Robert Reich’s latest book, Aftershock, is the first I’ve seen post-Great Recession to offer an economic rather than a political argument for either fair or re- distribution of wealth, depending on your political leanings.
Reich explores the paradox of productivity: what does it profit a nation to produce if its citizens cannot afford the fruits of that production? According to Reich, it causes lots of trouble, both economically and socially.
This paradox was most famously identified, and solved, by Henry Ford in 1914 when he increased his workers’ wages to $5 a day, an unheard-of rate for factory workers at the time. Ford, in nearly doubling his workers’ wages, turned them into consumers, specifically consumers of the very Model Ts they were building. As Reich writes, “Ford understood the basic economic bargain that lay at the heart of a modern, highly productive economy. Workers are also consumers.”
But despite Ford’s early successes, the real hero of Reich’s book is Marriner Eccles, Federal Reserve Board Chairman under FDR. Eccles saw the inequality of wealth in American society as the chief culprit behind the Great Depression. Not surprisingly, Reich sees parallels with the run-up to the bursting housing bubble that signaled the Great Recession of 2007.
The concentration of wealth was such that, according to Reich’s sources, the share of total income commanded by the richest 1% more than doubled from its low in the mid-1970s to over 23% in 2007 (a figure not seen since 1928, just before the Great Depression). Reich (and Eccles before him) contends that this concentration of wealth artificially drives up prices and creates bubbles: stocks in 1928, tech stocks in 2000 (when the wealth concentration was again over 20%), and housing in 2007.
Reich contends that not only does such a concentration offend our sense of fairness and distort price signals, but encourages over-leveraging as the aspirational middle class runs out of coping mechanisms for keeping up with the wealthy. According to Reich, the middle class put off the day of reckoning by first moving women into the workforce and then working longer hours until these resources were exhausted, finally ‘borrowing to the hilt’ to consume at the same pace relative to the wealthy while relative incomes fell.
Reich fears an angry, populist, xenophobic backlash leading to protectionism and decline, but also offers remedies to restore the balance of income to the point where the nation will be able to afford to consume what it produces. Though explicitly swearing it is no “Robin Hood” scheme, Reich’s solutions do offer up a fair degree of income redistribution:
Reverse Income Tax – Essentially an expansion of the Earned Income Tax Credit, a reverse income tax credit would pay every full-time worker $1 for every $2 their salary fell below $50,000 (e.g. someone making $30,000 would get $10,000 from the federal government). Additionally, incomes between $50,000 and $90,000 would be taxed at 10%; between $90,000 and $160,000, 20%. The rate would apply regardless of the source: wage, dividend, or capital gain.
Higher Marginal Taxes on the Wealthy – Once we get above $160,000, the marginal rates go up; 40% between $160,000 and $260,000, 50% between $260,000 and $410,000, and 55% over $410,000. This last category represents the top 1% in wage distribution.
A Carbon Tax – Initially starting at $35 per metric ton of carbon dioxide (or its equivalent), the tax would rise to $115 per ton or an additional $1 per gallon of gas (approximately).
A Re-employment System – Designed to replace unemployment insurance, a reemployment system would pay workers 90% of the difference between their old & new (lower) salaries for two years in the event of a job loss or 90% of their former wage for one year for approved retraining.
School Vouchers Based on Family Income – Converts the average per child per year cost into a range of voucher amounts based on family income. School districts would compete for the voucher dollars.
College Loans Linked to Subsequent Earnings – 10% of a graduate’s income for the first ten years of full-time work, regardless of occupation, would be put into a fund to provide free tuition at public colleges and universities and federal loans for private colleges.
Medicare for All – A single-payer system with subsidies for low- and middle-income families.
Public Goods – Free public transportation, parks, recreational facilities, museums & libraries.
In the end though, Reich’s solutions replace one pricing paradox with another, namely: how is information about supply & demand and capital allocation transmitted to markets in such a manner as to provide for complex and competing desires efficiently & equitably when the signals that transmit that information (prices) are being distorted by political policy choices? Though each reader will have their own preference as to which paradox they are most comfortable with, the true test may be which regime can survive in a competitive, international environment.
Reich explores the paradox of productivity: what does it profit a nation to produce if its citizens cannot afford the fruits of that production? According to Reich, it causes lots of trouble, both economically and socially.
This paradox was most famously identified, and solved, by Henry Ford in 1914 when he increased his workers’ wages to $5 a day, an unheard-of rate for factory workers at the time. Ford, in nearly doubling his workers’ wages, turned them into consumers, specifically consumers of the very Model Ts they were building. As Reich writes, “Ford understood the basic economic bargain that lay at the heart of a modern, highly productive economy. Workers are also consumers.”
But despite Ford’s early successes, the real hero of Reich’s book is Marriner Eccles, Federal Reserve Board Chairman under FDR. Eccles saw the inequality of wealth in American society as the chief culprit behind the Great Depression. Not surprisingly, Reich sees parallels with the run-up to the bursting housing bubble that signaled the Great Recession of 2007.
The concentration of wealth was such that, according to Reich’s sources, the share of total income commanded by the richest 1% more than doubled from its low in the mid-1970s to over 23% in 2007 (a figure not seen since 1928, just before the Great Depression). Reich (and Eccles before him) contends that this concentration of wealth artificially drives up prices and creates bubbles: stocks in 1928, tech stocks in 2000 (when the wealth concentration was again over 20%), and housing in 2007.
Reich contends that not only does such a concentration offend our sense of fairness and distort price signals, but encourages over-leveraging as the aspirational middle class runs out of coping mechanisms for keeping up with the wealthy. According to Reich, the middle class put off the day of reckoning by first moving women into the workforce and then working longer hours until these resources were exhausted, finally ‘borrowing to the hilt’ to consume at the same pace relative to the wealthy while relative incomes fell.
Reich fears an angry, populist, xenophobic backlash leading to protectionism and decline, but also offers remedies to restore the balance of income to the point where the nation will be able to afford to consume what it produces. Though explicitly swearing it is no “Robin Hood” scheme, Reich’s solutions do offer up a fair degree of income redistribution:
Reverse Income Tax – Essentially an expansion of the Earned Income Tax Credit, a reverse income tax credit would pay every full-time worker $1 for every $2 their salary fell below $50,000 (e.g. someone making $30,000 would get $10,000 from the federal government). Additionally, incomes between $50,000 and $90,000 would be taxed at 10%; between $90,000 and $160,000, 20%. The rate would apply regardless of the source: wage, dividend, or capital gain.
Higher Marginal Taxes on the Wealthy – Once we get above $160,000, the marginal rates go up; 40% between $160,000 and $260,000, 50% between $260,000 and $410,000, and 55% over $410,000. This last category represents the top 1% in wage distribution.
A Carbon Tax – Initially starting at $35 per metric ton of carbon dioxide (or its equivalent), the tax would rise to $115 per ton or an additional $1 per gallon of gas (approximately).
A Re-employment System – Designed to replace unemployment insurance, a reemployment system would pay workers 90% of the difference between their old & new (lower) salaries for two years in the event of a job loss or 90% of their former wage for one year for approved retraining.
School Vouchers Based on Family Income – Converts the average per child per year cost into a range of voucher amounts based on family income. School districts would compete for the voucher dollars.
College Loans Linked to Subsequent Earnings – 10% of a graduate’s income for the first ten years of full-time work, regardless of occupation, would be put into a fund to provide free tuition at public colleges and universities and federal loans for private colleges.
Medicare for All – A single-payer system with subsidies for low- and middle-income families.
Public Goods – Free public transportation, parks, recreational facilities, museums & libraries.
In the end though, Reich’s solutions replace one pricing paradox with another, namely: how is information about supply & demand and capital allocation transmitted to markets in such a manner as to provide for complex and competing desires efficiently & equitably when the signals that transmit that information (prices) are being distorted by political policy choices? Though each reader will have their own preference as to which paradox they are most comfortable with, the true test may be which regime can survive in a competitive, international environment.