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Heard on Fresh Air from WHYY
September 29, 2010 - DAVE DAVIES, host:
This is FRESH AIR. I'm Dave Davies, in for Terry Gross.
My guest, Robert Reich, isn't surprised at our anemic economic recovery. His new book argues that the economy isn't going to get moving again until we address a fundamental problem: the growing concentration of wealth and income among the richest Americans. Reich says the last time income was so concentrated at the top was before the Great Depression.
Robert Reich is a professor of public policy at the University of California Berkeley. He served as secretary of labor in the Clinton administration. He's a co-founding editor of the American Prospect, a regular contributor to public radio's Marketplace and the author of 12 previous books. His latest is called "Aftershock: The Next Economy and America's Future."
Well, Robert Reich, welcome back to FRESH AIR.
Mr. ROBERT REICH (Former Secretary of Labor; Author, "Aftershock: The Next Economy and America's Future"): Well, thank you, Dave.
DAVIES: You opened your book with the story of a man I'd never heard of, who served in the Roosevelt administration, Mariner Eccles. Am I pronouncing that right?
Mr. REICH: It's Mariner Eccles, and...
DAVIES: Yeah, tell us who he was an how he got involved in the New Deal.
Mr. REICH: I found that he actually foreshadowed much of the New Deal. He testified before Congress in 1933, even before FDR took over, and came up with a lot of the ideas that actually shaped the New Deal.
More interestingly, Mariner Eccles became, from 1934 to 1948, the Federal Reserve chair. He ushered many of the reforms, monetary and financial reforms and economic policymaking reforms, through the New Deal, and his name now adorns the Federal Reserve building in Washington, D.C. It is the Mariner Eccles Building.
DAVIES: But his origin was not as a government bureaucrat. He was a capitalist.
Mr. REICH: Oh, he was not only a capitalist, he was one of the preeminent industrialists and financiers west of the Rocky Mountains up until 1933.
He built a financial empire, and he was sort of such a preeminent industrial and financial character that when the Depression hit, when the crash occurred in 1929, and then the following years, nothing seemed to work, Mariner Eccles had a crisis in confidence. He suddenly doubted that his assumptions about capitalism were correct. You might say that he had an Alan Greenspan moment.
And he began to think in very different terms about what the economy needed. I found him fascinating, Dave, because Mariner Eccles, when he pondered what the cause of the Great Depression was, he said that it was ultimately that the middle class no longer had the purchasing power they needed to keep the economy going because in the 1920s, so much of the income and wealth of America had gone to the very top, leaving the middle class behind. That is, the only way middle class, the middle class in America, could keep on spending in the 1920s was by going deeper and deeper and deeper into debt.
And meanwhile, the top one percent that had accumulated so much of the national income and wealth, they turned around and speculated in stock and also in commodities and in real estate. And those two bubbles, that debt bubble from the middle class and that huge speculative bubble from all of that money concentrated at the top, essentially both bubbles burst, yielding the Great Depression.
And what interested me is the parallel, or the potential parallel, between all of that and what we experienced recently. And then I looked at the research and was amazed to discover there were two years in the 20th century in which income concentrated to such an extent it actually centralized a great deal of the nation's income right at the top.
One year was 2007, when the richest Americans took home, or got, I should say, about 23 and a half of total income. The other year was 1928.
DAVIES: This is interesting. You had this man who made a fortune in industry, and when the Depression first hits, he believes, as many did, that it was a necessary correction, that once all the speculation and debt were washed out of the economy, it would revive.
But when it didn't, he concluded, as you say you have, that it was this concentration of income among the extremely wealthy that had really robbed the middle class of the spending power that it needed to purchase the goods and services.
You broaden that argument and tell us that there are three pretty clear periods of the American industrial economy, which had different trends in terms of concentrations of wealth and income, very concentrated right before the crash, and then tell us what happened after that and bring us up to date.
Mr. REICH: Well, it was almost like a very big pendulum that swings back and forth. You had, from about the 1880s up until 1928, you had the pendulum moving in one direction: huge concentration of income and wealth in the United States brought out largely because that huge mass-production system that Henry Ford pioneered. But Ford was but one member of that gigantic mass-production system, and that system generated an extraordinary amount of profit and productivity. The economy expanded, but it centralized a lot of wealth and income in the hands of a relatively few industrialists.
And so by the time 1928 came along, most middle-class Americans just didn't have enough money to keep the economy going without themselves going deep into debt, which was not sustainable.
And then you had a reversal of the pendulum. Franklin D. Roosevelt didn't know exactly what he was doing. He experimented in many directions. But in 1935, he legalized the creation of unions.
Organized labor was really not legal before 1935. He made collective bargaining a protected activity. He also founded Social Security, a minimum wage, a 40-hour workweek with time and a half for overtime. In other words, all sorts of reorganizations of the economy that had the effect of spreading whatever prosperity that was.
That, combined with World War II, which demanded that nearly everybody in America go to work, even though it generated a huge debt at the end of World War II, that huge mobilization of people, combined with a reorganization of the economy under the New Deal, created a post-war economy and 30 years of what I call the great prosperity, which...
DAVIES: And during that period, what happened to distribution of income? You said it was highly concentrated, the top one percent getting something like 20 percent of the income right before the crash. How did it differ in this period of post-war America?
Mr. REICH: The top one percent had over 23 percent of the income just before the great crash, and then the pendulum reversed, partly because of Franklin D. Roosevelt's reorganization of the economy, including labor unions and many other innovations.
The entire economy was so fundamentally restructured that by the late '70s, instead of the top one percent taking home over 23 percent of national income, the top one percent, by the late 1970s, was getting about nine percent of total national income.
You see, it was a fundamentally more equal society in terms of the shares of income. The middle class had enough of the gains from growth, from economic growth, to turn around and buy what the great American labor force was capable of producing.
DAVIES: So then in 1980, things change, right? I mean...
Mr. REICH: Yes, things begin to change. Actually, they begin to change before 1980. New technologies cargo ships, container ships, satellite communications technologies and then eventually the computer and the Internet all enabled the production process to be parceled out around the world to wherever people could do things most cheaply but also automated many routine jobs.
You know, we used to have bank tellers and telephone operators and service station attendants, and even that old assembly line was very labor intensive. You go into factories today, and you see numerically controlled machine tools and robots. And you see a relatively few technicians handling all of that.
So automation, part of that huge technological wave that begins in the late '70s and '80s, also along with globalization, does change the way income is allocated.
It certainly has an effect on jobs, but the most profound effect is on the allocation of income. If you are very well-educated and very well-connected, if you're at the right place at the right time, if you are in finance, particularly, or if you are a CEO, if you are a top executive of a big company, you are doing marvelously well. By the first decade of this century, you are really raking in a substantial percentage of national income and also national wealth. But everybody else is not doing nearly that well.
DAVIES: We're speaking with Robert Reich. His new book is called "Aftershock." We'll talk more after a break. This is FRESH AIR.
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DAVIES: If you're just joining us, our guest is former labor secretary and political economist Robert Reich. His new book is called "Aftershock: The Next Economy and America's Future."
You know, your argument in this book is not just that the stagnation of middle-class incomes and concentration of income among the wealthy is unfair. It's not just that it's unfair but that it is debilitating for the economy, that we're not going to get a real recovery until we reverse this trend. Why?
Mr. REICH: That's right because, you see, the vast middle class and working class really are the ones who are going to spend most of their income, if not all of their income. And if most of the American economic gain goes to the top, if the top are taking home almost a quarter of all income that is generated in society, the vast middle class just doesn't have the purchasing power.
They can't go deeper and deeper into debt. They can't work longer hours. They've just, they've exhausted all of their coping mechanisms. And meanwhile, people at the top are taking home so much that they are almost inevitably going to speculate in stocks or in commodities or in whatever the current speculative vehicles are going to be, which causes the economy to become unstable anyway.
And that combination of a kind of unsustainable debt loads for the middle class, in fact, now the middle class can't even go back into debt, there's not nearly enough demand for all the goods and services the American economy could produce and can produce at full employment coupled with a lot of speculation.
And also, much of the income of the very wealthy goes around the world to wherever it can get the highest return. All of that means that this recovery is going to be experiencing a kind of anemic, unusually anemic recovery. It's not even a recovery for most people.
In fact, you tell people that the National Bureau of Economic Research has decided that we've had a recovery since June of '09, and what you get is derisive laughter.
DAVIES: I wanted to focus a bit on the '90s, if I can. If we have, to oversimplify, a situation in which economic trends and government policies hold back incomes for the middle class, the wealthy get lots and lots of money that they can't spend on goods and services, so you don't really have the demand that's there to buy the goods and services that the economy generates, it should have stalled out long before now.
And you say it was maintained because the middle class had these coping mechanisms, among them borrowing. How did the economy keep going?
Mr. REICH: Well, the first coping mechanism, which started in the late '70s and then grew dramatically in the '80s and '90s, was women going into paid work.
Just by contrast, before all this began, in the '60s and '70s, only about 20 percent of women with very young children were in the paid workforce. By the 1990s, over 60 percent of women with very young children were in the paid workforce.
I wish I could tell you that the reason women went into work in such extraordinary numbers was because of the wonderful professional opportunities open to women beginning in the late '70s, but actually, most women went into paid work because they had to in order to prop up declining or stagnating male wages and family incomes.
The second coping mechanism with that kind of that was exhausted, I mean, there's only a limit to how much paid work two parents can take on was for everybody to work longer hours.
And I noticed that by the mid-'90s, when I was labor secretary, the surveys showed, and my kind of informal discussions with people around the country also revealed, that people were working longer than ever before. I mean, the average American was putting in about 350 hours a year more than the typical European, more even than the enormously industrious Japanese.
But this, too, had to come to an end. I mean, you can't people can't work longer hours, even if they can find jobs. And the 1990s was a period where, at least by the late '90s, most people could find jobs if they needed them, but they couldn't work longer hours.
And finally we had the third and final coping mechanism, which was to go deeper and deeper into debt. And the great American middle class, working class, and many poor people, as long as the value of their homes, if they had homes, started going up dramatically, they could borrow against their homes.
We all experienced an enormous increase in our own purchasing power because we used our homes as kind of ATM machines. We used them to refinance, to get home equity loans, and between 2002 and 2007, Americans drew out from their homes about $2.3 trillion of money.
I mean, this kept the middle class purchasing and kept households purchasing, one might say, beyond their means. But until the housing bubble burst, that was the third and final coping mechanism.
DAVIES: You know, if one reads the polls and believes the pundits, it appears that we're headed for a midterm election in which voters are going to blame President Obama for not having gotten America back to work. As you look at that trend, what evidence do you see that policies for reform are getting any traction?
Mr. REICH: I don't think we're going to see a great deal of reform right away. I think that we are going to see two or three or four years of almost economic stagnation, high unemployment, a great deal of economic frustration or worse. But out of all of this, we will begin to understand the causes of our what I call aftershock. We'll understand the causes of our economic stagnation.
People are not going to sit back and say, oh, well, this is the way the economy is necessarily from now on. I think that people will realize that so much of what we are going to be enduring is related to the extraordinary imbalance in our distribution of income, also our failure to invest in our people in terms of education and infrastructure and all of the things that we need to really become a truly broadly prosperous nation.
There will be, inevitably, an opportunity for political leaders. I don't know whether it'll happen by the year 2012, the next presidential election, I hope so, but it is surely going to happen.
People will be asking fundamental questions: Why is this economy not turning around for most of us? Why is the middle class, the working class, the poor, why are we struggling so much? Why are we seeing the gap widen and continue to widen between people at the top and everybody else?
Answers will be demanded. And when answers are demanded by the American people, social learning takes place. They will get it.
DAVIES: Is President Obama missing an opportunity to make that case?
Mr. REICH: I think he is. I'm a great fan of President Obama. I think he has done a wonderful job. But to the extent that I think he could do a better job, it's that he has failed to connect the dots and failed to provide the public with a large and understandable narrative about what's happened, what's happened to the American economy structurally, not cyclically.
Everybody's looking at the business cycle as if its all about the business cycle. I'm talking about the structure of the economy. With so much of the income and wealth going to the top, a record amount, he's got to show that all the things he wants to do, whether it's health care or cap and trade or helping homeowners or whatever, are parts of this large challenge.
DAVIES: To what extent was the reform of Wall Street either derailed or enacted or put off until specific regulations are developed?
Mr. REICH: I think that we have not fundamentally reformed Wall Street. I think that we have reduced the risk that Wall Street is going to go on another rampage and simply create a lot of fancy instruments that ultimately are going to be a big bank's undoing, but we have not done what we needed to do.
Derivatives are still relatively unregulated. There are big, big holes in that Wall Street financial reform act, holes big enough for Wall Street traders to drive their Ferraris through.
We didn't bust up the big banks. I mean, we actually have fewer big banks than we had before the meltdown of Wall Street, which means that those even bigger banks are going to be even too big, even more likely to be too big to fail than they were before.
We have not in any way helped the mortgage market. One of the goals of bailing out Wall Street was to make sure that people could reorganize their mortgage loans and help pay them back and stay in their homes. Very little of that has been done. The bailout did not achieve that.
I think that we're going to be left with a Wall Street that continues to grow more and more powerful and richer relative to the rest of the United States economy. So I don't think that we have done what needed to be done.
DAVIES: You know, coming back to where we started, it almost sounds as if we can expect income to become even more concentrated among the wealthy.
Mr. REICH: I think that we will see, in the next few years, until something is done about it, until Americans recognize that this is one of the roots of our problem, income to be even more concentrated at the top.
I would not be surprised, even though people at the top have taken something of a hit in the stock market, people at the middle and below them have taken a much bigger hit. The value of their homes has dropped to a much greater extent than the stock market has dropped, and also, we have many more people in poverty.
DAVIES: Well, Robert Reich, I want to thank you so much for speaking with us.
Mr. REICH: Well, thank you, Dave.
DAVIES: Robert Reich is a former secretary of labor and professor of public policy at the University of California Berkeley. His new book is called "Aftershock: The Next Economy and America's Future." You can read an excerpt at our website, freshair.npr.org. I'm Dave Davies, and this is FRESH AIR.
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he's absolutely right that income disparity is at the heart of our economic troubles, but i'd like it a bit better if he didn't focus so much on the highest 1%. half of US personal income goes to the top fifth of households [those over $100k per year], and about 73% goes to the top two fifths. that leaves only half for 80% of us, and 60% of us have to divide up just 27% of all income.
it's not a matter of class warfare. the less you make, the more of it you spend, so producers depend on low and middle income folk to buy what they sell. if those who do the most buying have too little disposable income, they buy less, so producers' income falls. if the trend continues it leads to layoffs and/or reduced investment, thus a downward spiral, and the economy stagnates.
check out these census bureau tables, especially IE-1, H-1 (all races), and H-2 (all races). unfortunately, the tables don't go back far enough in time for you to see that the levels of disparity of 1929 were not repeated again till this past decade.
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