Furthermore, and this is more to the point of this post, knows how to organize a book. I took a look at his comments on how the current distribution of income violates “the basic bargain,” and turned to the index to see what there was under “basic bargain.” This is what was there. It doesn’t take much to see that in the three bold and asterisked headings, the basic bargain is defined, revoked, and restored. So I read those three sections and called it good.
basic bargain
economic growth and, 75—76
historical and conceptual evolution, 29—31
need for restoration of, 64—65, 75
in post—World War II prosperity, 42—43, 45—46, 51
*principles of, 28public understanding, 59—60
*revocation of, 55—57*strategies for restoring, 128—40
*strategies for restoring, 128—40
It doesn’t take a lot of smarts to do that. I have been thinking about that because we are now approaching the tenth and last week of the term at PSU and my students are beginning to complain about the huge reading assignments. I have no sympathy at all for their complaints. When I assign long readings, I specify exactly what I want them to get out of it. My favorite metaphor is that there is a trophy in this reading somewhere. “Go in. Find the trophy. Grab it and leave. You’re done now.”
The students who learn to do that have learned a valuable skill and have preserved time for their other courses. The students who, on moral grounds—I just isn’t right to treat a text like that—refuse, have made the academic hill steeper. Those who initially can’t do it right away get repeated instruction and many examples. If, after that, they still can’t, they need to take some other professor. In any case, what I did in this post is what I am urging them to do.
“Principles of, page 28.” This is the section that begins there. If you are a regular reader of this blog, you saw this before when I lamented my inability to feel the force of the argument even when I granted its soundness.
On January 5, 1914, Henry Ford announced that he was paying workers on his famously productive Model T assembly line in Highland Park, Michigan, $5 per eight-hour day. That was almost three times what the typical factory employee earned at the time. In light of this audacious move, some lauded Ford as a friend of the American worker; others called him a madman or a socialist, or both. The Wall Street Journal termed his action “an economic crime.” Ford thought it a cunning business move, and history proved him right. The higher wage turned Ford’s autoworkers into customers who eventually could afford to plunk down $55 for a Model T. Their purchases in effect returned some of those $5 paychecks to Ford, and helped finance even higher productivity in the future. Ford was neither a madman nor a socialist, but a smart capitalist whose profits more than doubled from $25 million in 1914 to $57 million two years later.
Ford understood the basic economic bargain that lay at the heart of a modern, highly productive economy. Workers are also consumers. Their earnings are continuously recycled to buy the goods and services other workers produce. But if earnings are inadequate and this basic bargain is broken, an economy produces more goods and services than its people are capable of purchasing. This can lead to the vicious cycle Marriner Eccles witnessed after the Great Crash of 1929 and that the United States began to experience in 2008. (Global trade complicates this bargain but doesn’t negate it, as I will discuss later.)
In his time, Ford’s philosophy was the exception. From the 187os to the 193oS, during what might be termed the first stage of modern American capitalism, most workers didn’t share in the bounty. Large factories, mammoth machinery, hand a raft of new inventions (typewriters, telephones, electric lightbulbs, aluminum, vulcanized rubber, to name just a few) dramatically increased productivity. But most working people earned far less than five dollars a day. America’s burgeoning income and wealth was concentrated in fewer hands. Consequently, demand couldn’t possibly keep up. Periodic busts ensued. The wholesale price index, which had stood at 193 in 1864, fell to 82 by 1890. Sharp downturns continued to jolt the economy. By the first decades of the twentieth century, the economy had stabilized, but productivity gains continued to outpace most Americans’ earnings. The rich, meanwhile, used their increasing fortunes to speculate— making the economy more susceptible to cycles of boom and bust. Eccles saw this pattern eventually culminate in the Great Depression.
“Revocation of, pp. 55—57.” Here Reich described how we drifted away from paying our workers enough to buy what we were trying to sell them.
The real puzzle is why so little was done in response to these forces that were conferring an increasing share of economic growth on a small group at the top and leaving most other Americans behind. With the gains from that growth, the nation could, for example, have expanded our educational system to encompass early-childhood education. It could have lent more support to affordable public universities, and created more job retraining and better and more extensive public transportation.
In addition, the nation could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service— big-box retail stores, restaurants and hotel chains, and child and elder care, for instance. We could have enlarged safety nets to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay dropped, transition assistance to move to new jobs in new locations, insurance for entire communities that lose a major employer so they could lure other employers. We could have financed Medicare for all. Regulators could have prohibited big, profitable companies from laying off a large number of workers all at once and required them to pay severance—say, a year of wages—to anyone they let go, and train them for new jobs. The minimum wage could have been linked to inflat,ion.
Why did we fail to raise taxes on the rich and fail to cut them for poorer Americans? Why did we fail to attack overseas tax havens by threatening loss of U.S. citizenship to anyone who keeps his money abroad in order to escape U.S. taxes? America could have expanded public investments in research and development, and required any corporation that commercialized such investments to create the resulting new jobs in the United States. And we could have insisted that foreign nations we trade with establish a minimum wage that’s half their median wage. That way, all citizens could share in gains from trade, setting the stage for the creation of a new middle class that in turn could participate more fully in the global economy.
In these and many other ways, government could have enforced the basic bargain. But it did the opposite. Starting in the late 197os, and with increasing fervor over the next three decades, it deregulated and privatized. It increased the cost of public higher education, reduced job training, cut public transportation, and allowed bridges, ports, and highways to corrode. It shredded safety nets—reducing aid to jobless families with children, and restricting those eligible for unemployment insurance so much that by 2007 only 40 percent of the unemployed were covered. It halved the top income tax rate from the range of 70 to 90 percent that prevailed during the Great Prosperity to 25 to 39 percent; allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax; and shrank inheritance taxes that affected only the topmost 1.5 percent of earners. Yet at the same time, America boosted sales and payroll taxes, both of which took a bigger chunk out of the pay of the middle class and the poor than of those who were well-off.
We allowed companies to break the basic bargain with impunity—slashing jobs and wages, cutting benefits, and shifting risks to employees, from you-can-count-on-it pensions to do-it- yourself 4o1(k)s, from good health coverage to soaring premiums and deductibles. Companies were allowed to bust unions and threaten employees who tried to organize (by 2010, fewer than 8 percent of private-sector workers were unionized). We stood by as big American companies became global companies with no more loyalty or connection to the United States than a GPS device. By 2009, Intel, Caterpillar, Microsoft, IBM, and a raft of other so-called American firms derived most of their revenues from outside the United States, and were hiring like mad abroad.
And nothing impeded CEO salaries from skyrocketing to more than three hundred times that of the typical worker (up from thirty times during the Great Prosperity), while the pay of financial executives and traders rose into the stratosphere. Increasingly, the ranks of America’s super-rich were made up of top business and financial executives. More than half of all the money that the top one-tenth of i percent of American earners reported on their 2001 taxes represented the combined incomes of the top five executives at the five hundred largest American companies. Almost all the rest were financial traders and hedge-fund managers.
Significantly, Washington deregulated Wall Street while insuring it against major losses. In so doing it turned finance—which until then had been the servant of American industry—into its master, demanding short-term profits over long-term growth, and raking in an ever-larger portion of the nation’s profits. Between 1997 and 2007, finance became the fastest-growing part of the U.S. economy. The gains reaped by financial executives, traders, and specialists represented almost two-thirds of the growth in the gross national product. By 2007, financial and insurance companies accounted for more than 40 percent of American corporate profits and almost as great a percentage of pay, up from 10% percent during the Great Prosperity. Before and after the bubble burst, the biggest Wall Street banks awarded tens of billions of dollars in bonuses. In 2009, the twenty-five best- paid hedge-fund managers together earned $25billion, an average of $i billion each. Henry Ford’s legacy was a company that no longer made its money exclusively from selling cars; in 2007, Ford’s financial division accounted for more than a third of the company’s earnings.
As the financial economy took over the real economy, Treasury and Fed officials grew in importance. The expectations of bond traders dominated public policy. And the stock market became the measure of the economy’s success—just as it had before the Great Depression.
Why did the pendulum swing back? Why didn’t America counteract the market forces that were shrinking the middle class’s share of the American pie? Answers to these questions offer clues about when and how the pendulum will swing in the other direction.
“Strategies for restoring, pp. 128—140.” This is Reich’s “here’s what ought to be done” section. This is where many authors with elegant and impassioned critiques fall entirely apart. Not Reich. I’ll hyperlink the whole chapter, just in case you are interested, but I’ll print here the nine things he thinks we should do. Here they are.
1. A reverse income tax.
The most immediate way to reestablish shared prosperity is through a “reverse income tax” that supplements the wages of the middle class.
2. A carbon tax.
We should tax fossil fuels (coal, oil, and gas), based on how many tons of carbon dioxide such fuels contain.
3. Higher marginal tax rates on the wealthy.
In a nation facing a widening chasm between the very rich and everyone else, it is not unreasonable to expect those at the top to pay a higher tax on their incomes, from whatever source (wages, salaries, or capital gains).
4. A reemployment system rather than an unemployment system.
The old unemployment insurance system was designed to tide people over until they got their jobs back at the end of a downturn.
5. School vouchers based on family income.
Over the longer term, the best way to boost the earnings of Americans in the bottom half is to improve their education and skills. To that end, spending on public schools should be replaced by vouchers in amounts inversely related to family income that families can cash in at any school meeting certain minimum standards
6. College loans linked to subsequent earnings.
A large and growing percentage of college students from lower- and middle-income families must finance their education with student loans.
7. Medicare for all.
The passage of health care legislation in 2010 represents only the first step toward reform. The next stage should be Medicare for all.
8. Public goods.
There should be a sizable increase in public goods such as public transportation, public parks and recreational facilities, and public museums and libraries.
9. Money out of politics.
Finally, and not least, we are all painfully aware of the failures of our democracy. As inequality has widened, money flowing from large corporations, Wall Street, and their executives and traders has increasingly distorted political decision making
So there you are. I'm back. Reich's last word was "making" in the above paragraph. In considerably less time than it took me, you have marched into the house, snagged the trophy from the mantle, and have headed back home for a well-earned beer.
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