Economic inequalities leave nation struggling

Former Labor Secretary and current UC Berkeley professor Robert Reich is, by any measure, very liberal.

His new book, Aftershock: The Next Economy and America’s Future, is no exception, and as such, its teachings must be taken with a grain of salt.

Julia Vann | Daily Trojan

That said, Reich’s argument is compelling because he makes the case that his proposals would work in everyone’s favor — including the upper class — making it an important line of reasoning for the many would-be tycoons on campus to understand.

His basic point is that our current financial crisis, rather than being an isolated incident, was only the latest manifestation of a structural problem that has plagued the American economy since 1980: rising inequality and shrinking middle-class wages.

American economic growth from the end of World War II until 1980 was broad-based; during that time, poverty fell, the middle class grew, and the top 1 percent of earners’ share of national income is the lowest it’s ever been. Since then, the opposite has occurred — during the decade preceding the financial crisis, middle-class wages actually shrunk despite massive growth in gross domestic product, the stock market and other economic indicators.

As a result, we now find ourselves facing a higher level of inequality than at any time since the eve of the Great Depression in 1928. According to Reich, it is this inequality that is the source of major economic crises, and we are bound to experience a recession even worse if it is not addressed.

This happens in a number of ways. Most basically, Reich argues that there is a point below which the middle class can no longer afford to buy the things — houses, cars, iPods — that make the economy go and the upper class rich. The continued success of the wealthy, therefore, depends largely on sustained demand from the rest of the country. In other words, to keep getting richer, the wealthy will have to accept a smaller piece of a larger pie.

Reich also makes an interesting point about the connection between this issue and the latest economic crisis.

As many USC students can probably attest, and as psychological studies have confirmed, being surrounded by extravagant spending leads people to spend more themselves  — even if their incomes have not increased.

This has been true of the United States’ middle class during the past thirty years. Despite stagnant incomes, the middle class greatly increased its spending during that time to mimic the upper classes’ conspicuous consumption.

The existence of two-year payment plans for such unnecessary items as flat-screen televisions and surround-sound systems are a clear indicator of this.

Americans found a number of ways to finance this consumption. The first was to increase the prevalence of two-income households and work longer hours. When they couldn’t work anymore, they borrowed — usually against the value of their house, which was perceived to be permanently increasing.

This created a credit bubble. When it burst, we entered the worst economic crisis since the Great Depression.

As President Barack Obama so frequently reminded voters on the campaign trail, the worst of the crisis is over. The economy is growing again, and unemployment is, at the very least, not increasing anymore.

However, Reich argues that the relative quickness of the recovery has taken away from the incentive to make structural reforms that would make the economy far stronger.

The anemic, “jobless” recovery of which we are now in the midst of is weak because persistent inequality prevents us from having a dynamic yet stable domestic market. Now that the worst is behind us, Reich fears that policy makers will no longer feel the need to make changes that will prevent another, even more severe crisis.

How to achieve these changes — and the extent of government’s role in the process — is certainly up for debate. Reich advocates making the tax system more progressive by increasing rates on high incomes and capital gains.

Certainly, the fact that those rates are lower than virtually any time since the Great Depression supports this point of view; letting the Bush tax cuts expire would be a good first step.

Even if one does not agree with its policy prescriptions, however, Aftershock is still valuable for the basic problem that it points out.

The United States is more unequal than it has been since the Gilded Age of the 1920s; aside from the moral implications, this represents a structural obstacle to sustained economic growth.

It is therefore in everyone’s interest — including the rich — to see that this problem is resolved before it leads to another crisis.

Daniel Charnoff is a senior majoring in international relations (global business). His column, “Through the Static,” runs Wednesdays.

4 replies
  1. John
    John says:

    Diane has it absolutely right. As an alumni of USC from quite a while ago, I can attest to one thing. It’s hard work that makes one successful. I have a 10 year old son, and we make sure he does his homework and gets to bed on time. I contrast that to a 10 year old inner city child whom I mentor. His welfare receiving single mom doesn’t make him read books, lets him watch TV, and let’s him stay up late (11:00 on a school night), and clearly does not instill the value of education. Fast forward 15 years, and I can guarantee that my son will have graduated from college, and this poor boy, who is bright, and sweet, will probably be on welfare too.

    The only inequality that exists in America is the horrible public schools that are leaving a portion of our population without the means to a good future. If you think that public schools are the only solution, then I would disagree. It’s parents who are the key to education. Parents who care enough to ensure that kids in public schools are educated , parents who home school, and parents who send their kids to private schools. If parents think they can drop their kids at the bus stop and that ends their obligation for the education, then things will never get better.

  2. Jacob
    Jacob says:

    Nice comment Diane. One of the funniest lines in the article was “In other words, to keep getting richer, the wealthy will have to accept a smaller piece of a larger pie.” What in the world does that even mean? As if “the wealthy” sit at a table together and decide how much of the pie is theirs. People earn as much money as possible, corporations earn as much as they can, and policies, not “the wealthy” dictate where wealth will be achieved. And while everything he says is true about inequality and the rising gap between the wealthy and the middle class, this is only a symptom, not the cause. This rising inequality is the result of many things, one of which is tax policy, but more importantly monetary and fiscal policy, as well as the role of Wall Street. These are topics that the author Daniel seems to have no clue or knowledge about, and childishly laments the growing inequality instead. People must understand that this is only a symptom, not a cause.
    The jobless recovery that Daniel alludes to has nothing at all to do with the idea that “persistent inequality prevents us from having a dynamic yet stable domestic market.” This fluffy statement, when you think about it, has no meaning at all. The recovery has been jobless because the government has artificially pumped billions of dollars into the economy, and Wall Street has been bailed out and put back on its feet. This results in a “recovery” on Wall Street and investments, but not in jobs because nothing really has been done to affect the job market.
    Let us discuss the real causes of this crisis before trying to fix the inequality that persists, which is only indicative of a larger problem. Perhaps Daniel should read another book or two before his next article.

  3. Diane
    Diane says:

    Oops forgot to add — if Daniel likes reading about economics, I recommend he try anything by Milton Friedman. Open your mind, Daniel — that’s what college is supposed to be all about.

  4. Diane
    Diane says:

    There are so many misstatements in this piece one doesn’t know where to begin. But let me just say this. This perceived “inequality” is a red herring, a straw man. We don’t need “equality” of the totalitarian kind espoused by little man Reich. We need equality of opportunity, which is best assured by government getting out of business’ way and letting the market grow and provide jobs. Then the people who wish to excel can do so. Those who are under the mistaken impression that the world owes them a living will continue to be “unequal” as they do not have the character to pull themselves up. No amount of elitist progressive tax hikes will change that, although they will continue to destroy the business climate in this state and this country, leading to fewer jobs and less opportunity for people to “be more equal.” Great idea, Daniel. Sheesh.

    There most pressing moral problems with “inequality” are the immoral ways the Left insists on responding to it — by forcing those who produce a lot to subsidize those who sit on their a$$es. What’s more, handouts are harmful to both individual character and the character of a community. I submit exhibit A, B, C, and D: South Central, Harlem, inner city Chicago, inner city Detroit… I could add exhibits E through Z and it would be the same thing. Every place where Leftist philosophy of high taxes and high welfare has been allowed to reign is a freakin’ cesspool. It is injurious to people’s human dignity to treat them like children, it destroys families, and — most ironic of all — it perpetuates poverty and a permanent underclass. Great idea, Leftists! Sheesh.

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