Aftershock

by Robert B. Reich

  The CEOs will also notice the public’s increasing anger. Before, the CEOs would have been largely insulated from it. The anger would not have spilled over into their gated communities, vacation retreats, office parks, and well-secured office towers. But at some point in the not-too-distant future it will spill over. Perhaps the CEOs will experience a growing number of troubling incidents (limousines purposefully scratched, enraged people showing up at their Park Avenue and Wall Street office buildings). The executives will hire more security guards to protect their offices and their homes, but this will not allay their concerns. It will become apparent to many of them, as it did to Eccles after the Crash of 1929, that if they “resisted any change designed to benefit all the people, [they] could be consumed by the poisons of social lag [they] had helped create.”

  The CEOs will also detect a change of mood in Washington. For years, these CEOs and the executives they supervise have showered politicians with contributions. The contributions have proved to be good investments, generating significant returns in the form of lower taxes and of legislation favoring their companies. Yet in the years to come the contributions will become less potent. Although the Supreme Court has allowed an unlimited amount of corporate political money to influence politics, the CEOs will discover this to be a double-edged sword. Vast corporate expenditures will ignite an even greater backlash as more Americans conclude that big business and Wall Street are exerting ever growing control over politics.

  The CEOs will note an increasing number of bills introduced to raise tariffs and reduce trade, restrict immigration, and limit global investment. Any such moves could have devastating effects on their firms’ bottom lines, as well as on their own incomes. The CEOs will also have to contend with legislative proposals to prevent them from firing employees or outsourcing abroad. Top executives on Wall Street will eventually confront attempts to break up their banks and narrowly constrain their investments. CEOs, executives, traders, hedge-fund managers, and others with high incomes will encounter more bills to cap their earnings and their bonuses, limit their wealth, and impose confiscatory taxes.

  If nothing is done to counter present trends, the major fault line in American politics will no longer be between Democrats and Republicans, liberals and conservatives. It will be between the “establishment”—political insiders, power brokers, the heads of American business, Wall Street, and the mainstream media—and an increasingly mad-as-hell populace determined to “take back America” from them. Eventually, the Independence Party, or its equivalent, will prevail.

  When they understand where all this is heading, the powerful interests that have so far resisted change are likely to see that the alternative is far worse. They will support reforms that lead us back to a fairer distribution of income, wealth, and opportunity. But the longer they take to come around, the larger and more virulent the backlash they will have to contend with.

  As I said at the outset of this book, a virtual pendulum underlies the American political economy. We swing from eras in which the benefits of economic growth are concentrated in fewer hands to those in which the gains are more broadly shared, and then back again. We are approaching the end of one such cycle and the start of the next. The Great Prosperity of 1947 to 1975 was followed by three decades of retrenchment, ending in the Great Recession.

  The question is not whether the pendulum will swing back. It surely will. The question is how it will swing—whether with reforms that widen the circle of prosperity, or with demagoguery that turns America away from the rest of the world, shrinks the economy, and sets Americans against one another.

  My bet is on the former. America has an enormous reservoir of resilience and common sense. Whenever we have faced a palpable crisis—a depression, an enveloping war, a profound threat to our civil liberties—we have put partisan politics and abstract ideology aside and gotten on with what needed to be done. Whenever we have faced the moral urgency of living up to our ideals—to recognize the rights of blacks, women, and the disabled, for example—we have risen to the occasion.

  None of us can thrive in a nation divided between a small number of people receiving an ever larger share of the nation’s income and wealth, and everyone else receiving a declining share. The lopsidedness not only diminishes economic growth but also tears at the fabric of our society. America cannot succeed if the basic bargain at the heart of our economy remains broken. The most fortunate among us who have reached the pinnacles of power and success depend on a stable economic and political system. That stability rests on the public’s trust that the system operates in the interest of us all. Any loss of such trust threatens the well-being of everyone. We will choose reform, I believe, because we are a sensible nation, and reform is the only sensible option we have.

  ACKNOWLEDGMENTS

  This book is the result of discussions with people too numerous to name, although some will no doubt recognize their arguments and counterarguments in these pages. Special mention should go to my former colleagues Jack Donahue and Richard Parker and current colleagues George Akerlof, Brad DeLong, Jack Glaser, David Kirp, Jane Mauldon, Harley Shaiken, Eugene Smolensky, and Laura Tyson, all of whom helped me sharpen my arguments but none of whom should bear responsibility for them. Several friends subjected earlier drafts to the sort of criticism only friends can be trusted to provide. Here, Doug Dworkin, John Isaacson, and Erik Tarloff played their customary roles. I am also grateful to diligent students here at the Goldman School of Public Policy, especially to Mia Bird, Teal Brown, Jason Burwen, Jonathan Stein, and Renee Willette, who helped me trace down facts and focus the argument. The Blum Center and the Goldman School, both at the University of California at Berkeley, provided financial support. As usual, my assistant, Rebecca Boles, was extraordinarily helpful, and Manuel Castrillo was responsive to all calls for technical assistance. I want to give special thanks to my partner, Perian Flaherty, for her remarkable insight, editorial flair, patience, and ever wise judgment. My agent, Rafe Sagalyn, provided much needed advice, and my long-standing editor and friend, Jonathan Segal, offered abiding encouragement, wisdom, and thoughtfulness.

  NOTES

  INTRODUCTION. THE PENDULUM

  1 “for too long, Americans were buying”: Timothy Geithner, “Press Briefing by Treasury Secretary Tim Geithner on the G20 Meetings,” Pittsburgh, September 24, 2009.

  2 Our history swings much like a pendulum: On this point, see Arthur M. Schlesinger, Jr., The Cycles of American History (New York: Houghton Mifflin, 1986). Schlesinger defined a political-economic cycle as “a continuing shift in national involvement between public purpose and private interest” (p. 27). See also Albert O. Hirschman, Shifting Involvements: Private Interest and Public Action (Princeton, N.J.: Princeton University Press, 1982).

  3 the last time income was this concentrated: See Thomas Piketty and Emmanuel Saez, “The Evolution of Top Incomes: A Historical and International Perspective,” AEA Papers and Proceedings 96, no. 2 (May 2006): 200–205.

  PART I. The Broken Bargain

  1. ECCLES’S INSIGHT

  1 “Men I respected assured me”: All quotes in this chapter are from Marriner Eccles’s memoir, Beckoning Frontiers (New York: Alfred A. Knopf, 1951), pp. 54, 71–81.

  2. PARALLELS

  1 The wages of the typical American: See Bureau of Economic Analysis, National Compensation Survey, “Current-Dollar Historical Listings: Employee Cost Listings Historical Index,” Tables 4–10, January 2010.

  2 a male worker earning the median male wage: See U.S. Census Bureau press release, “Household Income Rises, Poverty Rate Unchanged, Number of Uninsured Down,” U.S. Census Bureau, Current Population Survey data, August 26, 2008.

  3 Economists Emmanuel Saez and Thomas Piketty: See Thomas Picketty and Emmanuel Saez, “The Evolution of Top Incomes: A Historical and International Perspective,” AEA Papers and Proceedings 96, no. 2 (May 2006): 200–205. The most recent update of their data can be found in Emmanuel Saez, “Striking It Richer: The Evolution
of Top Incomes in the United States,” University of California, Department of Economics, August 5, 2009. Their calculation is before paying taxes, and it includes income from capital gains.

  4 Sociologists Robert S. Lynd and his wife: See Robert S. Lynd and Helen Merrell Lynd, Middletown (New York: Harcourt Brace, 1929), pp. 21–24.

  5 Savings had averaged 9–10 percent of after-tax income: See Bureau of Economic Analysis, National Income and Product Accounts Table, “Personal Income and Its Distribution,” last updated January 29, 2010 (http://www.bea.gov/national/nipaweb/

  TableView.asp?SelectedTable=58&ViewSeries=NO&Java=no&

  Request3Place=N&3Place=N&FromView=YES&Freq=Year

  &FirstYear=1943&LastYear=2009&3Place=N

  &Update=Update&JavaBox=no#Mid).

  6 Total mortgage debt was almost three times higher: See ibid.

  7 The Dow Jones Industrial Average: See Dow Jones Industrial Average Historical Charts, daily, Thomson Reuters and IDC/ComStock (http://stockcharts.com/charts/historical/djia19201940.html).

  8 Four years later: See Stock Exchange Practices, Hearings, April–June 1932, Part 2, pp. 566–67.

  9 Meanwhile, National City Bank: See Federal Deposit Insurance Corporation, “Learning Bank” http://www.fdic.gov/about/learn/learning/when/1930s.html.

  3. THE BASIC BARGAIN

  1 On January 5, 1914, Henry Ford: See A. Rees, National Bureau of Economic Research, Real Wages in Manufacturing 1890 to 1914, Chapter 5, “Real Wages,” 1961 (http://www.nber.org/books/rees61-1).

  2 Ford was … a smart capitalist: See A. Nevins and F. Ernest Hill, Ford: The Times, the Man, the Company (New York: Scribners, 1954).

  3 By the first decades of the twentieth century: See Damon Silvers, “How a Low Wage Economy with Weak Labor Laws Brought Us the Mortgage Credit Crisis,” lecture presented by The Berkeley Journal of Employment and Labor Law, Institute of Research on Labor and Employment, University of California, Berkeley, April 2, 2008 (http://www.irle.berkeley.edu/events/spring08/feller/).

  4 British economist John Maynard Keynes: These and subsequent quotes from John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt Brace, 1936), pp. 373–74.

  5 “Liquidate labor, liquidate stocks”: See Herbert Hoover, The Memoirs of Herbert Hoover, vol. 3: The Great Depression 1929–1941 (New York: Macmillan, 1952).

  4. HOW CONCENTRATED INCOME AT THE TOP HURTS THE ECONOMY

  1 The richest man in the world: See “Richest in the World, 2008,” Forbes magazine (http://www.forbes.com/lists/2008/10/billionaires08_Warren-Buffett_C0R3.html).

  2 in the same gray stucco house: See Roger Lowenstein, Buffett: The Making of an American Capitalist (New York: Broadway Books, 1995), pp. 8–10.

  3 “If I wanted to,” Buffet once said: See Janet Lowe, Warren Buffett Speaks: Wit and Wisdom from the World’s Greatest Investor (New York: John Wiley & Sons, 1997), pp. 165–66.

  4 the nearly $100 million Kenneth Lewis earned: See Securities and Exchange Commission Filings compiled by Forbes magazine, CEO Compensation Reports (sources: Bank of America SEC Filings; FT Interactive Data; and LionShares via FactSet Research Systems).

  5 In the year prior to Lehman Brothers’: See ibid.

  6 Taxing the wealthy to help the poor: See Jeremy Bentham, “Critique of the Doctrine of Inalienable, Natural Rights,” in Anarchical Fallacies, vol. 2 of The Works of Jeremy Bentham, ed. John Bowring (Edinburgh: William Tait, 1843).

  7 the top 10 percent took home: See analysis by Lawrence Mishel, Jared Bernstein, and Heidi Shierholz, The State of Working America, 2008/2009, Chapter 5, Table 2.4, “Shares of Total Income (Before and After Tax) and Income Tax for Percentile Groups” (Washington, D.C.: Economic Policy Institute, 2010).

  8 “much lower stakes will serve”: John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1961), p. 374.

  5. WHY POLICYMAKERS OBSESS ABOUT THE FINANCIAL ECONOMY INSTEAD OF ABOUT THE REAL ONE

  1 “Without this rescue plan”: See “White House Written Statement of President George W. Bush,” September 28, 2009 (http://thepage.time.com/statement-by-president-bush/).

  2 “If we do not do this”: Senator Judd Gregg to the Associated Press, September 28, 2008.

  3 The relative calm of preceding decades: The theoretical underpinnings of this occurrence had been developed by economist Hyman Minsky. See Hyman Minsky, Stabilizing an Unstable Economy (New York: McGraw-Hill, 2008).

  6. THE GREAT PROSPERITY: 1947–1975

  1 During this quarter century: See U.S. Census Bureau, Current Population Reports, Measuring 50 Years of Economic Change Using the March Current Population Survey (U.S. Government Printing Office, Washington, D.C., 1998), pp. 7–8.

  2 Labor productivity: U.S. Bureau of Labor Statistics, Historical SIC Industry Labor and Cost Indexes, 1947–1977.

  3 Expressed in 2007 dollars: See U.S. Bureau of Labor Statistics Series Reports, “Family, All Races by Median and Mean Income: 1947 to 2006,” Table F-7 (http://www.census.gov/hhes/www/income/histinc/f07ar.html).

  4 By the end of the war: See Budget of the United States Government, Historical Tables, Federal Debt, Table 7.1 —Federal Debt at the End of Year: 1940–2013, Executive Office of the President, December 2008.

  5 “All alike expect and fear”: Alvin Hansen, Economic Problems of the Post War World: Democratic Planning for Full Employment, National Council for the Social Studies, 1942.

  6 By the mid-1950s: See “Union Members Summary,” U.S. Bureau of Labor Statistics economic news release, January 2010 (http://www.bls.gov/news.release/union2.nro.htm).

  7 “Unless we get a more realistic distribution”: See Nelson Lichtenstein, Walter Reuther: The Most Dangerous Man in Detroit (New York: Basic Books, 1995), p. 231.

  8 A college sociology textbook of 1956: See Joseph Kahl, The American Class Structure (New York: Holt, Rinehart, 1956), pp. 109–10.

  9 The interstate highway system: See Richard Weingroff, The Greatest Decade: 1956 to 1966, Federal Highway Commission Report, December 22, 2008.

  10 The expansion of public universities: See U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements, “Type of Family, All Races by Median and Mean Income: 1947 to 2006” (http://www.census.gov/hhes/www/income/histinc/f07ar.html).

  11 The federal government, especially the Defense Department: See U.S. Department of Education, National Center for Education Statistics, Digest of Education Statistics, 2008 (NCES 2009–020), Chapter 3, 2009.

  12 The Pentagon also gave birth: See M. H. Weik, “The ENIAC Story,” Ordinance Ballistic Research Laboratories, 1961.

  13 New fighter jets and engines morphed: See Boeing Airlines, “Commercial Airplanes: Military Derivatives,” Boeing Airlines External Communications Commercial Airline Division (http://www.boeing.com/commercial/707family/deriv.html).

  14 “The old imperialism”: Inaugural address of President Harry S. Truman, January 20, 1949.

  15 In the 1950s, under President Dwight Eisenhower: See Internal Revenue Service, Statistics of Income, Individual Statistical Tables by Tax Rate and Income Percentile.

  16 “a better, richer, and happier life”: James Truslow Adams, The Epic of America (Boston: Little, Brown, 1931), p. 73.

  7. HOW WE GOT OURSELVES INTO THE SAME MESS AGAIN

  1 By the late 1990s: See U.S. Census Bureau, “Historical Trends in Income Inequality—Middle Class,” Table H-3, “Historical Income Tables by Quintile.”

  2 the median wage flattened: See U.S. Census Bureau, “Historical Trends in Income Inequality—Middle Class,” Table H-3.

  3 It shredded safety nets: See U.S. Department of Labor, Workforce Security Data Tables, “Unemployment Insurance Data Tables: 1st Quarter–4th Quarter, 2007,” Division of Actuarial Resources, Office of Income Support, January 7, 2010.

  4 by 2010, fewer than 8 percent: See U.S. Bureau of Labor Statistics economic news release, “Union Members Summary—2009,” January 2
2, 2010.

  5 And nothing impeded CEO salaries: See Lawrence Mishel, “Executive Pay,” in The State of Working America (Washington, D.C.: Economic Policy Institute, 2008), pp. 220–24.

  6 More than half of all the money: See Lawrence Bebchuk, “The Growth of Executive Pay,” Oxford Review of Economic Policy 21, no. 2 (2005): 283–303.

  7 By 2007, financial and insurance companies: See Bureau of Economic Analysis, National Income and Product Accounts (NIPA) Tables, Section I: Domestic Product and Incomes, “Real Gross Value Added by Industry,” 2009.

  8 In 2009, the twenty-five best-paid hedge-fund managers: See AR: Absolute Return + Alpha, annual survey, 2009.

  9 in 2007, Ford’s financial division: Securities and Exchange Commission Filings.

  10 according to presidential candidate Ronald Reagan: Ronald Reagan campaign address, “A Vital Economy: Jobs, Growth, and Progress for Americans,” October 24, 1980.

  11 Moreover, they had no clear memory: See Technology Triumphs, Morality Falters, Section 5: “America’s Collective Memory,” the Pew Research Center for the People and the Press, January 3, 1999.

  8. HOW AMERICANS KEPT BUYING ANYWAY: THE THREE COPING MECHANISMS

  1 Coping mechanism #1: See U.S. Department of Labor Women’s Bureau, “Labor Force Participation of Women and Mothers,” Historical Data Tables, October 9, 2009 (http://www.bls.gov/opub/ted/2009/ted_20091009.htm).