Robert Reich, the former Secretary of Labor in the early years of the Clinton Administration and now a professor at Berkeley, and for my money one of the smartest commentators on the US economy, has a terrific editorial in the New York Times today about why the widely anticipated U.S. recession could be far more painful and prolonged than previous ones. Fortunately, Reich also has some good advice for policymakers about what they can do to address the situation wisely.
According to Reich,
To get the economy rolling again, we need to get inject money into it, but where will it come from. The tax cuts in the stimulus package put forward by the Bush Administration and Congress is not likely to do this.
Much of the current debate is irrelevant. Even with more tax breaks for business like accelerated depreciation, companies won’t invest in more factories or equipment when demand is dropping for products and services across the board, as it is now. And temporary fixes like a stimulus package that would give households a one-time cash infusion won’t get consumers back to the malls, because consumers know the assistance is temporary. The problems most consumers face are permanent, so they are likely to pocket the extra money instead of spending it.
So what’s a policymaker to do? According to Reich, first let’s get our heads around the causes of the problem. It requires some clear thinking about trends over the last three or four decades, not something Americans are predisposed to do, especially about the economy. Reich's analysis of the precedents that got us to this point are, as I see them, right on.
The underlying problem has been building for decades. America’s median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago…
The problem has been masked for years as middle- and lower-income Americans found ways to live beyond their paychecks. But now they have run out of ways.
The first way was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 — to more than 70 percent. But there’s a limit to how many mothers can maintain paying jobs.
So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.
But there’s also a limit to how many hours Americans can put into work, so Americans turned to a third way of spending beyond their wages. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks by refinancing home mortgages and taking out home-equity loans. But this third strategy also had a built-in limit. With the bursting of the housing bubble, the piggy banks are closing.
The binge seems to be over. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth.
Let’s come back to my question above: what’s a policymaker to do? Well, it starts with higher wages for people at the bottom and in the middle of the income scale. Before the kneejerk response kicks in of how costs to employers will just get passed on to consumers, let me say (as does Reich) there are practical alternatives and one of the best is better use of the Earned Income Tax Credit (EITC).
A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required. The tax credit functions like a reverse income tax. Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. The current supplement for a worker with two children who earns up to $16,000 a year is about $5,000. That amount declines as earnings increase and is eliminated at about $38,000. It should be increased to, say, $8,000 at the low end and phased out at an income of $46,000.
Reich adds some other sound policy prescriptions, like stronger support for unions, especially union jobs that aren’t at risk of being shipped off shore, better investments in education at all levels, preschool, primary, secondary and post secondary, as well as greater investments in trade adjustment programs for displaced workers.
Maybe I’m fond of this article because it sounds so much like what we were calling for in the 2008 Hunger Report, Working Harder for Working Families. In any case, Reich will get the last word:
These measures are necessary to give Americans enough buying power to keep the American economy going. They are also needed to overcome widening inequality, and thereby keep America in one piece.
Well, I for one will be putting my $600 stimulus check towards paying off my credit card debt. I can't wait! The 0% APR for 12 mos. could change at any time-a chance I can't afford to let happen.
Did you realize that banks can change their credit card policies without even informing the consumer? The best advice on credit cards can be found at Americans for Fairness Lending:http://www.affil.org/consumer_rsc/top_10_tricks.php
Posted by: Emily Nohner | February 20, 2008 at 03:23 PM