Robert Reich latest book should act as a wake-up call to all Americans. I believe that the majority of Americans are unaware of the tremendous transfer of wealth and power that has occurred over the last 20 years. Embedded in the environment, accepting the business-market paradigm, and subjected to gradual change, they like the frog in the pot of water slowly brought to a boil, are in danger of perishing.
The chart below shows what has happened in this transfer of wealth. Another way to indicate this, using Motion Chart, can be found in my blog.
“As Mark Twain once observed, history does not repeat itself, but it sometimes rhymes. Had America not experienced the Great Depression, policymakers eighty years later would not have learned how to use fiscal and monetary policies to contain the immediate economic threat posed by the Great Recession. But we did not learn the larger lesson of the 1930S: that when the distribution of income gets too far out of whack, the economy needs to be reorganized so the broad middle class has enough buying power to rejuvenate the economy over the longer term. Until we take this lesson to heart, we will be living with the Great Recession's after-shock of high unemployment and low wages, and an increasingly angry middle class.
The wages of the typical American hardly increased in the three decades leading up to the Crash of 2008, considering inflation. In the 2000S, they actually dropped. According to the Census Bureau, in 2007 a male worker earning the median male wage (that is, smack in the middle, with as many men earning more than he did as earning less) took home just over $45,000. Considering inflation, this was less than the typical male worker earned thirty years before. Middle-class family incomes were only slightly higher.
But the American economy was much larger in 2007 than it was thirty years before. If those gains had been divided equally among Americans, the typical person would be more than 60 percent better off than he actually was by 2007. Where did the gains go? As in the years preceding the Great Depression, a growing share went to the top. It was just like Eccles's "giant suction pump," drawing "into a few hands an increasing portion" of the nation's total earnings.
Economists Emmanuel Saez and Thomas Piketty have examined tax records extending back to 1913. They discovered an interesting pattern. The share of total income going to the richest 1 percent of Americans peaked in both 1928 and in 2007, at over 23 percent. The same pattern held for the richest one-tenth of 1 percent (representing about 150,000 households in 2007): Their share of total income also peaked in 1928 and 2007, at over 11 percent. And the same pattern applies for the richest 10 percent, who in each of these peak years received almost half the total.
Between the two peaks is a long, deep valley. After 1928, the share of national income going to the top 1 percent steadily declined, from more than 23 percent to 16-17 percent in the 1930S, then to 11-15 percent in the 1940S, and to 9-11 percent in the 1950S and 1960s, finally reaching the valley floor of 8-9 percent in the 1970S. After this, the share going to the richest 1 percent began to climb again: 10-14 percent of national income in the 1980s, 15-19 percent in the late 1990S, and over 21 percent in 2005, reaching its next peak of more than 23 percent in 2007. (At this writing, there are no data after 2007.) If you look at the shares going to the top 10 percent, or even the top one-tenth of 1 percent, you'll see the same long valley in between the two peaks.”
Henry Ford’s greatest innovation was that he paid his workers enough money, and reduced the price of the cars, so that they could buy the cars they were making. (See Innovation History of Auto Industry: 1820 to 1970 for more information.)
“On January 5, 1914, Henry Ford announced that he was paying workers on his famously productive Model T assembly line in Highland Park, Michigan, $5 per eight-hour day. That was almost three times what the typical factory employee earned at the time. In light of this audacious move, some lauded Ford as a friend of the American worker; others called him a madman or a socialist, or both. The Wall Street Journal termed his action "an economic crime." Ford thought it a cunning business move, and history proved him right. The higher wage turned Ford's autoworkers into customers who eventually could afford to plunk down $575 for a Model T. Their purchases in effect returned some of those $5 paychecks to Ford, and helped finance even higher productivity in the future. Ford was neither a madman nor a socialist, but a smart capitalist whose profits more than doubled from $25 million in 1914 to $57 million two years later.
Ford understood the basic economic bargain that lay at the heart of a modern, highly productive economy. Workers are also consumers. Their earnings are continuously recycled to buy the goods and services other workers produce. But if earnings are inadequate and this basic bargain is broken, an economy produces more goods and services than its people are capable of purchasing.”
This can lead to a vicious cycle instead of the virtuous cycle desired.
It’s interesting to note how Americans compensated for their lost purchasing power. Reich identifies three coping mechanisms:
1. Women moved into paid work
2. Everyone worked longer hours
3. We drew down our savings and borrowed to the hilt
We’ve now done all that and we now have no way to sustain our standard of living.
“It should be apparent that there will be no return to "normal;' because the old normal got us into our present predicament and can't possibly get us out. So what comes next?
In order to fix what needs fixing, we need to be clear about what broke. The underlying problem is not that financial institutions were reckless, although they were. The ultimate solution, therefore, isn't just to make them more prudent. Nor is the central problem that consumers borrowed too much, although they did. The solution, therefore, isn't merely to get Americans to save more and consume less.
To summarize: The fundamental problem is that Americans no longer have the purchasing power to buy what the U.S. economy is capable of producing. The reason is that a larger and larger portion of total income has been going to the top. What's broken is the basic bargain linking pay to production. The solution is to remake the bargain.”
Not only is money being concentrated at the top, there is significant information to indicate that the “game is rigged”. Money buys political and judicial power so that those institutions fight any change to alter the game. They are playing the child’s game, “Tick tock, the game is locked and no one else can play.”
“As lobbying has become more lucrative, an ever larger portion of former federal officials has turned to it. In the 1970S, only about 3 percent of retiring members of Congress went on to become Washington lobbyists. But by 2009 more than 30 percent did, largely because the financial incentives from lobbying had become so large. Starting salaries for well-connected congressional or White House staffers had ballooned to about $500,000. Former chairs of congressional committees and subcommittees commanded $2 million or more to influence legislation in their former committees. According to the Center for Public Integrity, between 1998 and 2004 (years picked because they straddled Democratic and Republican administrations) more than twenty-two hundred former federal officials registered as lobbyists, as did more than two hundred former members of Congress.”
And later, he writes,” The point is that a staggering amount of money from big corporations, executives, and other wealthy individuals lies like a thick fog over the nation's capital, enveloping everyone and everything. Not only has it enriched Washington lobbyists, lawyers, and public relations professionals, and seduced thousands of ex-congressmen, but it has also transformed Washington into a glittering city of high-end restaurants and exquisite hotels. It has boosted the price of Washington real estate. Even home prices in its surrounding counties proved remarkably resilient during the Great Recession. Seven of Washington's suburban counties are listed by the Census Bureau as among the nation's twenty with highest per capita incomes.”
One of Reich’s biggest concerns is the rise of a demagogue. He devotes a chapter, The 2020 Election, to a potential scenario of Independence Party gaining power, and it’s frighteningly realistic.
As if to accentuate this point to me I received an e-mail from Clarus Research on 12/22/10 with part of title reading Nation in Decline:
In a year-end nationwide poll conducted by the nonpartisan Clarus Research Group assessing the mood of the country and the next presidential election, a whopping 85 percent of voters say they agree with the statement, "In many ways America is in decline and we need strong, competent leadership to get us back on track." "The public mood is bigger than the sum of its parts," said Faucheux, president of Clarus Research Group. "Regardless of how voters feel about specific issues or personalities, there is a widely shared sense across partisan labels that the nation is in decline and needs strong, competent leadership to get it back on track. This deep public concern has serious implications on how elected officials handle major issues and how the 2012 candidates position themselves."
Nearly half of all voters--48 percent--also say "it would be good for the country to elect a nonpartisan President who is neither a Democrat nor a Republican."
"You'd expect independent voters to want an independent President. But more than two out of every five Democrats and Republicans also say electing a nonpartisan President is a good idea," said Ron Faucheux, president of Clarus Research Group. "There is clearly potential for an independent candidate to do quite well in 2012."
“To be sure, prolonged economic stress could open the door to demagogues who prey on public anxieties in order to gain power. A classic sociological study of thirty-five dictatorships found that when people feel economically threatened and unhinged from their normal habits, they look to authority figures who promise simple remedies proffering scapegoats.”
He describes and defends several suggestions to change the situation:
• A reverse income tax
• Higher marginal tax rates on the wealthy
• A reemployment sytem rather than an unemployment system
• School vouchers based on family income
• College loans linked to subsequent earnings
• Medicare for all
• Increase in public goods
• Money out of politics
Reich writes, “We have been at this juncture before. Our history swings much like a pendulum between periods during which the benefits of economic change are concentrated in fewer hands, and periods during which the middle class shares broadly in the nation's prosperity and grows to include many of the poor-between periods during which we see ourselves as "in it together;' and periods during which we view ourselves as being pretty much on our own. Roughly speaking, the first stage of modern American capitalism (1870-1929) was one of increasing concentration of income and wealth; the second stage (1947-1975), of more broadly shared prosperity; the third stage (1980-2010), of increasing concentration. It is vital for our future that we commence a fourth stage, in which broad-based prosperity is again the norm.
Our history is not quite a pendulum because we never return exactly to where we were before. It is more like a spiral, in which we arrive at roughly the same points but at different altitudes and with somewhat different perspectives. Yet each turn of the spiral gives rise to similar questions about the nature and purpose of an economy. How much inequality can be tolerated? When bets go sour and the economy nosedives, who gets bailed out and who are left to fend for themselves? At what point does an economy imperil itself politically, as large numbers conclude that the game is rigged against them? Most fundamentally, what and whom is an economy for?”
At the beginning of the book is a quote from Arthur M. Schlesinger, Jr., The Cycles of American History
“Epochs of private interest breed contradictions ... characterized by undercurrents of dissatisfaction, criticism, ferment, protest. Segments of the population fall behind in the acquisitive race .... Problems neglected become acute, threaten to become unmanageable and demand remedy .... A detonating issue-some problem growing in magnitude and menace and beyond the market's invisible hand to solve-at last leads to a breakthrough into a new political epoch. “
A positive outcome or path is not guaranteed. Our role is to assure that we emerge with an even stronger democracy with more access to and participation in the political, economic and judicial systems.
After Shock: The Next Economy and America’s Future, Robert Reich, Knopf, 2010, 174 pp