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Robert Reich on the US's economic woes « Previous | |Next »
November 2, 2010

In this review of Robert Reich's After Shock: The Next Economy and America’s Future in the New York Times Sebastian Mallaby summarizes Rich's main argument about the stagnation of middle-class incomes and exploding inequality in the USA in the context of the global financial crisis.

Reich addresses the wide, glaring disparity of income between the rich and the middle and working classes and the way that Wall Street blames a reckless, overspending working class (and the poor) for bringing on the recession. His is a Keynesian narrative.

Mallaby says:

Caught between rising aspirations and stagnant wages, Reich says, middle-class Americans have gone through a series of coping mechanisms. First, women joined the workforce, giving families a second income. Then husbands and wives put in longer shifts, creating a species of family called DINS — “double income, no sex.” Finally, families went into debt. In this sense, inequality helped to stoke the credit bubble. Now that the bubble has burst, these coping mechanisms are exhausted...

As a consequence:
Americans will “face a necessity they have managed to avoid for decades: They have to make do with less.”The belt-tightening is not likely to be popular, and Reich goes so far as to suggest that it could trigger a political convulsion. People are very likely to resent material losses bitterly if these are not broadly and fairly shared. And in the wake of the financial crisis, fairness has gone by the wayside: millions of Americans have lost jobs, but the financial sector has bounced back; eye-popping bonuses have returned;

The Great Recession that started at the end of 2007 has seen the Obama administration step in quickly with enough money to contain the downward slide.

However, little has been done to reduce the underlying, cumulative problem of widening inequality. Reich argues that:

After the stimulus and loose money wear off, therefore, it is unlikely that growth can be sustained. . . . . . This will constitute the Great Recession’s aftershock. From it will emerge either a political backlash—against trade, immigration, foreign investment, big business, Wall Street, and government itself—or large-scale reforms that reverse the underlying trend.

So the fundamental problem is that too much money has ended up in the hands of too few people. Therefore, Americans no longer have the purchasing power to buy what the U.S. economy is capable of producing. The nativist Tea Party movement is the political backlash to this growing inequality.

The political violence and its various hatreds is being drummed up now is coming from the astroturf groups funded by big business, the Republican leadership itself and from right-wing hate-talk radio. These are people who understand full well what they're doing and just don't care about the repercussions.

Reich's proposal is to face head-on the currently existing inequities and to remedy them through legislative and executive action to restore the bargain that working and middle-class Americans would share with the wealthy in the prosperity created by their own increases in productivity and profits.

Reich's nine steps to do this are:

(1) a reverse income tax. Instead of money being withheld from workers paychecks to pay taxes to the government, money would be added to their paychecks by the government, according to a graduated or progressive formula;
(2) a carbon tax;
(3) higher marginal tax rates on the wealthy—up to 55%--and elimination of the capital gains exemption;
(4) a reemployment system rather than an unemployment system, including wage insurance;
(5) school vouchers based on family income;
(6) college loans linked to subsequent earnings, to be repaid during the first ten years of a student’s gainful employment;
(7) Medicare for all;
(8) a sizeable increase in public goods such as transportation, public parks, recreational facilities, public museums and libraries, with free public transportation, including high speed rail; and,
(9) the removal of money from politics.

I cannot see this kind of social democrat reform happening in the US, which is rapidly becoming a plutocracy. It is more likely that working and middle-class Americans will be squeezed further.

| Posted by Gary Sauer-Thompson at 10:59 AM |