Saving the Middle Class: A Review of Robert B. Reich’s After Shock, The Next Economy and America’s Future (Knopf, 2011)

With the American economy still in recovery mode, it’s a good time to consider whether the recession that began in 2008 was an aberration caused by, take your pick – government housing policies or greedy Wall Street speculators or both, or whether it stemmed from a more fundamental “structural” problem. Robert B. Reich, professor of public policy at U.C., Berkeley and former Secretary of Labor under Bill Clinton, comes down on the side of the latter in After-Shock, The Next Economy and America’s Future. The “Great Recession” as he dubs it, “was but the latest and largest outgrowth of an increasingly distorted distribution of income” (p. 5) which must be addressed lest the U.S. fall prey to reactionary political forces like those that led to the rise of Adolf Hitler (p. 90-91).

The distributional distortion began according to Reich when our political leaders failed to foresee or confront the impact of technology and global competition on the living standard of America’s middle class beginning in the 1970s (p. 6). As a result, over the past 35 years the rich have been free to get richer, while income levels for the middle class stagnated.

The middle class didn’t feel the pain for a while Reich argues because America’s families added a second wage earner, worked longer hours and was able to take advantage of cheap credit to purchase everything from houses and cars to lattes and Big Macs. Reich views Great Recession as the playing out of those “coping mechanisms” – when policies that had allowed people to borrow more than they could repay resulted in a house of cards debt structure that inevitably collapsed (p. 7).

Reich believes that the middle class is not getting its fair share of what our economy produces. That was not true he writes from the end of World War II until the mid-1970’s when middle class incomes were on the rise and the country prospered. To redress this imbalance and restore the implied bargain between the wealthy and the middle class, Reich calls for a tax driven redistribution of income, which he posits, can be brought about if America’s corporate CEOs go along – not primarily on moral grounds, but out of self-interest. If the rich give up some of their wealth to the middle class, the economy will grow Reich argues and they will benefit along with everyone else.

What does Reich propose?

Reich offers two kinds of reforms – those designed to redistribute income and those aimed at helping people who have been impacted negatively by economic dislocation. By asking those earning over $410,000 to accept being taxed at 55% (roughly 67% higher than today) and by imposing a “carbon tax” on energy producers, Reich proposes to raise enough money to institute a reverse income tax whereby people earning less than $50,000 a year are to be given up to $15,000 a year by the government. This he argues would result in sufficient domestic consumption to get the economy moving again and forestall any potential political crisis.

To deal with dislocation Reich favors measures including universal Medicare, school vouchers based on family income and making college entirely free at public colleges although graduates would be expected to repay the cost out of their future incomes.

One can argue about Reich’s specific reforms. I question for example whether it’s wise to give people an incentive to earn less and certainly one can question his plan for bringing about these reforms: namely, relying on corporate leaders to buy into his analysis of what’s in their best interest. However, focusing on his solutions assumes that we accept his thesis that the relatively static level of middle class incomes over the past three decades is largely a function of a distortion in the domestic economy brought about by public policy beginning with the Reagan presidency?

Another Interpretation

My major complaint is that Reich fails to take into account major developments in the global economy. To do so requires one to recognize that the prosperity the US experienced during Reich’s “Great Prosperity” – which he dates from 1947 to 1975 – was built on the imbalance in our trade with the third world, an imbalance which allowed us to obtain oil and other natural resources on the cheap and to charge high prices for our agricultural and manufacturing products.

What began with competition from Japan and Germany and continued as a result of OPEC’s raising the price of oil was a redressing of that imbalance. World-wide competition led to the long slow rise of third world economies such that today they are growing at a faster rate than the U.S. economy. China, Brazil, India and even small countries like Vietnam are also attracting capital that once preferred to stay home as well as capturing jobs once held by U.S. workers.

An alternative interpretation of the events which Reich describes as a distributional imbalance between America’s wealthy and its middle class is that the U.S. economy as a whole has been undergoing a re-balancing between the developed and under-developed worlds which has limited the incomes of those Americans who formerly benefited from lack of world-wide competition. While Reich is correct in stating that Reagan lowered taxes on the rich (along with the middle class) and that salaries of some CEOs reached levels not justified by their contributions to their shareholders, the extent to which the stagnation of middle class income levels can be laid to these policies has to be understood in this global context.

Who is Middle Class?

My second disagreement with Reich is over his use of the term “middle class”. He defines middle class in a footnote as “the 40 percent of American families with incomes above the median family income and the 40 percent below” (p. 19).

Even on his own terms, lumping 80 percent of American families into one “class” is problematic. In 2006, more than 12% of family incomes fell below the government’s poverty threshold and a full 20% had incomes under $20,000. By the way, the definition of family income includes food stamps, alimony, unemployment insurance and disability payments for all members of a household whether related or not. Family income data does not, however, include the underground economy, which experts size at between $690 billion and $1 trillion annually.

Reich wants us to believe that a family with earnings under $20,000 a year shares the same stake in the economy as a family earning $120,000 a year. Consider however that two-wage earner professional families have sufficient income to enjoy the fruits of their labor and thus are overwhelming optimistic about the future. Nor they are likely to support scape-goating political candidates. At the other end of the spectrum, the woes of the lowest income families are not caused by unemployment levels or lack of opportunity. Instead a variety of social factors interfere with poor people from gainful employment. In terms of the political threat of this segment of society, the majority of very poor are not registered to vote and those that are rarely show up at the polls. Part of the group in between the poorest and the two-wage earner families on the other hand may feel resentment towards those who are very successful. It is this segment that supported the tea party movement and which could support candidates offering even more drastic policies.

That analysis – sketchy as it admittedly is – points out the problem with Reich’s definition of middle class: the concept of class in today’s world ought not to be accepted as valid. The term stems from Karl Marx’s analysis of capitalism as containing the seeds of its own destruction by pushing more and more people into a working class that would get poorer and poorer until revolution was its only hope. More than one hundred years of history ought to be enough to dissuade people from thinking that American society is made up of classes that are so rigid that once someone has fallen into the working class he is unable to rise out of it. Further, recent history ought to dissuade anyone from viewing corporate America as a set of powerful business interests that dominates America economically and politically. Instead even before the 2008 recession we saw giant corporations brought to their knees and disappear while upstarts grew from dormitory rooms and garages to garner their founders Forbes 500 listings. Consider as well that corporate CEO’s lack either tenure or a guaranteed term in office to protect them against their business failings.

Use of the term ‘class’ in any discussion of American society ought to be recognized as a form of political propaganda. It presumes a reality that is not borne out by fact or by history, and when accepted loads the discussion in favor of those who benefit from the conclusions that class is an effectual social construct.

Unfortunately too many Americans do not realize that this is not our reality. Even in recessionary times our society offers incredible opportunities for people of talent and ambition to create lives of accomplishment and to gain personal comfort. The problem is that many of the adults who are at the bottom income rungs lack the necessary combination of ambition, ability, education and experience required to take advantage of those opportunities. That’s why there are unfilled jobs in all kinds of industries and not just at high-tech companies hungry for software engineers.

My final objection to Reich’s analysis is that it presupposes a static world. Those families whose incomes were just above the poverty threshold in 1980 were by 2000 most likely living in largely paid for homes with two cars in their driveways and a TV in every room. And, when comparing purchasing levels of a family in 1980 versus 2010 one must also take into account the quality of the product being purchased. Today cars both offer more safety features and last longer; homes offer greater comfort for family members; healthcare continues to add years to people who might have succumbed in the past. Most families move up the income ladder over their work lives and thus do not feel the pain Reich would have them feel.

Viewing all this from the after affects of the current recession distorts the big picture. As a result more people are pessimistic than five years ago and they are searching for someone to blame. In that regard Reich is correct to be worried.

What’s the Solution?

Even if Reich’s analysis that 80% of Americans have a unified social need, and I believe it is fundamentally flawed, that does not mean that his reform measures ought not to be considered. He is probably correct that the economy would be better off if people with incomes under $50,000 a year had more to spend on clothing, vacations and electronics. Alternatively, we as a society might want to provide more resources to those families on moral grounds even if it did not cause our economy to grow faster than it would otherwise. The problem is how to aid such families without harming our economy in the process.

Given my understanding of major world economic trends, reducing the ability of American companies to compete globally is the worst thing we can do. Any policy that hampers the emergence and growth of businesses that serve an international market is akin to economic suicide. That includes policies such as raising the tax on capital gains. Why? Such an increase will hamper investment in U.S. companies while providing an incentive for investors to look overseas. Because politicians and bureaucrats are inevitably poor arbiters of which businesses should grow and which should die, we should adopt policies that encourage domestic capital to support domestic entrepreneurship. For proof of that government is incapable of picking the right companies to back consider the abominable record of producing jobs of programs like NYS’ Empire Zones.

Second, we need to revise the policies that limit growth companies from obtaining skilled workers no matter their nationality. The current quota on foreign workers is also a form of economic suicide. Highly skilled people who cannot accept a job in the U.S. because the annual quota for such workers has been filled two months into the year may very well end up working for overseas companies that compete with the very U.S. companies that would have hired them, further weakening our economy and pushing more Americans down the economic ladder.

Finally we need to do something about the fact that millions of Americans find they are better off living off the underground economy while collecting unemployment and Medicaid, and the like than they would be if they accepted a 9 to 5 job. When a hospital in San Jose CA cannot fill unskilled and semi-skilled positions while millions are out of work, something is very, very wrong. (See Washington Post, Feb. 2, 2011.)

What about people displaced by the now more rapid transformation of our economy? The problem with government job training programs is that they often train people for jobs that are disappearing and pay poorly.

When I was 23 years old I spent a year (as a Vista Volunteer) teaching reading and math to men in Atlanta, Georgia who were receiving training in auto mechanics, carpentry, plumbing and painting. The problem with those career choices was that to get a good job as an auto mechanic you had to be sent for manufacturer’s training by your dealer employer. The problem with plumbing and carpentry was that the unions weren’t admitting blacks and the problem with painting is that no amount of training gave graduates a leg up in the job market.

Even community colleges can’t always move fast enough to provide courses in fields that come open. A better solution would be to give displaced workers vouchers that they could present to businesses with openings to cover training expenses.

Tax Policy Dilemma

It’s true the rich won’t miss the money some want to take on top of the current rates as much as the poor would benefit from having a small piece of that pie. The problem is that redistribution of wealth by government policy does not address the underlying problems America faces as a super power that can no longer dominate the rest of the world economically as it once did. Nor is expanding the current redistributional tax system a long-term solution. The likely damage is greater to the recipients of such aid to the extent they continue to believe they are guaranteed a certain standard of living just by virtue of being an American. Instead we need political leaders who explain to the public that world-wide competition is threatening our standard of living and that the way to fight back is to develop a more entrepreneurial society not hamper private sector growth as would occur under Reich’s plan.

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