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Excerpt: "When so much income goes to the top, the middle class doesn't have enough purchasing power to keep the economy going without sinking ever more deeply into debt - which, as we've seen, ends badly."

Portrait, Robert Reich, 08/16/09. (photo: Perian Flaherty)
Portrait, Robert Reich, 08/16/09. (photo: Perian Flaherty)

Inequality Has Wrecked the Economy

By Robert Reich, Robert Reich's Blog

05 September 11


Why inequality is the real cause of our ongoing terrible economy.

he 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to the latest research from Moody's Analytics. That should come as no surprise. Our society has become more and more unequal.

When so much income goes to the top, the middle class doesn't have enough purchasing power to keep the economy going without sinking ever more deeply into debt - which, as we've seen, ends badly. An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back. That can lead to wild gyrations. Sound familiar?

The economy won't really bounce back until America's surge toward inequality is reversed. Even if by some miracle President Obama gets support for a second big stimulus while Ben S. Bernanke's Fed keeps interest rates near zero, neither will do the trick without a middle class capable of spending. Pump-priming works only when a well contains enough water.

Look back over the last hundred years and you'll see the pattern. During periods when the very rich took home a much smaller proportion of total income - as in the Great Prosperity between 1947 and 1977 - the nation as a whole grew faster and median wages surged. We created a virtuous cycle in which an ever growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats.

During periods when the very rich took home a larger proportion - as between 1918 and 1933, and in the Great Regression from 1981 to the present day - growth slowed, median wages stagnated and we suffered giant downturns. It's no mere coincidence that over the last century the top earners' share of the nation's total income peaked in 1928 and 2007 - the two years just preceding the biggest downturns.

Starting in the late 1970s, the middle class began to weaken. Although productivity continued to grow and the economy continued to expand, wages began flattening in the 1970s because new technologies - container ships, satellite communications, eventually computers and the Internet - started to undermine any American job that could be automated or done more cheaply abroad. The same technologies bestowed ever larger rewards on people who could use them to innovate and solve problems. Some were product entrepreneurs; a growing number were financial entrepreneurs. The pay of graduates of prestigious colleges and M.B.A. programs - the "talent" who reached the pinnacles of power in executive suites and on Wall Street - soared.

The middle class nonetheless continued to spend, at first enabled by the flow of women into the work force. (In the 1960s only 12 percent of married women with young children were working for pay; by the late 1990s, 55 percent were.) When that way of life stopped generating enough income, Americans went deeper into debt. From the late 1990s to 2007, the typical household debt grew by a third. As long as housing values continued to rise it seemed a painless way to get additional money.

Eventually, of course, the bubble burst. That ended the middle class's remarkable ability to keep spending in the face of near stagnant wages. The puzzle is why so little has been done in the last 40 years to help deal with the subversion of the economic power of the middle class. With the continued gains from economic growth, the nation could have enabled more people to become problem solvers and innovators - through early childhood education, better public schools, expanded access to higher education and more efficient public transportation.

We might have enlarged safety nets - by having unemployment insurance cover part-time work, by giving transition assistance to move to new jobs in new locations, by creating insurance for communities that lost a major employer. And we could have made Medicare available to anyone.

Big companies could have been required to pay severance to American workers they let go and train them for new jobs. The minimum wage could have been pegged at half the median wage, and we could have insisted that the foreign nations we trade with do the same, so that all citizens could share in gains from trade.

We could have raised taxes on the rich and cut them for poorer Americans.

But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It cut spending on infrastructure as a percentage of the national economy and shifted more of the costs of public higher education to families. It shredded safety nets. (Only 27 percent of the unemployed are covered by unemployment insurance.) And it allowed companies to bust unions and threaten employees who tried to organize. Fewer than 8 percent of private-sector workers are unionized.

More generally, it stood by as big American companies became global companies with no more loyalty to the United States than a GPS satellite. Meanwhile, the top income tax rate was halved to 35 percent and many of the nation's richest were allowed to treat their income as capital gains subject to no more than 15 percent tax. Inheritance taxes that affected only the topmost 1.5 percent of earners were sliced. Yet at the same time sales and payroll taxes - both taking a bigger chunk out of modest paychecks - were increased.

Most telling of all, Washington deregulated Wall Street while insuring it against major losses. In so doing, it allowed finance - which until then had been the servant of American industry - to become its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation's profits. By 2007, financial companies accounted for over 40 percent of American corporate profits and almost as great a percentage of pay, up from 10 percent during the Great Prosperity.

Some say the regressive lurch occurred because Americans lost confidence in government. But this argument has cause and effect backward. The tax revolts that thundered across America starting in the late 1970s were not so much ideological revolts against government - Americans still wanted all the government services they had before, and then some - as against paying more taxes on incomes that had stagnated. Inevitably, government services deteriorated and government deficits exploded, confirming the public's growing cynicism about government's doing anything right.

Some say we couldn't have reversed the consequences of globalization and technological change. Yet the experiences of other nations, like Germany, suggest otherwise. Germany has grown faster than the United States for the last 15 years, and the gains have been more widely spread. While Americans' average hourly pay has risen only 6 percent since 1985, adjusted for inflation, German workers' pay has risen almost 30 percent. At the same time, the top 1 percent of German households now take home about 11 percent of all income - about the same as in 1970. And although in the last months Germany has been hit by the debt crisis of its neighbors, its unemployment is still below where it was when the financial crisis started in 2007.

How has Germany done it? Mainly by focusing like a laser on education (German math scores continue to extend their lead over American), and by maintaining strong labor unions.

THE real reason for America's Great Regression was political. As income and wealth became more concentrated in fewer hands, American politics reverted to what Marriner S. Eccles, a former chairman of the Federal Reserve, described in the 1920s, when people "with great economic power had an undue influence in making the rules of the economic game." With hefty campaign contributions and platoons of lobbyists and public relations spinners, America's executive class has gained lower tax rates while resisting reforms that would spread the gains from growth.

Yet the rich are now being bitten by their own success. Those at the top would be better off with a smaller share of a rapidly growing economy than a large share of one that's almost dead in the water.

The economy cannot possibly get out of its current doldrums without a strategy to revive the purchasing power of America's vast middle class. The spending of the richest 5 percent alone will not lead to a virtuous cycle of more jobs and higher living standards. Nor can we rely on exports to fill the gap. It is impossible for every large economy, including the United States, to become a net exporter.

Reviving the middle class requires that we reverse the nation's decades-long trend toward widening inequality. This is possible notwithstanding the political power of the executive class. So many people are now being hit by job losses, sagging incomes and declining home values that Americans could be mobilized.

Moreover, an economy is not a zero-sum game. Even the executive class has an enlightened self-interest in reversing the trend; just as a rising tide lifts all boats, the ebbing tide is now threatening to beach many of the yachts. The question is whether, and when, we will summon the political will. We have summoned it before in even bleaker times.

As the historian James Truslow Adams defined the American Dream when he coined the term at the depths of the Great Depression, what we seek is "a land in which life should be better and richer and fuller for everyone."

That dream is still within our grasp.

Robert Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written thirteen books, including "The Work of Nations," "Locked in the Cabinet," "Supercapitalism" and his latest book, "AFTERSHOCK: The Next Economy and America's Future." His 'Marketplace' commentaries can be found on and iTunes. your social media marketing partner


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+43 # wedwie 2011-09-05 10:47
Furthermore, the items that the superrich purchase or spend on are often not items that benefit the broad economy, but often foreign luxury items. Not the "bread-and-butt er" everyday items that middle-class Americans spend on when they have the money. Not all spending is equal when it comes to benefiting the economy.
+3 # Peacedragon 2011-09-05 10:59
The political will? If we organized, what laws should we work for?
+26 # Jeff C 2011-09-05 12:24
Good point and good question. The economic system is collapsing, but our political system is controlled and corrupted by the very same forces that have driven the collapse. It’s going to be very difficult to enact desperately needed progressive legislation when we’re - in essence - locked out of the system. The problem is made even worse by the fact that the mainstream media is also controlled by the same destructive and corruptive elements (which is why most of us are here at RSN to begin with, right?). Unless we address the role of money in politics in terms of robust campaign finance and corporate lobbying reform, we’re dead in the water, I think. So that, as a minimum, is one area we absolutely have to address up front. Problem is: our window of opportunity is so damned small, which is why organization is so critically important.
-36 # fredboy 2011-09-05 11:01
We should convince the top 5 percent to spend, spend, spend. This will life all of us, creating and ideal and just world.
+4 # TGMisanthrope 2011-09-05 20:40
Excellent use of sarcasm, fredboy, although it seems most people didn't get it.
+13 # jlohman 2011-09-05 11:06
>>> "With hefty campaign contributions..."

Yes Dr. Reich, let's say the words: political corruption! Clearly you are not going to be the leader in our advocacy, but we must totally accept that our current set of politicians are not going to fix the system. Only a 100% turnover will get us there.

Jack Lohman
+11 # JCM 2011-09-05 11:32
And who will be in the turnover that would not be just as corruptable!
+18 # Doggone 2011-09-05 14:05
Elizabeth Warren? There are some members of congress, not many but a few I'd trust, Bernie sanders & Dennis Kucinich to name two.
+30 # Barbara K 2011-09-05 11:09
Yes, the dream is still within our reach. We just have to keep Dems in power, or we can kiss our rights, SS, Medicare, and Medicaid good bye. The Republibaggers have been trying to kill those programs since we got them. They want everything for themselves and nothing for the rest of us. They live off us like vultures, while we pay Their Wages, Their Insurance, Their Retirement, they want to deny the same for the rest of us. NEVER VOTE REPUBLICAN.

VOTE STRAIGHT DEMOCRATIC, the alternative is disastrous.
+6 # JCM 2011-09-05 12:23
Thank You Barbara!
+8 # noitall 2011-09-05 16:08
If only it were that simple. They're taking us down the path that the USSR went down. The filthy rich got filthier and solidified their control and position. The rest of the country went into poverty and the lucky moved to the US to experience the horror yet once again.
-2 # Saberoff 2011-09-05 18:19
Yes, the repubs have been trying to kill Social Security since FDR thought it up but have never been able to do that (are not, still).

Have you not heard: Only a DEMOCRAT can kill Social Security?

Well Barrach Obama is on his way to doing just that.

"..keep the Dems in power..."(?) You've got to be kidding me!
+4 # JCM 2011-09-06 07:46
Can you tell me one good thing the Republicans conservative ideology has done for this country in the last 30 years that has benefited the middle class the most?
0 # Observer 47 2011-09-06 08:34
Are you a Republican troll? How can you not see that the Dems are as corrupted and paid-for as the Rethugs? They're two sides of the same coin, and they're TAKING the same coin from the corporations! The only hope is to dump both parties and find an alternative.
+50 # Nell H 2011-09-05 11:13
Henry Ford paid his workers enough that they could afford to buy his cars. There is a lesson there.
+6 # TGMisanthrope 2011-09-05 20:44
Henry Ford also looked well beyond the present fiscal quarter, a trait sorely lacking in most modern American businesspeople and, sadly, one of the main reasons that learning Chinese is probably a good idea for future generations.
+8 # balconesfalk 2011-09-05 11:18
DPFT stands for Drug Policy Forum in Texas.

They make speakers, like the one in the film at the web site, available to civic and fraternal organizations-- VFW, Rotary, Lions, etc., and Masonic lodges. This is a wonderful development to counter those who would demonize plants and people with them in hand. Elements in our society would just as soon lock 'um up, throw away the key, enslave them for their labor and toss them like used kleenex upon their release--stripe d of voting rights and scarred for life.
This is a a profit making, capitalist industry, to effect the exchange of money from the public and into the hands of the criminal/incarc eration industry. How obscene! It is time for democracy to reign in capitalism gone wrong for the benefit of our whole society and nation.
+49 # michelle 2011-09-05 11:28
Sadly the "enlightened executive class" Reich speaks of will simply relocate to the country of choice leaving this culture in a heap of trouble. I think a real problem is a lack of 'enlightenment' among the poor and middle class. They vote against their self interest, attack those professions that have managed to hang on to unions and pensions and reasonable wages, making it easy for the upper class to maintain the wealth and control. I recently struck up a conversion with a young man in a McDonald's uniform and told him when I was in London, McD was hiring and the sign in the window said 4 weeks paid vacation. He snapped back, "Vacations make you lazy, Look at how lazy they are in Europe." He defended his substandard working conditions and opposed any improvement. What can be achieved when half the population behaves this way? I am at a loss for solutions. Even with revolution I think half of our population would fight on the side of the upper class and fight to maintain their peasant status.
+12 # Saberoff 2011-09-05 18:45
An interesting story, Michelle, and well told; and I think, most unfortunately, you're perfectly right on.

How does one argue with a masochist? They LIKE being used and abused.

Maybe they’re like arsonists or something, as well: Wow, look at all that destruction.

We’re all at a loss for an explanation. The question was asked back in 2004 (in the book "What's the Matter with Kansas," by Thomas Frank).
+23 # brianf 2011-09-05 11:43
This is an excellent summary of what has happened to our economy over the past few decades. The worst event was when Clinton made his economic policies almost indistinguishab le from Republican policies, and the Democrats have been playing Republican ever since. Obama has become more Republican than Nixon in many other areas too.

Reich is almost correct that this class warfare will come back to bite the rich. But the rich know that when they have sucked the American economy dry, they can move on to China and India, both of which have a rising middle class.

In the end it is global warming that will be the downfall of the rich and the huge corporations. It is the great equalizer that will take us all down. Unless we stop it, of course, but that doesn't seem likely at this point. It's not just the rich that are short-sighted. The vast majority of people in this country think global warming is not that important or urgent, if they even admit it's real.
+14 # tahoevalleylines 2011-09-05 12:01
Robert Reich is probably best equipped and highly regarded to name actual, specific grand projects that could define a President.

One such project, rebuild of the nation's fine matrix of local branch rail lines, extant for over 100 years. Branch rail corridors were in service exactly when the USA was a lending not a borrowing nation. Local rail lines permitted competitive freight and victuals movement, and when fuel was scarce as in WWII, gave lifeline connectivity to rural and suburban communities.

Another grand engineering project is the "North American Water And Power Alliance" (NAWAPA). Drawing Columbia River outflow, using a complex of delivery methodologies water is delivered as far south as Mexico, and east to the Great Lakes. Enroute power generation and aquifer replenishment are important National Strategic imperatives.

Simply recharging the California Central Valley Aquifer, and the Midwest Ogallala Aquifer, respectively, will save untold amounts of electricity now chasing ever deepening water tables. Supplementing Mexican agricultural water will alleviate the US water grabs in the Southwest...
+20 # Abigail 2011-09-05 12:08
If we manage the cost of running for office, we can get our government to represent us How? By requiring all TV channels to give a set amount of time to all candidates for national offices. If any candidate buys more time, the selling channel must then give an equal amount of time to all opposing candidates. Take the money out of the system, and the system becomes our (the people's) again.
+7 # jnestler 2011-09-05 13:13
Things will only change when it is in the interests of the corporatists and the plutocrats to change. Right now, they're fat and happy and unmoved by what's happening to the other 98%.
+14 # fredboy 2011-09-05 13:25
Sorry about my typo and attempt at sarcasm, teasing that the rich can spend us all to security and make everything right.

Just so tired of the inequality Reich discusses, and the fact that we've been sold out by both political parties.

There is a great, historic need to be filled. Wonder what will fill it?
+3 # Nel 2011-09-05 14:22
The analysis is a no brainier; There is more than enough brains in the USA to know that. (Add that such inequality increases the overall morbidity and mortality of the population The problem is the elephant-in-the -room: The USA has become colony inhabited by terrorized pigs that pretend not able to read John Mearsheimer and Stephen Walt.
+9 # MainStreetMentor 2011-09-05 14:43
Inequality wrecks everything, not just economies. The falsely self-induced perceptions and self-imposed entitlements of the ultra-wealthy and mega-rich find humor in flaunting opulent lifestyles in the face of the down-trodden. That same opulence self-justifies multiple homes and extravagant wastes when millions are homeless and hungry. Inequality breeds contemptuous actions and deeds, much like Marie Antoinette’s “let them eat cake” commentary. Inequality’s Mother is Greed, and the father is complacency. Justice will one day intrude on inequality’s indulgences, and the results will most certainly alter the current status quo between the “haves” and “have nots”. I hope that can be avoided, for America’s sake.
+4 # Dying Middle Class 2011-09-05 15:44
Speaking of "political will," Professor Reich should challenge President Obama for the Democratic nomination. We desperately need a real Democrat in the White House, somebody who really understands what's happening in this country...
+1 # BVA 2011-09-05 15:55
A question for every Republican presidential candidate:

"The Obama administration appears to have delayed (deferred, suspended, or slowed) prosecution and civil litigation against executives of banks, mortgage companies, and other financial entities presumably until the economy recovers sufficiently so as not to interfere with that recovery.

"Do you, sir, plan to reinstitute and/or reinvigorate these deferred investigations, prosecutions, and civil litigations against financial executives and entities implicated in causing the economic collapse when the economy recovers?"
+4 # noitall 2011-09-05 16:06
One thing about these super rich/greedy 'rotten apples', these dog fesces, to be more accurate, is that when it comes to satisfying, albeit momentarily, their greed, they watch and learn and connive and persevere. They saw the fortunes made when the USSR came down. Citizens in Russia with some inside knowledge of the concentrations of wealth, resources, and with the capital to strike, made billions. "PRIVITIZATION! That is the only way we can save our NATION" That is the plan here I believe. Bring this motha down and set up the fiefdoms. We serfs are already being whipped into submission. Once this Republic tumbles (and its happening just like in the USSR), the kings will be crowned, armed, and ready. They already have the army, loyal to the same money god that the masters are. They count on us playing the DEM/GOP game right over the cliff. They say, "Trust me, look I'm a family man, I have religious values, my wife looks like a model, I donate to a lot of good causes, Trust Me, I'm clean, I even support Israel". And we vote for the one that is less sleezy (as far as we can see), the one that is reading from the best scrip, the one that paid the price for the best speechwriters and marketers. Me? I'm going demonstrating in DC. The home of the great WHITE father.
+6 # Sallyport 2011-09-05 17:01
Reich says: "... the Great Prosperity between 1947 and 1977 - the nation as a whole grew faster and median wages surged. We created a virtuous cycle in which an ever growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats." Not an entirely virtuous cycle, as during this period we also squandered resources to a degree that has impoverished the planet & polluted our water & air probably beyond redemption. While we certainly must have a fairer distribution of wealth, we must also learn to economize & have a thought for the environment. Reich should be the principal economic advisor to this and future administrations .
+9 # balancingact 2011-09-05 19:53
Yes, income disparity and wealth accumulation is not only wreaking havoc on what is conveniently referred to as the middle class, poor, working class and disenfranchised citizens of this country, but is likewise making a mockery of our Democratic political system. I do agree with the author and well said.

But please, please, please, Professor Reich, why is there no mention of the environmental costs of maintaining a consumption and fossil fuel based economic growth model? I didn't see the word "environment" or "ecology" or "externalities" or "peak oil" or "climate change" or "pollution" even ONCE in your thoughtful analysis. Why is this?

Am I to understand that a "virtuous cycle" simply equates to "an ever growing middle class" and the economy will prosper only if we "revive the purchasing power of America's vast middle class."

Is it not crucial that we question the underlying assumptions and real life consequences to business as usual? It's not only about consumption! Certainly, nature is not separate from the economy!

The economy is also about the intrinsic value and security of a healthy environment, of breathing clean air, of consuming nutritious food and having the time and well being to enjoy a summer baseball game with friends.
+1 # qasee 2011-09-06 13:27
'just as a rising tide lifts all boats, the ebbing tide is now threatening to beach many of the yachts.' I love that! I want it as a bumper sticker.
+2 # Tee 2011-09-06 20:00
The roits occurring in Britain could just as well of happen in the United States. What prevented it? The election of a so-called black president. Can you imagine what would happen if George Bush did the same things as Obama?

Hand it to the ruling elite. Their tactic of selecting Obama was very scewd of these greedy maggots. Even right now the ruling elite is thinking who they can install to mislead and pacify us since the black president charade has run it's course.

A Ron Paul would be suitable to further pacify the masses into hope and change. We don't need politicians, we need an American spring, camp city, and a Tarir square wrapped into one.
+2 # Ryguy913 2011-09-07 14:38
Did I miss something in this article? What does Reich suggest that we DO about this situation?

I mean, he gave very little detail about how Germany achieved the two changes he mentioned (improved education and stronger labor unions), and he really said hardly anything about how Americans/our government can reduce the income/spending gap here in the U.S.

I mean, do we really need a former Labor Secretary to tell us that there's too much money/spending power in the hands of too few people in this country?

We need solutions, and we need them badly.

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