Great Depression and Great Recession had similar causes

The Watchdog is reading Robert Reich’s “After-Shock, The Next Economy and America’s Future” not because he expected new ideas, but because he sought statistics that could be used to drive home past messages.  Reich is to be commended for his well founded ideas, but he occasionally takes short cuts with the facts to make his point, and that is unfortunate.

An example:  He attributes Henry Ford offering the munificent daily wage of $5, twice or more than the norm, to a shrewd desire to enable them to purchase his cars.  That’s a myth.   Workers were being introduced to working on an assembly line where they spent a ten hour day doing repetitive tasks.   They were quitting after a short period of time, which was reducing productivity.   The bonus pay in large part was to entice them to remain on the job.

Reich is correct in his main thesis for which he provides overwhelming statistical evidence that the major factors that brought about the Great Depression and the Great Recessions were identical:  (1) Failure for middle class ‘real’ incomes to rise over a decade or longer during periods of great economic growth,  and (2)  the aggregation of that increased wealth in the hands of the top 1% of the population, and especially the top 0.1%.

Reich contends that when the middle class ‘real’ income remains static and the economy grows, the saving rate drops and ultimately middle-class debt increases.   Meanwhile the very rich cannot begin to consume but a very small part of their earnings, and because of the lack of consumer demand for goods, invests its savings abroad or in speculations that creates bubbles, be they the Internet as in the 1990s or housing n the 2000s.

We Americans have been the unwitting victims of anti-free market and anti-democratic forces over the past decades, as described by Barry Lynn in “Cornered”, Joseph Stiglitz in “Free Fall” and Tony Judt in “Ill Fares the Land”, and as a subtopic in Martin Jacques “When China Rules The World”. The solution is a return to fairer division of the Gross National Product.

On page 21 a graph is reproduced from Thomas Piketty and Emmanuel Saez “The Evolution of Top Incomes:  A Historical and International Perspective” .  It is titled “Top 1 Percent Share of Total Income” and it shows peeks reaching highs approximately of 24% both right before the Great Depression in 1928 and right before the Great Recession in 2007.  During the post war decades of prosperity, the percent of total income by the top 1% hovered around 10%!

Reich goes on to point out “The drop in savings had its mirror image in household debt (including mortgages), which rose from 55 percent of household income in the 1960s to an unsustainable 138 percent by 2007.  … Total mortgage debt was almost three times higher in 1929 than in 1920.”

Reich concludes “In both eras, had the share going to the middle class not fallen, middle-class consumers would not have needed to go as deeply into debt in order to sustain their middle-class lifestyle.  Had the rich received a smaller share, they would not have bid up the prices of speculative assets so high.”

There are many reforms that are urgently needed to return vitality and competitiveness to the US economy.  But perhaps the first should be an increase, not a decrease, in taxes for the top one percent of earners by 5% over the first million in annual earnings, by another 5% on earnings over $5 million, and by still another 5% on earnings over $10 million.    The US enjoyed it greatest prosperity during post war years when the maximum incremental rate was in the 70% and 80% (and briefly even higher.)

Higher taxes will not stifle initiative, as has been shown in the past.  But it will help to redress the anti-free market factors that currently enable extreme earnings and to restore national solvency.

Then we need to begin enforcing anti-monopoly laws and plug multitudinous corporate and personal tax loopholes that Warren Buffett acknowledges enables him to pay no higher a percentage of income taxes than does his secretary.