The Basic Bargain That Drives the U.S. Economy

Aftershock – The Next Economy and America’s Future, Robert B. Reich, 2010, Alfred A. Knopf.

We may finally be climbing out of the Great Recession of 2008, but what caused it and where do we go from here?

In this tidy little book (174 pages, counting acknowledgments, notes and index), former Labor Secretary Robert Reich lays out the major cause and suggestions for fundamental changes for relief from this latest bust in our boom and bust economy.

Mr. Reich now serves as Chancellor’s Professor of Public Policy, University of California, Berkeley.

The “basic bargain” at the heart of Reich’s argument is that workers are also consumers, and that the middle class must have a fair share in the country’s prosperity in order to have enough money to purchase the country’s production.  When the middle class does not have a fair share, the result is a bust, a recession, or even a depression.

Mr. Reich illustrates his “basic bargain” argument with a graph titled “Top 1 Percent Share of Total Income” (page 21).  In brief, the chart shows the Great Depression that began in 1929 and the Great Recession that began in 2008 were both preceded by the top 1 percent share of total income reaching near 25%.  In other words, when the top 1 percent collected nearly 25% of the total income, the Great Depression (1929) and the Great Recession (2008) followed close behind.  The graph also shows that during periods of growth and economic stability (1943-1993) the top 1 percent share was mostly about 10% and ranged from 8% to 16%.

In another graph titled “Growth of Average Hourly Compensation and Productivity, 1947-2008” (page 52), hourly compensation and productivity were on the same growth trend from 1947 to 1974.  After 1974 hourly compensation flattened while productivity maintained a steady growth.

The middle class has coped with the effects of flat earnings and more and more income going to the top 1% in three ways: 1) more women in the workplace, 2) more hours worked, and 3) more debt and more savings drawn down.

Mr. Reich argues that although top executives who succeed should be paid well, the amounts being paid the last several years are excessive.  He points to the $100 million Kenneth Lewis earned as CEO of Bank of America in 2007 as he led the bank toward collapse and absorption by Merrill Lynch.  Mr. Lewis would have had to spend nearly $280 thousand every day to spend it all.  The point being that the rich don’t, can’t, spend at a pace that will result in more circulation of the money.  Every dollar spent becomes a dollar spent again and again and possibly even saved somewhere along the line.  Not enough dollars are in circulation to increase demand from the workers, and without demand investors don’t see the return, don’t conclude that investments will pay off.  A vicious cycle.

Setting out the nature of the problem so it can be understood is one thing; providing the solution(s) another thing entirely.  In Part III of the book, “The Bargain Restored,” Mr. Reich furnishes several ideas about what should be done and how to get it done.  Here are a few of those ideas: expansion of the Earned Income Tax Credit, higher marginal tax rates on the wealthy, capital gains income treated the same as ordinary income, a reemployment system, school vouchers based on family income, college loans based on subsequent earnings, Medicare for all.  Each comes with a discussion and cost/benefit analysis.

In the 1970’s I had the privilege of working for the Michigan Supreme Court as the State Court Administrator, responsible for managing the state’s court system with the authority of the Michigan Constitution, which gave the Supreme Court “superintending authority” over the entire Third Branch of government.  As a graduate of the first class of the Institute for Court Management, I was excited about implementing changes that would make the court system more efficient; e.g., computerizing court dockets, streamlining case assignment, and conducting educational activities for judges and court administrative personnel.

In the midst of a campaign to change the way testimony was preserved in the trial courts, we instituted a program to use sophisticated tape recording equipment intended to eventually replace the old stenographic machines.  I recall one of my many friends in the judiciary telling me one day that he was “all for progress, but opposed to change.”

We human beings, not just judges, resist change.  But after studying Mr. Reich’s book, I’m convinced our economic system needs a great deal of change if we are to avoid going over a fiscal cliff with regrettable regularity.


One thought on “The Basic Bargain That Drives the U.S. Economy

  1. Skip,  Ken Lewis – B of A  (CEO) Jerk was the big joke of the rescission!    Merry Xmas –  Ed   



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