Reich writes: "Rarely in history has the cause of a major economic problem been so clear yet have so few been willing to see it. The answer is in front of our faces."
Portrait, Robert Reich, 08/16/09. (photo: Perian Flaherty)
Why The Economy Can't Get Out of First Gear
13 June 12
arely in history has the cause of a major economic problem been so clear yet have so few been willing to see it.
The major reason this recovery has been so anemic is not Europe’s debt crisis. It’s not Japan’s tsumami. It’s not Wall Street’s continuing excesses. It’s not, as right-wing economists tell us, because taxes are too high on corporations and the rich, and safety nets are too generous to the needy. It’s not even, as some liberals contend, because the Obama administration hasn’t spent enough on a temporary Keynesian stimulus.
The answer is in front of our faces. It’s because American consumers, whose spending is 70 percent of economic activity, don’t have the dough to buy enough to boost the economy – and they can no longer borrow like they could before the crash of 2008.
If you have any doubt, just take a look at the Survey of Consumer Finances, released Monday by the Federal Reserve. Median family income was $49,600 in 2007. By 2010 it was $45,800 – a drop of 7.7%.
All of the gains from economic growth have been going to the richest 1 percent – who, because they’re so rich, spend no more than half what they take in.
Can I say this any more simply? The earnings of the great American middle class fueled the great American expansion for three decades after World War II. Their relative lack of earnings in more recent years set us up for the great American bust.
Starting around 1980, globalization and automation began exerting downward pressure on median wages. Employers began busting unions in order to make more profits. And increasingly deregulated financial markets began taking over the real economy.
The result was slower wage growth for most households. Women surged into paid work in order to prop up family incomes – which helped for a time. But the median wage kept flattening, and then, after 2001, began to decline.
Households tried to keep up by going deeply into debt, using the rising values of their homes as collateral. This also helped – for a time. But then the housing bubble popped.
The Fed’s latest report shows how loud that pop was. Between 2007 and 2010 (the latest data available) American families’ median net worth fell almost 40 percent – down to levels last seen in 1992. The typical family’s wealth is their home, not their stock portfolio – and housing values have dropped by a third since 2006.
Families have also become less confident about how much income they can expect in the future. In 2010, over 35% of American families said they did not “have a good idea of what their income would be for the next year.” That’s up from 31.4% in 2007.
But because their incomes and their net worth have both dropped, families are saving less. The proportion of families that said they had saved in the preceding year fell from 56.4% in 2007 to 52% in 2010, the lowest level since the Fed began collecting that information in 1992.
Bottom line: The American economy is still struggling because the vast American middle class can’t spend more to get it out of first gear.
What to do? There’s no simple answer in the short term except to hope we stay in first gear and don’t slide backwards.
Over the longer term the answer is to make sure the middle class gets far more of the gains from economic growth.
How? We might learn something from history. During the 1920s, income concentrated at the top. By 1928, the top 1 percent was raking in an astounding 23.94 percent of the total (close to the 23.5 percent the top 1 percent got in 2007) according to analyses of tax records by my colleague Emmanuel Saez and Thomas Piketty. At that point the bubble popped and we fell into the Great Depression.
But then came the Wagner Act, requiring employers to bargain in good faith with organized labor. Social Security and unemployment insurance. The Works Projects Administration and Civilian Conservation Corps. A national minimum wage. And to contain Wall Street: The Securities Act and Glass-Steagall Act.
In 1941 America went to war – a vast mobilization that employed every able-bodied adult American, and put money in their pockets. And after the war, the GI Bill, sending millions of returning veterans to college. A vast expansion of public higher education. And huge infrastructure investments, such as the National Defense Highway Act. Taxes on the rich remained at least 70 percent until 1981.
The result: By 1957, the top 1 percent of Americans raked in only 10.1 percent of total income. Most of the rest went to a growing middle class – whose members fueled the greatest economic boom in the history of the world.
Get it? We won’t get out of first gear until the middle class regains the bargaining power it had in the first three decades after World War II to claim a much larger share of the gains from productivity growth.
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Sadly the only way to make the changes that are necessary to hold onto our fragile and dying democracy is a revolution! I am not advocating a Revolution, only making an observation...
It is currently in the air, just as it was in France for the 10 years that led to 1789, I believe the Revolution that will happen here will be even more extreme.
This let them eat cake Philosophy in Washington and Wall Street is garnering much anger, but the people haven't directed that anger as yet in the right direction. When they figure it out, watch out, there will be a lynch mob mentality.
I am totally disenchanted with Obama as I am with all politicians (with a few exceptions). As far as I'm concerned, they're all corrupt. The things Obama has accomplished are insignificant compared to the things he has not fought for or against. Corruptions runs rampant and he has only given us are sweet words about fighting the banks, oil companies, Wall Street, the environment, fracking, etc. He has betrayed us on all the important issues.
Now what do we do?
Not only have the Democrats failed to use this option at nearly every opportunity, but they shot themselves (and the 99%) in the foot by caving in to GOP hostage taking and extending the Bush Tax Cuts. That jacked up the deficit and forced the cutting of programs to help the poor and middle class as well as the loss of tens of thousands of public sector jobs across the country.
Obama and the Democrats are their own worst enemies when it comes to economic policy.
Regardless of how Obama has let us down, we can't forget for a *minute* that the GOP has fought him tooth and nail against EVERYTHING, *including* measures that would benefit the *majority* of Americans!
Worst of all, though, the GOP did all of this out of SPITE!
If there was at least some *semblance* of principle in *anything* the Republicans were doing, I might be inclined to give them the benefit of the doubt, but there's NO principles, NO action for the greater good, NOTHING!
No matter how bad Obama has been, the GOP is FAR WORSE!
So we *have* to re=elect Obama and the Democrats!
Once we get the majorities back, then we can work towards getting *Progressives* into office.
But re-electing Obama is the first step!
We, the 99 % and our Congress keeping wanting and getting more and more benefits that cause more and more borrowing; and therefore more transfer of wealth and power to those not in debt. We are approaching an endgame in borrowing, and the economy is telling us that fact.
The big flaw in your thinking is that people that saved money gained anything. I believe you are not talking about the 1% but instead those that fit into the larger but still powerless group of 6 figure earners. Especially the lower half.
That group has had a large portion of their savings stolen from them during this fiscal crisis, and that is what happens when you allow bankers to make the rules of banking instead of the people that are affected by banking.
So typically the Right Wing just gets so much stuff backwards. We use banks, therefore we should make the rules. If the bankers cannot make any money under our rules, then they will get out of the banking business. Our need to have banks will then force us to modify the rules. If banks make the rules, we get no say in how they handle our money.
We are in trouble because we have too many freeloaders accepting the benefits of society without helping pay their way (a problem now sinking Europe). Those freeloaders go by the titles of corporations and multimillionair es (not all multimillionair es, but a large number).
Just before and after World War II, corporations were paying 47% of the income taxes in America, individuals picking up the other 53%. Now, corporations are paying less than 10% of income taxes and individuals who pay more than 90% of income taxes -- in addition to most gasoline, tobacco and liquor taxes -- don't have the spending cash, as the professor keeps telling us.
Those same freeloading corporations hoarding about $2 trillion in tax-havens overseas only add to the problem. That money needs to be in the United States economy and taxed so that there are no more freeloaders.
There is no specific plan for a solution coming from anyone (including Prof. Reich) but the book "Saving America: Using Democratic Capitalism to Rescue the Nation from Economic Folly" does offer a way out of our mess.
As long as they keep obstructing and preventing job creations, NOTHING will improve. they must be shamed into stopping.
And the country HAS to REALIZE, that the republicans are the ones that are DETERMINED to crash the economy, to prevent the re election of Obama.
WE understand, and Norman Ornstein and Thomas Mann are on a number of TV programs promoting their book and they sure make it clear that the republicans are the ones obstructing, so hopefully more people will begin to get the true picture.
Sadly, I know one liberal who has said she'll vote for Romney just to watch that crash take place. She thinks that will mobilize the 99%. I wish President Obama would listen to Robert Reich.
The obvious answer is a massive public works project that would not only fix our crumbling infrastructure but add to the overall economy by providing real-wage jobs to people who now have nothing. Contrary to what they blather every day in Congress, a government job is a real job. If that is not true then I guess none of them have a real job so we can quit paying them and they can work for pay at the nearest burger joint. That should help the deficit.
I used to think too that the well to do were cutting their own throat. They ARE NOT HURTING. they can afford to send their children to the best schools. They live in really nice safe areas.
The corporations don't need us to buy their wares, for they can sell them all over the world.
Then I thought, but they need a well educated youth to work the jobs?....... ...Well a number of the big corporations have divisions in Canada....so no problem.
What about all the young people with hardly any education??.... ...The corporations need them to fight the wars they are so eager to undertake. Our biggest production is weaponry of all kinds. That stuff need to be used, so we need some wars. PROBLEMS SOLVED!!!
Although I admire Reich very much, I think he's making a mistake here. Yes, consumer bubble economies characterized the period from the 80s to 2008, but consumers no longer matter. Most money made by our economic aristocracy comes from investment gambling. Most corporations that used to make stuff to sell to consumers are now really banks. GM is a bank. It would actually prefer not to make cars. The classic case is Enron which was a bank fronted by an energy company. Banks don't need consumers. They make money by speculating in arcane investments like derivatives. Reports say that there are about $1000 trillion dollars worth of derivatives out there. That's where the money is.
Old econominies like China, Germany, Japan, Italy make money by making consumer goods. the US is a truly postmodern economy. Most stock trading is done by computers that make a million trades a minute. This is not about owning stock in a company. This is about churning up nothing in order to throw off profit.
Most of us want to live in the old economy of manufacturing and consumption. Our economic elite no longer care about consumption or making.
That's really true for all US corporations now. Commodites often get in the way of making money. They require workers who are always a problem with their needs for healthcare, vacation days, and the rest. Why not just make what they really want in the first place -- money. And why not do it by churning up paper investments and throwing off profits. And why not do it with money borrowed at 0% interest from the FED.
The future of the US economy is clear. It will move more and more in the direction of USX until nothing is made, almost no one has a job, but the GDP soars on churned up investment profits.
This is not an accident. This is all be design. The chief design factor is federal taxes. You pay 15% income tax on capital gains and 35% income tax on manufactured good. Which sort of business do you think business men are going to get into? The 15% capital gains tax is also just nominal. there are deductions that reduce it quite easily to zero.
Get it? We won’t get out of first gear until the middle class regains the bargaining power it had in the first three decades after World War II to claim a much larger share of the gains from productivity growth.
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Robert, none of the commentators seems to have 'got it', so I will supply your unstated point: get off your butts, folks, and organize!!
You only have bargaining power when you are organized -- in unions and in elections. I trust the Occupy activists are on the case; let's join them.
WHEN GOVERNMENT (that's SUPPOSED to be OUR democratically elected engine for policy consensus on public/citizen/ aggregated priorities) IDENTIFIES PRIORITIES (that's OUR investigative/r egulatory/imple mentation solution of last resort), THE ACTION IT (WE) TAKE(S) IS TO INVEST OUR RESOURCES (TAXES AND LABOR) IN ADDRESSING AMERICAN'S PROBLEMS AND CONCERNS. THIS BUILDS CAPITAL VALUE - NATIONALLY.
Our economy seems to accepted the concept of running on credit since the 50's (the financial sector loves it). In the 30's FDR's Brain Trust conceived of long term mortgage guarantees (FHA, Farm Credit, etc.) to allow a "middle class" to grow, accumulate and participate in wealth/capital/ stuff accumulation. The plutocrats hated it then and have worked diligently to overturn those enhancements to 'average family' success. Lawyers, lobbyists, 'acquired politicians', 'thimk-tanks' and 'entertainment' news sources all are designed to return the top 1% to the Gilded Age.
Worrying about what we 'borrow' as a nation to finance capital investment (through the 'private' sector outsourcing that is so prevalent today) seems ONLY to bother you deficit hawks if it addresses equality of opportunity problems for the 'least among US'. There is so much more to be said about this disconnect.
Obama may win this year, but if he's left with a GOP-controlled House, let alone Senate, we're in for several, if not many more years of severe economic pain, especially if Europe starts disintegrating (watch the Greek elections this week). If Romney takes the whole enchilada, including Congress, it'll be like blasting off and landing on another planet; I can't even stomach him for 5 whole minutes...presi dent Romney?? Unthinkable.
"Medicare, Social Security, public and private pension claims in the countless billions" represent contractual obligations of all of us as citizens. We 'invested' together on a weekly basis with the understanding that we 'earned' a return at some future date.
If your banker told you he had changed his mind - not only would your deposits earn no interest, they were no longer yours. He had used them to speculate on derivative, securitized, manipulated high commission mortgage securities. They went bust right after he collected some fees ... but he was counting on you to pay additional taxes and lower his tax obligation so that YOUR government could guarantee his continued rape of your resources. Oh, and his profits could be 'invested' in a super PAC to insure your interests would never influence this process ... Our pain isn't likely to diminish in such a world under ANY circumstances.
ALL CHANGE IS PAIN (to someone). It's THEIR turn ... Time for the 1% to write off 40% of THEIR net worth.
I see your valid points, but just for the record, I was using the term 'demand" in the economic sense (i.e., supply and demand), not in the social sense that there's something illegitimate about entitlement; of course all those pensions are valid, but the fact is billions have been underfunded, or funds diverted to other uses, or melted down during this crisis, and the funds will have to be replaced and paid when due, and that will have to come from somewhere.
You can have the last word on this: I'm done.
Many of my retired Boomer relatives are also using their disposable incomes to help out their kids, who are struggling with a horrific economy. You aren't spending on restaurants and new cars if you're sending the kids a few hundred to tide them over every month so that they don't have to move to your basement.
The credit card society will not come back. 'Shopping Therapy' is so last decade. there's a widespread understanding that things are not going to get better anytime soon. The habits of thrift are coming back.
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