Robert Reich: Totally Spent

Reich has an interesting analysis of the present recession and its causes. However, his idea that the way out is to increase wages and the power of unions seems out of whack with present power relationships within US capitalism. Labor is weak and because of global competition capital is quite strong. The buyouts by General Motors are a good example. New workers are hired at very much lower wages than former workers. Wages are likely to fall as cheap labor in developing economies attract capital.

http://www.nytimes.com/2008/02/13/opinion/13reich.html?_r=1&th&emc=th&oref=sloginFebruary 13, 2008Op-Ed ContributorTotally SpentBy ROBERT B. REICHBerkeley, Calif.WE’RE sliding into recession, or worse, and Washingtonis turning to the normal remedies for economicdownturns. But the normal remedies are not likely towork this time, because this isn’t a normal downturn.The problem lies deeper. It is the culmination ofthree decades during which American consumers havespent beyond their means. That era is now coming to anend. Consumers have run out of ways to keep thespending binge going.The only lasting remedy, other than for Americans toaccept a lower standard of living and for businessesto adjust to a smaller economy, is to give middle- andlower-income Americans more buying power — and notjust temporarily.Much of the current debate is irrelevant. Even withmore tax breaks for business like accelerateddepreciation, companies won’t invest in more factoriesor equipment when demand is dropping for products andservices across the board, as it is now. And temporaryfixes like a stimulus package that would givehouseholds a one-time cash infusion won’t getconsumers back to the malls, because consumers knowthe assistance is temporary. The problems mostconsumers face are permanent, so they are likely topocket the extra money instead of spending it.Another Fed rate cut might unfreeze credit markets andgive consumers access to somewhat cheaper loans, butthere’s no going back to the easy money of a few yearsago. Lenders and borrowers have been badly burned, andthe values of houses and other assets are droppingfaster than interest rates can be lowered.The underlying problem has been building for decades.America’s median hourly wage is barely higher than itwas 35 years ago, adjusted for inflation. The incomeof a man in his 30s is now 12 percent below that of aman his age three decades ago. Most of what’s beenearned in America since then has gone to the richest 5percent.Yet the rich devote a smaller percentage of theirearnings to buying things than the rest of us because,after all, they’re rich. They already have most ofwhat they want. Instead of buying, and thusstimulating the American economy, the rich are morelikely to invest their earnings wherever around theworld they can get the highest return.The problem has been masked for years as middle- andlower-income Americans found ways to live beyond theirpaychecks. But now they have run out of ways.The first way was to send more women into paid work.Most women streamed into the work force in the 1970sless because new professional opportunities opened upto them than because they had to prop up familyincomes. The percentage of American working motherswith school-age children has almost doubled since 1970— to more than 70 percent. But there’s a limit to howmany mothers can maintain paying jobs.So Americans turned to a second way of spending beyondtheir hourly wages. They worked more hours. Thetypical American now works more each year than he orshe did three decades ago. Americans became veritableworkaholics, putting in 350 more hours a year than theaverage European, more even than the notoriouslyindustrious Japanese.But there’s also a limit to how many hours Americanscan put into work, so Americans turned to a third wayof spending beyond their wages. They began to borrow.With housing prices rising briskly through the 1990sand even faster from 2002 to 2006, they turned theirhomes into piggy banks by refinancing home mortgagesand taking out home-equity loans. But this thirdstrategy also had a built-in limit. With the burstingof the housing bubble, the piggy banks are closing.The binge seems to be over. We’re finally reaping thewhirlwind of widening inequality and ever moreconcentrated wealth.The only way to keep the economy going over the longrun is to increase the wages of the bottom two-thirdsof Americans. The answer is not to protect jobsthrough trade protection. That would only drive up theprices of everything purchased from abroad. Mostroutine jobs are being automated anyway.A larger earned-income tax credit, financed by ahigher marginal income tax on top earners, isrequired. The tax credit functions like a reverseincome tax. Enlarging it would mean giving workers atthe bottom a bigger wage supplement, as well asphasing it out at a higher wage. The currentsupplement for a worker with two children who earns upto $16,000 a year is about $5,000. That amountdeclines as earnings increase and is eliminated atabout $38,000. It should be increased to, say, $8,000at the low end and phased out at an income of $46,000.We also need stronger unions, especially in the localservice sector that’s sheltered from globalcompetition. Employees should be able to form a unionwithout the current protracted certification processthat gives employers too much opportunity tointimidate or coerce them. Workers should be able todecide whether to form a union with a simple majorityvote.And employers who fire workers for trying to organizeshould have to pay substantial fines. Right now, thetypical penalty is back pay for the worker, plusinterest — a slap on the wrist.Over the longer term, inequality can be reversed onlythrough better schools for children in lower- andmoderate-income communities. This will require, at theleast, good preschools, fewer students per classroomand better pay for teachers in such schools, in orderto attract the teaching talent these students need.These measures are necessary to give Americans enoughbuying power to keep the American economy going. Theyare also needed to overcome widening inequality, andthereby keep America in one piece.Robert B. Reich, a professor of public policy at theUniversity of California, Berkeley, is the author,most recently, of “Supercapitalism.”___________________________________