Thursday, September 1, 2011

Are You Better Off Than Your Grandparents?

My current commuting book is called Aftershock. It's thought invoking but not the book I had intended to listen to. I was expecting Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown  by David Wiedemer but what I got from the library was Aftershock: The Next Economy and America's Future  by Robert Reich, Labor Secretary under President Clinton.

The book I got is 100% Democratic-Keynesian economics which believes that one person's spendings goes towards anothers earnings, who in turn spends and supports anothers earnings. This circle continues on and helps support a normal functioning economy. Recessions/Depressions are difficult to break out of because unemployment leads to less spending, so business produce less and hire less, which increases unemployment, and around we go. Keynes advocated government spending to break out of this cycle and this was adopted (reluctantly) by FDR during the Great Depression and enthusiastically by Obama in the Great Recession with the Trillion dollar Stimulus.

Nancy Pelosi was criticized by Conservatives for saying unemployment checks were part of the Stimulus and good for economy but she's right according to Keynes. Unemployment checks allow the unemployed to keep buying and creating demand for goods and services. Ditto for Social Security with helps the elderly and disabled to continue to spending. Personally I now favor the government putting money into the hands of impoverished individuals and letting individuals determine how to spend it, a bottom-up money flow. The alternative Stimulus of shovel-ready projects and funding from the top-down has not worked. Stimulus to companies has created a limited number of jobs but often at a cost of $80K to $100K per job created. We might have been better off giving $20K to 4 or 5 families instead of a single (temporary) job created. [Conservative agree that individuals must spend but argue that if we lower taxes then families will have more money to spend and we won't need the government to act as a middle man and redistributer of cash.]

Reich claims that the economy is better off when money is widely distributed. The one family with a new job can only eat and spend so much whereas 5 families with $20K handouts will spend more collectively and create a larger economic boost. From Reich's viewpoint the problem with the Super Rich is not that they earn too much but that they spend too little. If you earn $500 million a year you'd have $240,000 to spend EVERY hour of the working day to use it up (ignoring taxes). Conspicuous consumption and a fleet of servants is a good thing because it puts money back into the economy. If the vast sum of money is not spent, where does it go? In the good-old days the money might go to an endowment or matching fund for a college or hospital, or invested in a company. Or the money might have gone into a bank, giving the bank the funds to make loans to businesses and families so they can improve themselves. But now the cash goes into hedge funds or investment banking whose purpose it to make a great returns by gambling on "sure-bets"; investing in precious metals, foreign currencies, or stock in proven, successful companies. The money won't typically go to the risky new business.

How did we get into the current economic mess? A key point to Reich's book is that the middle class has not benefited from America's growth for the past 40 years. The money has been diverted to the upper 2% or less of families and does not flow back into the economy as described above. He compares it to a poker game where one player wins most of the chips and everyone else must bow out of the game. During the golden age of prosperity after the great depression, average income for families rose from $15,000 (in inflation adjusted dollars) to $40,000 by 1970. An almost 3-fold (300%) increase. So most families could afford to buy TVs and fridges, a car, etc. But since 1970 the household income has risen to only $45,000, a measly 12% increase over 40 years.  So there's no money for a better lifestyle. We are stuck at the same standard of living as our grandparents.

Is this because the American economy flat lined for 40 years? No. Real income for families in the top 75% and 90% brackets did increase by 60% or more.

The book also suggests that the reality for average families is worse than the graph shows. While household income was increased (slightly) Reich claims that Individual Income has declined and households have been forced to use "coping" methods. I've not been able to find support for a decline but I did find one table where individual average earnings for males has not improved since 1976. Real wages for women has improved and for many households the "increase" in earnings is due to having both parents working. Also both husbands and wives put in longer shifts, creating a species of family Reich calls DINS — “double income, no sex.”  According to some estimates, Americans sleep an average of one or two fewer hours per night than did their parents in the 1960s; in 2007 they spent a whopping $23.9 billion on sleep aids, from white-noise machines to medications.

The household situation is like the Red Queen in Alice Through the Looking Glass; one must run as fast as one can just to stay in the same place.

Bottom Line

Is there a solution? Reich favors stronger unions, taxing the rich, and other traditional Democratic ideas which I don't buy into. He also recommends government support for research and infrastructure which I do agree with. What's missing from his book is the Conservative idea that business must WANT to hire. When government regulations become extreme businesses won't expand and may even shut down and leave. I recall an account by a Surfboard maker who described how regulators in California drove him out of the state. Or a recent government raid on Gibson guitars (over the wood they use?) Or raids on bunny farmers. Reagan rightly realized that government must encourage business to grow and hire. And not with temporary stimulus handouts or tax credits. These are short-term fixes. And subsidizing the public with money to maintain demand will only last so long if there are no profits being made to flow back via taxes.

We need to find ways to hire more people in productive work. But how?

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