Robert B. Reich - Aftershock: The Next Economy and Americas Future

ALSO BY ROBERT B. REICH

Supercapitalism

Reason

Ill Be Short

The Future of Success

Locked in the Cabinet

The Work of Nations

The Resurgent Liberal

Tales of a New America

The Next American Frontier

AS EDITOR
The Power of Public Ideas

AS COAUTHOR, WITH JOHN D. DONAHUE
New Deals: The Chrysler Revival and the American System

THIS IS A BORZOI BOOK
PUBLISHED BY ALFRED A. KNOPF

Copyright 2010 by Robert B. Reich
All rights reserved. Published in the United States by Alfred A. Knopf, a division of Random House, Inc., New York, and in Canada by Random House of Canada Limited, Toronto.
www.aaknopf.com

Knopf, Borzoi Books, and the colophon are registered trademarks of Random House, Inc.

Grateful acknowledgment is made to Alfred A. Knopf for permission to reprint an excerpt from Beckoning Frontiers by Marriner S. Eccles, copyright 1951 by Marriner S. Eccles and renewed 1979 by Sara M. Eccles. Reprinted by permission of Alfred A. Knopf, a division of Random House, Inc.

Library of Congress Cataloging-in-Publication Data
Reich, Robert B.
Aftershock : the next economy and Americas future / Robert B. Reich.
p. cm.
eISBN: 978-0-307-59452-5
1. United StatesEconomic conditions2009 .
2. United StatesEconomic conditions20012009.
3. United StatesSocial conditions21st centuryForecasting. I. Title.
HC106.84.R45 2010
330.973dc22 2010004134

v3.1

To Ella Reich-Sharpe, and her generation

Epochs of private interest breed contradictions characterized by undercurrents of dissatisfaction, criticism, ferment, protest. Segments of the population fall behind in the acquisitive race. Problems neglected become acute, threaten to become unmanageable and demand remedy. A detonating issuesome problem growing in magnitude and menace and beyond the markets invisible hand to solveat last leads to a breakthrough into a new political epoch.

Arthur M. Schlesinger, Jr.,
The Cycles of American History

In September 2009, on the eve of a meeting of the twenty largest economies, Treasury Secretary Tim Geithner, assessing what had happened to the United States in the years leading up to the Great Recession, repeated the conventional view that for too long, Americans were buying too much and saving too little. He then went on to say that this was no longer an option for us or for the rest of the world. And already in the United States you can see the first signs of an important transformation here as Americans save more and we borrow substantially less from the rest of the world. He called for a rebalanced global economy in which Americans consume less and China consumes more.

Geithner was correct about the transformation. But he misstated the underlying problem, of which the Great Recession was a symptom. The problem was not that Americans spent beyond their means but that their means had not kept up with what the larger economy could and should have been able to provide them. The American economy had been growing briskly, and Americas middle class naturally expected to share in that growth. But it didnt. A larger and larger portion of the economys winnings had gone to people at the top.

This is the heart of Americas ongoing economic predicament. We cannot have a sustained recovery until we address it. It is also our social and political predicament. We risk upheaval and reactionary politics unless we solve it. The central challenge is not to rebalance the global economy so that Americans save more and borrow less from the rest of the world. It is to rebalance the American economy so that its benefits are shared more widely in America, as they were decades ago. Until this transformation is made, our economy will continue to experience phantom recoveries and speculative bubbles, each more distressing than the one before.

We have been at this juncture before. Our history swings much like a pendulum between periods during which the benefits of economic change are concentrated in fewer hands, and periods during which the middle class shares broadly in the nations prosperity and grows to include many of the poorbetween periods during which we see ourselves as in it together, and periods during which we view ourselves as being pretty much on our own. Roughly speaking, the first stage of modern American capitalism (18701929) was one of increasing concentration of income and wealth; the second stage (19471975), of more broadly shared prosperity; the third stage (19802010), of increasing concentration. It is vital for our future that we commence a fourth stage, in which broad-based prosperity is again the norm.

Our history is not quite a pendulum because we never return exactly to where we were before. It is more like a spiral, in which we arrive at roughly the same points but at different altitudes and with somewhat different perspectives. Yet each turn of the spiral gives rise to similar questions about the nature and purpose of an economy. How much inequality can be tolerated? When bets go sour and the economy nosedives, who gets bailed out and who are left to fend for themselves? At what point does an economy imperil itself politically, as large numbers conclude that the game is rigged against them? Most fundamentally, what and whom is an economy for?

Technically, the Great Recession has ended. But its aftershock has only begun. Economies always rebound from declines, even from the depths of the darkest downturns. To this extent, the business cycle is comfortably predictable. Businesses eventually must reorder when inventories grow too depleted, families have to replace cars and appliances that are beyond repair, and modern governments invariably spend what they can and make it easier to borrow money in order to stimulate job growth. The larger and more interesting question is what happens next. If the underlying fundamentals are in orderif consumers are subsequently capable of spending and saving; if businesses have good reasons to invest; if governments maintain a fair balance between public needs and fiscal restraint; if the global economy efficiently allocates savings around the world, and if the environment can be sustainedthen we can expect healthy and stable growth. But if these conditions are out of whack, economies as well as societies become imperiled.

I will argue here that our fundamentals are profoundly skewed, that the Great Recession was but the latest and largest outgrowth of an increasingly distorted distribution of income, and that we will have to choose, inevitably, between deepening discontent (and its ever nastier politics) and fundamental social and economic reform. I believe that we simply mustand willchoose the latter.

The future is uncertain, of course, but indications are that the so-called recovery will be anemic. A large percentage of Americans will remain jobless, or their wages will drop. American consumers will not be able to spend enough to keep the recovery going. Without sufficient customers, businesses will not invest enough to fuel a sustained period of growth. Foreign markets, especially China, will not buy enough American exports to make up for the shortfall because they will be concerned about their own unemployment; they will have to fuel their own economies. And the U.S. government will not be able to run deficits large or long enough, or keep money cheap enough for a sufficient length of time, to fill the gap.