Robert Reich's "Aftershock: The Next Economy and America's Future"

This is an excellent review of the current economic mess in the US along with two alternative scenarios. One lets the current political stalemate continue until the forces of grievance and nationalism put a Tea Party-style crazy into the presidency and the other scenario looks at steps to create a "new deal" for the middle class that allow the benefits of productivity to flow down like they did during the golden era of 1947-1975.

I found the opening of the book with a vignette of Mariner Eccles, the Federal Reserve Chairman put in place in 1934 by FDR (Franklin Delano Roosevelt). Eccles diagnosed the problem as one where the rich were keeping all the wealth to themselves and not letting the benefits of new production methods (of productivity) to flow down to the middle and working classes. If these classes couldn't buy, then the production wasn't needed. Here's a nice summary of Eccles' view from The Economic Populist blog site which quotes Eccles's memoirs:

"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery.

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, 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.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spend by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

from Marriner Eccles' memoirs, Beckoning Frontiers (New York, Alfred A. Knopf, 1951)

Robert Riech follows the same analysis. But his little book includes lots and lots of facts and figures to back up the analysis.

Reich tends to optimism. He does lay out a pessimistic scenario for the future which sounds a lot like exactly what is happening and will happen over the next 10 years. But in his heart of hearts he believes that progressive forces will somehow bend the future to avert the worst and something like the golden era of the 1947-1975 era will return. This is the "pendulum swings" theory of economics and social forces. It makes a nice story. I want to believe it, but I've been expecting the pendulum to swing back for over 30 years so I'm getting jaded.

This book is an excellent short introduction to the crazy economic world we are stuck with. It is thought provoking. He has all the facts you need to appreciate the analysis. Read the book!