I rarely say this about books: but I think this should be read by everyone. Literally: go to your local library and get this book: Aftershock, by Robert Reich. It was an encouraging reminder of the way an economy can work that would be equitable, sustainable and work into the future. Since we all vote, we all need to understand the basics of economic theory: and this was an excellent presentation of what is possible. The ideas written in those pages were not only theoretical, but practical and tried… they reflect a more equitable way of thinking: and follow them from beginning to end.
I read this book on my flight to California: yes, almost the entire thing on a 4 hour flight from Toronto to L.A and my 3 hour layover to San Diego (during which I had to deal with screaming children and a massive headache, but I’m not going there). One of the reasons I was so determined to finish it is that it was excellent: not just the writing style, but the content. It was, in a word, inspiring. It gave me little new information: I’ve essentially believed the economic philosophy portrayed therein for most of my life. But it was portrayed very well, and in a way that is accessible to the popular reader.
Reich has worked with three presidents and taught economics at an impressive list of schools. He begins by drawing parallels between the current economic crisis and the Great Depression that followed the Stock Market collapse in 1929. Certainly it’s not exactly the same, but the underlying causes are similar enough to easily draw comparisons. And those reasons can be summed up in one “symptom” of the difficulty: the growing gap between rich and poor. As you can see in the graph to the right (reinventwork.com), the top one percent of the population in the U.S. “earned” (and I use the term loosely) one quarter of the wealth in 2007. That’s over twice the percentage that the same percentile took home in the 1960s and 1970s, which so many economists regard as such a peak of productivity. The last time that the percentage was so high was just before the collapse of 1928. What this means is that the average person (and especially the poor) may not be taking home less money… but we can buy less with it. The result, as we’ve seen, has been worry, anger, frustration and backlash. The rich get richer, even when they fail… and rest of us can barely squeak by, even when we succeed.
Reich argues against what can only be called “the trickle down effect”… that as the rich get richer, they invest more in the world, and that provides jobs and wealth among the lower classes. Because the fact is… this is an urban legend (putting it kindly). It doesn’t happen. I was reading an article in Forbes that described this difficulty. A quote from the article: “In fact, there are more rich people today than there were before the credit crisis… nearly crippled the world’s financial industry… the world’s population of high-net worth individuals (HNWI), with $1 million or more in investable assets, jumped 8.3% over the last year… Their financial wealth jumped 9.7% over the last year to $42.7 trillion.”
Sounds pretty good, doesn’t it? At least for them. Because at the same time, from the same article, for the rest of us: “Unemployment is at 9.2%, and the ruins of the U.S. housing market are still smoldering after the 2008 bonfire…[and] the U.S. GDP grew 1.9% in the first quarter of 2011, according to the U.S. Department of Commerce.” The politicians and the rich assure us that the “trickle down” just takes its “due time”… but it never seems to get here. We’re always waiting. What meagre growth is happening in the economy is concentrated in the hands of the rich.
But isn’t that against economic theory? One of the comments from the same article, illustrate that Rick Ferri has bought in to this lie: “Increasing wealth is a GOOD thing, not a BAD thing, even if it is among some at first and not others. This money is reinvested in the economy and that increases the standard of living for everyone.” The problem is that investment does nothing for the economy if there is no-one to buy the goods. And the middle class, the traditional engine of the market economy, can no longer afford to buy anything other than necessities. (Can you?) So with increased investment comes increased supply, but unless lots of people have enough to create a matching demand (which, as we’re told, won’t happen until the “trickle down” reaches them in “due time”), there is not enough demand to match the supply. So the price of the goods drop, and investors flee… and the company eventually declares bankruptcy. The investors lost a little, but that becomes a tax write-off (further using the middle class) and the rich are on to their next exploitation. Meanwhile all those once employed by the company somehow missed the trickle-down effect… and are now part of the 10% unemployed. So no, Mr. Ferri, the investment (and re-investment, and re-re-investment in the economy) increases the standard of living for no-one but the rich.
The book goes in to a lot more examples and rounds it out with a lot more detail. He also presents a theory of action, a method by which to re-distribute wealth so that demand will match supply and investment. And it’s not just theory: he works with examples that have solid evidence from the past. These are the principles that got us out of the Depression and ushered in the most productive era of history. If we use them again, and use them consistently, we can not only re-establish an economy that is comfortable for all, but one that is sustainable and empowering for everyone. If we don’t, the imbalances in the economies of the world will continue to grow until they correct themselves… in the only ways open to them: ways that have been illustrated in many countries of the world, but as yet avoided North America.
This is a repost of an article I posted on Gather.