After Shock – The Next Economy and America’s Future

by Robert B Reich

 

Robert Reich was secretary of Labor under Bill Clinton and is now The Chancellor’s Professor of Public Policy at the Richard and Rhoda Goldman School of Public Policy at the University of California. In this book he has written a different perspective on the financial crisis that affected the USA and the rest of the world. His view is that some of what are regarded as the causes of the crisis are merely the symptoms and therefore if all we do is to treat the symptoms the hoped for recovery will be nonexistent. Reich bases this view on something close to my heart which is the issue of the disparity in incomes between the middle class and the wealthiest in USA society (and other places such as Australia). However rather than making this argument as a moral one which has been the most common framing of the issue he argues this inequity threatens basic economic sustainability and therefore needs to be tackled with some urgency.

Initially he argues that in the lead up to the Great Depression there was a widening gap between the wealthy and the average person and presents compelling statistics to show this. He goes on to show this disparity narrowed in the subsequent decades of prosperity after the end of the depression, and has widened again in the last three decades. I think this draws a pretty long bow in looking at the root causes of the recent financial crisis and confuses correlation with causation. Just because one factor was the same in the preceding decades to two crises does not make that factor the cause, and the world is significantly different now than it was in the nineteen twenties and thirties.

Reich mounts a far more compelling case when he goes on to look at what has happened to the people in the middle. On page 52 he presents a graph which shows productivity gains and average hourly compensation for work over sixty years. Productivity in the USA has steadily grown over the sixty years from 1947 to 2007 but hourly compensation has two distinct phases. In the first phase between 1947 and around the mid seventies hourly compensation rose in lock step with the productivity rises. In the second phase from the mid seventies while productivity continued to rise hourly compensation flattened out.

It is central to the author’s argument that this flattening out has led inexorably to the problems we see today and he bases this argument on two key opinions:

 

  1. That if you give the same amount of income to the richest 1% of Americans or you give it to the middle 40% the spending patterns will be totally different. Reich argues the middle group would spend most of the income, thus driving the economy, but the richest Americans cannot consume that much even if they try and therefore less of the money is spent in the economy, reducing economic growth.
  2. That the average person has coped with the flattening of their hourly compensation through what he calls three coping mechanisms. They have used these mechanisms because they still aspired to increased consumption (in part driven by observing what the rich were doing) and so had to find ways to get more money. Those three mechanisms are:
    • More women entered the workforce
    • People worked more hours
    • People borrowed more money to finance houses or against houses to finance other consumption

 

Reich’s argument is these had a sort of a linear nature to them although not strictly happening in sequence. He also argues that as these have become tapped out people have used the other mechanisms more, but now we are in a situation where they are all tapped out. The data shows there has been a huge increase in the percentage of women in the workforce but that coping mechanism is close to being as high as it can be. The data also shows hours worked per person increased significantly in the USA but through a combination of maximising the mechanism and the effect of the financial crisis on available hours this has reduced. Finally the ability to borrow against, or for housing has been drastically curtailed. Reich argues the lax borrowing environment only enabled a behaviour that was already happening and to treat that as the cause rather than a symptom will cause all sorts of problems.

What flows from this argument is while it was necessary to stabilise the system as the Obama administration has done, the disparity between high income and middle income people has to be fixed or economic growth will be stagnant for years. The author despairs a little about the disparity widening rather than narrowing as a result of the bailout, with hedge managers and bankers making lots of money and the benefits of the bailout not being passed on to the average person. Reich suggests a range of policy solutions to, in his words “reconstitute the basic bargain”. Those solutions are:

 

  • A reverse income tax where lower wage earners are actually paid by the government, and middle income earners would have their taxes cut. This would be funded by a tax on carbon and higher taxes on the highest 5% of earners.
  • A reemployment system rather than an unemployment system because the original unemployment benefits system was designed to tide people over until they got a new job. In the modern world because so much change is going on in the market the argument is that people have to be radically re-skilled.
  • School vouchers based on income to level the playing field in educational opportunities between low and middle income earners and the rich.
  • College loans linked to subsequent income – a very similar policy to the HECS system in Australia where people repay the fee arrangement proportional to their subsequent income.
  • Medicare for all – further than the recent health program legislation that has passed both houses.
  • Public goods – more investment in public infrastructure.
  • Money out of politics because the rich use their money to pursue their vested interests.

 

I must say that I am somewhat pessimistic of a substantial part of this agenda being adopted. As a keen observer of US politics I believe the system is almost broken and the chances of getting a broad program of significant change without another serious crisis are very low.

 

I really enjoyed reading this book. The arguments are well presented and simply and clearly described. It gave me another perspective on income disparities and made me think differently about the issue. If you are interested in the economy, have an interest in income disparity, or you are involved in the public policy debate I highly recommend that you read this book. It is only 146 pages long but that is all it needs. I think that many books are padded out to look bigger and better but end up being weaker. This book can be easily read over a few days and any book that allows that but still challenges your thinking is worth consideration.