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.
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.