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Wednesday, February 13, 2008

"The Only Way to Keep the Economy Going Over The Long Run is to Increase the Wages of the Bottom Two-Thirds of Americans"

Robert Reich:

Totally Spent, by Robert Reich, Commentary, NY Times: We're sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.

The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going. ...

The underlying problem has been building for decades. America’s median hourly wage is barely higher than it was 35 years ago, 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. Most of what’s been earned in America since then has gone to the richest 5 percent.

Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us... They already have most of what they want. Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return.

The problem has been masked for years as middle- and lower-income Americans found ways to live beyond their paychecks. But now they have run out of ways.

The first way 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. ... But there’s a limit...

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 way of spending beyond their wages. 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... But this third strategy also had a built-in limit. With the bursting of the housing bubble, the piggy banks are closing.

The binge seems to be over. 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 wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. ... Most routine jobs are being automated anyway.

A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required. The tax credit functions like a reverse income tax. Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. ... We also need stronger unions, especially in the local service sector that’s sheltered from global competition. ...

Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities. This will require, at the least, good preschools, fewer students per classroom and better pay for teachers in such schools, in order to attract the teaching talent these students need.

These measures are necessary to give Americans enough buying power to keep the American economy going. They are also needed to overcome widening inequality, and thereby keep America in one piece.

The idea that the rich need to spend lavishly to prevent a recession is an old one, see for example the debate over the corn laws and the possibility/impossibility of gluts between Malthus and Ricardo. Later classical economists argued economy-wide gluts were impossible because the interest rate would move to equate saving and investment and, since all saving is converted into investment and investment is part of aggregate demand, there could be no loss of demand from saving (and hence no gluts: supply creates its own demand). Keynes, of course, had something to say about all this, and it's partly a difference in the propensity to consume at the margin (the mpc) that is behind the argument above. But it's easy to anticipate objections to the idea that transfers from rich to poor are needed to maintain a healthy, growing economy, or objections based upon the notion that transfers from rich to poor would harm economic growth.

But here's how I see it. Expanding the EITC is a good idea in any case, so none of that really matters.

    Posted by on Wednesday, February 13, 2008 at 01:02 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (141)


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