By SEBASTIAN MALLABY
AFTERSHOCK
The Next Economy and America’s Future
By Robert B. Reich
Way way back, which means before the financial sector imploded, it wasn’t Wall Street bonuses and vampire squids that excited the most fury. People agonized, instead, about the stagnation of middle-class incomes and exploding inequality. In “Aftershock” — impressively, his 12th book — Robert B. Reich steers our attention back to those earlier worries, which have arguably become more urgent in the wake of the financial crisis. But right on the first page, he comes close to blowing it.
Reich opens his book by quoting Treasury Secretary Timothy F. Geithner. “For too long,” Geithner says, referring to the period leading up to the financial bust, “Americans were buying too much and saving too little.” This assertion is so sleep-inducingly true that one wonders why Reich bothers to invoke it. But then, astonishingly, the author’s purpose becomes clear. He actually doesn’t agree with it.
Reich insists instead that American consumers, and particularly the middle class, have been buying too little. For years, the United States has consumed more than it has produced; the excess demand has sucked in products from abroad, which is why the nation has run a trade deficit. The idea that the economy has suffered from a lack of demand is, shall we say, eccentric. But Reich declares repeatedly that the stagnation of middle-class buying power has been a drag on growth. “If earnings are inadequate,” he asserts, “an economy produces more goods and services than its people are capable of purchasing.” If that sentence described the American condition in the 1990s and the period leading up to the crash, Reich’s predicted excess output would have gone abroad and the United States would have run a trade surplus.
Reich is trying to fortify the standard case for redistribution. As he acknowledges, he could have grounded his argument in morality: it is simply unfair that the richest 1 percent of Americans capture almost a quarter of the total income in the economy. Alternatively, Reich could have invoked American values: a grotesquely skewed inequality of outcomes is bound to tip the playing field for the next generation of Americans, mocking the nation’s commitment to equality of opportunity. But instead Reich reaches for an economic claim — that redistribution is a prerequisite for growth. He fumbles it.
This is a pity, since much of Reich’s book is important and well executed. A Berkeley professor, public radio commentator and Clinton-era labor secretary, he is fluent, fearless, even amusing. He cheerfully denounces members of his own party: Senator Chris Dodd for his cozy links to the financial industry, Tom Daschle for monetizing his connections after leaving the Senate and failing to pay taxes, Dick Gephardt for denouncing lobbyists and then becoming one. Recalling the 1950s, when white male workers had it good, Reich wryly acknowledges that others fared less well. In 1957, United Airlines advertised its “executive” service between New York and Chicago, promising comfortable slippers, a steak dinner and “no women on board except for two stewardesses.”
Setting aside his confused stance on middle-class demand, Reich makes several cogent arguments. Drawing on well-known findings from psychology and economics, he notes that people find it hard not to increase consumption when others around them are spending lavishly. In a poor country, a man proves that he loves his wife by presenting her with a rose; in a country where the rich splash money on extravagant bouquets, even ordinary husbands feel obliged to buy six roses. Thanks at least partly to the example set by millionaire nuptials, the cost of the typical American wedding rose to about $28,000 from $11,000 between 1980 and 2007 after adjusting for inflation.
Caught between rising aspirations and stagnant wages, Reich says, middle-class Americans have gone through a series of coping mechanisms. First, women joined the workforce, giving families a second income. Then husbands and wives put in longer shifts, creating a species of family called DINS — “double income, no sex.” Finally, families went into debt. In this sense, inequality helped to stoke the credit bubble.
Now that the bubble has burst, these coping mechanisms are exhausted. Americans are not going to push their working hours up even more. Already, according to some estimates, they sleep an average of one or two fewer hours per night than did their parents in the 1960s; in 2007 they spent a whopping $23.9 billion on sleep aids, from white-noise machines to medications. Nor are Americans going to incur more debts; to the contrary, the credit bust has forced them to pay down their balances. And so, as Reich puts it, Americans will “face a necessity they have managed to avoid for decades: They have to make do with less.”
The belt-tightening is not likely to be popular, and Reich goes so far as to suggest that it could trigger a political convulsion. People are very likely to resent material losses bitterly if these are not broadly and fairly shared. And in the wake of the financial crisis, fairness has gone by the wayside: millions of Americans have lost jobs, but the financial sector has bounced back; eye-popping bonuses have returned; and last year the top 25 earners at hedge funds bagged a combined $25 billion. At some point in the not-too-distant future, Reich warns, C.E.O.’s may find that limousines are being purposely scratched and mobs are picketing their offices.
Reich concludes with a wish list of reforms that might head off such a confrontation. He wants a more progressive income tax, including negative taxes for anyone earning below $50,000. He wants a top income-tax rate of 55 percent, with the kicker that income from capital gains, now taxed at 15 percent, would face the same rate as income from salaries. He wants wage insurance — temporary compensation for workers who take big pay cuts when they shift jobs — as well as investments that make public transportation and Medicare more available. These proposals are generally reasonable — the top marginal tax rate was 70 percent or more between 1936 and 1980, a period of generally strong growth, and Medicare is more cost-effective than private insurance. But Reich also throws a few curveballs, and fails to discuss the gains in social fairness and economic growth that could be secured by limiting mortgage-interest deductions and other loopholes in the tax code.
But the really interesting question is whether Reich is right about the politics — whether the new Gilded Age will conjure up a new William Jennings Bryan, and whether such a candidate could be elected. Even in the harshest periods of American history, after all, economic resentments have been surprisingly muted and rabble-rousing populists have failed to win power. Toward the end of the Depression, in the late 1930s, a sociologist named Alfred Winslow Jones conducted field research around the violently strike-prone factories of Akron, Ohio, expecting that bitter industrial conflict might have created equally bitter class divisions. To his surprise, he found little evidence of such polarization.
Thus reassured, Jones migrated from sociology to journalism to finance. Ultimately, in a twist that Reich might grimly appreciate, he invented a fantastically profitable investment vehicle. He called it a “hedged fund.”
Sebastian Mallaby is a senior fellow at the Council on Foreign Relations. His book “More Money Than God: Hedge Funds and the Making of a New Elite” was published in June.
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