Robert Reich: Income gap leading to 'dead' economy

McClatchy NewspapersSeptember 24, 2010 

WASHINGTON — Economists and historians will study the so-called Great Recession for decades to come, but we already know that the deep downturn laid bare the widening income gap between rich and poor in America.

The Census Bureau reported on Sept. 16 that the number of Americans living in poverty hit a 51-year high in 2009, and income disparity has only grown more severe in economic hard times. It's led Robert Reich to conclude the time is now for tough medicine to narrow this gulf.

A labor secretary in the Clinton administration, Reich is a liberal economist at University of California-Berkeley and a prolific economic writer. In a new book, "Aftershock: The Next Economy and America's Future," he argues that income inequality has left America's middle class too unstable financially to fuel demand for goods and services as in the past.

Absent aggressive government policies, he said, the average worker will continue to see wages stay flat or decline and the entire economy will suffer and the small number of rich don't spend enough to make up for the lost income in the middle.

Reich sat down with members of McClatchy's Washington bureau, and here are some of his thoughts, edited into a question and answer format.

Q: Where are we now in terms of income inequality?

A: The larger story is in this country we have had an extraordinary period of time, over the last 20 years, culminating in the top 1 percent, the top one-tenth of 1 percent, the top one-hundredth of 1 percent, getting more and more of the national income. To the point where not only the middle class lacks the purchasing power to keep the economy going, not only are we fomenting an incredibly lot of political anger and frustration and anxiety, but we are also at the same time giving an unbelievable tax windfall to the super rich, at a time when we have to worry about long-term deficits and we've got to invest in infrastructure, education and job training for the middle class, the working class and the poor.

Q: You cite research that shows the percentage of national income flowing to the top 1 percent of Americans peaked in 1928 before the Great Depression and in 2007 before the Great Recession. Why does this matter to the broader economy?

A: Where does the demand come from if consumers, who are 70 percent of the economy, are dead in the water; if businesses won't invest because there are not consumers for their business? Big businesses are sitting on $1.8 trillion in cash. What are they using it for? To buy other businesses, to buy back their shares of stock, to automate, to go offshore, to expand their opportunities abroad.

Q: As a proposed fix, you propose extending the earned-income tax credit given now to the poorest Americans further up the income scale, to earners with salaries as high as $55,000. You'd offset the lost revenues by imposing a carbon tax on energy use.

A: When I start talking about this kind of stuff, immediately I hear people charging, "You're a redistributionist." By the way, the marginal tax on the highest incomes under (President) Dwight Eisenhower, who nobody called a radical, was 91 percent on top incomes. I'm not suggesting anything close to that. But it is better for the rich to have a smaller share of a rapidly growing economy than a larger share of an economy that's essentially dead in the water.

Q: Are these periods of high-income inequality accompanied by social unrest?

A: What I do in the book is try to chart periods where we've had the ugliest, most partisan, nastiest, demagogic, isolationist, anti-immigrant politics. They are periods in which the economy is dead in the water, and you had high unemployment and people are scared. This is not rocket science. If you do not do anything about this in the next three or five or six years, we are going to see politics get uglier.

Q: In arguing for action now, you envision a 2020 election where a make-believe party called the Independence Party, somewhat patterned after the tea party movement, takes power. It adopts isolationist policies from the left and right.

A: If you've had a prolonged anemic recovery, if nothing structural changes, we could easily — and my prediction in the book is 10 years but it could be sooner — we could easily end up in an economy that is really a place of very cruel politics. An isolationist period, we withdraw from the IMF (International Monetary Fund), we essentially have tariffs and quotas and we try to protect ourselves in ways that you really can't.

ON THE WEB

Robert Reich's blog

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