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Overview
When the nation’s economy foundered in 2008, blame was directed almost universally at Wall Street. But Robert B. Reich suggests a different reason for the meltdown, and for a perilous road ahead. He argues that the real problem is structural: it lies in the increasing concentration of income and wealth at the top, and in a middle class that has had to go deeply into debt to maintain a decent standard of living.
Persuasively and straightforwardly, Reich reveals how precarious our situation still is. The last time in American history when wealth was so highly concentrated at the top—indeed, when the top 1 percent of the population was paid 23 percent of the nation’s income—was in 1928, just before the Great Depression. Such a disparity leads to ever greater booms followed by ever deeper busts.
Reich’s thoughtful and detailed account of where we are headed over the next decades reveals the essential truth about our economy that is driving our politics and shaping our future. With keen insight, he shows us how the middle class lacks enough purchasing power to buy what the economy can produce and has adopted coping mechanisms that have a negative impact on their quality of life; how the rich use their increasing wealth to speculate; and how an angrier politics emerges as more Americans conclude that the game is rigged for the benefit of a few. Unless this trend is reversed, the Great Recession will only be repeated.
Reich’s assessment of what must be done to reverse course and ensure that prosperity is widely shared represents the path to a necessary and long-overdue transformation. Aftershock is a practical, humane, and much-needed blueprint for both restoring America’s economy and rebuilding our society.
Product Details
| ISBN-13: | 9780307594525 |
|---|---|
| Publisher: | Knopf Doubleday Publishing Group |
| Publication date: | 09/21/2010 |
| Sold by: | Random House |
| Format: | eBook |
| Pages: | 192 |
| File size: | 3 MB |
About the Author
Read an Excerpt
1
Eccles’s Insight
The Federal Reserve Board, arguably the most powerful group of economic decision-makers in the world, is housed in the Eccles Building on Constitution Avenue in Washington, D.C. A long, white, mausoleum-like structure, the building is named after Marriner Eccles, who chaired the Board from November 1934 until April 1948. These were crucial years in the history of the American economy, and the world’s.
While Eccles is largely forgotten today, he offered critical insight into the great pendulum of American capitalism. His analysis of the underlying economic stresses of the Great Depression is extraordinarily, even eerily, relevant to the Crash of 2008. It also offers if not a blueprint for the future, at least a suggestion of what to expect in the coming years.
A small, slender man with dark eyes and a pale, sharp face, Eccles was born in Logan, Utah, in 1890. His father, David Eccles, a poor Mormon immigrant from Glasgow, Scotland, had come to Utah, married two women, became a businessman, and made a fortune. Young Marriner, one of David’s twenty-one children, trudged off to Scotland at the start of 1910 as a Mormon missionary but returned home two years later to become a bank president. By age twenty-four he was a millionaire; by forty he was a tycoon—director of railroad, hotel, and insurance companies; head of a bank holding company controlling twenty-six banks; and president of lumber, milk, sugar, and construction companies spanning the Rockies to the Sierra Nevadas.
In the Crash of 1929, his businesses were sufficiently diverse and his banks adequately capitalized that he stayed afloat financially. But he was deeply shaken when his assumption that the economy would quickly return to normal was, as we know, proved incorrect. “Men I respected assured me that the economic crisis was only temporary,” he wrote, “and that soon all the things that had pulled the country out of previous depressions would operate to that same end once again. But weeks turned to months. The months turned to a year or more. Instead of easing, the economic crisis worsened.” He himself had come to realize by late 1930 that something was profoundly wrong, not just with the economy but with his own understanding of it. “I awoke to find myself at the bottom of a pit without any known means of scaling its sheer sides. . . . I saw for the first time that though I’d been active in the world of finance and production for seventeen years and knew its techniques, I knew less than nothing about its economic and social effects.” Everyone who relied on him—family, friends, business associates, the communities that depended on the businesses he ran—expected him to find a way out of the pit. “Yet all I could find within myself was despair.”
When Eccles’s anxious bank depositors began demanding their money, he called in loans and reduced credit in order to shore up the banks’ reserves. But the reduced lending caused further economic harm. Small businesses couldn’t get the loans they needed to stay alive. In spite of his actions, Eccles had nagging concerns that by tightening credit instead of easing it, he and other bankers were saving their banks at the expense of community—in “seeking individual salvation, we were contributing to collective ruin.”
Economists and the leaders of business and Wall Street—including financier Bernard Baruch; W. W. Atterbury, president of the Pennsylvania Railroad; and Myron Taylor, chairman of the United States Steel Corporation—sought to reassure the country that the market would correct itself automatically, and that the government’s only responsibility was to balance the federal budget. Lower prices and interest rates, they said, would inevitably “lure ‘natural new investments’ by men who still had money and credit and whose revived activity would produce an upswing in the economy.” Entrepreneurs would put their money into new technologies that would lead the way to prosperity. But Eccles wondered why anyone would invest when the economy was so severely disabled. Such investments, he reasoned, “take place in a climate of high prosperity, when the purchasing power of the masses increases their demands for a higher standard of living and enables them to purchase more than their bare wants. In the America of the thirties what hope was there for developments on the technological frontier when millions of our people hadn’t enough purchasing power for even their barest needs?”
There was a more elaborate and purportedly “ethical” argument offered by those who said nothing could be done. Many of those business leaders and economists of the day believed “a depression was the scientific operation of economic laws that were God-given and not man-made. They could not be interfered with.” They said depressions were phenomena like the one described in the biblical story of Joseph and the seven kine, in which Pharaoh dreamed of seven bountiful years followed by seven years of famine, and that America was now experiencing the lean years that inevitably followed the full ones. Eccles wrote, “They further explained that we were in the lean years because we had been spendthrifts and wastrels in the roaring twenties. We had wasted what we earned instead of saving it. We had enormously inflated values. But in time we would sober up and the economy would right itself through the action of men who had been prudent and thrifty all along, who had saved their money and at the right time would reinvest it in new production. Then the famine would end.”
Eccles thought this was nonsense. A devout Mormon, he saw that what passed for the God-given operation of economics “was nothing more than a determination of this or that interest, specially favored by the status quo, to resist any new rules that might be to their disadvantage.” He wrote, “It became apparent to me, as a capitalist, that if I lent myself to this sort of action and resisted any change designed to benefit all the people, I could be consumed by the poisons of social lag I had helped create.” Eccles also saw that “men with great economic power had an undue influence in making the rules of the economic game, in shaping the actions of government that enforced those rules, and in conditioning the attitude taken by people as a whole toward those rules. After I had lost faith in my business heroes, I concluded that I and everyone else had an equal right to share in the process by which economic rules are made and changed.” One of the country’s most powerful economic leaders concluded that the economic game was not being played on a level field. It was tilted in favor of those with the most wealth and power.
Eccles made his national public debut before the Senate Finance Committee in February 1933, just weeks before Franklin D. Roosevelt was sworn in as president. The committee was holding hearings on what, if anything, should be done to deal with the ongoing economic crisis. Others had advised reducing the national debt and balancing the federal budget, but Eccles had different advice. Anticipating what British economist John Maynard Keynes would counsel three years later in his famous General Theory of Employment, Interest and Money, Eccles told the senators that the government had to go deeper into debt in order to offset the lack of spending by consumers and businesses. Eccles went further. He advised the senators on ways to get more money into the hands of the beleaguered middle class. He offered a precise program designed “to bring about, by Government action, an increase of purchasing power on the part of all the people.”
Eccles arrived at these ideas not by any temperamental or cultural affinity—he was, after all, a banker and of Scottish descent—but by logic and experience. He understood the economy from the ground up. He saw how average people responded to economic downturns, and how his customers reacted to the deep crisis at hand. He merely connected the dots. His proposed program included relief for the unemployed, government spending on public works, government refinancing of mortgages, a federal minimum wage, federally supported old-age pensions, and higher income taxes and inheritance taxes on the wealthy in order to control capital accumulations and avoid excessive speculation. Not until these recommendations were implemented, Eccles warned, could the economy be fully restored.
Eccles then returned to Utah, from where he watched Roosevelt hatch the first hundred days of his presidency. To Eccles, the new president’s initiatives seemed barely distinguishable from what his predecessor, Herbert Hoover, had offered—a hodgepodge of ideas cooked up by Wall Street to keep it afloat but do little for anyone else. “New York, as usual, seems to be in the saddle, dominating fiscal and monetary policy,” he wrote to his friend George Dern, the former governor of Utah who had become Roosevelt’s secretary of war.
In mid-December 1933, Eccles received a telegram from Roosevelt’s Treasury secretary, Henry Morgenthau, Jr., asking him to return to Washington at the earliest possible date to “talk about monetary matters.” Eccles was perplexed. The new administration had shown no interest in his ideas. He had never met Morgenthau, who was a strong advocate for balancing the federal budget. After their meeting, the mystery only deepened. Morgenthau asked Eccles to write a report on monetary policy, which Eccles could as easily have written in Utah. A few days later Morgenthau invited Eccles to his home, where he asked about Eccles’s business connections, his personal finances, and the condition of his businesses, namely whether any had gone bankrupt. Finally, Morgenthau took Eccles into his confidence. “You’ve been recommended as someone I should get to help me in the Treasury Department,” Morgenthau said. Eccles was taken aback, and asked for a few days to think about it.
“‘Here you are, Marriner, full of talk about what the government should and shouldn’t do,’” Eccles told himself, as he later recounted in his memoirs. “‘You ought to put up or shut up. . . . You’re afraid your theory won’t work. You’re afraid you’ll be a damned fool. You want to stick it out in Utah and wear the hair shirt of a prophet crying in the wilderness. You can feel noble that way, and you run no risks. [But] if you don’t come here you’ll probably regret it for the rest of your life.’” Eccles talked himself into the job.
For many months thereafter, Eccles steeped himself in the work of the Treasury and the Roosevelt administration, pushing his case for why the government needed to go deeper into debt to prop up the economy, and what it needed to do for average people. Apparently he made progress. Roosevelt’s budget of 1934 contained many of Eccles’s ideas, violating the president’s previous promise to balance the federal budget. The president “swallowed the violation with considerable difficulty,” Eccles wrote.
The following summer, after the governor of the Federal Reserve Board unexpectedly resigned, Morgenthau recommend-ed Eccles for the job. Eccles had not thought about the Fed as a vehicle for advancing his ideas. But a few weeks later, when the president summoned him to the White House to ask if he’d be interested, Eccles told Roosevelt he’d take the job if the Federal Reserve in Washington had more power over the supply of money, and the New York Fed (dominated by Wall Street bankers), less. Eccles knew Wall Street wanted a tight money supply and correspondingly high interest rates, but the Main Streets of America—the real economy—needed a loose money supply and low rates. Roosevelt agreed to support new legislation that would tip the scales toward Main Street. Eccles took over the Fed.
For the next fourteen years, with great vigor and continuing vigilance for the welfare of average people, Eccles helped steer the economy through the remainder of the Depression and through World War II. He would also become one of the architects of the Great Prosperity that the nation and much of the rest of the world enjoyed after the war.
Table of Contents
Introduction: The Pendulum 11
Part I The Broken Bargain
1 Eccles's Insight 23
2 Parallels 35
3 The Basic Bargain 50
4 How Concentrated Income at the Top Hurts the Economy 56
5 Why Policymakers Obsess About the Financial Economy Instead of About the Real One 66
6 The Great Prosperity: 1947-1975 72
7 How We Got Ourselves into the Same Mess Again 86
8 How Americans Kept Buying Anyway: The Three Coping Mechanisms 101
9 The Future Without Coping Mechanisms 107
10 Why China Won't Save Us 115
11 No Return to Normal 124
Part II Backlash
1 The 2020 Election 129
2 The Politics of Economics, 2010-2020 133
3 Why Can't We Be Content with Less? 138
4 The Pain of Economic Loss 145
5 Adding Insult to Injury 149
6 Outrage at a Rigged Game 162
7 The Politics of Anger 184
Part III The Bargain Restored
1 What Should Be Done: A New Deal for the Middle Class 201
2 How It Could Get Done 223
Acknowledgments 233
Notes 235
Interviews
A conversation with ROBERT B. REICH author of AFTERSHOCK
Q: What’s the “AFTERSHOCK” in your title?
A: The absence of a real recovery from the Great Recession. There’s even a likelihood of a return to recession – the so-called “double dip.” Typically after a recession the economy picks up again, and jobs and wages come back. Not this time, because this wasn’t a typical recession. It was the culmination of years of widening inequality in which most of the gains of economic growth went to the top. The middle class didn’t have the purchasing power to buy what was produced – other than by going ever deeper into debt. Eventually that debt bubble burst. And now we’re left with the aftershock.
Q: Does that mean the economy will never recover?
A: We may eventually have a recovery on paper. Share prices may move upward as big corporations make profits by shifting production and sales abroad. And by continuing to trim their payrolls – substituting software and merging with other companies.
But the real economy will remain in the doldrums. Unemployment will stay high for years. And the wages of most people with jobs will continue to stagnate or decline.
Q: That’s a bleak picture.
A: It doesn’t have to be that way. In fact, my purpose in writing the book is to show we have a choice. We can either resign ourselves to a continuing jobs recession, and the increasingly bitter and politics that accompanies it. Or we can choose genuine reforms that expand the circle of prosperity.
Q: You mean redistributing income from the wealthy to everyone else?
A: No. That’s a zero-sum game. I’m talking about remaking a basic bargain that once lay at the heart of this economy – paying workers enough to buy what they produce. Remember Henry Ford? Almost a century ago he paid workers on his Model-T assembly line a wage so high by the standard of the day that he was accused of being a socialist, and the Wall Street Journal termed his action “an economic crime.” But the higher wage allowed those workers to buy those Model Ts, and made Ford rich.
It’s the same for the economy as a whole. Rich Americans are now raking in and owning a larger percentage of the total economy than at any time since 1928. But that doesn’t do them much good if the economy isn’t growing. Just like Henry Ford, they’d do far better if they had a smaller percentage of a fast-growing economy. And everyone else would be better off, too.
Q: Don’t the rich buy lots of things?
A: Yes, but they spend a much smaller portion of their incomes than the rest of us. After all, being rich means you already have most of what you want. They save, and their savings go all around the world in pursuit of the highest returns. They also speculate, but that doesn’t create jobs. It just creates bubbles. Put simply, the rich on their own can’t possibly keep America employed.
Q: You mention 1928. The Great Crash the ushered in the Great Depression occurred in 1929. You think there’s a connection between what happened then and the Great Recession and its aftershock?
A: Yes. The parallels are stunning. In the book I introduce a man named Marriner Eccles, one of the richest Americans in the 1920s, who went on to become chairman of the Federal Reserve Board from 1934 to 1948. Most people don’t remember him now, but the Fed building in Washington is named after him. Eccles determined that the major cause of Great Depression was widening inequality. So much of the nation’s income was accumulating at the top that the vast middle class didn’t have enough money to buy what the economy was capable of producing – without going into ever deeper debt. Meanwhile, the rich had so much money they speculated in a narrow range of assets – mostly stocks and real estate – hoping other wealthy people would bid up the prices. When these two bubbles – the debt bubble and the asset bubble – burst, we had the Great Depression. Sound familiar?
Q: Yes, but we didn’t have a Great Depression this time. The Great Recession and its aftershock are bad, but not nearly as bad.
A: That’s because we learned one lesson from the Great Depression. When the bottom falls out of the economy – when consumers can’t spend and businesses won’t – government has to flood the economy with money in order to keep it afloat. That’s what the Fed did this time around, as well as Congress and the President with the stimulus package. So we avoided another Great Depression.
Q: But, as you say, the aftershock continues. There’s no real recovery.
A: That’s because we didn’t learn the second lesson of the Great Depression. The only way to get a genuine recovery is to restructure the economy so the vast middle class gets a fair share of its gains. That was the heart of the New Deal – labor unions that gave average workers more bargaining power, the 40-hour workweek with time and a half for overtime, Social Security and a minimum wage. There were also huge investments in the nation’s infrastructure, making average people far more productive.
Q: But you’re not suggesting a return to the New Deal, are you?
A: No. You might say I update the New Deal for the 21st century. I don’t pretend I have all the answers but the proposals I suggest in the book are important steps in the right direction. For example, wage subsidies extending up through the middle class, financed by proceeds from a carbon tax as well as modestly higher marginal taxes on top incomes. School vouchers whose values are inversely related to family incomes. A reemployment system with wage insurance to replace our unemployment system. College costs paid by tithing the first ten years of full-time income. Getting money out of politics by putting all donations into blind trusts so candidates can never know who contributed what.
Q: Why did the very rich end up with so much of the economy in the decades leading up the Great Recession, as well as the decades leading up to the Great Depression? Did the rich do something wrong?
A: No, at least not directly. Both periods were marked by major technological changes. Over the last thirty years, computers, software, and the Internet have transformed everything. Any routine job that can be done by software or done “over there” – in another nation linked by the Internet and satellite – is disappearing. Most rewards have gone to the top – to well-educated and well-connected – to CEOs, Wall Street executives and traders, hedge-fund managers, and computer and Internet entrepreneurs – all of whom know how to use these technologies to squeeze out ever more value.
The early decades of the twentieth century were marked by a different kind of technological revolution: Machines and factories capable of extraordinarily large-scale production. Then, too, most of the rewards went to the top – to the major owners of industry, and the Wall Street magnates who financed them.
Q: Okay, so if the culprit this time involves technology displacing workers directly or making it easy for employers to outsource abroad, why isn’t the answer just to raise tariffs and cut off free trade?
A: We tried that in the 1930s. It was called the Smoot-Hawley Tariff, and it made the Depression even worse. You see, the upside of trade is it gives us access to cheaper goods and services around the world. It allows developing nations to advance, and eventually buy our products. The problem isn’t trade. It’s that the benefits of trade have gone mostly to the well-educated and well-connected, while the burdens of technology and globalization have been borne disproportionately by the middle class and old working class.
Q: You say part of the aftershock shows up in our politics, that grows angrier and more surly and partisan. What’s the connection?
A: Economics and politics are intimately related. When people feel economically insecure and fearful, they naturally want to blame someone or some group – and often the people blamed have little or nothing to do with the problem, but are easy scapegoats. You might say times of severe economic stress bring out the worst in societies. I think that’s why we’re seeing a surge in “Islamaphobia” – more than we had after 9/11 – and a sharp reaction against undocumented immigrants – even though evidence shows fewer crossing our borders now than when the economy was strong. It’s also why we’re seeing such loathing toward all the major institutions in our society – government, big business, and Wall Street.
Q: You predict that if more of the American public come to believe the economic game is rigged against them, we’ll see even more politics of resentment.
A: Yes. That’s why TARP – the government bailout of Wall Street – was so detested on Main Street. In fact, the Wall Street bailout inspired the Tea Party movement on the right, and fueled anger on the left. In times like these, the basic political question boils down to: Whom do you trust less – big government, or big business and Wall Street?
As economic gains become concentrated at the top, more money at the top is also applied to politics. I don’t recall a time when so much money engulfed Washington – lobbyists, lawyers, PR professionals, campaign consultants – most of it coming from executives of major corporations and from Wall Street. This also feeds the cynicism of average people, who believe (with some reason) that laws and rules are designed in such way as to generate even more income and wealth for those at the top.
The Obama administration came to the conclusion it couldn’t get healthcare reform without essentially paying off Big Pharma – a huge giveaway that will end up costing the public more for the drugs they buy in future years. Health insurance companies paid so much money to legislators that it was impossible even to give the public a choice of whether to buy into a public insurance option.
Q: So where does this political anger go if nothing is done to give most Americans more economic security and a fairer share of the gains from economic growth?
A: A decade from now the major divide in American politics will no longer be between Republicans and Democrats. It will be between angry populists on the right and the left, and an “establishment” increasingly desperate to hold on to its power and privilege.
Q: So this is the impetus toward the reforms you propose – a new New Deal for the 21st century, as you put it?
A: Hopefully, reform occurs before then, because angry populism hasn’t proven to be a very rational or reliable source of positive change. American politics has always featured a tension between populism and progressive reform, but reformers have usually won. That’s because those who have the power and the money come to realize populism is just too dangerous and unpredictable.
In other words, those with the power and money in America have two reasons to embrace reforms that widen the circle of prosperity – one economic and one political. The economic reason is they’ll do better with a smaller percent of a growing pie than a larger percent of a static one. The political is they’ll have much to lose if angry populism gets out of hand.
Q: Are you optimistic?
A: Yes. This nation is extraordinarily resilient. Time and again, we’ve moved from periods of concentrated wealth and power to periods of reform. When we understand what has to be done, we roll up our sleeves and get it done. The question is how long it will take before we understand. I hope my book hastens the time.
Q: Meanwhile, what advice would you give individuals in this aftershock economy?
• don't blame yourself for loss of job or income, it's the economy.
• "downshift" your lifestyle, everyone else has to.
• be willing to move to where the jobs are, even if that means walking away from a house that's "underwater" (mortgage debt more than selling price).
• although it may hurt, be more generous -- to friends, family members, neighbors; they're hurting, too.
• develop neighborhood and city-wide cooperatives, in which everyone pitches in with their time (lots of underemployed have lots of it now) and splits the profits and benefits – childcare, eldercare, growing or transporting or preparing food, transportation.
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