Tuesday, December 28, 2010

Aftershock: The Next Economy and America's Future

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--> --> In a short, straightforward book, Reich makes the case that the typical argument for why the “Great Recession” happened (namely, too much credit-fueled consumption, not enough saving) is actually a symptom of a deeper problem, and not the problem itself. 

 The deeper problem, according to Reich, is that wealth in the United States has become increasingly concentrated in the hands of the richest, and the middle class has been unable to keep up.  Among the statistics Reich uses to support his claim:
“In the late 1970s, the richest 1 percent of the country took in less than 9 percent of the nation’s total income. After that, income concentrated in fewer and fewer hands. By 2007, the richest 1 percent took in 23.5 percent of total national income. It is no mere coincidence that the last time income was this concentrated was in 1928.”

Contrary to other economists, Reich believes that “The central challenge is not to rebalance the global economy so that Americans save more and borrow less from the rest of the world. It is to rebalance the American economy so that its benefits are shared more widely in America, as they were decades ago.”

 It is at this point that Glenn Beck and the various Fox News crazies would make the cry of “socialism.”  Reich is certainly no advocate of a government takeover of the economy, though.  He firmly believes in competition and in capitalism.  However, as should be apparent by now to more than just Reich, capitalism left on its own leads to crippling inequality.  With no control or regulation, the rising tide ends up drowning those at the bottom, and, Reich would argue, eventually even those in the middle.

Reich argues that if the middle class in the U.S. can have increased purchasing power, and reach a level of prosperity that it had during the “Great Prosperity” between 1945 and the 1970s, it would actually help out everyone in the economy, including those at the very top.  As Reich points out, the claim that taxing the richest at a higher rate causes them to “lose the incentive” to work harder and leads to an economic slowdown is simply bunk:

“During the almost three decades spanning 1951 to 1980, when the top rate was between 70 percent and 92 percent, average annual growth in the American economy was 3.7 percent. Between 1983 and the start of the Great Recession, when the top rate ranged between 35 percent and 39 percent, average growth was 3 percent.”

Reich himself realizes that the serious reforms needed to the economic system will be difficult to achieve.  Much of this is due to the fact that Wall Street is continuously increasing its influence in Washington.  Only a serious crisis or concerted and determined popular reform effort will be able to overcome the grip of hedge fund managers and big banks.  Reich laments the fact that President Obama did not seek more serious reform measures in his stimulus package, and instead simply applied a temporary salve to the U.S. economy that will not eliminate future problems arising from the growing inequality in wealth.

Reading Reich describe some of the blatant corruption and incendiary behavior on Wall Street can be downright heart-wrenching.  One example:

"In the years leading up to the Crash of 2008, Wall Street made large and risky bets with other  people’s money. Goldman Sachs, among others, created bundles of mortgage debt and persuaded investors to buy them, hawking them as good investments. Goldman even lobbied credit-rating agencies to give the mortgage bundles high ratings as solid bets. Yet Goldman simultaneously, and quietly, bet against them—“shorting” them, in the parlance of Wall Street.  When the bottom fell out of the mortgage market, Goldman made a huge profit. Through it all, government regulators slept."

Reich warns that the anger that American people feel when reading and hearing about this “rigged game” could potentially lead to a reactionary political movement that would try to destroy the influence of big banks at the expense of the U.S. economy as a whole.  Before things reach that point, reforms need to be made, and the most important way to fix the problem is to increase the purchasing power of the middle class.

If nothing else, Reich’s book provides a spark for future discussion.  He makes a compelling case, although, no doubt, a controversial one.  For those seeking to make sense of the U.S. economy and looking for answers to the recent economic crisis, Reich’s book is an essential read.