William Breakstone's Reviews > Aftershock: The Next Economy and America's Future

Aftershock by Robert B. Reich
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Dec 30, 2010

it was amazing


“Aftershock” by Robert B. Reich

Reviewed by Bill Breakstone, October 2, 2010


Robert B. Reich is Chancellor’s Professor of Public Policy at the University of California, Berkeley. He served as Secretary of Labor under President Bill Clinton, and has written twelve books.

His most recent book, Aftershock, is both an economic and sociological treatise, brief in length but concise, penetrating and filled with, from this reviewer’s point of view, insightful commentary on our present economic malaise and some of its sources.

As his fellow colleagues in economics such as Ben Bernancke, Joseph Steiglitz, Paul Krugman, Nouriel Roubini and others have closely studied and analyzed public policy in the aftermath of the Great Depression, so has Reich. However, this author brings a fresh perspective to the table, and that is one of a sociologist.

In addition, he focuses in part on the work of Merriman Eccles, who served as Federal Reserve Board Chairman from November 1934 through April of 1948, under Presidents Franklin Roosevelt and Harry Truman. As Reich states: “While Eccles is largely forgotten today, he offered critical insight into the great pendulum of American capitalism. His analysis of the underlying economic stresses of the Great Depression is extraordinarily, even eerily, relevant to the Crash of 2008. It also offers, if not a blueprint for the future, at least a suggestion of what to expect of the coming years.”


Merriman Eccles, a conservative banker by nature, was a reluctant adherent to Keynesian economic thought. In the aftermath of the Depression, Reich relates, “economists and the leaders of business and Wall Street sought to reassure the country that the market would correct itself automatically, and that the government’s only responsibility was to balance the federal budget.” Sound familiar? “Lower prices and interest rates, they said, would inevitably ‘lure natural new investments by men who still had money and credit and whose revived activity would produce an upswing in the economy.’ Entrepreneurs would put their money into new technologies that would lead the way to prosperity. But Eccles wondered why anyone would invest when the economy was so disabled.”

The answer, so said our conservative brethren, was that economic downturns were a natural phenomenon, part of the economic cycle, a Darwinian view that here, as in Nature, the fittest would survive and the economically strong would move on. This trend of thought harked back to the works of Austrian economist Joseph Schumpeter, who Roubini states in his excellent recent book Crisis Economics “developed a powerful theory of entrepreneurship that is often distilled down to a pair of powerful words: creative destruction. In Schumpeter’s worldview, capitalism consists of waves of innovation in prosperous times, followed by a brutal winnowing in times of depression. This winnowing is to be neither avoided nor minimalized. It is a painful but positive adjustment, whose survivors will create a new economic order.”

Reich goes on: “They further explained that we were in the lean years because we had been spendthrifts and wastrels in the roaring twenties. We had wasted what we earned instead of saving it. We had enormously inflated values. But in time we would sober up and the economy would right itself through the action of men who had been prudent and thrifty all along, who had saved their money and at the right time would reinvest it in new production. Then the famine would end.” Now keep in mind that we are here talking about the Great Depression, not the Great Recession. Yet the parallels could not be more vivid.

In any case, as Reich recounts, “Eccles thought this was nonsense.” As a leading banker in the national arena, Eccles testified before the Senate Finance Committee in February 1933, just weeks before Roosevelt was sworn in as president. “Others had advised the Committee to reduce the national debt and balance the federal budget, but Eccles had different advice. Eccles told the senators that the government had to go deeper into debt in order to offset the lack of spending by consumers and businesses. Eccles went further. He advised the senators on ways to get more money into the hands of the beleaguered middle class. He offered a precise program designed ‘to bring about by Government action, an increase of purchasing power on the part of all the people.’ ” It should be noted that this advice was given three years before John Maynard Keynes’ similar theories were first published in his famous General Theory of Employment, Interest and Money.

Eccles biggest and most important insight was this: the major cause of the Depression had nothing to do with excessive spending during the Roaring Twenties. It was, rather, the vast accumulation of income in the hands of the wealthiest Americans, which siphoned purchasing power away from most of the rest. “As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-1930 drawn into a few hands an increasing portion of currently produced wealth.”

Without adequate financial resources, consumers had to borrow to fund purchases. The borrowing took the form of mortgage debt on homes and commercial buildings, consumer installment debt, and foreign debt. Eccles understood that this debt bubble was bound to burst. And when it did, consumer spending would shrink. And so it did. Debtors were then forced to curtail their consumption, which naturally reduced the demand for goods and services of all kinds and brought higher unemployment. Unemployment further decreased consumption, which further increased unemployment. For Eccles, widening inequality was the major culprit.

Eccles realized back in 1933, and Reich and other economists are repeating now in the wake of another severe economic downturn, that recovery will be dependant on increasing aggregate demand, and that will be impossible to accomplish without the participation of middle class Americans. The inequality that Eccles saw regarding income distribution in 1930 is being repeated today, and that inequality must be re-balanced.

Reich goes on to detail the decline of middle class purchasing power over the period from roughly 1975 to the present. The New York Times Bob Herbert, in that Op-Ed piece, summarized the present plight: “Analysts have tracked the increasing share of national income that has gone to the top 1 percent of earners since the 1970s, when their share was 8 percent to 9 percent. In the 1980s, it rose to 10 percent to 14 percent. In the late-’90s, it was 15 percent to 19 percent. In 2005, it passed 21 percent. By 2007, the last year for which complete data are available, the richest 1 percent were taking more than 23 percent of all income. The richest one-tenth of 1 percent, representing 130,000 households, took in more than 11 percent of total income in 2007. That does not leave enough spending power with the rest of the population to sustain a flourishing economy.

Reich continues, drawing a parallel between government action to alleviate the effects of the Great Depression and current attempts to create a sustainable recovery after the Great Recession. Government policies in the wake of the Depression led to a new economic order, including many of the programs that Marriner Eccles proposed on the eve of Roosevelt’s inauguration—social insurance, improvements in the nation’s infrastructure, and improved educational opportunities, including an expansion of public universities, all initially financed by government borrowing. They made the American middle class vastly more secure, prosperous and productive.

“The Great Recession that started at the end of 2007, however, has produced no new economic order. Instead, the government stepped in quickly with enough money to contain the downward slide. . . . . . But little was done to reduce the underlying, cumulative problem of widening inequality—Eccles’s insight into what caused the Great Depression.

The middle chapters of “Aftershock” trace economic policy from the end of the Depression and World War II, through that period Reich names The Great Prosperity, encompassing the years 1947 through 1975, and finally the three-decade long period from 1980 through the current crisis. It was during those years that economic policy was reversed through deregulation, privatization, reduced public services, reduced aid to higher education, restriction on unemployment benefits, and reduced taxes, especially for the wealthiest Americans. At the same time, income taxes were greatly increased for the less advantaged among us, sales and payroll taxes were boosted, both actions taking a bigger chunk out of the middle class and poor.

“Significantly, Washington deregulated Wall Street while insuring it against major losses, in doing so turning finance—which until then had been the servant of American industry—into its master, demanding short-term profits over long-term growth, and raking in an ever larger portion of the nation’s profit.” In essence, the basic bargain between American business on the one hand and the public welfare on the other was broken.

Reich rhetorically asks how the pendulum could have swung back in the opposite direction of social progress. He proposes three answers:

First, there grew a consensus that there was simply no need for government intervention.

Second, the reversal could be viewed as the inevitable result of declining confidence in government.

Third, the more important cause of the pendulum reversal had to do with power. People with great economic power have an undue influence in making the rules of the economic game. Ronald Reagan, Margaret Thatcher, Alan Greenspan, Milton Friedman, and other apostles of free-market dogma reiterated a simple story: The choice was between free market and big government. Government was the problem. Free markets were the solution.”

“But how could the public have been so gullible as to accept this story? After all, America had gone through a Great Depression, suffering the consequences of an unfettered market and unconstrained greed. . . . . . America had also experienced the Great Prosperity, which depended so obviously on public improvements, safety nets, and public investment. Now that the basic bargain was coming apart once again, the need for them was even greater.”

The middle class is struggling on. “Starting in the late 1970s, the American center honed three coping mechanisms, allowing it to behave as though it was still taking home the same share of total income as it had during the Great Prosperity, and to spend as if nothing substantially had changed.”

Number 1: Women moved into paid work in greater and greater numbers;

Number 2: Everyone started working longer hours. What families failed to get in wage increases, they made up for in work increases;

Number 3: Middle class workers drew down on savings and borrowed up to the hilt. Borrowings were aided by the Federal Reserve’s easy money policy, as Greenspan and the Fed did everything they could on the monetary side to prolong economic prosperity from 2000 through the onset of the Great Recession, when the credit and housing bubbles burst. When that happened, the last of the coping mechanisms disappeared.

Paul Volker thought the underlying cause of the Great Recession was that Americans had been living beyond their means. But Laura Tyson, the former chair of Bill Clinton’s Council of Economic Advisors, disagreed: “The real problem was their means hadn’t been growing.”

Reich comments: “The fundamental economic challenge ahead is to lift the means of middle-class Americans and reconstitute the basic bargain linking wages to overall improvements—providing the vast American middle class with a share of economic gains sufficient to allow them to purchase more of what the economy can produce.”

“It should be apparent that there will be no return to ‘normal,’ because the old normal got us into our present predicament and can’t possibly get us out. So what comes next?

“Economic gains are so meager that the wealthy fight harder to maintain their share. The middle class, already burdened by high unemployment and flat or dropping wages, fights ever more furiously against any additional burdens, such as tax increases to support public schools or price increases resulting from regulations limiting carbon emissions. It’s a vicious cycle.”

The question, then, is how to move from a vicious cycle to a virtuous one—how to restore the widespread prosperity needed for growth, and how to get the growth necessary for widespread prosperity. The challenge is both economic and political. A fundamentally new economy is required—the next stage of capitalism. But how will we get there? And what will it look like when we do?”

Reich moves on to examine the source of voter dissatisfaction and anger. He concludes: “Given the chance, most members of the middle class want to join the ranks of the rich and gain all the perks that come with great wealth. The real frustration, and the final straw, will come if and when they no longer feel they have a chance because the dice are loaded against them.”

Reich believes there are two alternatives available to address the diminished role and opportunities of middle-class Americans and, in turn, the future health of the American economy. The first way forward results in a societal breakdown, a move to the ultra right, and a resulting economic catastrophe unlike any the Nation has ever suffered.

The second alternative Reich proposes is to face head-on the currently existing inequities and remedy them through legislative and executive actions. His specific suggestions are enumerated at the end of this review.

Reich next examines the power and influence of lobbyists, and here, here he is getting to one of the underlying systemic roots the dilemma. No one will deny the corrupting influence of money. It drove, in part, the bank rescues, and the “people” were left behind holding the bag. It funds politicians’ campaigns, who then cow tow to contributors’ interests rather than the public welfare they swore to protect. Thus, the cause of the problem is political, and that will require a political solution. If our elected officials didn’t need so much money, their vulnerability to its corrupting influence would diminish. Could the answer lie in having fewer elections at more infrequent intervals? Why do members of the House of Representatives need to face reelection every two years, while across the aisle, senators serve six year terms. It’s obscene! Why do presidents have to run for reelection every four years? It severely limits their effectiveness as leaders—they in essence have a two-year period after being elected to put their programs to work, and then spend the following two years running for reelection. Why not, as many have suggested, have a six-year term for our presidents?

Both of these changes would encounter fierce resistance from exactly those whose undue influence such changes would address, i.e., the lobbying industry itself. But it’s a fight worth taking on. Reich does not advocate anything in this regard, and that is the first fault I find with his work. The following is the second:

Reich proposes nine steps to restore the balance between middle-class opportunities and the rich and powerful—restore what he refers to as the “bargain”—that intellectual or ideological agreement giving workers a proportionate share of the fruits of economic growth. I will simply state his proposals without elaboration.

First, a reverse income tax. Instead of money being withheld from workers paychecks to pay taxes to the government, money would be added to their paychecks by the government, according to a graduated or progressive formula; second, a carbon tax; third, higher marginal tax rates on the wealthy—up to 55%--and elimination of the capital gains exemption; fourth, a reemployment system rather than an unemployment system, including wage insurance; fifth, school vouchers based on family income; sixth, college loans linked to subsequent earnings, to be repaid during the first ten years of a student’s gainful employment; seventh, Medicare for all; eighth, a sizeable increase in public goods such as transportation, public parks, recreational facilities, public museums and libraries, with free public transportation, including high speed rail; and, finally, the removal of money from politics.

Reich maintains “This is not an unrealistic agenda. It is practical and doable.”

It is said that one of the dangers of an academic life can be isolation from reality. Living in the ivory tower of academia can blur a person’s reasoning powers. If Reich thinks his nine-step program is doable, he is deceiving himself. To end such a brilliant study of our economic and political systems with these kinds of proposals is a true shame.

I have seldom read a book as thought-provoking as this one. I regularly read 25 pages or so before bedtime, and found myself awakening hours later and writing notes to myself about one insight or another that Reich had brought to mind. I have also found the many quandaries that the author describes to be deeply troubling, for no one seems to be addressing the underlying causes of our economic malaise. Rather, all things seem to be pointing to a breakdown in effective government, in our national leaders’ ability to overcome political rancor in order to solve our nation’s problems.

Is there a basic flaw in our political system? Our founding fathers created a lasting document over 240 years ago, our Constitution. It has served the nation well for a long, long time. However, those founders never conceived that effective leadership would be so compromised by political parties totally unwilling to cooperate and put the common good ahead of partisanship and the striving for power. In fact, the party system did not even exist at the time of the Constitutional Convention. But the Signers did bequeath to future generations the ability to modernize the document through the passage of Constitutional Amendments. It is in that direction that we must proceed. As mentioned above, the contentious effect of our party system must be corrected, and the only way this can be accomplished is to reduce party and lobbying influences; reduce the predominance of special interests, and put the reins of government back in the hands of our elected officials, allowing them to represent both their constituents and their own conscience.

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