The Heart of the Economic Mess, by Robert Reich

Another great commentary from Secretary Reich. This one even made sense to me, the economically challenged one. I recommend you all forwarding it to your friends so we can all put a layman’s voice to what is wrong with our economy.

Chef Sheila

The Heart of the Economic Mess

The Federal Reserve Board’s “beige book” for June and July offers a clear explanation for why the economy has slowed to a crawl. It shows American consumers cutting way back on their purchases of everything from food to cars to appliances to name-brand products. As they do so, employers inevitably are cutting back on the hours they need people to work for them, thereby contributing to a downward spiral.

The normal remedies for economic downturns are necessary. But even an adequate stimulus package will offer only temporary relief this time, because this isn’t a normal downturn. The problem lies deeper. Most Americans can no longer maintain their standard of living. The only lasting remedy is to improve their standard of living by widening the circle of prosperity.

The heart of the matter isn’t the collapse in housing prices or even the frenetic rise in oil and food prices. These are contributing to the mess but they are not creating it directly. The basic reality is this: For most Americans, earnings have not kept up with the cost of living. This is not a new phenomenon but it has finally caught up with the pocketbooks of average people. If you look at the earnings of non-government workers, especially the hourly workers who comprise 80 percent of the workforce, you’ll find they are barely higher than they were in the mid-1970s, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Per-person productivity has grown considerably since then, but most Americans have not reaped the benefits of those productivity gains. They’ve gone largely to the top.

Inequality on this scale is bad for many reasons but it is also bad for the economy. The wealthy devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, the very wealthy are more likely to invest their earnings wherever around the world they can get the highest return.

This underlying earnings problem has been masked for years as middle- and lower-income Americans found means to live beyond their paychecks. But they have now run out of such coping mechanisms. As I’ve noted elsewhere, the first coping mechanism was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 — to more than 70 percent. But there’s a limit to how many mothers can maintain paying jobs.

So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

But there’s also a limit to how many hours Americans can put into work, so Americans turned to a third coping mechanism. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks by refinancing home mortgages and taking out home-equity loans. But this third strategy also had a built-in limit. And now, with the bursting of the housing bubble, the piggy banks are closing. Americans are reaching the end of their ability to borrow and lenders have reached the end of their capacity to lend. Credit-card debt, meanwhile, has reached dangerous proportions. Banks are now pulling back.

As a result, typical Americans have run out of coping mechanisms to keep up their standard of living. That means there’s not enough purhasing power in the economy to buy all the goods and services it’s producing. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth.

The only way to keep the economy going over the long run is to increase the real earnings of middle and lower-middle class Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway. Nor is the answer to give tax breaks to the very wealthy and to giant corporations in the hope they will trickle down to everyone else. We’ve tried that and it hasn’t worked. Nothing has trickled down.

Rather, the long-term answer is for us to invest in the productivity of our working people — enabling families to afford health insurance and have access to good schools and higher education, while also rebuilding our infrastructure and investing in the clean energy technologies of the future. We must also adopt progressive taxes at the federal, state, and local levels. In other words, we must rebuild the American economy from the bottom up. It cannot be rebuilt from the top down.



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36 responses to “The Heart of the Economic Mess, by Robert Reich

  1. Tucker’s picture is a lot cuter than Dr. Reich’s


  2. Bob Schaffer’s Son May Face Discipline At School For Racist Facebook Page

    And they wonder why we call them “repugs”

  3. dnd

    Bob Schaffer’s facing the popular (but possibly a bit liberal for Colorado) Mark Udall, who currently represents Colorado’s 2nd district. They’re gunning for Wayne Allard’s seat.

    Bob Schaffer’s a decent guy, though he’s got some corporate skeletons in his closet. This thing with his son is making all the local news, but will probably be forgotten by November.

  4. dnd

    Really good piece by Reich. The non-rich (and some rich) have been living beyond their paychecks. The best way to get rich and stay that way is to have a prosperous middle class, and for the lower class not to be impoverished. However there’s something about greed that works against that.

  5. Reich on MSNBC right now!

  6. Steve (Aging Hipster)

    Thanks Sheila Reich’s and Stuffinenvelops books are my two favorites among the Clinton memoirs. He’s a smart guy for sure..

  7. Horsedooty

    the easiest way to get rich is to carefully chose your parents and ask for a complete financial statement before being born.

    The easiest way to stay rich is to have a rich spouse also. Along with very rich grand parents helps a lot.

    ¡yo soy Horsedooty!

  8. Running for president and winning seems to be a good way to end up rich too!

  9. Steve (Aging Hipster)

    “I am not a crook”

  10. Yeah but what about Killer Dog Nasty?

  11. dog's eye view

    Marc Ambinder: In Search of a Landslide

    Some thoughts on why Obama is not more ahead of McCain — or maybe he is.

    He’s opened this one to comments, so maybe leave one for him.

  12. dog's eye view

    Patricia had this video up on Morning Martini. Someone might have posted it yesterday, but do love watching this Obama response on energy.


  13. Dr. Ivins is dead, he committed suicide, and therefore he’s guilty of sending the anthrax that killed seven and sickened scores more — so says the FBI. Case closed! Move on!

  14. Hey eProf if you’re around I’d love to see what you have to say about what the DOJ said today about the anthrax case.

  15. Chef Sheila

    Liked the marc Ambinder article. I makes sense and puts a more realistic spin on the poll shifts. I guess holding steady and then expecting a bounce after the convention is traditional and what we can really expect.

    thanks Dog

  16. Chef Sheila


    This whole incident sounds like its made for Hollywood….

  17. Weird we both posted at the same time eProf, were you watching the News Hour too?

  18. Chef Sheila

    Exon/McCain 08

    I like that. Its kind of catchy

  19. Obama’s lead over McCain remains what it was last month. And while the Arizona Senator now has the edge on being a straight-talker, the Democrat’s supporters continue to be much more enthusiastic than McCain’s.
    Barack Obama leads John McCain by 45% to 39% in the latest CBS News Poll.

  20. Steve (Aging Hipster)

    Bleary eyes good morning to all

  21. Steve (Aging Hipster)

    “Bleary eyes good morning to all”

    er uh I meant

    Bleary eyed good morning to all

  22. Steve (Aging Hipster)

    Nice article on how you can save a lot of money with better driving habits, ect…the do-it-yourself method that Grumpy thinks is so funny….

  23. Steve (Aging Hipster)

    Left Winger Rails Against Obama’s Afghanistan Policy

    What I get from the article is “Al Qeada isn’t interested in attacking the US any more.”

    I don’t agree with a word of it, I am just passing it along.

  24. Steve (Aging Hipster)

    The Bush Administration, ABC News and the Scare Tactics That Lead the US to War

    Like several of my fellow exiles here I have been following this story with raised eyebrows since it first popped up here. I thought some of you might be interested.

    Or maybe you would just like to buy the feds
    Nothing to see here, move along argument.

  25. Chef Sheila

    Steve Honestly,

    We all have never thought anything else but, “The Feds Did It”. I can’t speak for some, but most of us who started with Crawfordslist were decrying the war and all the obvious lies before we even hit the ground in Kuwait.

  26. Steve (Aging Hipster)

    Thanks Sheila. i will be in and out all day today. Lots of flaming bowling pins in the air, and am also follwoing the favre story—he was traded to the Jets.

  27. Karolenna

    Hi Folks,

    Like Steve I will be in and out today. Babysitting this morning. Looking forward to it.

    Stay cool.

  28. Chef Sheila

    Well! I’ll be doing my usual hit and run between meals

  29. Chef Sheila

    Speaking of hit and Run,

    Why is this non-argument about the Clintons and the Convention coming up again?

  30. Good morning all

    Slow news cycle….

  31. morning peeps. good day to avoid Craig’s, today’s thread over there is going to do nothing but whip up the cadre of hysterics.

  32. Chef Sheila

    Good Morning Burrito!

    I haven’t read over there since the last time there was a scuffle of nastiness. I like it here more better ;0)

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