Aftershock(Inequality for All--Movie Tie-in Edition): The Next Economy and America's Future

This book is a must read for all who want to understand and see a path to fixing our economy. Reich draws a comparison of economic conditions that resulted in the great depression and the ongoing great recession. Both periods had a huge income inequality where 24% of income went to the most wealthy 1% of the nation. The Obama administration learned from the past and avoided depression 2.0 by bailing out the financial system and saving the auto industry. However they did little to deal with the root cause of high unemployment: extreme income inequality. He talks about the influence in the 1930s of a conservative Utah businessman by the name of Marriner Eccles who helped guide FDRs policies during the great depression. Eccles understood that it was "the vast accumulation of income in the hands of the wealthiest people in the in the nation, which siphoned purchasing power away from most of the rest." Because the wealthy have no need to spend most of their income, compared to low income earners who must spend nearly all to survive, there is a net lack of demand for goods and services that the nation can produce. This leads to high unemployment. Reich talks about coping mechanisms that helped mitigate the inequality issue until recently, including: a move to two earner families, using homes as piggy banks to go into debt, and working longer hours. These coping mechanisms are no longer viable. Quoting Reich: "The fundamental problem is that Americans no longer have the purchasing power to buy what the US economy is capable of producing." He talks about the period of great prosperity after the New Deal and WWII, from 1947 to 1975 when the share of income to the top 1% was much lower, in the range of 10 to 12%. During this time "the typical family's income rose from about $25,000 to $55,000." During this period the top tax rate was 91 to 77% and yet the country prospered "including those at the top". Failure to fix our economy leads to the politics of anger (which we already see evidence of in the Tea Party) that could lead to the rise of "demagogues who prey on public anxieties to gain power" with simplistic and ineffective solutions. Reich's solutions include a revised tax code to give more purchasing power to the middle class and includes an expanded reverse income tax for the lower earners and a top tax rate of 55% as well as other ideas. He also proposes a carbon tax to help get us off of our dependence on oil and to mitigate climate change. The impact of the carbon tax on low earners would be off set by the reverse income tax. The carbon tax would be much more equitable solution than the cap and trade approach. The book is powerful, extremely well written and easy to follow.

“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth... Instead of achieving that kind of distribution, a giant suction pump had... drawn into a few hands an increasing portion of currently produced wealth. ...In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.” This is from Robert Reich’s book Aftershock. It is a very good summary of what happened in 2008. Except that it isn’t Reich himself and it isn’t about 2008. Reich is quoting long-ago Fed chairman Marriner Eccles. And Eccles was writing not about 2008 but about 1929 and the Great Depression that followed. Reich was Labor Secretary in Clinton’s first administration and is now Professor of Public Policy at Berkeley. His diagnosis, as set out in Aftershock, is simple; it is that the concentration of wealth in the hands of a few will make everyone poorer, because the rich don’t spend anything like enough to generate employment – that needs a mass market, with everyone participating. In fact, the process of wealth concentration had been going on for years before 2008. “The wages of the typical American hardly increased in the three decades leading up to the Crash of 2008, considering inflation. In the 2000s, they actually dropped,” says Reich, and goes on to explain that the economy has grown so much over that period that, had the benefits been divided equally, the typical person would be 60% better off. If that’s the case, how come no-one seemed to notice this was happening for 30 years? Reich argues that the relative decline in income for most people was masked by longer hours; the participation of women as well as men in the workforce, generating dual incomes; and, most dangerously, by an explosion of credit. A quick look at house prices over the last 30 years suggests where much of that credit went. When the property bubble burst, the game, indeed, stopped. This is a lucid and persuasive book. Reich writes well; his talent is to explicate and illuminate, rather than lecture. The same can be seen in the film Inequality for All, which arose from the book and sets out the same ideas; Reich comes across as a man of some warmth and humour and a natural communicator. This book isn’t just a diagnosis, however; it’s a prognosis and prescription as well. And it’s on these two latter that the book does come unstuck a little. The prognosis, Reich warns, is that if we’re unlucky Americans will at last say “Hell, we were screwed” but then draw quite the wrong conclusion from that, electing a right-wing, isolationist, populist and frightening President. (He is wise enough to make this a fictional character, though she slightly resembles a sort of Palin-Thatcher cross.) Losers of rigged games, as Reich rightly says, tend to get angry. His scenario may come true, but it is just as likely that Americans, and Brits, will vote for governments who see the need for greater equality, but that those governments will be hamstrung by markets, trade treaties and, in the US, legislative stasis. In that case people will, quietly first and then in greater numbers, drift away from the system, and society will lose its cohesion; government will become ineffective; and the Western world will slide into senescence and irrelevance. Prof Reich also suggests a number of measures to address inequality. One is a “reverse income tax” that will subsidise the middle class (why does the US not appear to have a working class, one wonders?). The money would be added to paychecks. This reminds one of the system of poor relief devised by magistrates at Speenhamland in Berkshire at the end of the 18th century. “Speenhamland” was, when I was young, always taught as an example of the road to hell being paved with good intentions. It simply allowed employers to lower wages, thus accumulating wealth for themselves while making the public pay their wage bill. In fact, recent research has suggested that Speenhamland’s outcomes were not so clear-cut. Still, with many lower-paid workers in Western countries now drawing welfare to supplement their wages, one wonders whether we already have Speenhamland writ large. Wouldn’t we be better off having a much higher, and strongly enforced, minimum wage? Far from bankrupting employers, it’ll make us all richer in the end. Reich also proposes a carbon tax to fund this wage subsidy. He suggests an indirect tax set at $35 a ton. In suggesting this, he is rather going where angels fear to tread. The whole argument of carbon tax vs. carbon market is a big messy one, and governments have so far had a hard time applying either. The price of carbon on the open market is nothing like $35; moreover permission to emit it is effectively a raw material for industry. Taxing what is, in effect, a raw material at way above its market value may not be a good idea; you wouldn't do it with steel. It's far better to offset emissions with credits bought on the market, as this means positive as well as negative credits can be accrued, giving a much bigger incentive to reduce emissions. I’d argue that the carbon question shouldn't get mixed up with wages; it needs its own solution, and is best left in the separate box where it belongs. The author also does not really address the whole question of governance. True, he clearly perceives poor governance as a driver of inequity; many of the evils of the last 30-odd years would not have arisen if the privileged hadn’t been able to buy power and influence through lobbyists, or hold politicians in thrall through campaign contributions. Reich therefore suggests measures to get money out of politics, and he is clearly right. What he does not discuss is the weakness of electoral systems that give voters a limited choice between at most two candidates, both of which will in effect be part of the system he deprecates. You want to throw the bums out? Give us a system that allows alternatives. Reich’s prognosis and prescription are incomplete, and are the reason why I give this book four stars and not five. But in a way that is not the point of Aftershock. There can be no prognosis or prescription without diagnosis, and the diagnosis in this book is spot-on. What is more, it is (as in the film) delivered with clarity, warmth and charm. Anyone who wants to know how we got into such a mess in 2008, and 1929, should read this book, then think for themselves – long and hard – about where we go next.

Para reflexionar sobre la economía de hoy en día en el mundo occidental. Ojo que está en inglés, a tener en cuenta.

Dr. Reich is a scholarly economist who, in this book, has focused on what is, next to global warming, the number one problem facing Americans: the huge and still growing inequality in wealth between the mass of ordinary Americans and that select circle of the very rich who have seized effective control of American government and use that control to enrich themselves further. Trouble is, what they take, they take from the mass of regular, ordinary working Americans, whose income has been shrinking for the past three decades, and continues to shrink in a process for which there is no end in sight. How long can this go on without some drastic upheaval? Reich, more hopeful than I am, explores some possibilities that he sees. He has written a wonderfully readable book on a difficult but vitally important topic.

Robert Reich has produced another highly relevant study of the world economy that really explains what's gone wrong and how the problems should be addressed. He de-bunks the whole myth about why the economic crisis happened, and explains why austerity won't work. It undermines all the current beliefs about overspending causing the crisis, and highlights the new directions that world governments should be taking if they really want to get out of this mess (do they?). After reading this you will be older, wiser and very angry! A great read.

Le troisième opus de R. Reich est une analyse aussi profonde que celle des deux premiers opus. Simplement, la situation (notre situation) n'a pas arrêté de se dégrader, et n'est pas près de s'arrêter. A recommander chaudement, bien davantage que le bouquin de Piketty qui est déjà pas mal.

I loved Robert Reich's previous book "Supercapitalism" and this book, written in our more troubled times, continues the same trail of thought, and pushes on further with some quite radical proposals. The main theme of this book is that in the US, growing income inequality and the relatively lower purchasing power of the middle classes is the major factor contributing to America's economic problems. It is quite a strongly Keynesian viewpoint, which stresses the difference between middle class consumers who spend and therefore re-circulate a high proportion of their income, and the very wealthy who do not have consumption habits so widely beneficial to their fellow countrymen, and who instead speculate, and invest / spend abroad. The quality of Reich's writing and the historical and anecdotal insights are as satisfying to read as ever, but to me some of the final analysis and proposals are too brutally socialist to be widely accepted or effective. For example, the case for making the tax system in the US much more progressive in response to widening inequality is a good one, but going beyond that and topping up middle class wages by substantial transfer payments is very radical. Middle class Americans nostalgic for a time when their country's technological lead meant that their low and medium skilled workers could command high wages may love this book, and find Reich a champion of their interests. However trying to reverse or replace this lost comparative advantage of the US worker with large transfer payments from the rich is a very blunt instrument indeed, which may have many side effects. Also there is an implicit assertion running through this book that the standard of living of the American middle class should be maintained and perpetually rise. For me this sits uncomfortably with the future of our world environmental issues. It could be argued that it is international trade, and the catching up of countries like China in their technological ability which has caused both the growing inequality and economic problems in the West. Therefore it could be argued that the solution to the problems of the US and others needs to confront more directly these fundamental international trade issues at the root, rather than using the state to treat the symptoms of the problem. In this book Reich warns against "killing the cow", meaning a reactionary response born out of envy of the rich, which could endanger the wider prosperity of our free market and free trade system. This kind of caution is characteristically wise, but perhaps others may have less worries about the free-trade/free-market cow, and perhaps be happy to see it, if not killed, then penned in and put on a diet.