Reich Foresees ‘Phantom Recoveries,’ Revolt Against Rich: Books

Robert Reich
Former U.S. Secretary of Labor Robert Reich, author of "Aftershock." Photographer: Emile Wamsteker/Bloomberg News

Soon after his election in 2008, Barack Obama huddled with advisers including Paul Volcker to discuss the economic challenge ahead, writes former U.S. Labor Secretary Robert Reich in “Aftershock.”

“Tall Paul” was blunt: Americans have been living beyond their means, the revered central banker told the president- elect. Laura Tyson, Reich’s colleague from the Clinton administration, disagreed: “The real problem is their means haven’t been growing,” she said.

“Laura was right,” Reich says.

Both were right, of course, though Reich’s emphasis merits a place in the debate about how to haul the U.S. out of the money pit.

Plenty of Americans went into debt to buy Bayliner boats and McMansions. Yet many more became credit junkies because the cost of a middle-class lifestyle outstripped their income, as New York Times staffer Peter S. Goodman documented last year in his exhaustive piece of reporting, “Past Due.” The pressing question for U.S. leaders -- apart from demagogues seeking voters and preachers haranguing sinners -- is how to reverse this pernicious trend.

Loose money and stimulus spending are more likely to deliver “phantom recoveries” than sustainable growth, Reich writes. We can expect years of high unemployment and weak wages culminating in an “aftershock” -- either a brutish political backlash or deep reforms, he says.

Income Inequality

Our Great Recession boiled up, in Reich’s view, from 30 years of growing income inequality that concentrated the nation’s winnings in the hands of the wealthy few. By 2007, the richest 1 percent of Americans received more than 23 percent of U.S. income (up from some 9 percent in the 1970s). The last time U.S. wealth was so condensed was in 1928.

Reich’s objection has less to do with morality than with practicality. When income clumps at the top, demand for goods and services shrinks, he says.

Take the almost $100 million in compensation that Kenneth D. Lewis was allocated as chief executive officer of Bank of America Corp. as it skidded toward disaster, according to Forbes’ annual ranking of best-paid CEOs. To spend all that in a year, Lewis would have had to purchase $273,972.60 worth of goods and services each day, weekends included, Reich says.

“The sheer magnitude of the task of spending obscene amounts of money can be surprisingly challenging,” Reich says.

If you spread the cash around, by contrast, it gets spent.

Henry Ford

“Workers are also consumers,” Reich says. Paid enough, they buy the goods and services other workers produce. Henry Ford grasped this when he decided to pay Model T assembly-line workers $5 a day, more than doubling the going wage. That “basic bargain” underpinned what Reich calls the Great Prosperity that the U.S. enjoyed from roughly 1947 to 1975.

The bargain broke down when middle-class America buckled under global competition and labor-replacing technology. Reich blames what happened next on the rich and powerful: They financed think tanks, books and ads that hypnotized the public into heeding Milton Friedman and voting for Ronald Reagan.

“How,” he asks, “could the public have been so gullible” as to believe that government was the problem and free markets were the solution?

This snarky question does Reich’s argument a disservice. Government was a problem in the 1970s, when neo-Keynesians in Washington stoked a wage-price spiral in a well-meaning attempt to keep the economy close to full employment, as Robert J. Samuelson shows in “The Great Inflation and Its Aftermath.” The double-digit inflation of those years can’t be blamed wholly on surging oil prices and a drop in the dollar, as Reich says.

Job Creation

Reich fails to grasp why a generation that came of age during the Great Inflation and the Vietnam War became more grateful to Volcker than to politicians. Nor does he articulate a vision for how America can create more high-value jobs. Consumer spending alone does not an economy make.

Reich proposes to rebalance income distribution by raising marginal tax rates for the wealthy. People in the top 1 percent, with incomes exceeding $410,000, would pay a marginal tax of 55 percent. Those in the top 2 percent (above $260,000) would pay 50 percent, while a 40 percent rate awaits those in the top 5 percent (more than $160,000).

These would be combined with wage supplements and tax reductions for the middle class. Full-time workers earning $20,000 or less would get a supplement of $15,000, an amount that would incrementally decline as wages rise to $50,000. The rate would be 10 percent for those making $50,000 to $90,000 and reach 20 percent for those with $90,000 to $160,000.

As midterm elections approach, I’d like to believe that Americans can find a way forward that avoids a populist revolt and eschews both the tax-and-spend excesses of Western Europe and the Social Darwinism of crude laissez-faire. I’d also like to believe that pigs have wings.

“Aftershock: The Next Economy and America’s Future” is published by Knopf (174 pages, $25). To buy this book in North America, click here.

(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)

Before it's here, it's on the Bloomberg Terminal. LEARN MORE