Elevate Difference

Aftershock: The Next Economy and America’s Future

Many people shy away from trying to understand economics. They assume that because they don’t know much about tax or trade policies, or because they don’t understand what a derivative on Wall Street is and does, that economics is too complicated, and they leave the fate of the economy in the hands of the “experts”. The trouble with this is that the experts often have a vested interest in keeping everyone else in the dark in order to make a profit.

Enter Robert Reich. In his newest book Aftershock: The Next Economy and America’s Future, the former US Secretary of Labor under Bill Clinton and currently professor at the University of California, Berkeley, manages to make a complicated topic digestible. He presents a thorough, yet easily accessible analysis of patterns in America’s economy since the Great Depression.

His underlying premise is that the American economy swings back and forth like a pendulum between times of economic contraction (to varying degrees) and times of economic growth and prosperity. He argues that in this pattern lies another pattern that provides the key to understanding why things went so horribly wrong in 2008 and have not gotten much better since: the concentration of income at the top and a flat growth of income for everyone else. Reich steps beyond the now common analyses that see the root of the economic crash in 2008 in the mortgage crisis or in the scrupulous behavior on Wall Street. He points out that while it is true that Wall Street’s strategy of betting against the American economy and making profits off of people losing their homes contributed to an accelerated downward spiral into the Great Recession, the real issue that led to the economic collapse has been the ongoing erosion of income for the vast majority of Americans.

Reich notes that in the year leading up to the crash in 2008, the top one percent of the American population earned twenty-three percent of the nation’s income. The last time income was so concentrated at the top in the US was in 1928, just before the Great Depression. He explains that the time of economic prosperity that the US experienced after 1945 was a result of macroeconomic policies that ensured a fairer distribution if income and wealth. The Social Security system, Medicare and Medicaid, regulation of the housing and loan market, increased power of labor unions to negotiate higher wages, and programs designed to create jobs were legacies of the New Deal that between 1947 and 1975 created a time where ordinary Americans earned enough money to consume the products they were producing. However, the pendulum swung back starting in the late 1970s. Reich points out that when it became increasingly difficult for American workers to be able to afford to consume, they turned to, and ultimately exhausted, three key coping mechanisms: women entering the workforce, working longer hours, and when that failed to generate enough income, borrowing against your house.

Reich puts the current Great Recession in political and historical perspective. He points out that the path toward the crash really started in the 1980s, when the emphasis on free-market economics and the linking of Wall Street and key decision-making position in politics made the pendulum swing away from a basic bargain that meant that average Americans could afford to live a decent life. He points out that the only way to really get out of the Great Recession is to reverse that trend and ensure that income is distributed more fairly to allow Americans to consume, which would trigger production of goods through increased demand, which in turn would trigger job growth.

Reich ends his book with a series of suggestions for how to achieve this: a reverse income tax, where those earning less than $20,000-$30,000 annually receive wage subsidies rather than paying income tax, higher marginal tax rates for the wealthy, a carbon tax, school vouchers that are based on family income, college loans linked to subsequent income, Medicare for all, and a delinking of money/corporate interests and politics. While this plan sounds utopian, especially given the current trend toward electing politicians who run on an even more drastic deregulation and anti-government platform, Reich makes it very clear that unless we make the pendulum swing toward fair distribution of income again, which can only be done through government action, the Great Recession is here to stay and might, ultimately, undermine the social and political peace in America.

We can’t afford to not understand this. We can’t afford to not understand economics.

Written by: Annette Przygoda, November 12th 2010