extra savings were harmful

because they reduce the demand for goods and services. The problem was too little demand not too

little savings.

Keynes gave a theoretical basis for what Eccles thought government should do: maintain aggregate


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demand so that production doesnt outrun the capacity to buy, which produces less incentive to

invest. Give workers a proportionate share of the economic growth. This is the basic bargain in a

balanced economy.

4. How Concentrated Income at the Top Hurts the Economy

The rich do not spend nearly all they earn; they hoard, invest and speculate. If there isnt enough

consumer demand for a higher living standard, domestic investment is lessened because there is

little profit in investing. Every dollar spent has a multiplier effect. Overall, rich people do not

spend enough. An example is Warren Buffet with 2008 net worth of 68 billion dollars. Another is

CEO of Bank of America Kenneth Lewis who earned 100 million in 2007. To spend it, he would

have to spend $274,000/day- thats $380.00/minute in a twelve hour, 7 day week. There are many

examples of high earning-high spending rich people but they only spend a small portion of their

yearly incomes. The advantage of a fortune lies more in its cachet than in its spending power.

Most rich people cant spend the money they earn. The 19th century ethical philosophy

utilitarianism founded by Jeremy Bentham thought that the law should provide the greatest

happiness to people equally.Taxing the wealthy to help the poor increased the sum of happiness.

Eccles and Keynes had a broader economic justification for redistributing wealth. If Ken Lewis had

managed to spend 25 million, leaving 75 million unspent, that money would not have gone into the

economy. If 500 people took home 200,000 and spent 150,000 (50,000 in savings) total spending

would be 75 million. If 2000 people had taken home $50,000 the money would have been almost

all spent and there would have been less debt.

Before 2008, 50% of spending was done by the top 20% (40% by the top 10%). If the broader

middle class took a greater proportion, total spending would have been greater. There would be

greater consumption of goods and services as well as education, recreation and the arts-useful and

pleasant.

Many of Americas rich have been generous-Carnegie, Rockefeller, Gates, Buffet et al, but they

dont generate as many jobs and economic growth as would occur if a larger percentage of people

had more wealth.

The lure of wealth is certainly an incentive to entrepreneurial zeal. How much is necessary for

motivation? Keynes said that lower stakes will serve the purpose equally well. Eccles was not

criticizing the rich- his viewpoint was pragmatic.

5. Why Policy Makers obsess about the Financial Economy instead of About the Real One.

Economic policy makers believe that Wall streets financial health is a precondition for a


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prosperous real economy. The real economy does need to borrow money from the financial

economy, but its reliance on Wall street is a recent phenomenon. Previously, when the middle class

could save more, they borrowed from local banks and savings & loans institutions. Wall street

just issued stocks. The situation changed when the law separating investment from commercial

banking was repealed in 1999. This changed Wall street into a casino with high stake bets, the

betting houses keeping a percentage of the wins for themselves and fob off losses on othersincluding taxpayers. Its like a masquerade ball.

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, ie saving the assets and the

asses of bankers. Mexicos Peso crisis required financial rescue in 1997. East Asias crisis

demanded capital infusions, Long Term Capital Gain management had to be baled out. After the

dot-com crash and Enrons plunge, capital markets needed assistance, Financial officials viewed

these rescues as exceptions to the assumption that rational investors arent threatened by financial

crises because they evaluate and weigh all risks beforehand.

The biggest banks and the insurer that backed them (AIG) were baled out in 2008. But the real

economy on main street worsened. Officials viewed this as a result of risky lending rather than the

effect of greater borrowing to meet a decent standard of living.The locus of the problem was in the

real economy, not the financial economy.

Policy makers viewed the debt load as the problem to be remedied-splurging (saving too little and

borrowing more than one could afford). Savings from other countries (China, Japan, Germany, oil

producing countries) invested in this country did make it easier for Americans to afford the costs of

borrowing, but this doesnt mean that the answer to long term problems is to borrow less and save

more and spend within our means.

Had the share of the economys gains been distributed more evenly, most Americans could have

afforded a good life-style and still saved for a rainy day-they wouldnt have needed to borrow so

much. The basic bargain had been broken-earnings had not kept up to reasonable expectations of

what they could afford.

The Great Prosperity:1947-1975

The nation provided enough money to workers so they could buy what they produced. There was

mass production and mass consumption. Everyones wages grew, not just the top 1-10%. The

wages of lower income people grew at a faster rate than higher income people.

Productivity also grew, defying the predictions of those who said top executives needed the

incentive of outsized earnings.


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How did this change? The US government did not directly redistribute income from the rich to the

poor - it created the conditions for the middle class to share the prosperity.It pushed the economy

towards full employment, creating a progressive income tax, enhancing the bargaining power of

workers, building up social security and a safety net. The New Deal was relatively small, but the

spending of WWII was huge. The national debt equaled 120% of the entire economy. Post war,instead of economic collapse, people had the means to buy and produced a huge demand for things

that been unavailable during the war, as well a baby boom. New jobs were created and the debt

shrank as a percentage of GDP.

The Great Prosperity reorganized work. Time and 1/2 for overtime created additional incentive for

hiring new workers. There was a requirement for minimum wages and unemployment benefits.

Government increased the bargaining leverage of workers-the right to join labor unions. In mid

1950s, 1/3 were in unions. Higher wages meant greater buying power; health and pension benefits

were not taxed. Even executive pay was a result of bargaining between business, labor and,

indirectly, the government.Executives didnt take home disproportionately large packages.

A 1956 college textbook called The American Class Structure described changes from the class

divisions of the 1920s because of the new corporate organization of production- all were

employees, not owners. Corporate bureaucracies tended to level incomes-the bottom elevated and

the top constrained by job categories. Income is determined by functional role in the bureaucracy.

There was security against the economic risks of life: Social Security unemployment benefits,

disability insurance, pension funding, and in 1965 health insurance for the elderly and the

poor.Economic security was part of prosperity and enabled sharing the costs of adversity as well as

consuming the fruits of labor. The government sponsored low cost mortgages and interestdeductions on mortgage interest. 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, partly justified to speed troops to war, if need be. The road

building program generated suburbs, shopping malls, boosted auto sales, enlarged the construction

industry, the trucking industry and reduced the costs of transport and transit.

Government widened access to higher education. The GI bill paid for vets. There was an expansion

of public universities with average tuitions 4% of mean income instead of 20% in private

universities. College enrollment surged-3/4 in public universities and colleges. A lot of university

research was under written by the government-cold war defense spending, but spilled over into

commercial production. Some examples are small transistors, hard plastics, optical fibers, lasers,

computers, jet aircraft and engines, even the Internet.

The nation also found the time and money to rebuild Western Europe and Japan. Truman wanted

development based on fair dealing The old Imperialism-exploitation for foreign profit-has no place

in our plans. We gave technological assistance to developing nations and shared in the worlds

economic growth, keeping Communism at bay. A new global assistance and trade system was


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created, which permitted American corporations to expand and prosper.

This was paid for by revenues from an expanding middle class as well as upper class. Income

taxes were as high or higher post WWII. (top marginal rates were 79-94% during the war, 91%

during the fifties and dropped to 77% in 1964. Even after deductions and credits, high income

taxpayers paid over 50% taxes on their earnings. But the high tax rates didnt reduce economicgrowth-middle class prosperity enabled economic growth. the result was most people came out

ahead, including the top.

The governments new role came out of The Great Depression and WWII, which produced a sense

of common purpose- we were all in it together, rising or falling. The historian James Truslow

Adams coined the phrase the American dream... a better, richer and happier life for all our

citizens of every rank. There were many inequalities, however, blacks and women, in particular,

which eventually improved. There was also a blandness, uniformity and materialism that many

people hated, although there was much more opportunity. Widely shared income gains were

essential to economic growth.

7. How We Got Ourselves Into the Same Mess Again.

The pendulum began to swing back towards the conditions before The Great Depression in the late

1970s and worsened during the next few decades. Middle class wages stopped climbing, even

though the economy expanded, with the benefits going to the top. In the Clinton administration, the

minimum wage was raised, emergency leave support instituted, attempts at universal access to

health care, access to college, refundable tax credit for low-income workers, tying of executive

compensation to performance. However, Alan Greenspan insisted on cutting the federal budgetrather than deliver more supports, and lowered interest rates ( nb. Joseph Stiglitz disagrees and

says interest rates were increased, which increased the profits of lending institutions, which then

invested with larger returns producing a surplus in tax receipts) which helped a strong recovery.

There was temporary rise in middle class wages in the late 1990s because of an upturn in the

business cycle, but no stable change in the economic structure. When the economy cooled, family

incomes were lower.

During the Great Prosperity (1947-1975), wages were directly related to productivity. After 1975,

the two directions diverged. Globalization was blamed for the flattening of incomes, since jobs

were outsourced. However, imported goods were cheaper, and there were new markets for export,

as well as investments from abroad in the USA, creating jobs. The problem was not just loss of

jobs, but increasing automation, which lowered job rates within the USA. Millions of jobs were

lost to automation, not just globalization. However, trade and technology have not really reduced

the number of jobs available-the new jobs dont pay as well. At the same time, the pay of the well

connected has soared.

Why was so little done to spread the wealth? We could have expanded our educational system


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(early childhood and public universities), created more job retraining and made more extensive

public transportation. Also, we could have given workers more bargaining power, especially in

personal services industries,such as retail stores, restaurants, hotel chains, child and elder care. We

could have enlarged safety nets, like unemployment insurance for part-time work, wage insurance,

transition assistance, universal health care. We could have required severance pay from employers

laying off workers, linked the minimum wage to inflation.

We failed to raise taxes on the rich and to cut them for the poorer people. We failed to attack

overseas tax havens by threatening loss of citizenship to those who evaded taxes this way. We

could have expanded public investment in research and development with the requirement that new

jobs be created in the USA from the results. We could have insisted that foreign trade nations

establish a minimum wage thats 1/2 their median wage.

Government could have enforced the basic bargain, but it did the opposite-it de-regulated and

privatized the economy. It increased the cost of public higher education, reduced job training, cut

public transportation, allowed the infrastructure to corrode, reduced aid to jobless families withchildren, restricted eligibility for unemployment insurance. It halved the top income tax rate from

range of 70-90% that prevailed during the Great Prosperity to 25-39%, allowed the rich to treat

their income as capital gains, with no more than 15% taxes, and shrank inheritance taxes that

affected the top 1.5% of earners. At the same time, sales and payroll taxes were increased, taking

more out of the pockets of the middle class and poor.

We allowed companies to break the basic bargain, slashing jobs, wages, benefits, shifting risks for

pensions, health care to employees. Unions were busted (by 2010, less than 8% of private workers

were unionized). American companies became global companies deriving most of their revenues

from overseas. Nothing impeded CEO salaries from sky-rocketing to more than 300 times theaverage worker, compared to thirty times during the Great Prosperity. The pay of financial

executives and traders rose into the stratosphere. The super rich were top financial and business

executives.

The Federal Government de-regulated Wall St while insuring it against major losses.That turned

finance from a servant to a master of American industry, demanding short-term profit over long-

term growth. Between 1997 and 2007, finance became the fastest growth part of the economy.By

2007, financial and insurance companies made more than 40% of American corporate profits.Both

before and after the bubble burst, Wall St banks and financial managers got billions in bonuses. In

2009, the 25 best paid hedge fund managers earned an average of $1 billion each!

The financial economy took over the real economy. The expectations of bond and stock traders

became the measure of success, just as before the Great Depression. Why did the pendulum swing

back? When will it swing in the other direction?

Some argue that there was no need for government intervention. 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. This argument equates the stock market with the


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economy and doesnt address the basic bargain, where the middle class cant buy what it produces.

Some think that the pendulum swing related to declining confidence in the government, which had

been living too well.The tax revolts in the late 1970s were against paying more taxes on

flattened income. The inflation of the 1970s wasnt due to excess government spending-there was

a 12x increase in oil prices and a drop in dollar value.

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. Campaign

contributions, lobbyists and public relations organizations pushed through legal changes for the

rich- including union busting, cutting corporate payrolls, reducing benefits, lowering taxes for

themselves and de-regulating Wall st. They put pressure on companies to perform, pushed

leveraged buy outs, paid with high risk junk bonds, pumped up profits by firing workers, then

dumped the company on the market at a higher price. The Dow Jones average rose 10x between

1980 and 2000. The value of middle class pensions did rise, since they were dependent on the

stock market. However, the average market holdings of the middle class were small compared tothose of the rich.

The rich and powerful also conditioned peoples attitudes. They financed think tanks, books media,

ads to persuade that free markets were best. Their choice was between free markets and big

government, the former the solution, the latter, the problem. 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. They had no memory of the great Depression experience of a fallible

and unreliable market offset by a strong and reliable government. They saw the apparent failure of

government and the success of the market. They had no memory of a society in which people were

all in it together, but one in which we were increasingly on our own.

8. How Americans Kept Buying Anyway: The Three Coping Mechanisms

To mitigate the pendulum swing, there were three coping mechanisms:

1. Women moved into paid work, both professionally and non-professionally. Contraception

helped plan families, laws against discrimination and wider educational opportunities became

available. This transition has been one of the most important social and economic changes in many

years. Instead of a minority of women working, there was a majority- limited only by the hiring

cost of running a household or child-rearing.

2. Everyone works longer hours, sometimes multiple jobs. Typical American worker put in 350

more hours per year than European workers and even Japanese workers. DINS=double income,

no sex.

3. Draw down savings and borrow to the hilt. During the Great Prosperity, middle class saved 9%

after taxes; by 2006, the proportion was 2.6%. Debt had averaged 50-55 % of annual after tax


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income in prosperity-it reached 138% by 2007. Borrowing vehicles were credit cards, auto loans,

college loans, mortgage loans, re-financing on inflated home values.

Some blame consumers for borrowing too much, others fault banks for careless loans, foreign

lenders, the Federal Reserve, which lowered interest rates too much, regulators, with poor

oversight. Although much of the blame is justified, the real cause was the lack of growth of middleclass income. People could no longer live as they had been or thought they should or could be

living.

9. The Future Without Coping Mechanisms

Paul Volker (former chair of Federal Reserve) told Obama that Americans had been living beyond

their means. Laura Tyson said the problem was that their means hadnt been growing. Reich says

Tyson was correct. It is an economic and moral challenge-concentrated wealth and income

threatens the cohesion and integrity of society and undermines democracy. In November, 2008,Obama was faced with the immediate challenge of rescuing the financial system-fragile banking

system and massive debt. The coping mechanisms are exhausted-there arent enough jobs or hours

to go around- it will take years to make up for the lost jobs, and wages will continue to erode.

The great Recession accelerated structural changes that began in the late 70s, viz, automation and

outsourcing. Re-hiring will be associated with lower pay and benefits. Over the long term the

challenge is pay, not jobs, with subsequent widening of income disparity.Borrowing will be

curtailed-tighter standards, bank regulations and oversight. Housing will not gain its speculative

peak for a long time.Americans are paying off, paying down or walking way from outstanding

loans-de-leveraging.

At the same time tens of millions of boomers will be retiring with shrunken nest eggs. In 2009, 50

million workers lost at least one trillion in their 401k plans. Even if and when the stock market

returns to its peak, boomers will have lost years of economic gain- many will put off retirement,

making it harder for younger people looking for work. There will be less middle class

consumption. Even though replacements for worn out things will be forced, this is not enough for

a vigorous recovery.

Bank of America and Merrill Lynch analysts predict that the top 10% of Americans, who

accounted for 40% of the spending would have the spending power to fuel a recovery, because

their assets were mostly in stocks rather than in homes. Reich thinks this reasoning is specious,

because the 10% at the top were taking home 50% of the income, and a recovery cant be fueled by

40% of prior spending. There will not be a sufficient demand without a buoyant middle class to

justify new equipment, buildings, factories, research, products, services, etc. 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 1990s,) but without that

kind of jolt, the long term trajectory will not be good. Government can fill the gap for a while, but it


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would lead to deficit spending and printing more money. Some people think the answer will come

from consumers outside the USA but Reich believes they are wrong.

10. Why China Wont Save Us

In September, 2009 the Group of Twenty had a summit in Pittsburgh. Obama spoke of re-balancing world growth especially between the economic colossi of China and the USA. Obama

says the USA has to sell to China, not just China sell to the USA based on credit supplied by

China. The long term fix is for Americans to save more and Asians like the Chinese to spend more,

ie Chinese consumers will substitute for American former spenders to keep the American economy

going. The hope is that the Asian market is potentially huge and its middle class is growing, the

US dollar will decline and they will buy more from us and we will buy less from them, leading to

a resurrection of manufacturing in the USA. New technologies will be produced here and exported.

Reich thinks this is wishful thinking.

Chinas market is growing very fast for computers, cell phones, cars, appliances (the country willbecome the largest shopping bazaar in history). However, Chinese consumer spending is growing

slower than its overall economy. The share of national income going to households in wages and

investment is dropping as the share going to companies increases. In 2009 personal consumption

was 35% of the economy, where it had been 50% in 1999. Investment rose from 35% to 44% of

the economy during this period. Most new jobs were in production, not sales or service as in the

USA. Profits are being plowed into production- the government stimulus package in 2009 was

$585 billion dollars, geared to railways, roads, power grids, sewers, factories- a larger proportion

of Chinas economy than our stimulus spending was to our economy. Chinas capital spending

will dwarf ours, but its consumer spending is only 1/6 of ours. What China produces goes mostly

to other nations.

Why is Chinese consumer spending relatively low? Inadequate social safety nets (health care,

education, retirement. There are more young Chinese males than females, so assets are part of the

marriage bargain. Chinese society is aging quickly because population growth has been limited,

therefore money is being saved to support the elderly. The larger reason for low spending is the

orientation to production rather than consumption, including a wish to lead in technology.

China wants American know-how, so it allows Americans to sell to China, provided that the goods

are produced in China, including cars, consumer goods, clean energy technologies, aircraft. That

way, China acquires American technical expertise and also produces jobs. The yuan has a fixed

relationship to the dollar, which undervalues its currency (if its value floated, the yuan would be

more valuable). That way, its exports are cheaper and more saleable. 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. Chinas export policy is also its social policy, since many

millions of people are looking for better paying work, and if they dont find it, there will be social

unrest. Job creation, even at the cost of subsidizing foreign buyers is preferable to allowing the

yuan to float, risking job shortages.


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Re-balancing trade is very complicated and not so easy to achieve. Both China and the USA are

capable of producing much more than their consumers can buy. In the USA, the problem is a

disproportionate share of income going to the wealthy. In China, the disproportionate share goes to

capital investment. There is a disconnect between production and consumption in both countries,

with the threat of civil unrest in China, and political unrest in the USA.

If other nations respond to a declining dollar by buying more from the USA, thereby generating

more American jobs, there might be fewer jobs in those nations, which would be unpopular. It is

risky to rely on currency regulation as a major jobs policy since it would lead to competitive

devaluation of currency. Anyway, our export sector would have to grow immensely to make up for

jobs lost, and then wed become poorer because imports would cost more.

11. No Return to Normal

The underlying problem is not the recklessness of institutions, even though they were reckless. Itisnt the excessive debt, although that too occurred. The fundamental problem is that Americans no

longer have the purchasing power to buy what we are capable of producing, because too much of

our income has been going to the top. Pay and production are no longer linked.

Obama brought the economy back from the brink with bank rescues and stimulus packages,

combined with low interest rates.The health reform legislation of 2010 was a small step in the right

direction. There is persistent high unemployment with flat or declining wages.Growth is not an

end-it is a means to better our lives individually and communally. 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, they are more willing to pay taxes.

Slow growth has the reverse effect and produces a vicious cycle.as each group fights against

additional burdens. How to move from a vicious to a virtuous cycle? How to produce widespread

prosperity which is necessary for growth and vice versa. There are economic and political

ramifications.

PART II BACKLASH

1. The 2020 Election

Imagine the year 2020, 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, a freeze on legal immigration, increased tariffs on all imports, a ban on American

outsourcing, a ban on foreign investments in the USA, withdrawal from the UN, WTO, World

Bank, International Monetary Fund, end involvement in foreign countries, refuse to pay interest on


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our debts to China, stop trade with China unless it floats its currency. Profitable companies will be

prohibited from laying off workers, The Federal budget must be balanced and the Federal Reserve

abolished.

Banks will only be allowed to take deposits and make loans, Investment banking will be

prohibited, insider frauds will face prison for at least 10 years. In order for the government tobalance the budget, provide for defense and pay our national debt, personal income will be capped

at $500,000/year; Earnings above that are 100% taxed. Earnings above $250,000 are taxed at 80%.

All net worth above $100,000 will be taxed at 2%/year. Any American sheltering income in a

foreign nation will lose citizenship.

The presidential victory speech of the Independent party candidate would indicate that the people

have taken America back from big government, big business and big finance. We have taken our

freedom back from the politicians, from foreigners robbing us of our jobs, from the rich, from

immigrants, from the elites, from the money manipulators and corporate greed masters, influence

peddlers, pork peddlers. America for Americans.

The result would be chaos in the stock market, business world, political world. How could this

have happened?

2 The Politics of Economics, 2010-2020

Politics is bound up with economics. There is a perception that presidents are responsible for

economic events. James Carville Its the economy, stupid.Jobs and economy are almost always

at the forefront of voters minds. Even then, the hypothetical scenario presented above would relate

to voter frustration and anger as well as economics; they have to make do with less.

Poor families with minimal education are hardest hit. The middle class adapts: live with parents and

delay marriage and children. Search for bargains, buy more private labels and generics, lower

grades of meat, fewer vacations, give up 2nd cars, do ones own repairs, grow their own food.

Just before the Great Recession, consumption was 70% of GDP in USA. By contrast, in Britain,

65%, Germany, 55%, Japan, 52%. During the Great Prosperity, it was 62% in the USA.

Permanent frugality will not come naturally to the USA. We need a better understanding of the

confluence between economics, politics and behavior.

3. Why Cant we be Content With Less?

America has a cultural obligation to consume, but it was tempered previously by thrift and self-

sufficiency. The simple life has been viewed a honorable. Even after mass production and mass

marketing, materialism was eschewed. The people of this country need a ...philosophy of living,

not having; of happiness, not wealth, said John Ellsworth Jr in The North American Review of


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October, 1932 during the Great Depression.

Years ago, a psychologist surveyed the Forbes wealthiest 100, who had only slightly greater

happiness than the average American, and even that was temporary.People in other countries are

much the same, according to a researcher who examined 256,000 people in 17 countries and found

little connection between money and happiness, above a subsistence level. What money buys hasdiminishing returns as long as we are not destitute; happiness is less about getting what we want

than appreciating what we have.

Much of what people want cant be bought anyway. Behavioral scientist Abraham Maslow in

1943 wrote a Theory of Human Motivation in which he posited a hierarchy of human needs. At

the bottom were food, shelter, sex and sleep, then safety and security. Once these needs are met,

our higher needs cant be satisfied in the market. Trying to purchase them actually robs them of

their emotional sustenance They include love, acceptance, affiliation and esteem, self-actualization-

our yearning to find meaning in our lives and to express ourselves.

One could argue that with less paid work and money to spend people could enjoy simpler lives.

People were coping with declining wages by sleeping 1-2 hours less before the Great Recession, a

form of deprivation that created a new industry of sleep related services-twice as much spent on

this compared to a decade before. In mid 2009, 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. The proportion on anti-depressants doubled in the

decade before 2007, even as the stock market and home values soared.

The harder we work to buy things, the less time and energy we have to enjoy them-a mixed

message: Work like mad but enjoy life to the fullest, an impossible contradiction. SociologistDaniel Bell identified this cultural contradiction years ago. 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. The process was fueled by anxieties over aging, status and personal

attractiveness.

The argument for hard work has always had a lie for its premise: one day, we will be satisfied, if

not in the work, then in the accumulation of what we desire. But that day never seems to arrive.

Even Adam Smith, the putative father of market economics, 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...pursues the idea of a certain artificial and elegant repose which he

may never arrive at, for which he sacrifices a real tranquility....It is this deception which rouses and

keeps in continual motion the industry of mankind.

It is not implausible that Americans will find more contentment as we consume less, but we will

have to make painful adjustments.

4 The Pain of Economic Loss


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There will be a lower standard of living. Behavioral research shows that losses are more painful

than gains are pleasurable.Gains and losses arent symmetrical, because what we possess sets the

standard for how we see our subsequent well being. When we lose something of value, we retain

its memory and regret the loss, especially if we relied on it or depended on it.

Societies whose living standards drop, experience more stress than societies which never had as

much to begin with. Suicide rates go up if people remain jobless, and did so in the USA

consistently during the Great Depression. In Germany, after WWI, most Germans became poorer,

rebuilding was difficult because of reparations, hyperinflation and widespread unemployment.

Germany became eager for an easy solution and a scapegoat as presented by Adolf Hitler.

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. The disappointments involved are akin to

having a serious illness. The despair could make people angry at themselves and/or at the economic

system or political or business leadership. People could become angry reactionaries, but notnecessarily.

5. Adding Insult to Injury

The second painful adjustment is the realization that the standard of living will be below that of the

rich.We compare ourselves- when people at the top do better, we feel poorer. Americas rich took a

hit in the crash of 2008-the Forbes 400 lost $300 billion, but they still had $1.27 trillion. The

median pay of CEOs dropped 15% to $ 7.3 million. Pay and benefits at Wall st big banks dropped

11%, although 5000 of Wall st top performers received multi-million dollar bonuses.Twenty-five

% of top executives had increases in their retirement plans-their contracts guaranteed fixed returns.

By the end of 2009, most of the rich had bounced back, and the gap was widening again. Most of

their assets were in financial instruments whose value rose as companies cut costs and payroll and

expanded global operations. The major assets of the middle class were their homes which lost

value. A year after the crash, Wall st awarded bonuses as if the crash hadnt occurred. Wall st

resisted efforts to tie its hands. Compensation packages continue to soar, linked to profitability and

stock performance. The 25 leading hedge fund managers did even better than investment bankers

and corporate executives, at $1 billion each on the average. If this continues, the share going to the

top will increase and the share everywhere else will decrease.

Value is often figured as its relation to what other people have, ie not only the indispensable to

support life but the perceived necessities which are not really indispensable, but would be shameful

not to have. The concept of conspicuous consumption was noted by economist-sociologist

Thorstein Veblen and demonstration effect by economist James Duesenberry-the social pecking

order. When the top earners do better, the social norms change upwardly- it isnt just a matter of

envy. Inequality produces dissatisfaction.


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During the Great Recession, conspicuous consumption became unseemly. Entry to prestigious

universities is easier for the wealthy , who attend private schools of high quality, have access to

tutors, test preparation services, coaches and who donate large amounts of money. The best health

care facilities have become available only to the rich.

Education, medical care, beautiful property, things in limited supply are becoming less available tothe middle class. The rich have bid up the price of desirable private modalities and reduced the

quality of public modalities. The rich sequester themselves from the public and take their tax money

with them.

As a result of these deprivations, many feel poorer and frustrated. Income inequality increases

social discontent and fuels social unrest. (economists Perotti and Alesina) which increase the

probability of coups, revolutions and mass violence. This hasnt happened in the USA so far.

Here, opulence has provoked more ambition than hostility. We often aspire to become rich.

However, we dont like wealth exercising political power.

6. Outrage at a Rigged Game

Americans might accept low wages and employment, lowering of our standard of living, wider

financial inequality, but we wont tolerate a rigged economic system.

The game is tilted towards wealth and big business. Reich cites union busting, slashed payrolls

and benefits, junk bonds and private equity deals that flipped companies like cards, burdened them

with debts and forced mass layoffs; resplendent pay packages of corporate and financial executives

and traders, cutting of marginal taxes on the rich and de-regulation of Wall st.

Reich also cites the Savings and Loan bank bailout, costing taxpayers 125 $billion, with corrupt

practices by bank owners like Charles Keating donating $300,000 to 5 senators who greased the

skids with federal regulators. He cites insider and junk bond trading scandals with Ivan Boesky

and Michael Milken. He cites the corporate looting scandals where CEOs of Enron and

Worldcom padded their nests at the expense of investors. Other corporations cooked their books

including Adelphia, Global Crossings, Tyco, Sunbeam and Imclone. Major accounting firms

admitted negligence or paid fines without admitting guilt. Nearly every major investment bank

defrauded investors by urging them to buy stocks that the banks analysts thought were junk.

Wall st made large and risky bets with other peoples money before the crash of 2008. He cites

Goldman Sachs creating bundles of mortgage debt and selling them as good investments, lobbying

credit rating agents to give them high ratings, then selling them short when the bottom fell out of

the mortgage market. This didnt change the voting records of Americans, who continued to

reward incumbents on the upswings and punish them on the downswings. But the situation is

changing.

In 2008, the fall of Lehman Brothers caused panic among banks who had made bad bets. The


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nation was warned of economic collapse by Paulson (Bush Treasury Secy) Bernanke (Fed Res

chmn) Geithner (Fed res NY) and 700 $ billion bailout was given to banks (in secret deals). This

was billed as saving Main st and jobs, but appeared to do neither-the banks were solvent as a result

and could do new deals, but businesses couldnt get loans, few people could renegotiate

mortgages, homeowners were not allowed to declare bankruptcy to avoid forfeiting their homes.

It began to look like an insider deal for Wall st at the expense of others. Paulson and Geithner had

connections at Goldman Sachs ( respectively, former CEO, and appointed by Rubin, a former

CEO) and Blankfein was CEO, helping to engineer the bailout.Goldman-Sachs and Citigroup were

among the biggest bailout beneficiaries. When AIG bailout was considered AIG owed 13 billion to

Goldman-Sachs. Paulson and Geithner consulted with Blankfein. Had AIG been forced into

bankruptcy, Goldman-Sachs would have collected far less. These facts were not publicly disclosed

or acknowledged for many months.

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.. Later on, several of the big banks were madeeven bigger by providing subsidies ( to Bank of America, Wells Fargo, JPMorgan Chase) to help

them merge with weaker institutions.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. Within

a year, the banks were profitable again including mortgage profits. The government was

subsidizing banks mortgage loans, but the savings werent being passed on to homeowners.

(mortgage rates were not cut).

After the bailout, there was talk about regulation to avoid similar problems in the future, but the

proposed rules were filled with loopholes. At the same time, homeowners couldnt declare

bankruptcy. Also, despite the plea that the banks were too big to fail, no anti-trust laws wereinvoked to break them up. It is difficult for legislators to hold Wall Street and big business

accountable while at the same time, 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. 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. The game was fixed. Also, there has been an enormous surge in lobbying from $1.44

billion in 1998 to $3.47 billion in 2009.-this is an underestimate, since there is vagueness about

who registers and enforcement is casual.

As the costs of campaigns have escalated, political contributions from wealthy people become more

important, despite the internet process of harnassing small donors. The Supreme Court fostered

this even more with the Citizens Uniteddecision making corporations equal to individuals.

At the turn of the 20th century, sacks of money were deposited on the desks of friendly legislators;

today, political corruption is not as overt. The photo of an executive in the company of a legislator


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commands attention to the power liaison between the two. The perceived entree to the legislators

influence is useful in dealing with the executives contacts.The politician may or may not get a

contribution, but he gains access to a network of wealthy people- in time, these people will give

money also and ask that others do so. The politician is relatively isolated from the concerns of less

influential people, who are represented by polls and occasional political appearances. He is not

immersed in the lower economic echelons because he is immersed in the culture of the comfortable.The wealthy do not buy the politicians vote- they buy his mind.

In the 1970s, 3% of retiring congress people became lobbyists; by 2009, more than 30% had done

so. Starting salaries for lobbyists have balooned to about $500,000; former chairs of committees

were getting $2 million or more to influence legislation in their former committees. 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.

In order to be enacted, major legislation usually requires payoffs to powerful corporations andindustries. Obama had to guarantee the health care industry that they would come out ahead with

his proposed health care legislation. Similarly, to get caps on greenhouse gases and allow permits

to pollute within the caps, congress had to promise subsidies for the nuclear industry, and

agribusiness ethanol and so-called clean coal. The market for trading permits would be open to

speculators and derivatives- a large source of revenue for Wall st.

The middle class has become more sensitive to the governments advancing corporate interests,

using tax-payer dollars to subsidize R&D, opening foreign markets, giving government contracts,

all raising their share prices.

The middle class is also noting the regressive direction of tax policy. In 2001, Bush lowered the

estate tax and scheduled its repeal in 2010; Obama and the Congress didn t restore this tax, on the

richest 2% of the country and as a result it will drain $485 billion dollars during the next decade.

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.

Meanwhile, state and local governments increase regressive sales taxes, because of lower revenues.

Some legislators are even pushing a national sales tax to replace the federal income tax. At the

same time, local property taxes fall on the shoulders of homeowners, rather than the financial assets

of the wealthy.

If Americans feel they can get ahead despite the tilted playing field, the situation could still be

tolerated, but access to wealth is stacked against the middle class. Social mobility is being limited

by economic circumstances. Politicians rarely speak of this problem. This produces anger and

could usher in the Independence party as hypothetically described previously, bringing with it

nationalism, isolationism, intolerance and paranoia.


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7. The Politics of Anger.

Reich refers to a Russian folk tale about a peasant whose neighbor becomes wealthy enough to

have a cow. The peasants response is to pray that the cow be killed. Reich thinks that the

Independence party or its facsimile will kill the cow. Reducing unfair winnings is almost asimportant to people as getting a modest share for themselves.

For example, some would slash investment and trade with other countries despite the subsequent

loss of cheaper goods from abroad, if they believed the people at the top would have greater losses

than those lower down. They would support confiscatory taxes on the wealthy, even if that were to

discourage investment, because that would hurt the rich most of all. They would opt to kill the cow.

Economic anger was evident when the government bailed out AIG with $150 billion, and the firm

gave its executives $165 million in bonuses and a $440,000 spa resort holiday. There were death

threats against AIG executives. Anger at the bailout produced political losses for some politicianswho had voted for it, and anger was directed against people who had great wealth and connections

and were considered to have abused them.

Backlash can be seen in the turn against international trade and immigration.Tariff reduction and

trade agreements have been put on hold. Laws have been passed encouraging racial and ethnic

profiling and baning ethnic studies.

There has been increasing virulence and shrillness in politics.The Tea Party has derided

establishment Republicans, and threatens them with defeat. At a national convention of Tea Party

Nation the cult of multiculturalism was denounced and shouts of Take back our country wereheard. There are attacks on the elites...who think they are above everybody else.

Talk radio and yell TV emit vitriol towards races, foreigners, elites, intellectuals, politicians,

executives. Richard Hofstader (historian) described a recurring strain of paranoia in American

politics.Kill the cow populism.

PART III The Bargain Restored

1. 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. 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, he bases his argument on two threats that such inequality poses for everyone. The first is

economic-unless the middle class gets its fair share, it cannot consume what the nation produces,


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and the result would be slow economic growth and boom and bust economies. The other threat is

political- widening inequality with the perception that big business, Wall st and the government are

in cahoots, gives fodder to the demagogues on the extreme right and extreme left. They gain power

by turning public anxiety into resentment against particular people and groups.

Important steps to reverse these trends-Some steps would be costly, but could be paid for so theywouldnt increase the national debt, and because they would generate sustainable growth, they

would shrink the debt as a proportion of the GDP.

A reverse income tax.

Supplement the wages of the middle class-add money to their payroll checks.. We provide this for

low income workers (Milton Friedmans idea) through the earned income tax credit (EITC). This

reduces poverty and also increase the incomes of families that will spend the money, creating more

jobs. In 2009, EICT was the largest anti-poverty program, over 24 million households receivingbenefits.

Reich suggests that full time workers with $20,000 or less income would receive a supplement of

$15,000, which would decline incrementally as income increased. $10,000 for $30,000/year,

$5000 for $40,000/year and zero for $50,000/yr.The tax rate for full-time workers between

$50,000-90,000/year (no matter what the source of income) would be cut to 10% of earnings;

between 90,000 and 160,000 the taxes would be 20% of earnings. The yearly cost of wage

supplements to the federal government would be $633 billion. The cost of tax cuts to the middle

income families would be billions more.

Lost revenues would be compensated for by a carbon tax on fossil fuels, which would gradually

increase to encourage less use of carbon. If the initial tax was $35.00/metric ton, the tax would

raise $210 billion the 1st year and rise to $115.00/metric ton , yielding $600 billion. The public

would pay this tax indirecly as the price of goods rose in proportion to its carbon use. A carbon tax

would encourage reduction of greenhouse gases through use of alternative energy sources, and

could help develop cheaper sources. By stimulating such investments, the carbon tax would

increase energy demand.

Higher Marginal Taxes on the wealthy.

Those at the top should pay a higher tax on their incomes. Reich proposes top 1% of earners

(more than 410,000/yr) pay 55% on marginal income, top 2% pay 50% over 260,000 and top 5%

over 160,000 pay 40% on marginal income. These taxes , when added to the taxes from the

50-160,000 group, would raise $600 billion more than our present tax system. Add the $210

billion carbon tax for the first year and total is $810 billion . This would more than pay for the

income supplements and tax cuts proposed. The surplus could be used for other initiatives and for

reducing the federal deficit.


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Income from capital gains would be treated as wages or salaries. Income between 50 and 90,000

even if it were from capital gains would be taxed at 10%. However, someone with income of

several million dollars would pay 55% on all income, including capital gains. ( he mentions that the

400 highest- income taxpayers with an average income of over $300 million dollars, paid 17% of

total income in taxes in 2007-this is not a progressive tax.)

>From 1936-1980, the top marginal rate was 70% or more. Since 1987, the top rate has been 40%

and after deductions, between 20-25%. Higher taxes have not produced slower growth. During

1951-1980, top rate was 70-92%, average growth rate was 3.7%.Between 1983 and the Great

Recession, when the income tax rate was 35-39%, growth rate was 3%.

This isnt a Robin Hood re-distribution. The middle class would spend more and move the

economy toward full capacity. There would be higher growth and profits. The rich would receive a

smaller share of the economys overall gains, but the overall gains would be larger than they would

be otherwise. Hence, richer Americans would likely come out ahead as they did during the GreatProsperity.

A reemployment system rather than an unemployment system.

Previously, unemployment worked because there were similar jobs to go back to. Now, we have

to re-train for new jobs. Wage insurance could be part of this process. People would be eligible for

90% of the difference between old wages and new wages, for a finite period (eg 2 years). This

would stimulate movement into new jobs that pay less, saving cost of unemployment benefits, and

adds revenue from income taxes. For job retraining, 90% income support would be provided for

one year during re-training.

Reich estimates the cost of a re-employment system to be $3 billion above the 2.35 billion now

spent on unemployment insurance /year. The costs would drop as the skills were acquired and the

rate of long-term unemployment decreased.Any shortfalls would be made up for by a severance tax

on profitable corporations that lay off workers.

School Vouchers based on Family Incomes

Improving the earnings in the bottom half requires improving education and skills. Spending on

public schools should be replaced by vouchers inversely related to family income that can be

cashed in at any school meeting standards. This would introduce competition into the school

system, which should improve overall performance and give purchasing power to lower and

middle income families. This would infuse billions of dollars to upgrade plants and equipment and

to hire better teachers. Reich proposes that after three years, the schools would have to compete

with other schools for the revenue. The schools would be either private charter schools or public

schools. He expects that wealthy suburban school districts would compete for these children and

the vouchers they bring. There should also be vouchers for early childhood education. $20 billion/


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year should be devoted to vouchers for early childhood education, money coming from the reverse

income tax.

College Loans linked to Subsequent Earnings

Education is financed increasingly, with student loans. Many are concerned about their eventualability to pay back these loans, especially in lower paying professions, whose social contribution is

useful and desirable. Reich thinks that the financing of higher education should be changed.

Tuition should be free at public colleges and universities. To attend private higher education,

federal loans should be available. The pay back should be a fixed percentage of taxable income, eg

10% for their first 10 years of full-time work, paid into a fund that finances public higher education

and provides loans for private education. After that, loans would be considered fully paid. This

way, lower income graduates would be subsidized by higher income graduates. Ten percent may

not do it, but the percentage should be geared to be self-funding, without additional federal

revenues.

Medicare for All

The next stage toward health care reform should be Medicare for All, says Reich-its the most

efficient way, and would require subsidies for middle and lower income families. we depend on

private, for profit insurers. Over 30% of health care spending goes for administrative costs, twice

the cost in Canada. Medicare administrative costs are 2% compared to 11% with Medicare

Advantage (private Medicare). Allowing Medicare to bargain with drug companies for cost of

drugs would lower costs even more. The savings from extending Medicare to all would be

$60-400 billion/year, enough to subsidize the coverage without more taxes. Reich points out that

3/4 of people polled said that it was important to give people a choice of both a public and privateplan. (However, that is not a comment on single-payer preference, only on including a public

option.)

Public Goods

Reich suggests an increase in public transportation, parks, recreational facilities, museums and

libraries, free of charge.These public goods make up to some extent for stagnant or declining

wages and would provide more jobs. Expanded public transportation would reduce traffic

congestion and carbon emissions.

Money Out of Politics

Money increasingly distorts political decisions. We need strong campaign-finance laws, generous

financing of elections, stricter limits on contributions and issue advertising which is partisan. 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. The claim of support would not

be supported by a public record, separating quid from quo.


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2

How It Could Get Done

The agenda is realistic and doable, Reich states. To implement it would require cooperation at all

levels of society, which could come from a major crisis in society, uniting the grassroots to seek

reform rather than reactionary kill the cow politics. Theodore Roosevelt and Woodrow Wilsontried to institute reforms, with some success, but major reforms had to await FDR presiding over

the Great Depression.

Barack Obama had a similar situation early in his administration, but when the immediate crisis

was contained, political support for large scale reform diminished. In reassuring the public that jobs

would return, he failed to expose the long term trend and its dangers. We were left with diffuse

economic problems that seem unrelated and inexplicable. Housing foreclosures, continued high

unemployment, lower earnings, less economic security, widening inequality, soaring pay for the

elite produce bewildered and angry responses.

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. As a

result, in order to get reforms started, the White House had to broker profitable deals for the health

insurance and pharmaceutical industries. The resulting legislation is inadequate. The same

happened with reforms for the financial system. 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. Instead, they defined the goals narrowly, to reduce risks to the financial system. It

became a technical fix on conducting business and the public lost interest once the worst had

passed.

The Obama administration postponed the day of economic reckoning, but the postponement

cannot last for long, says Reich. An aftershock with a deep recession might spur reform, but a

slower aftershock, with years of high unemployment, 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 1920s and early 1930s. The early

stirrings of backlash may yet convince established interests that reform is needed to forestal worse

repercussions.

Sooner or later the powers that be will become concerned about the lackluster economy. A strong

middle class is necessary to purchase products and services. Only the most globalized American

firms can create profits abroad. There will be increasing public anger, and a backlash of political

control via political contributions. There will be an increasing number of bills to raise tariffs and

reduce trade, restrict immigration and limit global investment, with negative effects on the business

worlds earnings. There will be attempts to limit firing of employees and outsourcing abroad, break

up cartels and constrain investments, cap earnings, limit wealth and impose confiscatory taxes.

The major fault line in politics will not be between Republicans and Democrats; it will be between


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establishment and angry populace to take back America. When the establishment sees where this

is heading, there will likely be a realization that the alternative to change is worse and support

reforms leading to fairer distribution of wealth, income and opportunity.

The question is how will the pendulum swing back in our economy- with reforms that widen the

circle of prosperity or with demagoguery that isolates us from the world, shrinks the economy andsets Americans against each other. America has lots of resilience and common sense. When faced

with a crisis, we have become pragmatic and risen to the occasion. The lopsidedness of our

economic situation not only diminishes economic growth but tears at the fabric of society. The

basic bargain is fairness and the need for stability will promote reform in that direction.

aftershock summary reich

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