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'Aftershock' is an excellent economic analysis

January 13, 2011|By ALLAN POWELL

For a long time, I have been a fan of Robert Reich, former secretary of labor and now professor of public policy at the University of California, Berkeley. He also is seen frequently on political talk shows. 

Reich's recently published book, "Aftershock," is an excellent analysis of the Great Recession and is a must-read. All of the books that I have read about the latest major economic crisis have been good, but "Aftershock" ranks the highest.

Reich starts his book by characterizing our economy as a swinging pendulum that moves between periods of prosperity and recession. In these swings, there is a shifting of benefits from middle-class Americans toward the upper ranks of our society. 

Reich is primarily interested in three swing periods — 1870 to 1929, in which a shift favored the wealthy; 1947 to 1975, in which the middle class experienced more widely shared income; and 1980 to 2010, in which there was a recurring shift of economic benefits toward the top of the economic pyramid. After each shift to the top, there was a serious crash within the system.

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This phenomenon raises some important questions about how much inequality is tolerable during these periodic dislocations. Also, are these swings endemic to our economic system? Then, too, what might happen if a significant number of middle-class citizens draw the conclusion that the system is rigged in favor of the wealthy and against their well-being? We are now witness to politicians who provide billions of dollars to corporations "too big to fail" while simultaneously refusing to extend unemployed workers unemployment insurance.

Reich displays his Keynesian orientation frequently and argues that the primary force behind these periodic meltdowns is a lack of purchasing power on the part of the large middle class. He reminds us that in 1914, the great industrialist, Henry Ford, voluntarily raised the pay of his assembly line laborers to $5 per eight-hour day so that they could afford to buy his Model T cars. Ford was wise enough to perceive that mass production presupposes mass consumption.

Another crucial Keynesian proposal was that when consumer demand plummeted and remained so, it was the responsibility of government to stimulate the marketplace with huge influxes of money. For every dollar supplied, there would be a "multiplier effect" of about $3 as each consumer transferred the income until it stalled in the process and more money was spent.

According to Reich, Ford clearly understood that a basic economic bargain has to be made for a highly productive economy to function more or less smoothly, that is, workers also are consumers and must be able to purchase the myriad products in the marketplace. Unfortunately, claims Reich, this bargain has been broken by the continuous practice of management reducing the earnings and benefits of workers while expanding the income and benefits of the wealthy. This systemic process pulls the system down.

There are other things that indicate that the system is rigged in favor of the upper ranks. There is a symbiotic relationship between the financial elite and politicians. Reich gives some figures that show evidence of this cozy connection. He argues that wealth "does not necessarily buy a politicians vote, it buys his mind!" In the 1970s, only about 3 percent of retiring members of Congress went on to become lobbyists in Washington. By 2009, more than 30 percent made the switch from government to lobbying.

The motivation was simply — money. Salaries for former White House staff and congressional aides alone reached $300,000. Salaries of some former congressmen, on important committees, reached a staggering $2 million.

Reich concludes that the power of private money to benefit the rich and powerful "lies like a thick fog over the nation's Capital, enveloping everyone and everything." We have created a "culture of the comfortable" who essentially serve the interests of the economic elites while indifferent to the needs of middle-class Americans.

Another measure of the widening gap between the top and the bottom of the American social structure is disclosed by the recent announcement of the Census Bureau that the percentage of the population classified as below the poverty level has now reached 14.3 percent — the highest level in 50 years.

The pendulum has made another swing in the direction similar to that which existed in 1929, with several of the same causes and with the same consequences. We do not appear to have learned very much from these tragic economic recurrences. Anxiety exists in abundance as the pendulum swings.

Allan Powell is a professor emeritus of philosophy at Hagerstown Community College

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