Robert Reich: The Truth About the American Economy

The following statement is excerpted from Robert Reich's testimony to the U.S. Senate Committee on Health, Education, Labor, and Pensions, presented on May 12, 2011 and is therefore in the public domain and not copyrighted material. BBI

The Truth About the American Economy
By Robert Reich

The U.S. economy continues to stagnate. It’s growing at the rate of 1.8 percent, which is barely growing at all. Consumer spending is down. Home prices are down. Jobs and wages are going nowhere.

It’s vital that we understand the truth about the American economy.

How did we go from the Great Depression to 30 years of Great Prosperity? And from there, to 30 years of stagnant incomes and widening inequality, culminating in the Great Recession? And from the Great Recession into such an anemic recovery?

The Great Prosperity

During three decades from 1947 to 1977, the nation implemented what might be called a basic bargain with American workers. Employers paid them enough to buy what they produced. Mass production and mass consumption proved perfect complements. Almost everyone who wanted a job could find one with good wages, or at least wages that were trending upward.

During these three decades everyone’s wages grew — not just those at or near the top.

Government enforced the basic bargain in several ways. It used Keynesian policy to achieve nearly full employment. It gave ordinary workers more bargaining power. It provided social insurance. And it expanded public investment. Consequently, the portion of total income that went to the middle class grew while the portion going to the top declined. But this was no zero-sum game. As the economy grew almost everyone came out ahead, including those at the top.

The pay of workers in the bottom fifth grew 116 percent over these years — faster than the pay of those in the top fifth (which rose 99 percent), and in the top 5 percent (86 percent).

Productivity also grew quickly. Labor productivity — average output per hour worked — doubled. So did median incomes. Expressed in 2007 dollars, the typical family’s income rose from about $25,000 to $55,000. The basic bargain was cinched.

The middle class had the means to buy, and their buying created new jobs. As the economy grew, the national debt shrank as a percentage of it.

The Great Prosperity also marked the culmination of a reorganization of work that had begun during the Depression. Employers were required by law to provide extra pay — time-and-a-half — for work stretching beyond 40 hours a week. This created an incentive for employers to hire additional workers when demand picked up. Employers also were required to pay a minimum wage, which improved the pay of workers near the bottom as demand picked up.

When workers were laid off, usually during an economic downturn, government provided them with unemployment benefits, usually lasting until the economy recovered and they were rehired. Not only did this tide families over but it kept them buying goods and services — an “automatic stabilizer” for the economy in downturns.

Perhaps most significantly, government increased the bargaining leverage of ordinary workers. They were guaranteed the right to join labor unions, with which employers had to bargain in good faith. By the mid-1950s more than a third of all America workers in the private sector were unionized. And the unions demanded and received a fair slice of the American pie. Non-unionized companies, fearing their workers would otherwise want a union, offered similar deals.

Americans also enjoyed economic security against the risks of economic life — not only unemployment benefits but also, through Social Security, insurance against disability, loss of a major breadwinner, workplace injury and inability to save enough for retirement. In 1965 came health insurance for the elderly and the poor (Medicare and Medicaid). Economic security proved the handmaiden of prosperity. In requiring Americans to share the costs of adversity it enabled them to share the benefits of peace of mind. And by offering peace of mind, it freed them to consume the fruits of their labors.

The government sponsored the dreams of American families to own their own home by providing low-cost mortgages and interest deductions on mortgage payments. In many sections of the country, government subsidized electricity and water to make such homes habitable. And it built the roads and freeways that connected the homes with major commercial centers.

Government also widened access to higher education. The GI Bill paid college costs for those who returned from war. The expansion of public universities made higher education affordable to the American middle class.

Government paid for all of this with tax revenues from an expanding middle class with rising incomes. Revenues were also boosted by those at the top of the income ladder whose marginal taxes were far higher. The top marginal income tax rate during World War II was over 68 percent. In the 1950s, under Dwight Eisenhower, whom few would call a radical, it rose to 91 percent. In the 1960s and 1970s the highest marginal rate was around 70 percent. Even after exploiting all possible deductions and credits, the typical high-income taxpayer paid a marginal federal tax of over 50 percent. But contrary to what conservative commentators had predicted, the high tax rates did not reduce economic growth. To the contrary, they enabled the nation to expand middle-class prosperity and fuel growth.

The Middle-Class Squeeze, 1977-2007

During the Great Prosperity of 1947-1977, the basic bargain had ensured that the pay of American workers coincided with their output. In effect, the vast middle class received an increasing share of the benefits of economic growth. But after that point, the two lines began to diverge: Output per hour — a measure of productivity — continued to rise. But real hourly compensation was left in the dust.

It’s easy to blame “globalization” for the stagnation of middle incomes, but technological advances have played as much if not a greater role. Factories remaining in the United States have shed workers as they automated. So has the service sector.

But contrary to popular mythology, trade and technology have not reduced the overall number of American jobs. Their more profound effect has been on pay. Rather than be out of work, most Americans have quietly settled for lower real wages, or wages that have risen more slowly than the overall growth of the economy per person. Although unemployment following the Great Recession remains high, jobs are slowly returning. But in order to get them, many workers have to accept lower pay than before.

Starting more than three decades ago, trade and technology began driving a wedge between the earnings of people at the top and everyone else. The pay of well-connected graduates of prestigious colleges and MBA programs has soared. But the pay and benefits of most other workers has either flattened or dropped. And the ensuing division has also made most middle-class American families less economically secure.

Government could have enforced the basic bargain. But it did the opposite. It slashed public goods and investments — whacking school budgets, increasing the cost of public higher education, reducing job training, cutting public transportation and allowing bridges, ports and highways to corrode.

It shredded safety nets — reducing aid to jobless families with children, tightening eligibility for food stamps, and cutting unemployment insurance so much that by 2007 only 40 percent of the unemployed were covered. It halved the top income tax rate from the range of 70 to 90 percent that prevailed during the Great Prosperity to 28 to 35 percent; allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax; and shrunk inheritance taxes that affected only the top-most 1.5 percent of earners. Yet at the same time, America boosted sales and payroll taxes, both of which took a bigger chunk out of the pay the middle class and the poor than of the well off.

How America Kept Buying: Three Coping Mechanisms

Coping mechanism No. 1: Women move into paid work. Starting in the late 1970s, and escalating in the 1980s and 1990s, women went into paid work in greater and greater numbers. For the relatively small sliver of women with four-year college degrees, this was the natural consequence of wider educational opportunities and new laws against gender discrimination that opened professions to well-educated women. But the vast majority of women who migrated into paid work did so in order to prop up family incomes as households were hit by the stagnant or declining wages of male workers.

This transition of women into paid work has been one of the most important social and economic changes to occur over the last four decades. In 1966, 20 percent of mothers with young children worked outside the home. By the late 1990s, the proportion had risen to 60 percent. For married women with children under the age of 6, the transformation has been even more dramatic — from 12 percent in the 1960s to 55 percent by the late 1990s.

Coping mechanism No. 2: Everyone works longer hours. By the mid 2000s it was not uncommon for men to work more than 60 hours a week and women to work more than 50. A growing number of people took on two or three jobs. All told, by the 2000s, the typical American worker worked more than 2,200 hours a year — 350 hours more than the average European worked, more hours even than the typically industrious Japanese put in. It was many more hours than the typical American middle-class family had worked in 1979 — 500 hours longer, a full 12 weeks more.

Coping mechanism No. 3: Draw down savings and borrow to the hilt. After exhausting the first two coping mechanisms, the only way Americans could keep consuming as before was to save less and go deeper into debt. During the Great Prosperity the American middle class saved about 9 percent of their after-tax incomes each year. By the late 1980s and early 1990s, that portion had been whittled down to about 7 percent. The savings rate then dropped to 6 percent in 1994, and on down to 3 percent in 1999. By 2008, Americans saved nothing. Meanwhile, household debt exploded. By 2007, the typical American owed 138 percent of their after-tax income.

The Challenge for the Future

All three coping mechanisms have been exhausted. The fundamental economic challenge ahead is to restore the vast American middle class.

That requires resurrecting the basic bargain linking wages to overall gains, and providing the middle class a share of economic gains sufficient to allow them to purchase more of what the economy can produce. As we should have learned from the Great Prosperity — the 30 years after World War II when America grew because most Americans shared in the nation’s prosperity — we cannot have a growing and vibrant economy without a growing and vibrant middle class.

http://robertreich.org/post/5993482080

:kick:

:kick:

PB

I would swim a river of snot to help elect him.

are treading water. Old tricks and rules aren't going to hack it. The country needs to retool for the 21st century. ... but not much is going to change as long as we have a marriage between the banksters, wall street and gov. It is an insidious relationship benefiting a small minority, and then we have a deluded sector thinking they are or are going to be part of that minority. The joke is on them, but they just can't get it ...

when TSHTF that the anger is directed to those responsible for this mess. THE BANKSTERS.

in choppy seas, with the ambient temperature dropping precipitously...

:)

But I am committed here. Or soon will be if I don't calm down.

:D

I'm deadly cereal.

People have been screaming the whole way.

nt

K&R

Which is indeed a real reason people have lost jobs in America, not just automation.

marginilize the role of globalization, he can't be that naiive though...?

during the Clinton administration. He knows better, but he simply cannot bring himself to admit that those policies that originated with Reagan/Bush and Clinton/Gore supported have been a disaster. If he has changed on that, then I must have missed it.

specifically rewrites history leaving out the whole globalization thing.

globalization during the Clinton years, and that was his one regret. I don't know how far he considers too far, or whether he ever repeated the sentiment.

gone way too far. It really doesn't matter who says it or who believes it, it is true.

When we adopted the mantra of "global free trade is always good" and implemented said policies, we subjected American companies and workers to a downward force that quickly transformed into a perpetual spiral. We decapitated our manufacturing sector and had no choice but to go full "service" sector in order to survive. We're slowly witnessing the cataclysmic results of this Faustian deal.

All in the name of cheap electronics, consumer gadgets, and increased imports that in the relative short term reduced costs, but the concession (and incalculable amount of destruction borne directly to the American worker and pain resulting) ended up taking our economic souls.

Oasis

much too late? I don't think so. In that we are late, the solution will have to be larger and more dramatic.

the "Tax cuts are always good" philosophy.

If we can see the cause of this damage why is the other side engaged in a fight to the death to preserve this mess they have foisted upon us?

that part of our Faustian deal (love the analogy) is CHEAPER, more abundant FOOD, which is tied directly to the fact that fully 80% of our population is overweight. (I highly recommend Food, Inc. for a better understanding of this aspect of our Faustian hubris.)

he is the voice of wealth telling wealth to be nice and do what's right. Wealth doesn't do that. The Great Prosperity he talks about was an anomaly, the result of victory in WWII, fear of the Soviets, fear of the millions of working class veterans returning from the war and a need to rebuild the global economy. The capitalist class has always wanted a two tiered social and economic order. What is truly ironic is that the collapse of the Soviet Union seems to have been the death knell of the American middle class and the resurrection trumpet of predatory capitalism. Things change here when the government is more afraid of the people than it is beholden to Wall Street. It's always been like that. Nothing has changed.

that RR does not like to admit that his/Clinton's NAFTA and other trade policies are a BIG part of the problem. A nation cannot export its manufacturing base and be free of the economic consequences. Automation and technology are NOT the primary reason for fewer jobs.

I remember that well. But as I say upthread, better late than never that he starts to realize Clinton's policies were a contributing factor in decimating the middle class.

Given the fact that there are fewer jobs in manufacturing now than there were then (in spite of increased production), isn't it possible that "automation and technology" contributed mightily to producing more goods with less workers?

International trade (particularly "free trade") is a much smaller part of our economy than it is for Canada, Australia or European countries, all of which are much more progressive than the US. Their income equality is much better than ours, their unions are stronger and their safety nets are more effective. The degree to which a nation engages in international trade is positively correlated with the quality of life (national wealth and its equitable distribution) of its citizens.

Whirlpool employees whose jobs were shipped overseas because their company no longer wants to use U.S. union labor. American workers can use automated machinery as well as a Mexican worker or an Indonesian worker. The entire textile industry in the southern U.S. was moved to Pakistan, Malaysia, and other countries in Asia. Do you think that was because they had better technology or the machines were more highly automated? The pictures I've seen of the textile plants in those nations show buildings packed with WORKERS.

None of those job losses were caused by technology or automation. They were caused by the corporate world's singular focus on profits. That demand for higher profits means that the company must reduce operating costs even if it means hiring workers who work for a fraction of the hourly labor cost of an American worker--not to mention working with no benefits and no safety protections.

I don't buy the argument about automation and technology. If that were the reason then there would simply be fewer workers at the plants, but the plants could remain here. They're going overseas to nations where everything costs less.

We can certainly engage in international trade, but it doesn't have to be done solely at the expense of the American worker. Perhaps you haven't noticed that the profit picture for the corporations is looking ever brighter even as they offshore our industries.

They are outsourcing/investment scams designed to transfer wealth from the workers into the pockets of a few rich investors and corporate executives. This is not David Ricardo's "free trade". We would have several million more middle class workers today if we had never signed crap like NAFTA, CAFTA, GATT/WTO, and all the others as they were written at the time.

I know a dozen people who have lost their jobs because the factories where they worked were moved to Mexico or China, and it's not just manufacturing workers. Three of them are electrical engineers. None of them have the wages and benefits they had over a decade ago. Some have lost their homes and now live in cheap apartments or mobile homes. When the factories close, the domino effect tears through the economy like a tsunami. Spin-off and support jobs, engineering jobs, jobs with local governments, retail jobs, eventually are lost.

There is no one out there who can explain what is REALLY going on with anything like his insight and straightforwardness.

We need a battalion of Robert Reichs.

I wish there was a way to separate social goals and income equity from the illusion that the more economic growth we have, the better off we are. You only have to look at the last twenty years of economic growth, which almost entirely benefited the wealthy, to see that perhaps the whole concept is a con game.

A livable and sustainable society is possible without economic growth, if population growth follows the same track. On a planet with finite resources, everything else leads to a population limited by its misery.

I was just sitting here, reading through the responses hereinabove, and wondering why no one has mentioned our burgeoning global population. Although we seldom acknowledge it, our species is now the number one stressor in our planet’s ecosystem.

Ours’ is a global economy now, so talking about 'outsourcing' jobs is like lamenting the loss of our prize horse AFTER the barn doors have been open—for decades. By definition (of capitalism as an economic paradigm), the corporatists are doing exactly what they MUST do to insure that they continue to amass wealth—plus protect their amassed wealth—even if this means relocating to countries where they can pay their workers the equivalent of less than a dollar a day (and no bennies).

Isn't it ironic how MANY of us marched on Washington to say NO to the illegal invasion of Iraq; to say NO to runaway deficit spending; to say NO to the hedonistic, sociopathic Corporate Megalomaniacs who've usurped our government, our media and our economy--yet here we are as a nation, decrying the primacy of the uber wealthy, and better than $14 trillion in debt!?

The inevitable turmoil of the global economic catastrophe we are just beginning to witness promises to get far worse, especially since our politicians think they can keep doing the same thing over and over again, expecting different results...

In college—lo, these many years ago— Economic Anthropology was my favorite elective. How enlightening it was to read about the genesis of our species' contemporary economic behaviors.

Now—in my mid-fifties—I watch as we humans struggle with the effects of overpopulation. I see how our myriad fears manifest as hatred, resentment, depression, and violence—even as our vital resources become ever scarcer.

I listen as individuals explain our species' less savory traits as 'human nature,' as though proffering this dismissive palliative countermands our collective hubris...

As we wallow around in the muck and the mire at the bottom of the abyss we've created through our own hedonism, rigid defensiveness, and externalization of personal responsibility; I dream of our species' potentialities. Hierarchy (thus, capitalism) is not the social construct in my dreams.

Malthusian :-(

RR is right here. So are the people who complain about what he leaves out. Sure, globalization creates problems. But don't fall for the bogey-man theory that all we need is non-permeable borders. It's nice to have a fact to blame. And there are faces to blame, but they are interlinked. Had unions not lost power in some cases or had caving leadership in others, the off-shoring stuff wouldn't have happened.

If you need a single locus, look to the neocons. Their concerted effort to bring back the 1890's has been a drumbeat that has penetrated the minds of Americans through capital class control of the media. Through lies and diversion the public has ignored what is being done to them and come to chant the very mantra that is their destruction. It is pervasive. You see it when the word "entitlements" fall from Democrat's mouths to the digs against unions and public workers that show up even on DU. We have an enemy. They are winning every time a Democrat champions one of the neocon points, whether it is cutting SS and Medicare, protecting the wealthy from sharing, or privatizing things like schools and retirement.

We will only begin to fight back when we realize that he enemy has infiltrated our party and our minds.

influence inside the Obama Administration.

Thanks for the thread, Better Believe It.

K&R

I know he's ruled that out but I asked him to reconsider.

by private interests seeking control over government and its agencies -- i's wealth

and its natural resources -- for its own profit.

In other words, capitalism is an evil --

Unregulated capitalism is merely organized crime.

Excellent analysis.

"resurrecting the basic bargain linking wages to overall gains, and providing the middle class a share of economic gains sufficient to allow them to purchase more of what the economy can produce. As we should have learned from the Great Prosperity — the 30 years after World War II when America grew because most Americans shared in the nation’s prosperity — we cannot have a growing and vibrant economy without a growing and vibrant middle class."

Tax the rich.

Reduce the military.

Fund a robust social safety net.

Fund research, infrastructure, and education.

Quality health care as a right.

So obvious, as you say, but these ideals are rarely mentioned in our national discourse. If you're on the cable TV 'news' and endorse these things, say goodbye to your career. If you're a politician and dare promote them, then good luck getting that $10 million or so in campaign contributions that you'll need to get re-elected next time around.

We are awash in a sea of corruption, except for the rare voice like Reich, crying in the wilderness.

And if you give your labor intensive jobs away to other countries you will soon be bankrupt.

Want to know what my parents told me when I hit 18 years old?

They said get your ass down to the Ford plant and get with the program son. And I did.

Don

No matter how accurate or important this is, I'll bet no one was listening.

This squeeze stems from the decline of the Empire, beginning imperceptibly with the current account deficit, circa 1970.

...Obama or anyone else - to restore jobs and decent pay in America? To restore the middle class?

NOTHING.


Not. One. Damn. Thing.


In fact, they're doing the opposite. Tearing it down further.

Ross Perot was right. Not just NAFTA but the WTO as well. Deregulation was never meant to work for the middleclass.

of me I cannot understand why any one rich or poor would want to follow the University of Chicago and Milton Friedman's bull. We all had it so good how could they want to give that up?

Global Oligarchy are few in number (less the 370), yet they own and control more than 45% of the world's resources, including human resources.

The top 400 richest people are from Australia, Austria, Bahama, Belgium, Bermuda, Brazil, Chile, China, Colombia, Czech Republic, Denmark, England, Egypt, France, Germany, Hong Kong, India, Israel, Japan, Kazakhstan, Korea (South), Kuwait, Lebanon, Malaysia, Mexico, Monaco, Norway, Portugal, Russia, Saudi Arabia, Singapore, Sweden, Spain, Switzerland, Taiwan, Thailand, Turkey, Ukraine, United Arab Emirates, and Venezuela.

Despite the geographic diversity of the uber wealthy, their common socioeconomic status renders each a member of Richistan, whose citizenry enjoy the rarest of comestibles, the finest accommodations, the most expensive trinkets, and the most richly appointed, exclusive residences. Denizens of Richistan travel in private jets, yachts, and limos; and they NEVER discuss their wealth.

Fully one-third of the wealthiest 400 are from the United States. Almost half of the 50 wealthiest people are from the United States. (Bill Gates was toppled from his rarefied status as the richest person on the planet in March of 2010; replaced by Mexican mogul Carlos Slim Helu.)

When you contemplate this radical income inequity, dear reader, please understand viscerally, that you are NOT a member of this exclusive club, nor are you likely to EVER be. You are an insignificant member of the vast hoi polloi. The denizens of Richistan comprise a mere 5.8 X 10^(-10)% of our planet's population. For those of you who are math challenged, that number is 0.00000000058% You are more likely to win the lottery than join the ranks of the Wealthy Elite.

We the People (globally) must STOP snarfing the wealth carrot meme. Raising awareness about radical income inequity is merely the first step in our species' choosing a different evolutionary path.

As ever, I remain sincerely,

Ms. Silence B. Damned

himself to accept the well documented fact that the slave trade agreements have decimated the manufacturing base in the US. Instead, he lays the blame on automation. Were that true then why are we buying manufactured goods from Mexico, China, India, Vietnam, etc., when they could be made right here using all of these wonderful machines? Why do GM, Ford and Chrysler have massive manufacturing plants in Mexico employing thousands of workers?

As part of the Clinton globalization wrecking-ball tag-team, he spoke dismissively towards the concerns of sending manufacturing overseas - and while he dialed that back after resigning,,,,, I think he just can't quite look the subject straight in the face as a result.

They are too blinded by greed to realize it.

Robert Reich knows how to tell it like it is :yourock:

Citigroup Plutonomy Report Part 1 
Oct 16, 2005
- The World is dividing into two blocs - the Plutonomy and the rest.  

The U.S., UK, and Canada are the key Plutonomies - economies powered by the wealthy. Continental Europe (ex-Italy) and Japan are in the egalitarian bloc.
- Equity risk premium embedded in "global imbalances" are unwarranted.  

In plutonomies the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers like savings rates, current account deficits, consumption levels, etc.  
This imbalance in inequality expresses itself in the standard scary "global imbalances". We worry less.
- There is no "average consumer" in a Plutonomy.  
<...>
Indeed, traditional thinking is likely to have issues with most of it.  We will posit that:  

1. the world is dividing into two blocs - the plutonomies, where economic growth is powered by and largely consumed by the wealthy few, and the rest.  
Plutonomies have occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S.  
What are the common drivers of Plutonomy?
Disruptive technology-driven productivity gains, 
creative financial innovation, 
capitalist-friendly cooperative governments, 
an international dimension of immigrants and 
overseas conquests invigorating wealth creation, 
the rule of law, and 
patenting inventions.  
Often these wealth waves involve great complexity, exploited best by the rich and educated of the time.          
1. We project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization.
<...>
1. In a plutonomy there is no such animal as "the U.S. consumer" or "the UK consumer", or indeed the "Russian consumer".  
There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the "non-rich", the multitudinous many, but only accounting for surprisingly small bites of the national pie.  <...> i.e., focus on the "average" consumer are flawed from the start.
http://www.scribd.com/...
Here's the key part, mentioned in the Moore film, where CitiGroup frets about us pesky "laborers" could some day push-back, that we might demand fair treatment and pay for all our productivity:
Citigroup Plutonomy Report Part 2 
Mar 5 2006
RISKS -- WHAT COULD GO WRONG? 
Our whole plutonomy thesis is based on the idea that the rich will keep getting richer. This thesis is not without its risks. For example, a policy error leading to asset deflation, would likely damage plutonomy. Furthermore, the rising wealth gap between the rich and poor will probably at some point lead to a political backlash. Whilst the rich are getting a greater share of the wealth, and the poor a lesser share, political enfrachisement remains as was -- one person, one vote (in the plutonomies). At some point it is likely that labor will fight back against the rising profit share of the rich and there will be a political backlash against the rising wealth of the rich. This could be felt through higher taxation on the rich (or indirectly though higher corporate taxes/regulation) or through trying to protect indigenous laborers, in a push-back on globalization -- either anti-mmigration, or protectionism. We don’t see this happening yet, though there are signs of rising political tensions. However we are keeping a close eye on developments."


plus there's now this http://bigcorporationusa.blogspot.com/