Aftershock

Robert B. Reich, “Aftershock: The Next Economy & America’s Future” Kindle Library Edition, 2010, 147 pps

Robert Reich is the author of thirteen books and has served in three national administrations, most recently as secretary of labor under President Bill Clinton; currently he is the Professor of Public Policy at the University of California, Berkeley.

This book is very worthwhile and offers some very provocative and useful thoughts concerning America’s Great Recession detailing why the economy remains bad for so many, why our politics is even more angry, and the fundamental choices we face in the coming years. To summarize the books theme: The fundamental problem is that Americans no longer have the purchasing power to buy what the U.S. economy is capable of producing as a larger and larger portion of total income has been going to the top. What’s broken it the basic bargain linking pay to production (P75).

Technically, the Great Recession beginning in 2008 has ended; but its aftershock has only begun: a large percentage of Americans will indefinitely remain jobless, or their wages will drop. The underlying problem actually began around 1980 when the American middle class started being hit by the double whammy of global competition and labor-replacing technologies. Gone is the Great Prosperity era (1947 to 1975) where the nation provided its workers enough money to buy what they produced and almost anyone who wanted a job could find one with wages that were always trending upward.

My Notes:

Pg. 1. Over the last three decades working families have taken home a smaller and smaller share of the nation’s total income. A larger and larger portion has gone to people at the very top. This has hurt the economy. The rich don’t spend as high a percentage of their earnings as the rest of us. They invest their savings wherever around the world they reap the highest return. This problem was disguised through the three decades as most Americans continued to buy as if their incomes had continued to rise. They did this by going deeply into debt—the bubble burst in 2008.

Pg. 2: 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 wealth concentration.

Pg. 5: In the late 1970s, the richest 1 percent of the country took in less than 9 percent of the nation’s total income. By 2007, the richest 1 percent took in 23.5; a concentration of income not seen since 1928.

Pg. 11: Marriner Eccles was the Federal Reserve Board chairman from 1934 until 1948. His proposed program of recovery from the Depression was contrary to most economist of his time and anticipated Keynes ideas: relief for the unemployed, government spending on public works, government refinancing of mortgages, 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. Roosevelt’s 1934 budget contained many of Eccles ideas.

Pg. 17: In 1950 Eccles retired to write his memoirs and reflect on what had caused the Great Depression. Its major cause, he concluded, was the vast accumulation of income in the hands of the wealthiest people in the nation, which siphoned purchasing power away from most of the rest. “As mass production has to be accompanied by mass consumption, mass consumption in turn, implies a distribution of wealth—not of existing wealth, but of wealth as it is currently produced—to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery….” “In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.” Eccles noted that the borrowing had taken the form of mortgage debt on homes and commercial buildings, consumer installment debt, and foreign debt; when this debt bubble burst, consumer spending would shrink, and so it did.

Pg. 19: In the 2008 crisis, lessons from the 30s led to the appropriate application of fiscal and monetary policies to contain the immediate economic threat. But we did not learn or apply 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 aftershock of high unemployment and low wages, and an increasingly angry middle class.

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. Middle-class family incomes were only slightly higher. (Note: there is no strict definition of the “middle class”. The author defines it broadly to include the 40 percent of American families with incomes above the median family income and the 40 percent below.) But the American economy was much larger in 2007 than thirty years before. If those gains had been divided equally among Americans, the typical person would be more than 60 percent better off. The gains went into a few hands at the top.
Economists Saez and Piketty have examined tax records extending back to 1913 and 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 American income. Between these two peak years is a long deep valley. After 1928, the share of national income going to the top 1 percent steadily declined, from more that 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. It then began to climb: 10-14 percent of national income in the 1980s, 15-19 percent in the late 1990s, and over 21 percent in 2005, reaching 23 percent in 2007. Across the nation, the most affluent Americans have been seceding from the rest of the nation into their own separate geographical communities. Being rich now means having enough money that you don’t have to encounter anyone who isn’t.

Pg. 29: Keynes declared capitalism the best system ever devised to achieve a civilized economic society. But he recognized in it two major faults—“its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”
Classical economists had viewed markets as self-correcting. They had supposed that full employment would always prevail in the end. Any spate of unemployment would cause wages to drop until employers found it profitable to hire workers again. Like Eccles, Keynes did not view unemployment as a moral failing. He saw it as a failure of demand. Average workers lacked enough purchasing power to buy what they produced.

Pg. 39: In 1999 the Depression-era law separating investment from commercial banking was repealed when Wall Street convinced Clinton that the law had outlived its usefulness. Wall Street’s major function turned into 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 the losses on others, including taxpayers. Many economic policymakers have spent their formative years on Wall Street and view finance as the crucial center of the economy. Presidents routinely appoint Treasury secretaries from the Street.

Pg. 40: A list of recent financial bailouts preceding 2008:
1989 Savings and Loan
1994 Mexico peso crisis
1997 East Asia crisis
1998 Long-Term Capital Management
2000 Dot.com crash & Enron, etc…

Pg. 60: Starting in the late 1970s, the American middle class honed three coping mechanisms allowing it to behave as though it was still taking home the same share of total income as it had during the Great Prosperity era, and to spend as if nothing substantially had changed. Not until these coping mechanisms finally became exhausted in the Great Recession (2008) would the underlying reality become evident.

Coping mechanism #1: More American women move into paid work. In 1966, 20 percent of mothers with young children worked outside the home. By the late 1990s, the proportion had risen to 60 percent.

Coping mechanism #2: Americans works longer hours. By the mid-2000s it was not uncommon for men to work more than 50 hours a week and women more than 40. Hourly workers relied on overtime. All told, the typical American family put in 500 additional hours of paid work, a full twelve weeks more than it had in 1979.

Coping mechanism #3: Americans draw down savings and borrow to the hilt. During the Great Prosperity household debt averaged 50 to 55 percent of annual after-tax income (including what people owed on their mortgages). By 2007 the typical American household owed 138 percent of is after-tax income.

Pg. 63: In 1980 the average home sold for $64,600; by 2006 it went for $246,500. Between 2002 and 2007, American households extracted $4.3 trillion from their houses.

Pg. 108: The Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission, has opened wide the flood gates of corporate money by deeming corporations “people” with First Amendment rights.

Pg. 110: 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. Starting salaries for well-connected congressional or White House staffers has ballooned to about $500,000. Former chairs of congressional committees and subcommittees commanded $2 million or mor to influence legislation in their former committees.

Pg. 129: Reich’s Plan: Full time workers earning $20,000 or less (2009 dollars) would receive a wage supplement of $15,000. This supplement would decline incrementally up the income scale, to $10,000 for full-time workers earning $30,000; to $5,000 for full-time workers earning $40,000; and then to zero for full-time workers earning $50,000. The tax rate for full-time workers with incomes between $50,000 and $90,000—whether the source of those incomes are wages, salaries, or capital gains—would be cut to 10 percent of earnings. The taxes for people with incomes of between $90,000 and $160,000 would be 20 percent, whatever the income source. People in the top 1 percent, with incomes of more than $410,000, pay a marginal tax of 55 percent; top 2 percent, earning over $260,000, 50 percent; top 5 percent, earning over $160,000 pay 40 percent. Capital gains would be treated no differently from income derived from wages and salaries. These taxes, when added to the modest amounts contributed by taxpayers who earn between $50K and $160K would raise $600 billion more than our current tax system per year.

Pg. 132: So called supply-siders are fond of claiming that Reagan’s 1981 tax cuts caused the 1980s economic boom. There is no evidence to support their claim. In fact, that boom followed Reagan’s 1982 tax increase. The 1990s boom likewise was not the result of a tax cut; most of it followed Bill Clinton’s 1993 tax increase.

Pg. 133: We need a reemployment system rather than an unemployment system. The old unemployment insurance system was designed to tide people over until they got their jobs back at the end of a downturn. Nowadays, most job losers never get their jobs back. One piece of such a reemployment system would be wage insurance. Any job loser who takes a new job that pays less than his or her former job would be eligible for 90 percent of the difference, for up to two years.

Pg. 134: School vouchers based on family income to introduce competition into the school system. Spending on public schools should be replaced by vouchers in amounts inversely related to family income that families can cash in at any school meeting certain minimum standards. For example, the $8,000 now spent per child in a particular state would be turned into $14,000 education vouchers for each school-age child in a poor family, and $2,000 vouchers for each child in a very wealthy family.

Pg. 139: Public goods: There should be a sizable increase in public goods such as public transportation, public parks and recreational facilities, and public museums and libraries. And they should be free of charge to users.

Money out of politics: All political contributions should go through “blind trusts” so that no candidate can ever know who contributed what.