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The pay packet crunch

Robert Reich, labour secretary in Clinton's administration and world-renowned economist, explains wh

American voters go to the polls in five weeks. They are deeply angry about the bailout, voted down in the House of Representatives by 228 to 205. The bill will be enacted, though. Republicans will have to sign on because the Democrats, who control Congress, don't want to take full responsibility for one of the most unpopular pieces of legislation ever introduced. Conservative Republicans hate the idea of government taking over the free market. Liberal Democrats hate the idea of Wall Street fat cats getting a free ride on the backs of hard-working taxpayers. The more the public focuses on what has gone wrong, the angrier people become.

So why can we be sure the bailout will go forward? Because no member of Congress wants to be held responsible for the meltdown of the American economy. The stock market dropped precipitously on Monday after the House failed to pass the bailout bill - the largest one-day drop in history, by value. Roughly half of all American families have some retirement money in the stock market. And even if they don't own shares of stock, an increasing number are feeling the pinch of an economy gradually grinding to a halt.

Bailout or no bailout, the US economy is going into deep recession. One of the first things Congress will have to do when it returns in January - and one of the first initiatives of the next president - will be an economic "stimulus package", designed to get the economy moving through good old-fashioned Keynesian fiscal policy. Sad to say, even an adequate stimulus package will offer only temporary relief this time, because this is not a normal downturn.

The problem lies deeper. Most Americans can no longer maintain their standard of living. Remember, Wall Street's near-meltdown originated with the bursting of the great housing bubble. That bubble had allowed millions of Americans to take money out of their homes by using their rising home values as collateral for loans. But now the bubble has burst, those homes can no longer be used as piggy banks. As a result, America's huge middle class no longer has the money it needs to buy the goods and services that it produces.

The bubble masked this basic reality: for most Americans, earnings have not kept up with the cost of living. The earnings of non-government workers who are paid by the hour - and who comprise 80 per cent of the American workforce - are lower today than they were in 2000, adjusted for inflation. They are barely higher than they were in the mid-1970s. Indeed, the income of a man in his thirties is now 12 per cent below that of a man his age three decades ago. Productivity per person has grown considerably over the past three decades, and has continued to rise even in the lacklustre recovery of this decade. However, most Americans have not reaped the benefits of those productivity gains. The benefits have gone largely to the wealthy few.

The top 1 per cent of American earners now take home about 20 per cent of total national income. In 1980, the top 1 per cent took home just 8 per cent. Inequality on this scale is bad for many reasons, but it is particularly bad for the economy. The wealthy devote a smaller percentage of their earnings to buying things than the rest of us, because, after all, they're rich. They already have most of what they want. Instead of buying, the very wealthy are more likely to invest their earnings wherever around the world they can get the highest return.

This underlying earnings problem has been masked for years as middle- and lower-income Americans found means to live beyond their earnings, but they have now run out of such coping mechanisms. The first such mechanism was to send more women into paid work. Most women streamed into the workforce in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 - to more than 70 per cent. Yet there is a limit to how many mothers can maintain paying jobs.

So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

Yet there is also a limit to how many hours Americans can put into work, so Americans turned to a third coping mechanism. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks. Now, with the bursting of the housing bubble, Americans are reaching the end of their ability to borrow and lenders have reached the end of their capacity to lend.

Regardless of the Wall Street bailout, typical Americans have run out of coping mechanisms to keep up their standard of living. That means there is not enough purchasing power in the economy to buy all the goods and services it is producing. We are finally reaping the whirlwind of widening inequality and ever more concentrated wealth.

The only way to keep the economy going over the long run is to increase the real earnings of middle- and lower-middle-class Americans. The answer is not to protect jobs through trade protection. That would only drive up prices of everything purchased from abroad. Most routine jobs are being automated anyway. Nor is the answer to give tax breaks to the very wealthy and to giant corporations in the hope they will trickle down to everyone else. We have tried that and it hasn't worked. Nothing has trickled down. The Wall Street bailout may be necessary in order to keep credit markets working, but it is almost irrelevant to this larger and more important story.

The long-term answer is for Americans to invest in the productivity of working people, enabling families to afford health insurance and have access to good schools and higher education, while also rebuilding infrastructure and investing in the clean energy technologies of the future. We must also adopt progressive taxes at the federal, state and local levels. We must rebuild the American economy from the bottom up. Bailout or no bailout for Wall Street, the economy of America's Main Streets cannot be rebuilt from the top down.

Robert Reich is professor of public policy, University of California at Berkeley, former US secretary of labour, and the author, most recently, of "Supercapitalism: the Battle for Democracy in an Age of Big Business" now available in the UK from Icon

This article first appeared in the 06 October 2008 issue of the New Statesman, Perils of power

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The New Times: Brexit, globalisation, the crisis in Labour and the future of the left

With essays by David Miliband, Paul Mason, John Harris, Lisa Nandy, Vince Cable and more.

Once again the “new times” are associated with the ascendancy of the right. The financial crash of 2007-2008 – and the Great Recession and sovereign debt crises that were a consequence of it – were meant to have marked the end of an era of runaway “turbocapitalism”. It never came close to happening. The crash was a crisis of capitalism but not the crisis of capitalism. As Lenin observed, there is “no such thing as an absolutely hopeless situation” for capitalism, and so we discovered again. Instead, the greatest burden of the period of fiscal retrenchment that followed the crash was carried by the poorest in society, those most directly affected by austerity, and this in turn has contributed to a deepening distrust of elites and a wider crisis of governance.

Where are we now and in which direction are we heading?

Some of the contributors to this special issue believe that we have reached the end of the “neoliberal” era. I am more sceptical. In any event, the end of neoliberalism, however you define it, will not lead to a social-democratic revival: it looks as if, in many Western countries, we are entering an age in which centre-left parties cannot form ruling majorities, having leaked support to nationalists, populists and more radical alternatives.

Certainly the British Labour Party, riven by a war between its parliamentary representatives and much of its membership, is in a critical condition. At the same time, Jeremy Corbyn’s leadership has inspired a remarkable re-engagement with left-wing politics, even as his party slumps in the polls. His own views may seem frozen in time, but hundreds of thousands of people, many of them young graduates, have responded to his anti-austerity rhetoric, his candour and his shambolic, unspun style.

The EU referendum, in which as much as one-third of Labour supporters voted for Brexit, exposed another chasm in Labour – this time between educated metropolitan liberals and the more socially conservative white working class on whose loyalty the party has long depended. This no longer looks like a viable election-winning coalition, especially after the collapse of Labour in Scotland and the concomitant rise of nationalism in England.

In Marxism Today’s “New Times” issue of October 1988, Stuart Hall wrote: “The left seems not just displaced by Thatcherism, but disabled, flattened, becalmed by the very prospect of change; afraid of rooting itself in ‘the new’ and unable to make the leap of imagination required to engage the future.” Something similar could be said of the left today as it confronts Brexit, the disunities within the United Kingdom, and, in Theresa May, a prime minister who has indicated that she might be prepared to break with the orthodoxies of the past three decades.

The Labour leadership contest between Corbyn and Owen Smith was largely an exercise in nostalgia, both candidates seeking to revive policies that defined an era of mass production and working-class solidarity when Labour was strong. On matters such as immigration, digital disruption, the new gig economy or the power of networks, they had little to say. They proposed a politics of opposition – against austerity, against grammar schools. But what were they for? Neither man seemed capable of embracing the “leading edge of change” or of making the imaginative leap necessary to engage the future.

So is there a politics of the left that will allow us to ride with the currents of these turbulent “new times” and thus shape rather than be flattened by them? Over the next 34 pages 18 writers, offering many perspectives, attempt to answer this and related questions as they analyse the forces shaping a world in which power is shifting to the East, wars rage unchecked in the Middle East, refugees drown en masse in the Mediterranean, technology is outstripping our capacity to understand it, and globalisation begins to fragment.

— Jason Cowley, Editor 

Tom Kibasi on what the left fails to see

Philip Collins on why it's time for Labour to end its crisis

John Harris on why Labour is losing its heartland

Lisa Nandy on how Labour has been halted and hollowed out

David Runciman on networks and the digital revolution

John Gray on why the right, not the left, has grasped the new times

Mariana Mazzucato on why it's time for progressives to rethink capitalism

Robert Ford on why the left must reckon with the anger of those left behind

Ros Wynne-Jones on the people who need a Labour government most

Gary Gerstle on Corbyn, Sanders and the populist surge

Nick Pearce on why the left is haunted by the ghosts of the 1930s

Paul Mason on why the left must be ready to cause a commotion

Neal Lawson on what the new, 21st-century left needs now

Charles Leadbeater explains why we are all existentialists now

John Bew mourns the lost left

Marc Stears on why democracy is a long, hard, slow business

Vince Cable on how a financial crisis empowered the right

David Miliband on why the left needs to move forward, not back

This article first appeared in the 22 September 2016 issue of the New Statesman, The New Times