The Answer Isn’t Socialism; It’s Capitalism that Better Spreads the Benefits of the Productivity Revolution

Francois Hollande’s victory doesn’t and shouldn’t mean a movement toward socialism in Europe or elsewhere. Socialism isn’t the answer to the basic problem haunting all rich nations.

The answer is to reform capitalism. The world’s productivity revolution is outpacing the political will of rich societies to fairly distribute its benefits. The result is widening inequality coupled with slow growth and stubbornly high unemployment.

In the United States, almost all the gains from productivity growth have been going to the top 1 percent, and the percent of the working-age population with jobs is now lower than it’s been in more than thirty years (before the vast majority of women moved into paid work).

Inequality is also growing in Europe, along with chronic joblessness. Europe is finding it can no longer afford generous safety nets to catch everyone who has fallen out of the working economy.

Consumers in China are gaining ground but consumption continues to shrink as a share of China’s increasingly productive economy, while inequality in China is soaring. China’s wealthy elites are emulating the most conspicuous consumption of the rich in the West.

At the heart of the productivity revolution are the computers, software, and the Internet that have found their way into the production of almost everything a modern economy creates. Factory workers are being replaced by computerized machine tools and robotics; office workers, by software applications; professionals, by ever more specialized apps; communications and transportation workers, by the Internet.

Some work continues to be outsourced abroad to very low-wage workers in developing nations but this is not the major cause of the present trend. This work now comprises such a tiny fraction of the costs of production that it’s becoming cheaper for companies to do more of it at home with computers and software, and even bring back some of it (“in-source”) from abroad.

Consumers in rich nations are reaping some of the benefits of the productivity revolution in the form of lower prices or more value for the money – consider the cost of color TVs, international phone calls, or cross-country flights compared to what they were before.

But most of the gains are going to the shareholders who own the companies, and to the relatively small number of very talented (or very lucky and well-connected) managers, engineers, designers, and legal or financial specialists on whom the companies depend for strategic decisions about what to produce and how.

Increasingly, via stock options and bonuses, the owners and the “talent” are one and the same. While many other people indirectly own shares of stock through their pensions and 401-K plans, 90 percent of the value of all financial assets in the U.S. belongs to the richest 10 percent of the American population.

Meanwhile, a large number of low-paid service workers sell personalized comfort and attention – something software can’t do — in the retail, restaurant, hotel, and hospital sectors (most U.S. job growth since 2009 has occurred here.) Others – temps, contract workers, the under- and partially-employed, fill in where they can. A growing number are not working.

The problem is not that the productivity revolution has caused unemployment or under-employment. The problem is its fruits haven’t been widely shared. Less work isn’t a bad thing. Most people prefer leisure. A productivity revolution such as we are experiencing should enable people to spend less time at work and have more time to do whatever they’d rather do.

The problem comes in the distribution of the benefits of the productivity revolution. A large portion of the population no longer earns the money it needs to live nearly as well as the productivity revolution would otherwise allow. It can’t afford the “leisure” its now experiencing involuntarily.

Not only is this a problem for them; it’s also a problem for the overall economy. It means that a growing portion of the population lacks the purchasing power to keep the economy going. In the United States, consumers account for 70 percent of economic activity. If they as a whole cannot afford to buy all the goods and services the productivity revolution is generating, the economy becomes stymied. Growth is anemic; unemployment remains high.

That’s why “supply-side” tax cuts for corporations and the wealthy are perverse. Corporations and the rich don’t need more tax cuts; they’re swimming in money as it is. The reason they don’t invest in additional productive capacity and hire more people is they don’t see a sufficient market for the added goods and services, which means an inadequate return on such investment.

But more Keynesian stimulus won’t help solve the more fundamental problem. Although added government spending has gone some way toward filling the gap in demand caused by consumers whose jobs and incomes are disappearing, it can’t be a permanent solution. Even if the wealthy paid their fair share of taxes, deficits would soon get out of control. Additional public investments in infrastructure and basic research and development can make the economy more productive – but more productivity doesn’t necessarily help if a growing portion of the population can’t absorb it.

What to do? Learn from our own history.

The last great surge in productivity occurred between 1870 and 1928, when the technologies of the first industrial revolution were combined with steam power and electricity, mass produced in giant companies enjoying vast economies of scale, and supplied and distributed over a widening system of rails. That ended abruptly in the Great Crash of 1929, when income and wealth had become so concentrated at the top (the owners and financiers of these vast combines) that most people couldn’t pay for all these new products and services without going deeply and hopelessly into debt – resulting in a bubble that loudly and inevitably popped.

If that sounds familiar, it should. A similar thing happened between 1980 and 2007, when productivity revolution of computers, software, and, eventually, the Internet spawned a new economy along with great fortunes. (It’s not coincidental that 1928 and 2007 mark the two peaks of income concentration in America over the last hundred years, in which the top 1 percent raked in over 23 percent of total income.)

But here’s the big difference. During the Depression decade of the 1930s, the nation reorganized itself so that the gains from growth were far more broadly distributed. The National Labor Relations Act of 1935 recognized unions’ rights to collectively bargain, and imposed a duty on employers to bargain in good faith. By the 1950s, a third of all workers in the United States were unionized, giving them the power to demand some of the gains from growth.

Meanwhile, Social Security, unemployment insurance, and worker’s compensation spread a broad safety net. The forty-hour workweek with time-and-a-half for overtime also helped share the work and spread the gains, as did a minimum wage. In 1965, Medicare and Medicaid broadened access to health care. And a progressive income tax, reaching well over 70 percent on the highest incomes, also helped ensure that the gains were spread fairly.

This time, though, the nation has taken no similar steps. Quite the contrary: A resurgent right insists on even more tax breaks for corporations and the rich, massive cuts in public spending that will destroy what’s left of our safety nets, including Social Security and Medicare and Medicaid, fewer rights for organized labor, more deregulation of labor markets, and a lower (or no) minimum wage.

This is, quite simply, nuts.

And this is why a second Obama administration, should there be one, must focus its attention on more broadly distributing the gains from growth. This doesn’t mean “redistributing” from rich to poor, as in a zero-sum game. It doesn’t mean socialism. The rich will do far better with a smaller share of a robust, growing economy than they’re doing with a large share of an economy that’s barely moving forward.

This will require real tax reform – not just a “Buffet” minimal tax but substantially higher marginal rates and more brackets at the top, with a capital gains rate matching the income-tax rate. It also means a larger Earned Income Tax Credit, whose benefits extend high into the middle class. That will enable many Americans to move to a 35-hour workweek without losing ground – thereby making room for more jobs.

It means Medicare for all rather than an absurdly-costly system that relies on private for-profit insurers and providers.

It will require limiting executive salaries and empowering workers to get a larger share of corporate profits. The Employee Free Choice Act should be an explicit part of the second-term agenda.

It will require strict limits on the voracious, irresponsible behavior of Wall Street, from which we’ve all suffered. The Glass-Steagall Act must be resurrected (the so-called Volcker Rule is more ridden with holes than cheese), and the big banks broken up.

And it will necessitate a public educational system – including early child education – second to none, and available to all our young people.

We don’t need socialism. We need a capitalism that works for the vast majority. The productivity revolution should be making our lives better — not poorer and more insecure. And it will do that when we have the political will to spread its benefits.

This post originally appeared at Robert Reich’s Blog and is posted with permission.

6 Responses to "The Answer Isn’t Socialism; It’s Capitalism that Better Spreads the Benefits of the Productivity Revolution"

  1. Mark   May 8, 2012 at 5:29 am

    Bravo, Mr Reich! It's Adler and Kelso's "Capitalist Revolution" of 1958. A gentler, kinder, dare I say more "socialistic" capitalism, a hybrid economy, the next evolutionary phase of economy. A sustainable economy that learns from the past. Yes, yes…

  2. charles   May 8, 2012 at 7:27 am

    It seems we can not learn from history and therefore we are doomed to repeat history and kill ourselves off. Reich has it right, who will buy the goods and services if there is no middle class. The 1% don't pay full price for anything any way and there are not enough of them to keep the world economy going any way. What good are masses of unemployed or under employed people. The rich should know they win either way it goes, but for some reason there is this belief, that goverment can get us out of this mess we are in, it can help but it won't rescue the world economy. We are doomed to fail, we can't even pass legislation in congress to save lives, there are two bill that have been sitting in congress for 14 months , that would save cancer paitents lives and has people on both sides of the congress trying to get it thru and no success. It is very sad that man is the only animal that is suspose to be intelligent and yet he continues to do things that kills himself.

  3. Odikhmantievich   May 8, 2012 at 9:54 am

    Reich believes the system can be fixed with a few public policy shifts – resurrect the Glass-Steagall Act, provide healthcare, fund our schools and the people will be empowered. But look at Europe, where social democracy was supposed to have made capitalism work for all. Turns out their public policy fixes do nothing to protect their sovereignty from capitalists. Moneychangers and corporate delegates now relay commands to elected officials – and those that refuse to comply are swiftly replaced.

    Look, if it was the NLRA that made the economy work, then what's changed? I think the appropriate focus is the force generated by millions of workers coming together to reject the promulgations of the ruling class. That's what we should keep working towards – building solidarity. That's the major impact we have on the balance of power.

  4. james grazys   May 8, 2012 at 11:33 am

    long overdue

  5. jim Grazys   May 8, 2012 at 11:35 am

    the book is an eyeopener

  6. R. Coutinho   May 9, 2012 at 8:57 am

    It will take some time, but eventually the vast majority will unite against the financial oppression. Until that happens, expect both political parties (in the USA) to keep feeding all the monetary benefits to their owners.