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NationofChange / Op-Ed
Published: Wednesday 13 June 2012
“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.”
Why the Economy Can’t Get Out of First Gear
Rarely 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.
This article was originally posted on Robert Reich's blog.
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ABOUT Robert Reich
ROBERT B. REICH, one of the nation’s leading experts on work and the economy, is Chancellor’s Professor of Public Policy at the Goldman School 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. Time Magazine has named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including his latest best-seller, “Aftershock: The Next Economy and America’s Future;” “The Work of Nations,” which has been translated into 22 languages; and his newest, an e-book, “Beyond Outrage.” His syndicated columns, television appearances, and public radio commentaries reach millions of people each week. He is also a founding editor of the American Prospect magazine, and Chairman of the citizen’s group Common Cause. His widely-read blog can be found at www.robertreich.org.
17 comments on "Why the Economy Can’t Get Out of First Gear"
June 14, 2012 11:42am
This thread is about ready to welcome Klaatu (the new movie version) to erase life from the planet and start over.
Why Reich has become so timid with his articles is a mystery. The superrich are not going to start recruiting thousands of people to go to small towns and poor sections of cities and hand out a few hundred dollars to everyone they meet. Nor are they going to permit the government to do so, or continuing to do so.
A WPA might be nice, but unless progressive Democrats win big in November, it will not happen. A simpler way would be Nixon's negative income tax, with quarterly distributions to those who qualify for it. That will not happen because Obama is against it. Remember, he knows poor people because he could not organize them (I graduated from the UChicago Law School, 1967, so I know something about the problem).
The Third Rail will vanish if Romney is elected and the Republicans win control of both houses, or even just control over the House. Even Obama has indicated he is willing to put SS and Medicare on the table. Many seniors who are collecting and barely living on Social Security don't believe these are government programs. They vote for Romney and any Republican or tea partyer who wants to get rid of "entitlements." So no one now talks about getting rid of SS. It's get rid of entitlements. And it's working!
Where are the Democratic responses to these ploys? Why are they letting the other side set and define the terms of the debate? Got me.
June 14, 2012 3:35am
The only thing good about income tax is the ability to create a progressive tax. Isn't it ironic that the talk is turning to make it a flat tax? Then for good measure get rid of the "death tax." Anything more that can be done to concentrate wealth?
June 13, 2012 8:28pm
Rich people are the Problem!!!!! No wonder Jesus didn't have anything nice to say about them. Spread the loaves and fishes around and we'll all be eatin' good!
June 13, 2012 8:20pm
The level of pontification is becoming overwelming. All this micromanagement of the planet and the economy is a bit much. Don't you think? Let's keep it simple. Rule no. 1: If you keep doing the same old things in the same old way, you will keep getting the same old results. Rule no.2: Those who ignore the lessons of history are doomed to repeat them. Rule no.3: Remember the Golden Rule; he who has the gold rules. Rule no.4: It is better to remain silent and be thought the fool than to speak and remove all doubt. Now when you can apply those rules to the present situation, you'll begin to get a handle on fixing things. Until than, ,, well good luck anyway.
June 13, 2012 6:48pm
The reason the economy can not get out of first gear is that with ecological collapse we are no longer able to grow the economy. prosperity will come about through shrinking the economy, healing ecosystems, and dramatically reducing the wealth of the 1%.
June 13, 2012 6:19pm
"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."
No shit. I've been saying this since 2008 and before. Demand is the life blood of any demand oriented economy. Why is this so incredibly hard for people to understand?
Our economy is NEVER going to grow again if wages keep losing ground, and they are--for many reasons, not only some diabolical conspiratorial fantasy. This, folks, is the natural life of capitalism--demand decreases, the system recedes. Continued growth needs infinitely increasing demand.
What we have is an economic system that is unsustainable. Get use to the common worldview that people just aren't needed for a receding economy. We see the result in high unemployment and rising homelessness.
June 13, 2012 5:18pm
Another aspect of today's context that may differ from our past is today's diminshed threat of communism. In the middle of the 20th century, 1% thinking was very much concerned with capitalism vs. communism. A growing, powerful, hopeful and even happy middle class was a necessary demonstration to the masses of the advantages of capitalism. Today, Communism is no longer the threat to the 1% it once was, and so the 1% may feel quite safe in retrieving power from the middle class. Today's response to militant Islam, a perennial threat to all infidels since its inception centuries ago, does not require a happy middle class, but rather a terrified one. 9/11 has conveniently bolstered U.S. internal security, further comforting the 1% that their rightful gains can be secured. A compliant media allow any threat to the new world order to be labled as terrorism. Disparaging comments regarding socialist and communist thinking echo frequently still in the media, indicative of a lingering cautiousness in a portion of the 1%. A Christian ethic of bearing one's suffering peacefully furthers the cooperation of the middle class and the poor in the new arrangement. Christians don't seem to answer the media with Paul's direction to Timothy to boldly command the wealthy to be generous and obtain true spiritual wealth. The future indeed looks stagnant, if not grim, for the majority of our youth. This strains my heart. However, I do not write to advocate the return of a Communist challenge. Rather I would hold out for patronizing, with the few dollars we still have, employee-owned businesses. It is hard to evade the products and services that empower the 1%, but we must do it more. They should easily be content with what they already have. Yet I suspect many of them will never be happy, even when they have taken everything they can from us. I want to help the young have the opportunities I have had, and I believe employee ownership is the way to go. I hope Robert will speak up for that option.
June 14, 2012 4:24am
Excellent post!
June 13, 2012 4:40pm
What goes on in other countries of the world should not concern us . It is up to the citizens of those countries to resolve their own problems . As it is there are about 200 countries in the world . The U.S. has troops stationed in over 130 countries . If Russia or China would do that , we would rightfully say that they were determined to conquer the world. There is a power behind the throne who dictates to our so called " Public Servants " who is promoting the " New World Order " , a world dominated by the U.S. , Britain , France , Israel and possibly Russia and China because of their size. We the U.S. since 1950 have invaded over 30 poor 3 rd world countries who were no threat to us . Why ? Read Orwell's book , 1984 , it spells it out clearly where we are headed .....The New World Order . The millions of people on this earth will become " indentured servants " Slavery has once again been legalized . Dominus Vobiscum
June 13, 2012 2:06pm
Pray for Armageddon.
Support limited nuclear war.
Support genetically-engineered pandemics.
Support cruelty and violence.
Support mass starvation and famines.
Rethugs will grind the transmission to shreds as long as they aren't in complete control of government.
June 13, 2012 11:12am
Nice superficial "analysis" of the microcosm...
Now, for an analysis of the basic problem:
http://tinyurl.com/8255g73
STOP PRETENDING THAT THE NATURAL WORLD DOESN'T EXIST.
The "economy" you tinker with is BOUNDED by the natural world -- which is being destroyed by overpopulation and overexploitation...
June 13, 2012 1:26pm
Hey Chetdude, STOP cutting & pasting under so many articles with your SPAM!!!
June 13, 2012 3:50pm
I was thinking EXACTLY the same thing, but now you can add plagiarism to the list. Couple weeks ago in this same space I posted a brief response to an article about BofA purposely defrauding / foreclosing on homeowners, and Chetdude's response to yet another article went word for word with what I had posted. (It's a little weird to see your own words posted by another commenter in another place. Strange.)
June 13, 2012 10:08am
What seems so clear from this analysis is that we need policies and practices that, in fact, re-distribute income more equitably. Keynesian programs such as the Conservation Corps would allow many unemployed Americans to return to meaningful work. They would then pay taxes and have more income for spending. Such public works programs, paid for by the Federal government, would boost the economy and help us address our aging infrastructure. What good is there in having a social order without more common "good" and good will? For all? Isn't that what the "common good" means?
Raise taxes on the wealthy and re-distribute the income through work and public works programs; forgive student debt and make concerted efforts to bring manufacturing and other computer-driven employment back to the US. Stop paying for foreign wars and focus on making the US a more sane and healthy society with single-source health care, more cooperative ownership of businesses, and public programs focused on correcting our educational and social deficits. The lessons from our economic history after the Depression and WWII can be capitalized upon if enough of us rise up and demand these common sense programs. We must demand a move away from "corporatocracy," "managed democracy," and the worship and practice of amassing wealth at the expense of others.
Unfortunately, as George Bernard Shaw once said, "The lesson we learn from history is that we learn little to nothing from history." Perhaps the 99% movement will result in logical and practical change, but only if enough of us demand it.
June 13, 2012 9:12am
Wealth keeps concentrating at the top, misery at the bottom. Robots do most of the production, humans have become obsolete in many places. No work, no demand. It is that simple. The elite has to learn to share the unprecedented wealth with the masses or spend on population control all over the world. They have to promote and somehow enforce one child per family policy, like China. Otherwise, they will have to eliminate a significant portion of the population through wars, disease, and poverty. It seems like the big powers have been preparing for the next big war. If humans survive, they might reconstruct the society under better system. Keep watching the Syrian situation. Might be that big mother of all wars.....
June 13, 2012 12:32pm
I agree with your analysis Norman, please expand on your comment about
Syria becoming the 'big mother of all wars"
June 13, 2012 4:01pm
I, too, agree with Norman's analysis, and would like to know more... ?
may I suggest BBC World News, which yesterday had a rather good analysis of what's been going on in Syria (civil war, indeed) and who will be the first to launch the cruise missiles. Obama wants a proxy war, it seems, and he's about to get it. The situation in Syria is poles apart from what transpired in Libya: far too many disparate factions arguing with each other, failing to unite to depose the bastard Bashar al Assad. Christians, Alawites, Sunnis, Muslim Brotherhood, etc.... yet the majority are Shia.
Never underestimate what Israel can do with three billion in military aid from the good ole' U S of A.
And that's not even taking into account Turkey, Jordan, Qatar, and of course, our brothers in oil, House of Saud. Think IRAN. Any one of these players could be the flashpoint. It will not be over so easy once started.