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Are We in This Together?

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Are We in This Together?

Even though the economic recession of 2007 ended in June of 2009 according to the National Bureau of Economic Research (NBER), its harmful effects remain and continue to reverberate. Overwhelmed by a sense of skepticism, many economists have started to challenge the key ideas that have served as the building blocks of capitalism for decades and question their validity. There has emerged a massive surge of serious inquiries into the operation of capitalism, its impartiality, its workability in 21st century, and the constantly changing global economic paradigm. There are still many unanswered questions at the forefront of people's minds. For instance, why, after many decades of robust economic progress, are socioeconomic problems still lingering? Is there something fundamentally wrong with capitalism that has led to its broad-based failure in recent years? Have there been structural changes in the world economic paradigm that render capitalism no longer operational? Why are the conventional theories no longer fully pertinent? Are there any inherent aspects of capitalism that make it apathetic to the plight of the poor, aggravate inequality, sanction exploitation, and create temptations that lead to corruption and reckless behavior?

Needless to say, in bad times we vehemently search for villains, people on whom to dump the burden of blame. In the aftermath of the recent economic crisis, there is no shortage of blame to go around. For many, however, by default, the target of blame is the government. During the latest midterm election campaign, ultra conservatives and Tea Party candidates and their sympathizers vociferously made a mockery out of government policies implemented by the Obama administration and promised to repeal them once they took control of Congress, or hold them in abeyance. Fear was fomented and issues were blown out of proportion by a group of demagogues who sought to take advantage of the gullibility of American voters and turned public frustration into outrage and confrontation.

They gained momentum by obfuscating the issues, preying on public emotion, and impugning the reforms that were painstakingly put together by the Obama administration. Who knows where this dissenting propaganda is going to lead us in the future.

In his newly published book entitled Aftershock: The Next Economy and America's Future, Dr. Robert Reich offers his own unique, and a bit unconventional, perspective about what he calls the "great recession" of 2007 and the structural reforms urgently needed to safeguard us from another one in the future. He believes that the great recession was the "outgrowth of an increasingly distorted distribution of income that needs to be addressed, otherwise, we may encounter another one in the future." Although many researchers blamed the myriad of households who lived beyond their means by excessive borrowing and spending the money they didn't have, Dr. Reich argues that "The problem was not that Americans spent beyond their means but that their means has not kept up with their reasonable expectations for what they could afford as the economy grew."

In other words, there has not been a balance between overall supply and demand in our economy. The money that should have ended up in the hands of the middle class has been diverted to the coffers of wealthy companies, rendering the overall demand inadequate. We cannot ameliorate the situation unless we restore balance by channeling a greater share of income into the hands of the middle class. A hefty compensation of $150,000,000 to a CEO of a Fortune 500 company, for example, may not generate many business transactions that benefit the main stream economy because most of that money will be tied to speculative activities or spent on conspicuous consumption. According to Reich, the problem with the concentration of income in the hands of a few is that their extra income does not do much good for the economy. "Their savings are hoarded, circulated in a fury of speculation, or, these days, invested abroad" he argues.

However, if the $150 million is divided among 1500 families, each family will be better-off by $100,000 and this would certainly serve the economy better because of the sizeable increase in consumption of these households thus generating income and supporting jobs for thousands of other individuals. Because of the heavy concentration of income and wealth in the hands of the richest, people in the middle class have been diminished to the point where they no longer have enough purchasing power to buy the things they helped the economy to produce.

According to the information resented by Reich: "In the late 1970s, the richest one percent of the country took in less than nine percent of the nation's income. By 2007, the richest one percent took in 23.5 % of total national income." The wealth distribution has become even more inequitable despite the severe recession in recent years. Almost 35% of the nation's total wealth is held by the top one percent of the population, more than twice the share of the bottom 80% of the population.

To some researchers, the key cause of the problem originated in 1981 with the emergence of so-called supply-side ideology and trickle-down theory that led to the removal of or the relaxing of regulatory restrictions for business firms and massive tax cuts for wealthy Americans. These policies were resurrected by the second Bush administration. Likewise, the rise of excessive and often destabilizing speculation by well-to-do investors in the 1990s and the proliferation of so-called dot-com businesses created a flock of investors who were apathetic to the growth and viability of the companies they invested in and unconcerned with the long-term prosperity of the economy.

They were only concerned with raising stock prices and hence the market value of the firms. In the same way, massive and excessive speculation in asset-backed securities during the 2000s led to escalating prices of underlying assets, especially housing, to the point of bursting. When the price bubble did burst, the party was over; housing prices plummeted, setting the stage for a crisis in financial markets.

The great recession, as we know, started with the turmoil in financial sector which then extended into real sectors of the economy, housing in particular that ultimately cost middle class dearly. When housing values started to plummet, the house of cards collapsed.

Contrary to the Great Depression, the great recession did not lead to New Deal type programs. Instead, a hastily packaged bailout plan, that was put together mostly in secrecy, was implemented. The plan did stabilize the financial sector and allegedly saved the economy from plunging into another Great Depression, however, it failed to earnestly address a much more troublesome issue which is, according to Professor Reich, the fading economic power of the middle class in America. It may have even disserved the economy by diverting our attention away from the life-saving but painful larger issue we need to address. "President Obama's success in forestalling the economic collapse reduced the urgency of dealing with the larger challenge [income inequality]."

Undoubtedly, elevating the standard of living is everyone's aspiration. Erroneously, I believe, we equate that with increasing our possession of material goods. Under normal conditions, it seems commonplace for people to borrow money and buy things they cannot afford to buy with their income. They seem to be able to get away with this as long as they have valuable assets to back up their obligations.

But what happens if the value of those assets plunges, debt capacity is exhausted, and payments cannot be made? Sooner or later, the overall demand for goods and services deteriorates and unemployment rate starts to go up lowering the consumption further and pushing the economy into a vicious circle of high unemployment, low income, and inadequate spending. There seems to be two solutions to this dilemma. We have to either let our national production shrink to keep pace with overall demand--that is, to accept a lower standard of living - or rely on government to inject more liquidity into the system to restore equilibrium to its original level. "When the basic bargain is maintained, the entire economy is balanced. When the basic bargain breaks down, government must step in to reinforce it, or economy will shrink."

The inability of the private sector to spend enough on current goods and services during economic downturn meant that "Government had to go deeper in debt in order to offset the lack of spending by consumers and businesses." Reich argues, nonetheless, that although government efforts to stimulate the economy through the so-called stimulus package stabilized the economy and prevented a catastrophe like the Great Depression, it also diluted the urgency for much more needed structural reforms involving a more equitable income distribution, narrowing the gap between the rich and poor, and the overhaul of the tax system. Unless we tackle these problems effectively, the threat of another great recession will continue to haunt us. This is the recurring theme of his book.

Dr. Reich challenges the supposition of conservative economists that a market economy is capable of resorting balance because it has built-in corrective mechanisms that kick in automatically when the economy is experiencing disequilibrium. Disequilibrium, according to these economists, is a temporary phenomenon that will go away eventually, thanks to price flexibility and the ensuing automatic adjustments of aggregate demand and supply. All we need to do is wait.

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Reza Varjavand (Ph.D., University of Oklahoma) is associate professor of economics and finance at the Graham School of management, Saint Xavier University, of Chicago. He has been an avid participant in many professional organizations and active in (more...)
 
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