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Robert Reich: The Real Reason The Economy Might Collapse – OpEd

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Skyrocketing wealth inequality isn’t just wrong. It’s also weakening our economy. 

70 percent of the US economy depends on consumer spending. So American consumers need to spend enough money to buy most of the goods and services Americans are capable of producing. 

This means that over the long term their incomes need to keep pace with their productivity. 

But their incomes haven’t. Over the past 40 years, most people’s wages have basically stagnated, while worker productivity has soared. 

Where did the economic gains go? Mostly to the top. The wealthy now own more of the economy than at any time since the 1920s.

Here’s the economic problem: The wealthy spend only a small percentage of their income and wealth. Their spending is not enough to fulfill the consumer demand that keeps the economy churning.

Lower-income people, on the other hand, spend almost everything they have – which is becoming very little. Most workers aren’t earning nearly enough to buy what the economy is capable of producing. 

The result is a gap between potential output and potential consumption.

To fill the gap, the economy depends on people going deeper and deeper into debt so they can buy. Even in 2018, when the economy appeared strong, 40% of Americans had negative net incomes and were borrowing money to pay for basic household needs.

The Fed has had to keep short-term interest rates lower and lower to accommodate this buying. And the government has to spend more and more to fill the remaining gap. 

None of this is sustainable. At some point, widening inequality causes the economy to collapse. 

We’ve seen this before. Years ago, Marriner Eccles, chairman of the Federal Reserve from 1934 to 1948, explained that the Great Depression occurred because the buying power of most Americans fell far short of what the economy was producing. 

He blamed the increasing concentration of wealth at the top: “A giant suction pump had by 1929-1930 drawn into a few hands an increasing portion of currently produced wealth. As in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

While the wealthy of the 1920s didn’t know what to do with all their money, most Americans could maintain their standard of living only by going into debt. When that debt bubble burst, the economy tanked.

Fast forward 100 years and we see the same pattern. While the typical Americans’ wages have barely budged for decades, adjusted for inflation, most economic gains have gone to the top, just as Eccles’s so-called “giant suction pump” drew an increasing portion of the nation’s wealth into a few hands before the Great Depression.

The result has been an economy whose underlying structure is far more fragile than it may seem.

Remember the housing and financial bubbles that burst in 2008? We avoided another Great Depression then only because the government pumped enough money into the economy to maintain demand, and the Fed kept interest rates near zero. Then came the pandemic.

The Fed has had to keep interest rates near zero. And the government has had to pump even more money into the economy. While these programs have been crucial to staving off a pandemic-induced depression, they’re only temporary.

Over the long term, the real worry continues to be on the demand side. Widening inequality means not enough demand. 

America’s wealth gap is now more extreme than it’s been in over a century. Until this structural problem is remedied, the American economy will remain perilously fragile.

It will also be vulnerable to the next demagogue wielding anger, racism, and resentment as substitutes for real reform. 

Closing our staggering wealth gap is crucial to the survival of both our economy and our democracy.

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Robert Reich

Robert B. Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley and Senior Fellow at the Blum Center for Developing Economies. He served as Secretary of Labor in the Clinton administration, for which Time Magazine named him one of the ten most effective cabinet secretaries of the twentieth century. He has written fifteen books, including the best sellers "Aftershock", "The Work of Nations," and"Beyond Outrage," and, his most recent, "The Common Good," which is available in bookstores now. He is also a founding editor of the American Prospect magazine, chairman of Common Cause, a member of the American Academy of Arts and Sciences, and co-creator of the award-winning documentary, "Inequality For All." He's co-creator of the Netflix original documentary "Saving Capitalism," which is streaming now.

9 thoughts on “Robert Reich: The Real Reason The Economy Might Collapse – OpEd

  • October 12, 2021 at 2:52 am
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    Democracy and Socialism have nothing in common but one word: Equality.
    But notice the difference: While Democracy seek equality in liberty, socialisms seeks equality in restraint and servitude. Robert Reich has been wrong on almost any thing he has said and done! Just look at Venezuela and how it scandalized its rich and forced them to flee once prosperous country and miserable conditions prevalent afterward! But Dr. Reich, while amassing a fortune thanks to the capitalist country he has lived in, continues to bash it!

    Reply
    • October 12, 2021 at 4:28 am
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      You post like a defective AI. I don’t always agree with Mr. Reich, but what he writes here is historicaly accurate and contemporary based with it’s warning. Unfettered capitalism is dictating an ineffective response across the board to every significant crisis our country is threatened with.

      Reply
    • October 14, 2021 at 3:48 pm
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      The people being kept servile and in restraint are the workers, and the owners are the ones doing it.

      But if you’re arguing we should have Nordic capitalism, that’d be okay.

      Reply
  • October 12, 2021 at 12:36 pm
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    Your comment offered nothing to support you anti-socialism, ‘God bless the rich’ stance. By the way, ‘anything’ is one word as used here.

    Reply
  • October 12, 2021 at 2:45 pm
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    What Dr Reich said is common sense so why are you bashing the truth when you know he is correct. One don’t need to even have education you know that is sensible reasoning and truth. But as the saying goes lies are easily believe than truth. The wealthy seems to want to keep the poor poorer and gathering wealth for what I don’t know. When one die, which we all will, one cannot take it with you. So why not care about others. That’s a better gathering of wealth.

    Reply
  • October 14, 2021 at 1:08 pm
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    How about over time restructuring the economy so it isn’t so dependent on consumption? Basing an economy on continuous growth from consumption isn’t sustainable. We can’t afford to continue on this destructive path.

    Reply
  • October 14, 2021 at 6:08 pm
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    Having read this and having seen how little Mr Reich was able to accomplish on behalf of the masses of hoi polloi and other morlocks, I will only opine that the wealth disparity is the result of the deliberate policies enacted, with very little opposition in ruling caste circles. Fabians like Bernie Sanders talk a good game but they supported the dismantling of the west. Because champagne socialism of the Tony Blair kind is meant to cement in place an eternal global regime wherein the top .001%, the 60 or however many families it is who hold all the assets will survive quite nicely in their enclaves while the remainder are toyed with and experimented upon until a wholly deracinated servile being emerges to fix the plumbing and operate the lithium mines while the useless remainder of ‘consumers’ are disposed of. As Mark Blythe so neatly puts it ‘You are now a problem to be policed.’ When Mr Schwab, who Mr Reich no doubt knows quite well says ‘You will own nothing and love it”, he means you will own no assets. The ownership of anything beyond $600 is not for you to worry dirty little heads over. They don’t even need bread and circuses in the world they envision. They took ‘1984’, ‘Brave New World’ and ‘Blade Runner’ and used those as their model. Mr Perala will wish he was in 1990s Venezuela before it’s all done.

    Reply
  • October 14, 2021 at 6:54 pm
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    “And the government has to spend more and more to fill the remaining gap.

    None of this is sustainable.”

    Government spending is entirely sustainable because it has no fiscal limits. The excess saving of the wealthy can be constantly accommodated. It’s not something we need to worry about.

    It’s time to stop obsessing about the wealthy. They are not important. Look after the unemployed, ensure everybody has an alternative job to go to, and all will be well.

    Let the rich count their coins. They are not relevant.

    Reply
  • October 14, 2021 at 7:37 pm
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    Dr. Reich offers an informative, in-a-nutshell diagnosis. But what should we do? By “we,” I mean ordinary schlubs like myself.

    Should we vote for Democrats? That’s a laugh. They and the Republicans are completely bought out several times over. I just read an article detailing how the Dem leadership forces representatives (a misnomer) and senators to spend most of their time raising funds (outright bribes) from donors and using the money to buy positions on committees. Bankers in a given district, for instance, can basically pay to put their representative on a banking committee. And then there are the swarms of lobbyists literally writing legislation and the promise of no-show high-six-figure jobs for pols when they leave Congress. Moreover, the executive branch and all the regulatory agencies are similarly corrupted. And I suppose I need only mention our suspiciously opaque election processes corrupted by black-box machines and unlimited corporate spending.

    I’m rounding out my seventh decade in this life and can truthfully say I’ve never been represented by anyone at the state or federal level and have never voted for a candidate in whom I’ve invested even one iota of faith. (When I have voted, I’ve done so only to keep a perceived worse alternative from winning).

    To be fair, Dr. Reich’s purpose here is only to describe our situation. But I can get and have gotten that from any number of sources. What we really need is an authoritative voice describing what can credibly be done about the obscenity and atrocity I describe above. As things stand, this country is occupied by a hideous, hostile, many-tentacled power that embraces every aspect of the surface state, the deep state and the most influential media. Radical and even hack-job extraction is probably required.

    Reply

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