The Owls' Nest

Robert Reich is an eminent economist. He was Secretary of Labor under President Clinton from 1993 to 1997. In 2008, Time Magazine named him one of the Ten Best Cabinet Members of the century, and The Wall Street Journal in 2008 placed him sixth on its list of the "Most Influential Business Thinkers".

He has a great piece at Huffington Post entitled The Truth About The American Economy. It's excerpted from testimony he gave a Senate Committee on May 12 and includes material from his latest book. It's sensible and well-reasoned, a long way from being a lefty screed. Reich examines what he calls The Great Prosperity, from 1944-1977, and The Middle-Class Squeeze, from 1977-2007. He asks:

How did we go from the Great Depression to 30 years of Great Prosperity? And from there, to 30 years of stagnant incomes and widening inequality, culminating in the Great Recession? And from the Great Recession into such an anemic recovery?

The Great Prosperity was the result of a successful social contract between labor, capital, and government. Increasing production led to increasing consumption; workers were paid well enough to purchase the products they were making. "Labor productivity -- average output per hour worked -- doubled. So did median incomes."

The middle class had the means to buy, and their buying created new jobs. As the economy grew, the national debt shrank as a percentage of it.

In an expanding economy, laws were passed concerning overtime pay. That encouraged employers to hire workers rather than increase hours. The minimum wage law meant that those of the bottom of the economic ladder were doing better than they otherwise would.

The union movement was strong. "By the mid-1950s, more than a third of all America workers in the private sector were unionized."

Government played an active and positive role. Social Security and Medicare provided a secure safety net that gave people a feeling of confidence and well-being. The government provided low-cost mortgages and interest deductions on mortgage payments and provided the robust infrastructure -- provision of water, electricity, the interstate highway system -- necessary to support a vibrant economy. The G.I. Bill paid for veterans' education, and government support allowed public universities to provide affordable higher education.

This government contribution was paid for by taxes. "But contrary to what conservative commentators had predicted, the high tax rates did not reduce economic growth. To the contrary, they enabled the nation to expand middle-class prosperity and fuel growth."

Globalization and technical advances have resulted in Reich's "Middle Class Squeeze," from approximately 1977-2007. As automation reduced the number of workers required, the broad work force quietly accepted less and less pay rather than be unemployed. Wages stagnated.

Starting more than three decades ago, trade and technology began driving a wedge between the earnings of people at the top and everyone else. The pay of well-connected graduates of prestigious colleges and MBA programs has soared. But the pay and benefits of most other workers has either flattened or dropped. And the ensuing division has also made most middle-class American families less economically secure.

As the economy faltered, government turned away from providing the support that it had in the good years. Over a period of decades, it has slashed public investment in education, for example, and has allowed public transportation to crumble and corrode.

It shredded safety nets -- reducing aid to jobless families with children, tightening eligibility for food stamps, and cutting 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 28 to 35 percent; allowed many of the nation's rich to treat their income as capital gains subject to no more than 15 percent tax; and shrunk inheritance taxes that affected only the top-most 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 the middle class and the poor than of the well off.

Reich suggests that the American people developed three methods to cope with the economic squeeze:

1. Far more women entering the workforce:
   

   In 1966, 20 percent of mothers with young children worked outside the home. By the late 1990s, the proportion had risen to 60 percent. For married women with children under the age of 6, the transformation has been even more dramatic -- from 12 percent in the 1960s to 55 percent by the late 1990s.

2. Working longer hours:
   

   All told, by the 2000s, the typical American worker worked more than 2,200 hours a year -- 350 hours more than the average European worked, more hours even than the typically industrious Japanese put in. It was many more hours than the typical American middle-class family had worked in 1979 -- 500 hours longer, a full 12 weeks more.

3. Drawing down savings and going into debt:
   

   Individual savings dropped from an average of 9% in the period of The Great Prosperity to 0% by 2008. By 2007, the typical American owed 138 percent of their after-tax income.

It would be nice if Reich had ended optimistically with sensible, concrete plans for improvement. But he's a little more downbeat than that:

All three coping mechanisms have been exhausted. The fundamental economic challenge ahead is to restore the vast American middle class.

That requires resurrecting the basic bargain linking wages to overall gains, and providing the middle class a share of economic gains sufficient to allow them to purchase more of what the economy can produce. As we should have learned from the Great Prosperity -- the 30 years after World War II when America grew because most Americans shared in the nation's prosperity -- we cannot have a growing and vibrant economy without a growing and vibrant middle class.

Click the link. It's an interesting read.