The 1% Solution

Robert Reich speaks up for everyone else.
By Glen Martin

America’s great cultural schism is deepening, with Tea Partiers partying hearty on one side and Occupiers flying their 99 percent colors on the other. But these are mere expressions of a deeper discontent, one born from a stark, unifying realization: We were robbed. All of us—left, right, and center; vegan communard, uncompromising Randist, and laid-off widget-twister. The rage is just a symptom, an acknowledgement of a rip-off of historic proportions—and an expression of fear that the worst isn’t over. Robert Reich, the former U.S. Secretary of Labor under President Bill Clinton and the Chancellor’s Professor of Public Policy at the University of California, Berkeley’s Goldman School of Public Policy, comments on this subject with both righteous indignation and enthusiasm.

Reporter Glen Martin reached Reich by phone at his office recently, and tossed a few questions his way.

Our economy is hobbled by debt—first corporate, now sovereign—and little is being done to address it. Our government representatives pander to their bases, but most Americans are centrist by nature and feel they’ve been hung out to dry. Can we break this impasse? Or is it a classic “wicked” problem, one with no practical solution?

Reducing the deficit long-term will require budget cuts and tax increases. And those tax increases should be particularly targeted to the wealthiest Americans. The richest 1 percent by income is now receiving the largest share of total income in 80 years—and they are also enjoying the lowest tax rate in three decades. From the end of World War II to 1981, the top marginal income tax rate never fell below 70 percent. During the Eisenhower administration, it was 91 percent. Today, it’s 35 percent. And most of the income for the richest Americans is capital gains, which typically is taxed at 15 percent. The wealth of the 400 richest Americans exceeds all the assets of the 150 million Americans in the bottom income bracket. Think of that! And yet they (the 400 richest) pay an average tax of 17 percent, because so much of their income is from capital gains.

At the same time, we need to create more income tax brackets. Currently, the top bracket is $375,000. So you have professionals like doctors and lawyers paying the same rate as a CEO making $20 million a year. That is patently unfair.

But given the level of both domestic and global debt, will that be enough? Or will we unavoidably embark on a massive and essentially uncontrolled deleveraging, with years of subsequent misery?

You hear that from some classic economists—that misery is the only way out of a deep recession, that you have to “deleverage” your way back to economic health, regardless of the damage you inflict on your citizens. This simply isn’t true. It’s not the level of debt itself that’s critical—it’s the ratio of debt to GDP. Now, it’s dangerous for a nation to let that ratio get out of hand—but you can address it through economic growth. The ratio of debt to GDP, of course, depends on the growth of the GDP. If an economy is in a recession, the last thing you want to do is cut public spending, especially when you’re in something like our current situation, where there isn’t enough private spending to make up the difference. The time to cut debt isn’t when vast numbers of Americans are out of work, consumer spending has stopped, and the economy has locked up. You cut debt when unemployment is down and growth is up. And we’re not at that place right now. In 1946, the U.S. debt was 120 percent of GDP. [It is currently at about 100 percent.] But in the ensuing 15 years, the ratio shrank dramatically. Why? We had tremendous public investment. The national highway system was built, we had the Marshall Plan to fund, and we had to maintain high military spending because of the Korean War and the Cold War. The lesson from that experience is that you have to avoid austerity when you’re in a serious recession. You must not cut public debt—if you do, you end up with a worse debt/GDP ratio and further economic deterioration.

A protectionist sentiment is ascendant, and free trade now seems reflexively distrusted by both the right and left. Will we see a disassembling of the global marketplace?

In every downturn, the public turns against global trade and immigration. The U.S. was deeply isolationist during the Great Depression—so isolationist that we were foolhardy enough to set off a trade war via the [1930] Smoot-Hawley Tariff [which raised U.S. tariffs dramatically and reduced the country’s imports and exports by more than 50 percent]. That made the Depression much worse, not better. Now we’re “tough on immigration,” and we’re “confronting China” (for maintaining a devalued yuan). But we forget that prior to the 2008 crash, unemployment was at 5 percent and we had more trade than we do now, but immigration was much higher and the yuan was even lower. So immigration and free trade aren’t driving our current problems. We mustn’t repeat the mistakes of the past.

So what’s your prognosis? Are we going to crawl out of the hole or just dig ourselves deeper?

The basic cause of the current recession is the housing bust. That represented a $7 trillion asset loss for the American people. We fooled ourselves into using our homes as piggy banks, and it became painfully clear that it wasn’t a sustainable strategy.

We feel poorer—we are poorer, and we’re spending less as a result. And as long as we spend less than the economy can potentially support, we’ll remain in recession.

Underlying this is three decades of income inequality. The economy today is twice as large as it was in 1980—we’re capable of producing far more than 30 years ago. But most of the gains have gone to the top. Most people don’t have the purchasing power, the basic means needed for economic participation. Until we get at the basic issue—income inequality—people won’t be able to spend. And if they can’t spend, we won’t turn this thing around.

From the Spring 2012 Piracy issue of California.
Image source: AP Photo/Jeff Chiu
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Thank you for the clear and succinct delineation of the 1% vs 99% issue.
So spending (and printing) another 5-10 trillion will fix the problem? We have to remember that the “1-5%” are large and small business owners who actually produce jobs. The rest of the eligible worker population is either looking for government handouts or waiting to be given a job. USA/World has a glut of workers; what we need is efficient job creators (Not the $300K/Year Government spending to create a $50K/Year job) to give people work; else the 49% of the population being supported by the government will grow and we will have the economy of the great government run/communist nations (i.e. Late Soviet union, North Korea, Cuba). I’d add China but they are using a mix of raw capitalism and watered down Communism not sure how that will turn out in long run. Job producer/talented worker relationship is a delicate balance. If management doesn’t treat/pay workers “right” they will go work for a competitor. If workers demand too much they will replace/outsourced. Both outcomes are painful for both parties. Last thing we want is government involvement to skew the balance….because in the long run you will have what you have now…slow/no real growth, high unemployment , increasing dept and decreasing credit rating. If 1000 workers lose their Jobs… 950 will collect benefits/wait for the 1-5%er (rich person) /corporation to give ‘em jobs. At most 50 will start small businesses. Unfortunately most of the 50 will find the cost of taxes/regulations is not worth the effort. It’s easier to find a way collect government payments. (SSI Disability rates skyrocket when the hyper-extendeded unemployment benefits run out). Taking more money (taxes) away from Job producers/investors/VCs will not produce more jobs. In the modern world….Job producers can/will move or source workers from other less expensive countries. (1920’s/1950s economic models don’t apply in a modern global economy) Look at Apple/Google/GE … Great American companies (management makes sweet love to Obama administration/policies nightly) doing everything they can to avoiding the highest taxes on the planet. Push ‘em too hard… They will move to another country. If we want job producers to have a sense of community/national responsibility don’t treat ‘em as a revenue source/sugar daddies. If we do; don’t be surprised if they resort to tax shelters/outsourcing (or sugar daddies leave town, leaving us with expensive lifestyle expectations/level we cannot afford). Regards Job producer
Robert Reich is just the type of radical that Cal does NOT need. His socialistic idealism is exactly why UC is short of operating money. As long as he and others of his ilk are encouraged to participate in and support events such as “Occupy Wall St.”, potential alumni donors will choose to not participate in UC’s ongoing fund raising campaigns.
So, Anonymous Job Producer, how is it that the Anonymous Job Producers who came before you managed to generate so much employment at tax rates of 70% - 90% (which were put in place during a number of Republican administrations, it should be noted)? It sounds like the only jobs you’re willing to create are in countries that won’t trouble you to meet certain minimum environmental and labor standards while contributing a share of your profits to the infrastructure of transportation, public safety, enforceable civil and criminal law, health, and education that allow you to operate. If you don’t leave something on the table for the people whom you expect to buy your goods and services, eventually you won’t have anyone to sell to.
Cutting, cutting, cutting - absolutely the wrong way to get out of the depression. The way to get out is to spend - to start with build our infrastructure, roads, rail, air, electricity transmission so we can get electricity from the producer (wind energy on the great plains to the cities), and much more - like education. Borrow the money from China and Europe at 3%. They are pushing it on us right now. As long as the value of our country continues to rise, due to higher quality population (education), productivity and infrastructure (partly as measured by GDP, but also by the willingness of foreigners to push money on us at 3%) we won’t even have to pay it back. We spent our way out of the great depression in WWII when our debt was as high as 120% of GDP (70% today) and we didn’t make consumer goods, just throwaway items like tanks and airplanes ( I was priveleged to fly in one of them over Germany in 1945 and did not worry about its effect on the national debt). Then, after the war, the government sent most of the veterans to school (2.2 million to universities and colleges and 6.6 million to other education and training)
(continuation of previous comment, I pushed the wrong button and got it sent before I had finished)That generation, not all of whom utilized the GI Bill but almost all supported by government funding (dole), invented most of the things (lasers, transisters) that run the information age and promote the prosperity of the United States. Government spending - good or bad? Where would we be without it?
The concept that income inequality is the problem is absurd. Mr. Reich should go live in a socialist country and gain an understanding of why Socialism robs individuals of the desire to work hard to improve their situation through excessive taxes and income redistribution. I agree with Jon Shawl that potential donors choose not to support Cal because of Mr. Reich and his views.
Is is possible that the 91% marginal rate that lasted from 1950-1963 actually created the middle class? Is it plausible that income inequality was minimized because the high rate of taxes on the highest earners made it impossible for capital to simply coagulate in the hands of a small minority? With the current tax structure, it is easy for some entrepreneurs and bankers to become extremely wealthy in a relatively short amount of time because they are not heavily taxed. Our current tax structure promotes huge and somewhat immediate income inequality between a few individuals and the majority of the population. A high tax rate on the highest incomes, routes money into public institutions and services on which the middle class rely like public education, infrastructure, and regulatory bodies. Our current tax structure has the ability to simulate an aristocracy where class mobility becomes very difficult due to a concentration of wealth into the hands of a minority and a lack of public resources for the majority. In addition, tax dollars were traditionally invested in the United States for the direct benefit of the American people. Even if there is heated debate about certain government programs or services, at the very least, the money was being spent to employ Americans and to help create services that have the intent to benefit the American public. When money that is made in the United States through the use of our public infrastructure and marketplace is not taxed properly, it simply passes through into the hands of private individuals and corporations who can move the funds anywhere and at any time. For instance, Apple has enormous cash reserves that it can invest anywhere in the world. They are under no obligation to invest in the United States or create jobs in America. That is there right and I support that right. But it seems fool-hardy that we should not tax Apple and the people who are making generous profits from its products to reflect the public resources that it utilized to become the company that it is today. There is a reason that Apple and Google were started in California and not Belgrade. To ensure that a future generation of entrepreneurs will have the same opportunities as past generations of Americans, we need to support our public sphere and create a system of taxation which enables the middle class. Many prominent business people come from solidly middle class backgrounds. They went to public schools and used public resources as part of their journey to wealth. That is the proverbial American dream and it relies on our infrastructure and democracy as its base. I support Robert Reich in his discussion of these issues. We are at a moment in history where we are embarking on a new social contract and it’s important that we have a full understanding of what is at stake and what we are potentially giving up. Grover Norquist wants to “starve the beast”, but he never talks about what our society will look like if the beast starves. Will we have a higher or lower percentage of children, families, and elderly people living in poverty? Will we have a functioning judicial system? Will we have a higher or lower percentage of people graduating from high school and college? Will we have regulatory bodies that are funded and functioning to monitor our food and water sources? Yes, we can starve the beast but then what?

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