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The 1% Solution

March 17, 2012
by Glen Martin
Robert Reich speaking with a megaphone

Robert Reich speaks up for everyone else.

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.

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