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The Real Lesson of Labor Day

The Real Lesson of Labor Day

Courtesy of Robert Reich 

Labor Day with American flag

Welcome to 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, which, when added to the loss of public-sector (mostly temporary Census worker jobs) resulted in a net loss of over 50,000 jobs for the month. But at least 125,000 net new jobs are needed to keep up with the growth of the potential work force.

Face it: 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, along with 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.

1. The Origin of the Crisis 

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.

2. What We Learned and Didn’t Learn From the Great Depression of the 1930s

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.

3. What Else Should Be Done

What else could be done to raise wages and thereby spur the economy? I don’t pretend to have all the answers but some initiatives seem worthwhile.

[Pause for a commercial announcement. These points, and others, are developed at length in my upcoming book, “AFTERSHOCK: The Next Economy and America’s Future,” out in two weeks from Alfred Knopf.]

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. The carbon tax would raise the prices of goods and services especially dependent on carbon-based fuels, which is appropriate given that the social costs of carbon-based fuels should be included in their prices. Consider how much our society now spends on such things as foreign wars designed to secure our sources of oil, as well as oil cleanups. But the wage subsidies would more than make up for these price rises, at least for most Americans in the middle and below.

Another step would be to exempt the first $20,000 of income from payroll taxes and paying for it with a payroll tax on incomes over $250,000. This, too, seems reasonable, given that under current law only the first $106,000 of income is subject to the Social Security portion of the payroll tax – a particularly regressive system. Most higher-income people, who get good medical care, live longer and collect far more in Social Security benefits, than do lower-income people.

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.

Here’s the point. 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.

*Graphics and emphasis added by Phil. 

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  1. While I am impressed with the presentation of how the problem developed, and although I am seriously concerned about the future of regular Americans, I believe that Mr. Reich (and Phil… I’m sure Phil had plenty of input) continues to overlook human nature in their solutions. It is the most important issue of our times, and it is absolutely worth debating, but it seems that the only solution you will ever hear on these pages is to tax success in the hope government can spend the money to wipe out failure. The government has always been terrible at this. And the more money it has, the worse it gets. Government stimulus might work, but most of the money is wasted. It is always such.
    I do not care how much money you spend on "education" when this produces a system that speaks a language regular folks do not understand. Have you been privy to a conference of educators? If this is English, I missed the class. I have met many serious people in the profession of education, yet, when they work together, they produce a process that takes on a ridiculous and tangential life of its own, and it all ignores the reality that most of their students do not care a whit for what is being taught. There it is in a nutshell. Crack that one, and change might happen. It is transparently clear that our young people are undereducated and for the most part, ignorant. It is also obvious that our educational industry as a class (not as individual people) lacks even the beginnings of the answer to the problem. So, yes. We need regular Americans to have more skills. Desperately. But it is not happening, and it is not about money. The process is hopeless. Money spent this way is certain to be wasted.
    I appreciate the concern of the typical liberal. In fact, we want the same outcome. If you want to tilt the scales to favor the unprepared and the insufficient, it only annoys the prepared and successful. And I’m not clear that it is a good thing to do. Tilt the scales more and more and more and more, and the unprepared and unwilling will STILL fail, and probably, when they get through with your extensions and expansions of programs and your explosion of education, they will not even try much any more. And the successful will try to leave. Ask NY state how they feel about so many high-income people fleeing to better jurisdictions. Even Lennon and McCartney wrote the song "Taxman" as a complaint about outrageous taxes on success. Famous liberals, right?
    Can you people understand that it matters how people respond to what you do to them? If you give people stuff, they will reduce their efforts and expect more stuff. If you steal from people, they will do everything in their power to protect themselves in the future.
    We need to move things in the right direction. I know that the right corrections will be subtle and belong to no one philosophy or party. These days, whoever has power invokes their ideology, and the other side digs in and fights it to the death. How can this possibly work?

  2. Finally, a voice of reason on this website, thank you barfinger.  Libs will never understand the concept that you describe.  You can never make one more successful by making another less successful, which is the end result of oppressive taxation.

  3. barfinger… that is a very well written essay. Throwing money at a wall, does nothing for the wall, if the wall can not benefit from it. We need to start at the family level, and educate the parents about parenting, and instilling values into the children they bring into the world. The government and a tsunami of cash will not change our problems, but only will make the demise less painful. This downhill trajectory we are riding has been decades in the making, brought on by liberal values, and until this changes, we will continue in the same direction. We need more people in our society employed, but we need much more a reviisitation of the principles of what made out society great, and make that the cornerstone of our recovery going forward. Congratulations on a brilliant piece!

  4. You guys might appreciate this--Mish argues Robert Reich’s position, point by point:


  5. Thanks Ilene, excellent rebuttal

  6. Well, well, well…………. Another political tit for tat argument… the "liberals" and the "libs"…. these comments ALWAYS do so much to advance the conversation.  It reminds me of any high school athletics contest…. all the people in the bleachers with all the opinions, criticisms and "telling it how it is"…… At least Phil offers specific suggestions on policy changes.  He at least is down on the floor with involvement than sitting in the bleachers.  I don’t believe Phil has ever stated the government is perfectly run without fault and waste. MAybe, he needs to offer more policy sugesstions in those areas.  In my experience, when people use labels, it is because they have no concrete, specific solutions…….. only labels, slogans and generic criticisms.  Let’s hear some specific policy solutions……….. ???
    I believe the comments by barfinger have merit regarding the educational system today….. but I believe the insinuation that "most students" don’t give a whit might be overstated as too much of a generalization. In my opinion the state governments are mainly responsible for the education provided K-12.  Some states do a much better job than others…. it depends on priorities.  The facilities available at that level among all states, especially in poorer areas of big cities are night and day. IT has been proven many times, that given the proper tools, motivation to see a future and dedicated teachers that students which appear to be "deadenders" can and do excell and achieve.  It appears the current administration under Arnie Duncan is attempting to influence the correction of these problems.  And yes, some teachers don’t belong in teaching.  The unions have protected the bad for too long.  
    Another aspect of this conversation regards taxes.  It appears to me that many persons who created wealth over the past 30 to 40 years did so under a much "greater tax burden".  In those days the brackets were much higher, but the ability to tax shelter income (knowing the rules of the game) was also, much greater. Thee also, was a limit to these deductions.  I believe the tax system should be changed to rid itself of all the loop holes.  Let’s face it, the lobbyists have written the oppressive tax code we have today.  
    Phil… so, you have written a book…… hope we all at PSW can purchase a "signed copy"…. I was thinking about writing one myself prior to the 2012 election.  But it could be too hard core for the public. The theme would be…. when the American public gets its head out of it’s A**, and revolt, then there will be change…… "See you Tuesday"…………

  7. Mish has it nailed…No need to add further comments as he has said it all. Theory is for speulation only, both in government and trading. The "real world experience" is the guidline that should be followed.  Case in point -  I am in the midst of a large building project that is four months behind schedule. Most all of the worker-bees are unionized. I encouraged them ( about 30 guys ) to work over the weekend if they chose ( for overtime pay ). Nope – no takers.  All prefered to take the three day weekend, and many cut out early Friday to make it almost a four day weekend.  These are guys that have been unemployed for the most part of the last two years. They evidently are not bothered too much by unemployment, as the benefits will always be there for them. Poor government policy is a large part of our problem, and Reich ‘s contribution should be noted.

  8. Our local school board meeting is televised and each one is repeated several times on the government access cable channel. By mistake, my finger lingered for a second on the remote, and I was hooked. The board now sounds like the educational professionals they nominally supervise (in reality, school boards in NY have no real power – it is all mandated by the state) One topic was the "Board’s goals for the school year". Not once among the six or seven bullet points did I find a number. Goals that have no numbers tend to be bullshit in all walks of life ("we resolve to do better….."  "we need to focus on our core values", etc.) and then, and during the discussion, in which several "group leaders", "administrators", and "counselors" took turns mouthing meaningless educational buzzwords, which were cheerfully responded to by several board members in like language. After five or so minutes, I realized I had no idea what was going on. After ten minutes, I realized nothing was going on. Not one person said one thing that would be recognizable in a normal conversation.
    And teachers and staff talk to the kids in a dumbed down (if that’s possible) version of the eduspeak I heard on TV. This school district heroically reduced its requested increase in total budget, by sacrificing in a couple of "vital initiatives" that are much needed by the kids. I’m sure….
    I have no great love for any political agenda, but I have to admit I get offended when one side insists that yes, I have to pay more taxes (the laughable "fair share") to make sure that we do not lay off any more of these inspirational educational "professionals". I would be tempted to lay them all off.