The Real Lesson of Labor Day

Robert Reich
Friday, September 3, 2010
http://robertreich.org/post/1060844316/the-real-lesson-of-labor-day

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.

_____________________________________________

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