Robert Reich's book, After Shock: The Next Economy and America's Future (Alfred A. Knopf, 2010), does not contain a lot of new information. But he makes a persuasive case for the kinds of policies that our country has relied on to create a prosperous society, and points to the real cause of the economic malaise that we are suffering today.
He starts by looking at the period of Great Prosperity under Roosevelt after WWII. Marriner Eccles, head of the Federal Reserve Board from 1934 to 1948, recognized the way moneyed interests could control the economy in their favor.
The "major cause [of the Great Depression] ...had nothing whatever to do with excessive spending during the 1920s. It was, rather, the vast accumulation of income in the hands of the wealthiest people in the nation, which siphoned purchasing power away from mowst of the rest." Id. at 17.
We are in that situation again, Reich points out. The wealthiest few at the top garner about the same share of income and wealth that they had in that time, leaving those at the bottom to scrounge for necessities. As he notes, the share going to the richest 1% of the population peaked in 1928 and 2007 at over 23%, with the richest 10% enjoying the same kind of peak. at 20. Compare that to the 9-11% share from the 50s through the 70s.
The wages of the typical American hardly increased inthe three decades leading up to the Crash of 2008, considering inflation. In the 2000s, they actually dropped. ...In 2007, a male worker earning the median male wage...took home just over $45,000. Considering inflation, this was less than the typical male worker earned thirty years before. But the American economyh 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 wa by 200y. Where did those 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. Id. at 19.
Economists and financiers in that day, too, were insisting that "the market would correct itself automatically, and that the government's only responsibilityh was to balance the federal budget. Lower prices and interest rates, they waid would inevitably 'lure natural new investments by men who still had money." Id. at 13.
But "Eccles though that was nonsense. ... He saw that what passed for the God-given operation of economics 'was nothing more than a determination of this or that interest, specially favored by thestatus quo, to resist any new rules that might be to their disadvantage.'" at 14. He recognized "that men with great economic power had an undue influence in making the rules of the economic game, in shaping the actions of government that enforced those rules, and in conditioning the attitude taken by the people." Id. at 13-14.
So in the Depression, there were the same old arguments that the "free market" could take care of everything, and that govenrment policies should ensure that the wealthy are undisturbed because that's how jobs will be created. It was balderdash then just as it is now, since of course there is no such thing as a free market, but rather a government-created climate amenable to commerce.
"Eccles told the senators that the government had to go deeper into debt in order to offset the lack of spending by consumers and businesses. ... He advised the senators on ways to get more money into the hands of the beleaguered middle class. He offered a precise program designed 'to bring about, by Government action, an increase of purchasing power on the part of all the people. ...His proposed program included relief for the unemployed, government spending on public works,government refinancing ofmortgages, a federal minimum wage, federally supported old age pensions, and higher income taxes and inheritance taxes on the wealthy in order to control capital accumulations and avoid excessive speculation." Id. at 14-15.
Those programs worked.
The wages of lower-income Americans grew faster than those at or near the top. the pay of workers in the bottom fifth more than doubled over these years [from 1945-1975]....Productivity also grew quickly...,defying the self-serving predictions of those who said wide inequality was necessary for rapid growth because top executivews and innovators needed the incentive of outsized earnings. Labor productivity--average output per hour worked--doubled, as did median incomes.
[The U.S. government] actively created the conditions for the middle class to fully share inthe nation's prosperity. It did so by pushing the economy toward full employment, creating a more progressive income tax, enhancing the bargaining power of average workers, building up Social Security, providing workers with a strong safety net when they couldn't work, and improving their productivity. Id. at 44.
As Reich notes, the period of Great Prosperityh "provide that widely shared income gains were not incompatible with economic growth; they were, in fact, essential to it." Id. at 50. And high income tax rates on the wealthy played a significant role in assuring that economic gains were appropriately distributed during and after WWII.
The top marginal rate during the war ranged frp, 79 percent to 94 percent. In the 1950s, under President Dwight Eisenhower, whom few would call a radical, it was 91 percent. In 1964, the top rate dropped to 77 percent. It was 77 percent again in 1969, when Richard Nixon became president. Id. at 49.
Of course, we are now in a period of similar inequality of income and concentration of wealth in the hands of a few, like the prior Gilded Age, and the top rate has dropped precipitously (and capital gains--the primary income of the wealth--gets a significant preference of just about half the top rate for ordinary income). And of course those programs proposed by Eccles and put in place under the New Deal--the ones that made that period of Great Prosperity possible-- are the very programs that the GOP budget proposed by Ryan would decimate or destroy entirely. (If Social Security and Medicare are left in place for those 55 and older while weakened for everybody else, it will be little time before they are weakened as well for those 55 and older. Sheer jealousy will see to that.)
Companies were allowed to bust unions and threaten employees who tried to organize. .. .
And nothing impeded CEO slaaries from skyrocketing to more than three hundred times that of the typical worker (up from thirty times during the Great Prosperity), while the pay of financial executivesw and traders rose into the stratosphere. Increasingly, the ranks of America's super-rich were made up of top business and financial executives. More than half of all the money that the top one-tenth of 1 percent of American earners reported on their 2001 taxes represented the combined incomes of the top five executives at the five hundred largest American companies. Almost all the rest were financial traders and hedge-fund managers.
Significantly, Washington deregulated Wall STreet while insuring it against major losses. In so doing, it turned finance. . .into its master. . . . As the financial economy took over the real economy, Treasury and fed officials grew in importance. The expectations of bond traders dominated public policy. And the stock market became the measure of the economy's success. Id. at 56-57 (with much left out).
And this time our society is bifurcated so much by class that the wealthy and the rich don't even seem to feel very bad about using their influence in the halls of power (including the Supreme Court) to get rules that favor themselves. That may be because, as Reich notes,
Across the nation, the most affluent Americans have been seceding from the rest of the nation into their own separate geographical communities with tax bases (or fees) that can underwrite much higher levels of services.They have moved into office parks and gated communities, and relied increasingly on private security guards instead of public police, private spas and clubs rather than public parks and pools, and private schools (or elite public ones in their own upscale communities) for their children rather than the public schools most other children attend. Being rich now means having enough money that you don't have to encounter anyone who isn't. Id. at 22 (emphasis added).
Reich makes an important point about Wall Street.
It is common practice among economic policymakers to fervently and sincerely believe that Wall Sgtreet's financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow.... [But] Wall Street is a casino in which high-stakes wagers are placed within a limited number of betting houses that keep a percentage of the wins for themselves and fob off losses on others, including taxpayers. Id. at 39.
One of the basic asumptions of capitalism is that anyone paid huge sums of money must be worth it. Policymakers are not immune to this logic. ...They talk solemnly of the importance of "stabilizing" the [financial] system and "recapitalizing" it. Roughly translated, this means saving the assets--and the asses--of bankers. Id. at 40
We worry about Wall Street, and gauge the success of the economy by where the Dow and the NASDAQ are. But that is a wrong assumption. As we've seen with the Bush years and the radical concentration of wealth at the top, what is good for Wall Street isn't necessarily good for Main Street. The stock market goes up, but private equity managers are still doing leveraged buyouts, laying off workers, and selling the slimmed down business for a profit. Jobs are disappearing, while shareholders and managers make money from outsourcing and offshoring and using expensive and aggressive tax avoidance techniques (and lobbying Congress for more of them). And this is all done in a way that conditions people to accept it, even to laud the "free market" ideology that is stripping them of their jobs and their dignity.
The rich and the powerful also had substantial influence "in conditioning the attitude taken by people as a whole toward[the] rules....They generously financed think tanks, books, media, and ads designed to persuade Americans that free markets always know best. Ronald Reagan, Margaret Thatcher, Alan Greenspan, Milton Friedman, and other apostles of free-market dogma reiterated a simple story: the choice was between a free market and big government. Government was the problem. Free markets were the solution.
But how could the public have been so gullible as to accept this story? After all, America had gone through a Great Depression, suffering the consequences of an unfettered market and unconstrained greed. Even Marriner Eccles .... saw that left to its own devices, the market concentrates wealth and income--which is disastrous to an economy as well as to a society. American had also experienced the Great Prosperity, which depended so obviously on public improvements, safety nets, and public investment. ...
One way to understand the paradox is loss of generational memory. While the trauma of the Great Depression echoed in the memories of people who came to adulthood in the 1930s....their grandchildren, born during the Great Prosperity, had no actual, palpable memory of their grandparents' experience of a fallible and unreliable market offset by a strong and reliable government. ... [A]ll they recalled was the failure of government and the apparent success of the market. This made them particularly susceptible to the seductive rants of the free marketeers. Id. at 59-60.
The next post will look at Reich's suggestions for bringing our economy back to a more stable equilibrium where wealth and income is not so concentrated.