Robert Reich: The Truth About the American Economy

by on May 31, 2011 · 10 comments

in American Empire, Economy

By Robert Reich / May 30, 2011

The U.S. economy continues to stagnate. It’s growing at the rate of 1.8 percent, which is barely growing at all. Consumer spending is down. Home prices are down. Jobs and wages are going nowhere.

It’s vital that we understand the truth about the American economy.

How did we go from the Great Depression to 30 years of Great Prosperity? And from there, to 30 years of stagnant incomes and widening inequality, culminating in the Great Recession? And from the Great Recession into such an anemic recovery?

The Great Prosperity

During three decades from 1947 to 1977, the nation implemented what might be called a basic bargain with American workers. Employers paid them enough to buy what they produced. Mass production and mass consumption proved perfect complements. Almost everyone who wanted a job could find one with good wages, or at least wages that were trending upward.

During these three decades everyone’s wages grew — not just those at or near the top.

Government enforced the basic bargain in several ways. It used Keynesian policy to achieve nearly full employment. It gave ordinary workers more bargaining power. It provided social insurance. And it expanded public investment. Consequently, the portion of total income that went to the middle class grew while the portion going to the top declined. But this was no zero-sum game. As the economy grew almost everyone came out ahead, including those at the top.

The pay of workers in the bottom fifth grew 116 percent over these years — faster than the pay of those in the top fifth (which rose 99 percent), and in the top 5 percent (86 percent).

Productivity also grew quickly. Labor productivity — average output per hour worked — doubled. So did median incomes. Expressed in 2007 dollars, the typical family’s income rose from about $25,000 to $55,000. The basic bargain was cinched.

The middle class had the means to buy, and their buying created new jobs. As the economy grew, the national debt shrank as a percentage of it.

The Great Prosperity also marked the culmination of a reorganization of work that had begun during the Depression. Employers were required by law to provide extra pay — time-and-a-half — for work stretching beyond 40 hours a week. This created an incentive for employers to hire additional workers when demand picked up. Employers also were required to pay a minimum wage, which improved the pay of workers near the bottom as demand picked up.

When workers were laid off, usually during an economic downturn, government provided them with unemployment benefits, usually lasting until the economy recovered and they were rehired. Not only did this tide families over but it kept them buying goods and services — an “automatic stabilizer” for the economy in downturns.

Perhaps most significantly, government increased the bargaining leverage of ordinary workers. They were guaranteed the right to join labor unions, with which employers had to bargain in good faith. By the mid-1950s more than a third of all America workers in the private sector were unionized. And the unions demanded and received a fair slice of the American pie. Non-unionized companies, fearing their workers would otherwise want a union, offered similar deals.

Americans also enjoyed economic security against the risks of economic life — not only unemployment benefits but also, through Social Security, insurance against disability, loss of a major breadwinner, workplace injury and inability to save enough for retirement. In 1965 came health insurance for the elderly and the poor (Medicare and Medicaid). Economic security proved the handmaiden of prosperity. In requiring Americans to share the costs of adversity it enabled them to share the benefits of peace of mind. And by offering peace of mind, it freed them to consume the fruits of their labors.

The government sponsored the dreams of American families to own their own home by providing low-cost mortgages and interest deductions on mortgage payments. In many sections of the country, government subsidized electricity and water to make such homes habitable. And it built the roads and freeways that connected the homes with major commercial centers.

Government also widened access to higher education. The GI Bill paid college costs for those who returned from war. The expansion of public universities made higher education affordable to the American middle class.

Government paid for all of this with tax revenues from an expanding middle class with rising incomes. Revenues were also boosted by those at the top of the income ladder whose marginal taxes were far higher. The top marginal income tax rate during World War II was over 68 percent. In the 1950s, under Dwight Eisenhower, whom few would call a radical, it rose to 91 percent. In the 1960s and 1970s the highest marginal rate was around 70 percent. Even after exploiting all possible deductions and credits, the typical high-income taxpayer paid a marginal federal tax of over 50 percent. But contrary to what conservative commentators had predicted, the high tax rates did not reduce economic growth. To the contrary, they enabled the nation to expand middle-class prosperity and fuel growth.

The Middle-Class Squeeze, 1977-2007

During the Great Prosperity of 1947-1977, the basic bargain had ensured that the pay of American workers coincided with their output. In effect, the vast middle class received an increasing share of the benefits of economic growth. But after that point, the two lines began to diverge: Output per hour — a measure of productivity — continued to rise. But real hourly compensation was left in the dust.

It’s easy to blame “globalization” for the stagnation of middle incomes, but technological advances have played as much if not a greater role. Factories remaining in the United States have shed workers as they automated. So has the service sector.

But contrary to popular mythology, trade and technology have not reduced the overall number of American jobs. Their more profound effect has been on pay. Rather than be out of work, most Americans have quietly settled for lower real wages, or wages that have risen more slowly than the overall growth of the economy per person. Although unemployment following the Great Recession remains high, jobs are slowly returning. But in order to get them, many workers have to accept lower pay than before.

Starting more than three decades ago, trade and technology began driving a wedge between the earnings of people at the top and everyone else. The pay of well-connected graduates of prestigious colleges and MBA programs has soared. But the pay and benefits of most other workers has either flattened or dropped. And the ensuing division has also made most middle-class American families less economically secure.

Government could have enforced the basic bargain. But it did the opposite. It slashed public goods and investments — whacking school budgets, increasing the cost of public higher education, reducing job training, cutting public transportation and allowing bridges, ports and highways to corrode.

It shredded safety nets — reducing aid to jobless families with children, tightening eligibility for food stamps, and cutting unemployment insurance so much that by 2007 only 40 percent of the unemployed were covered. It halved the top income tax rate from the range of 70 to 90 percent that prevailed during the Great Prosperity to 28 to 35 percent; allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax; and shrunk inheritance taxes that affected only the top-most 1.5 percent of earners. Yet at the same time, America boosted sales and payroll taxes, both of which took a bigger chunk out of the pay the middle class and the poor than of the well off.

How America Kept Buying: Three Coping Mechanisms

Coping mechanism No. 1: Women move into paid work. Starting in the late 1970s, and escalating in the 1980s and 1990s, women went into paid work in greater and greater numbers. For the relatively small sliver of women with four-year college degrees, this was the natural consequence of wider educational opportunities and new laws against gender discrimination that opened professions to well-educated women. But the vast majority of women who migrated into paid work did so in order to prop up family incomes as households were hit by the stagnant or declining wages of male workers.

This transition of women into paid work has been one of the most important social and economic changes to occur over the last four decades. In 1966, 20 percent of mothers with young children worked outside the home. By the late 1990s, the proportion had risen to 60 percent. For married women with children under the age of 6, the transformation has been even more dramatic — from 12 percent in the 1960s to 55 percent by the late 1990s.

Coping mechanism No. 2: Everyone works longer hours. By the mid 2000s it was not uncommon for men to work more than 60 hours a week and women to work more than 50. A growing number of people took on two or three jobs. All told, by the 2000s, the typical American worker worked more than 2,200 hours a year — 350 hours more than the average European worked, more hours even than the typically industrious Japanese put in. It was many more hours than the typical American middle-class family had worked in 1979 — 500 hours longer, a full 12 weeks more.

Coping mechanism No. 3: Draw down savings and borrow to the hilt. After exhausting the first two coping mechanisms, the only way Americans could keep consuming as before was to save less and go deeper into debt. During the Great Prosperity the American middle class saved about 9 percent of their after-tax incomes each year. By the late 1980s and early 1990s, that portion had been whittled down to about 7 percent. The savings rate then dropped to 6 percent in 1994, and on down to 3 percent in 1999. By 2008, Americans saved nothing. Meanwhile, household debt exploded. By 2007, the typical American owed 138 percent of their after-tax income.

The Challenge for the Future

All three coping mechanisms have been exhausted. The fundamental economic challenge ahead is to restore the vast American middle class.

That requires resurrecting the basic bargain linking wages to overall gains, and providing the middle class a share of economic gains sufficient to allow them to purchase more of what the economy can produce. As we should have learned from the Great Prosperity — the 30 years after World War II when America grew because most Americans shared in the nation’s prosperity — we cannot have a growing and vibrant economy without a growing and vibrant middle class.

(This is excerpted from my testimony to the U.S. Senate Committee on Health, Education, Labor, and Pensions, on May 12. It is also drawn from my recent book, Aftershock: The Next Economy and America’s Future.)

Robert Reich is Chancellor’s Professor of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written thirteen books, including The Work of Nations, Locked in the Cabinet, Supercapitalism, and his most recent book, Aftershock.

{ 10 comments… read them below or add one }

avatar joe skolnicki May 31, 2011 at 10:07 pm

Unfettered and with the wealthy in total control capitalism drifts into a deflationary depression. It has happened over and over again. We have had a bubble economy,no real recovery since 1980. We are headed towards another 1929 guaranteed without intervention. There are no bubbles left.


avatar de June 1, 2011 at 7:45 pm

Globalization is the main factor for decreased salaries and jobs in the US. I don’t know how this can be ignored. How many things in your house are made in China, India, Vietnam, Mexico — low-cost countries? Probably 70% would be my guess. Hence, the breadwinners salary is stagnant or decreasing so the wife must work to keep income high enough. This isn’t the 1950’s anymore. Blame poor leadership in the US govt over the last 50 years for not keeping a balance to this sensitive situation. They should have kept a very minimal or limited economic activity with China. Not open the floodgates. Hope you understand what I’m saying. China labor was a major competitive advantage and should have been dealt with in a much better way by looking at all possible future scenarios that could have unfolded. Such as China’s dominance over the US dollar and China’s keeping their economy from expanding. They want to keep wages low, otherwise their people would be able to buy anything, which is what the Chinese govt doesn’t want. They want a Communist controlled society with a nascent (limited) Capitalistic system. The Chinese govt isn’t allowing their economy to explode and expand which means the Chinese people could then buy US goods and services which is what we desperately need. We scratched China’s back and they are not scratching ours. Failure on US leadership to predict that. I personally don’t trust our government, not so much because they give in to the lobbyists (greed), but because they are so negligent. Bottom line: Protect yourself and don’t trust inept and greedy leadership. Open your own business and don’t be vulnerable on the corporate ladder.


avatar Terry Edlin June 2, 2011 at 7:28 pm

Globalization is the culprit that comes readily to mind but Winner-Take-All Politics, ( the recent book by Jacob Hacker and Paul Pierson shows compelling evidence that is is the systematic and deliberate corruption of politics starting in the 1980s and continuing to this day that has undermined our country and our economy beyond recognition. I highly recommend the book.


avatar Citizen Cane June 1, 2011 at 9:38 pm

We need long term solutions in a world run by short term thinkers. They can’t see a depression only 18 months away, because it’s beyond the artificial horizon of quarterly and annual budgets.


avatar Dan June 2, 2011 at 9:59 pm

Mr Reich – I do not disagree with you on many things, but i am curious to know just how much of an impact two primary factors had in the primacy of the USA in the post-WWII era.

The first is obvious – we had no prolonged recovery of physical infrastructure to repair. Europe and Asia lay in ruins for thousands of square miles of industrial development, but the USA was untouched and unspoiled. That alone HAS to account for some of the prosperity generated from 1947 – 1977, though I agree in principle that higher tax rates allowed for government revenues to accomplish many things – Medicare, Medicaid, Social Security expansions, Civil Rights (which could NEVER have been achieved in today’s divisive and hyper-partisan world.

The second is less obvious but equally compelling – the utter gutting of the oil reserves of North America – at least the light, sweet crude. We had an ocean of energy and we exploited almost all of the easy to get stuff by the mid 1970’s. I do not believe it is all coincidence that many of our economic woes began around the same time we began to run out of cheap, domestic oil literally shooting out of the ground.

An intact infrastructure and massive advantage on cheap power sources made us a force to reckon with like no other in history; and sadly, instead of leveraging those advantages for the betterment of all Americans, as the gravy train began to slow in the late 70’s we started handing the keys to the idiots of hard right ideology. Their primary mission to bring back the Gilded Age and erase any residual progress that WAS made while burning through our natural resources like binge drinkers on a Friday night before Prom. Reagan and the Bushes have wrought untold damage on the nation and we will be paying for their mistakes for decades to come….perhaps the next 30 year cycle should be known as “The Bill Collector Cometh”


avatar Seth Johnson June 9, 2011 at 7:12 pm

Who is investing in alternative energy technology, specifically hydrogen power? Check it out, might be something to it.


avatar BELOWZERO June 15, 2011 at 2:30 pm

There will be no recovery. The middle class has been trashed by the neo-con republicans.
There will be no tax increases.
There will be no wage increases.
There will be no expansion.
There will be no free market.
What there WILL be is a lot of hot air and BS from the right.
The few who vote will buy into the lies and put republicans back into public office November 2012. The rich will be happy happy happy.
Smile! You have been mugged again…


avatar john July 13, 2011 at 12:08 am

Why are we losing the middle class…..? Maybe because governmental regualtion…? no! really…
Robert Reich is too arrogant to understand and too isolated to see what many small business owners and large corporations are having to put up with… Look at Boeing, they are trying to build a huge 787 plant in SC but this administration (ie: government) is preventing the middle class to gain employment… Unbelievable… Obama NLRB Tells Boeing to Build Plant in Washington Not South Carolina (…

Hey Robert.. the Truth hurts, but dont teach our children about this……


avatar BELOWZERO July 13, 2011 at 2:23 pm

I will vote republican next time. That’s the ONLY thing that will work. I see that now.
We don’t really need good paying jobs. And we sure as hell don’t need National Health Insurance or Social Security or ANY of that stuff.
No one should ever be required to pay taxes. (except poor people and workers)
We don’t need regulations or laws that stifle the rich either.
We don’t need cops trying to keep us honest. WE will be able to lie, cheat ,steal ,rob ,poison maim and injure AT WILL! We’ll go scott free!
We don’t need Unions telling us what to do with our own damn businesses.
It will be a GREAT day when we win once and for all and can do whatever we damn well please.
Paying a nickle an hour is TOO MUCH. If we can we’re going to bring back slavery!!
Obama will gone gone gone and WE will be in charge of everything and everybody!!
This country will take off like a rocket. You’ll see…


avatar Jeffrey Cavell July 18, 2011 at 8:53 am

To Dr. Reich’s historical reveiw I would add this small observation: another change in the 70’s is the rise of the influence of the MBA-prepared CFO. Most American corporations were, before then, directed by engineers, and the product was the important thing. But stockholders of all kinds found they had a partner in the person who could put profit above all else, including decency and good judgement, ship companies overseas, loot pension plans, treat workers like faulty machinery… and justify child labor? Even my friends who hold MBAs admit the predatory behavior of some of their type is despicable. And common.


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