Why This Is the Worst Recovery on Record

The biggest economic debate is between Keynesians (who want more government spending and lower interest rates in order to fuel demand) and supply-side “austerics” (who want lower taxes on the wealthy and on corporations to boost incentives to hire and invest, and who see government deficits crowding out private investment).

But both approaches have problems.

George W. Bush tried supply-side tax cuts but nothing trickled down. Jobs and wages declined. And austerity economics has been a disaster for Europe.

Unfortunately the U.S. is now adopting supply-side austerics by making the Bush tax cuts permanent for 98 percent of taxpayers, hiking Social Security taxes back up, and implementing the sequester.

I’m on the Keynesian side. Yet the biggest weakness of modern Keynesian economics is it doesn’t have a clear answer for how much spending is necessary in an economy, like ours, in which wages keep dropping and government debt keeps growing. Simply arguing “more” won’t cut it.

John Maynard Keynes urged that governments “prime the pump” to stimulate demand but pump priming has limited effect if the well is running dry.

Both sides of the modern debate have neglected the scourge of widening inequality.

We’re now witnessing what happens when all of the economic gains go to the top, and the rest of the population doesn’t have enough purchasing power to keep the economy going.

Four years into a so-called recovery and we’re still below recession levels in every important respect except the stock market. A measly 88,000 jobs were created in March, and total employment remains some 3 million below its pre-recession level. Labor-force participation is its lowest since 1979.

Businesses won’t hire and expand unless they have more customers, but most Americans can’t spend more. Last Friday’s retail sales report showed sales down .4 percent in March. Consumer sentiment has fallen to its lowest level in nine months.

The underlying problem is the vast middle class is running out of money. They can’t borrow more — and shouldn’t, given what happened after the last borrowing binge.

Real annual median household income keeps falling. It’s down to $45,018, from $51,144 in 2010. All the gains from the recovery continue to go to the top.

Widening inequality is not inevitable. If we wanted to reverse it and restore middle-class prosperity, we could.

We could award tax cuts to companies that link the pay of their hourly workers to profits and productivity, and that keep the total pay of their top 5 executives within 20 times the pay of their median worker. And impose higher taxes on companies that don’t.

We could raise the minimum wage to half the average wage.

We could increase public investment in education, including early-childhood.

We could eliminate college loans and allow all students to repay the cost of their higher education with a 10 percent surcharge on the first 10 years of income from full-time employment.

We could expand the Earned Income Tax Credit.

And we could pay for all this by adding additional tax brackets at the top and increasing the top marginal tax rate to what it was before 1981 – at least 70 percent.

But none of this will happen until the public understands why widening inequality is so damaging. Even the rich would do better with a smaller share of a rapidly-growing economy than a large share of one that’s barely growing at all.

Our political leaders in Washington have for now chosen supply-side austerity economics over Keynesian economics. That’s bad enough. Their inability or unwillingness to do much of anything about widening inequality will prove a larger problem.

This piece is cross-posted from Robert Reich.org with permission.

8 Responses to "Why This Is the Worst Recovery on Record"

  1. JPBulkoMBA   April 17, 2013 at 12:01 pm

    What about a bold private-sector solution? Offer Wall Street a new toy to play with: The Venture-Backed Security, which provides to Wall Street a purely private-sector profit incentive to invest hundreds of billions of dollars in new business ventures in the "Main Street" (=real) economy: http://tinyurl.com/co8bf5c

  2. Valli Genevieve   April 17, 2013 at 7:01 pm

    And you spider just want to justify rampant greed and legal theft from the many to the few. How much is enough? Apparently no matter how much, the 1% won't rest till they have it all.

  3. carlyle   April 17, 2013 at 10:11 pm

    Lower taxes, cheaper labor, older whisky and more money is the goal of the power strtucture of the country. The need for campaign money has turned the politicians into employees of the powerful. Working Americans have no champions in Congress. In time, enough Americans will be damaged by weak income and increased costs that they will follow some leader in their demand for change. We are headed down hill and as more people become frightened the fear will cause a doubtful future for America.
    We may get a leader like FDR or we may get a General promissing law and order. We have already graduated from a Democracy to some other form of government not yert defined.

  4. Anonymous   April 23, 2013 at 10:09 am

    Main Street is starving for capital!!!! The banks are not lending at reasonable terms, its too risky to borrow to finance growth. No growth, no need to hire anyone new. No need for new people, no need to raise pay. No raises, no upward mobility. Ironically, demand is strong since there is little completion because competitors can't finance growth either. The "rich" are doing pretty well without growing because they own the means of production and new competitors are shut out because there is no capital. All the capital is going to finance the federal debt because bank regulators don't second guess a bank if it buys t bills and works the spread instead of lending on potentially "risky" private loans.

  5. EEB   May 4, 2013 at 10:49 pm

    Reich ponders the question: why don't the capitalists support expansionary fiscal policies, even though they would also be benefitted by such policies via higher effective demand, and hence, a greater mass of profits? The answer may be found in a careful reading of Michal Kalecki's 1943 paper "Politcal Aspects of Full Employment'. The conclusion must be this: the bourgeoisie is not interested in the maximization of the mass of profits, but in the rate of profit, as measured by their desired mark- ups. The name of the game among the monopolists and oligopolists under advanced finance capitalism is social and economic POWER. Their strategies to achieve this overarching end include, but are not limited to, union- busting and having their minions operate the real macroeconomy in a state of permanent "soft" or "mild" depression (as Thorstein Veblen pointed out in his 1904 book "The Theory of Business Enterprise"). So, although the world economy obviously needs WPA/ ELA, the bosses will never allow this to occur, for fear that wages might rise to equal, or even exceed, productivity growth.