September 2, 2010
How to End the Great Recession
By ROBERT B. REICH
THIS promises to be the worst Labor Day in the memory of most Americans. Organized labor is down to about 7 percent of the private work force. Members of non-organized labor — most of the rest of us — are unemployed, underemployed or underwater. The Labor Department reported on Friday that just 67,000 new private-sector jobs were created in August, while at least 125,000 are needed to keep up with the growth of the potential work force.
The national economy isn’t escaping the gravitational pull of the Great Recession. None of the standard booster rockets are working: near-zero short-term interest rates from the Fed, almost record-low borrowing costs in the bond market, a giant stimulus package and tax credits for small businesses that hire the long-term unemployed have all failed to do enough.
That’s because the real problem has to do with the structure of the economy, not the business cycle. No booster rocket can work unless consumers are able, at some point, to keep the economy moving on their own. But consumers no longer have the purchasing power to buy the goods and services they produce as workers; for some time now, their means haven’t kept up with what the growing economy could and should have been able to provide them.
This crisis began decades ago when a new wave of technology — things like satellite communications, container ships, computers and eventually the Internet — made it cheaper for American employers to use low-wage labor abroad or labor-replacing software here at home than to continue paying the typical worker a middle-class wage. Even though the American economy kept growing, hourly wages flattened. The median male worker earns less today, adjusted for inflation, than he did 30 years ago.
But for years American families kept spending as if their incomes were keeping pace with overall economic growth. And their spending fueled continued growth. How did families manage this trick? First, women streamed into the paid work force. By the late 1990s, more than 60 percent of mothers with young children worked outside the home (in 1966, only 24 percent did).
Second, everyone put in more hours. What families didn’t receive in wage increases they made up for in work increases. By the mid-2000s, the typical male worker was putting in roughly 100 hours more each year than two decades before, and the typical female worker about 200 hours more.
When American families couldn’t squeeze any more income out of these two coping mechanisms, they embarked on a third: going ever deeper into debt. This seemed painless — as long as home prices were soaring. From 2002 to 2007, American households extracted $2.3 trillion from their homes.
Eventually, of course, the debt bubble burst — and with it, the last coping mechanism. Now we’re left to deal with the underlying problem that we’ve avoided for decades. Even if nearly everyone was employed, the vast middle class still wouldn’t have enough money to buy what the economy is capable of producing.
Where have all the economic gains gone? Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income.
It’s no coincidence that the last time income was this concentrated was in 1928. I do not mean to suggest that such astonishing consolidations of income at the top directly cause sharp economic declines. The connection is more subtle.
The rich spend a much smaller proportion of their incomes than the rest of us. So when they get a disproportionate share of total income, the economy is robbed of the demand it needs to keep growing and creating jobs.
What’s more, the rich don’t necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe where they’ll summon the highest returns — sometimes that’s here, but often it’s the Cayman Islands, China or elsewhere. The rich also put their money into assets most likely to attract other big investors (commodities, stocks, dot-coms or real estate), which can become wildly inflated as a result.
Meanwhile, as the economy grows, the vast majority in the middle naturally want to live better. Their consequent spending fuels continued growth and creates enough jobs for almost everyone, at least for a time. But because this situation can’t be sustained, at some point — 1929 and 2008 offer ready examples — the bill comes due.
This time around, policymakers had knowledge their counterparts didn’t have in 1929; they knew they could avoid immediate financial calamity by flooding the economy with money. But, paradoxically, averting another Great Depression-like calamity removed political pressure for more fundamental reform. We’re left instead with a long and seemingly endless Great Jobs Recession.
THE Great Depression and its aftermath demonstrate that there is only one way back to full recovery: through more widely shared prosperity. In the 1930s, the American economy was completely restructured. New Deal measures — Social Security, a 40-hour work week with time-and-a-half overtime, unemployment insurance, the right to form unions and bargain collectively, the minimum wage — leveled the playing field.
In the decades after World War II, legislation like the G.I. Bill, a vast expansion of public higher education and civil rights and voting rights laws further reduced economic inequality. Much of this was paid for with a 70 percent to 90 percent marginal income tax on the highest incomes. And as America’s middle class shared more of the economy’s gains, it was able to buy more of the goods and services the economy could provide. The result: rapid growth and more jobs.
By contrast, little has been done since 2008 to widen the circle of prosperity. Health-care reform is an important step forward but it’s not nearly enough.
What else could be done to raise wages and thereby spur the economy? We might consider, for example, extending the earned income tax credit all the way up through the middle class, and paying for it with a tax on carbon. Or exempting the first $20,000 of income from payroll taxes and paying for it with a payroll tax on incomes over $250,000.
In the longer term, Americans must be better prepared to succeed in the global, high-tech economy. Early childhood education should be more widely available, paid for by a small 0.5 percent fee on all financial transactions. Public universities should be free; in return, graduates would then be required to pay back 10 percent of their first 10 years of full-time income.
Another step: workers who lose their jobs and have to settle for positions that pay less could qualify for “earnings insurance” that would pay half the salary difference for two years; such a program would probably prove less expensive than extended unemployment benefits.
These measures would not enlarge the budget deficit because they would be paid for. In fact, such moves would help reduce the long-term deficits by getting more Americans back to work and the economy growing again.
Policies that generate more widely shared prosperity lead to stronger and more sustainable economic growth — and that’s good for everyone. The rich are better off with a smaller percentage of a fast-growing economy than a larger share of an economy that’s barely moving. That’s the Labor Day lesson we learned decades ago; until we remember it again, we’ll be stuck in the Great Recession.
Robert B. Reich, a secretary of labor in the Clinton administration, is a professor of public policy at the University of California, Berkeley, and the author of the forthcoming “Aftershock: The Next Economy and America’s Future.”
US unemployment edges up to 9.6%
Economy loses another 54,000 jobs but figure is better than 120,000 jobs many economists feared might be lost.
Last Modified: 03 Sep 2010 17:27 GMT
Jobs scarcity is hurting consumer spending, which normally accounts for about two-thirds of economic activity [EPA]
Unemployment in the United States rose from to 9.6 per cent in July from 9.5 per cent, the country’s labour department has said.
Friday’s report said the economy lost 54,000 jobs last month, a better figure than the 120,000 loss expected by economists.
A bright spot in the August jobs report was the private sector’s ability to create a much better than expected 67,000 jobs, although that was not enough to offset the government releasing around 114,00 temporary census workers.
The figures are seen as a crucial litmus test for the sputtering economic recovery and the policies of Barack Obama, the US president.
Obama called the figures “positive news” but said the numbers were not good enough and more needed to be done to address US economic woes.
The president said he would outline new measures next week to try to help boost the US economy.
The White House has ruled out an “extraordinary” new economic stimulus plan to boost the slowing recovery, but has said Obama is scouting new ideas to boost jobs and growth.
The rise in the jobless rate reflected an increase in the labour force as some discouraged workers resumed the hunt for jobs.
“We really need private businesses to step up and begin to hire more aggressively for this recovery to really gain momentum,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania.
The news was seen by Wall Street as moderately good, but will throw up challenges for the White House and the Federal Reserve as they struggle to help the jobs market to its feet.
Obama is embarking on a number of economy-themed events, including travelling to the hard-hit Midwest to highlight his economic recovery plans.
But with many legislators fretting ahead of November’s mid-term elections and public concern mounting over the forecast $1.4 trillion budget deficit, the president’s leeway is limited.
Jobs scarcity is hurting consumer spending, which normally accounts for about two-thirds of US economic activity, leaving the recovery from the worst recession in 70 years under threat.
Growth slowed markedly in the second quarter and Ben Bernanke, the Federal Reserve chairman, has said the central bank stands ready to take fresh measures to support the economy if needed.
Minutes of the bank’s last policy meeting released this week showed several policymakers felt the outlook would have to deteriorate “appreciably” to spur fresh monetary support.
“The economy is in a bit of a lull and gauging how long we are stuck in this rut will determine if the Federal Reserve needs to step in,” said Sweet.
The economy’s poor health has weakened Obama’s popularity and could see Republicans wrestle control of Congress away from the Democratic Party.
Source: Al Jazeera