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News Opinion

Robert B. Reich: Why the economy can't get out of first gear

Rarely in history has the cause of a major economic problem been so clear, yet have so few been willing to see it.

The major reason this recovery has been so anemic is not Europe's debt crisis. It's not, as right-wing economists tell us, because taxes are too high on corporations and the rich, safety nets are too generous to the needy, and regulations on business are too onerous. It's not even, as some liberals contend, because the Obama administration hasn't spent enough on a temporary Keynesian stimulus.

The answer is in front of our faces. It's because American consumers, whose spending is 70 percent of economic activity, don't have the dough to buy enough to boost the economy -- and they can no longer borrow like they could before the crash of 2008.

If you have any doubt, just take a look at the Survey of Consumer Finances, released last week by the Federal Reserve. Median family income was $49,600 in 2007. By 2010 it was $45,800 -- a drop of 7.7 percent.

All of the gains from economic growth have been going to the richest 1 percent -- who, because they're so rich, spend no more than half what they take in. They send the rest around the world wherever it can get the highest return.

Can I say this any more simply? The earnings of the great American middle class fueled the great American expansion for three decades after World War II. Their relative lack of earnings in more recent years set us up for the great American bust.

Starting around 1980, globalization and automation began exerting downward pressure on median wages. Employers broke unions in order to make more profits. And increasingly deregulated financial markets began taking over the real economy.

The result was painfully slow wage growth for most households. Women surged into paid work in order to prop up family incomes. When that stopped working, families went deep into debt, using the rising values of their homes as collateral. Then the housing bubble popped.

The Fed's latest report shows how loud that pop was. Between 2007 and 2010 (the latest data available) American families' median net worth fell almost 40 percent -- down to levels last seen in 1992. The typical family's wealth is their home, not their stock portfolio -- and housing values have dropped by a third since 2006.

Bottom line: The American economy is still struggling because the vast American middle class can't spend more to get it out of first gear.

What to do? There's no simple answer in the short term except to hope we stay in first gear and don't slide backwards. Over the longer term, the answer is to make sure the middle class gets far more of the gains from economic growth.

How? We might learn something from history. During the 1920s, income concentrated at the top. By 1928, the top 1 percent was raking in an astounding 23.94 percent of the total (close to the 23.5 percent the top 1 percent got in 2007). At that point, the bubble popped and we fell into the Great Depression.

But then came the Wagner Act, requiring employers to bargain in good faith with organized labor. Social Security and unemployment insurance. The Works Projects Administration and Civilian Conservation Corps. A national minimum wage. And to contain Wall Street, the Securities Act and Glass-Steagall Act.

In 1941, America went to war -- a vast mobilization that employed every able-bodied adult American, and put money in their pockets. And after the war came the GI Bill, sending millions of returning veterans to college. A vast expansion of public higher education. And huge infrastructure investments, such as the National Interstate and Defense Highways Act. Taxes on the rich remained at least 70 percent until 1981.

The result: By 1957, the top 1 percent of Americans raked in only 10.1 percent of total income. Most of the rest went to a growing middle class -- whose members fueled the greatest economic boom in the history of the world.

Get it? We won't get out of first gear until the middle class regains the bargaining power it had in the first three decades after World War II to claim a much larger share of the gains from productivity growth.

Robert B. Reich, Chancellor's Professor of Public Policy at the University of California and former U.S. Secretary of Labor, is the author of the newly released "Beyond Outrage: What has gone wrong with our economy and our democracy, and how to fix it," a Knopf e-book original.

Copyright © 2015, The Baltimore Sun
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