No Return To Normal

Robert Reich
January 14, 2011

Excerpt from Chapter 11 of Aftershock: the Next Economy and America's Future, by Robert B. Reich (New York: Alfred A. Knopf, 2010). Reich is a keynote speaker at Earl Lectures 2011.

It should be apparent that there will be no return to “normal,” because the old normal got us into our present predicamentand can't possibly get us out.So what comes next?

In order to fix what needs fixing, we need to be clear about what broke. The underlying problem is not that financial institutions were reckless, although they were. The ultimate solution, therefore, isn't just to make them more prudent. Nor is the central problem that consumers borrowed too much, although they did. The solution, therefore, isn't merely to get Americans to save more and consume less.

To summarize: The fundamental problem is that Americans no longer have the purchasing power to buy what the U.S. economy is capable of producing. The reason is that a larger and larger portion of total income has been going to the top. What's broken is the basic bargain linking pay to production. The solution is to remake the bargain.

President Obama brought the economy back from the brink. His bank rescue and stimulus packages, combined with the Fed's low interest rates, prevented the Great Recession from turning into another Great Depression. But the nation has not recommitted itself to the basic bargain. The 2010 health reform legislation was a step in the right direction but small in relation to the overall challenge. Consequently, most Americans will continue to experience relatively high unemployment and flat or declining real wages. Economic growth will be hampered.

Growth, it should be noted, is not an end in itself. It is a means to better lives for all, generating not only higher incomes and possibilities for more personal consumption but also making room for the consumption of public improvements that benefit all—an atmosphere less polluted by carbon, good schools, better health care. Rapid growth also smoothes the way toward the basic bargain: When the economy is growing nicely, the wealthy more easily accept a smaller share of its gains because they can still come out ahead of where they were before. Simultaneously, when everyone enjoys a larger share, they more willingly pay taxes to support public improvements. It's a virtuous cycle.

Slow growth or no growth has the reverse effect. Economic gains are so meager that the wealthy fight harder to maintain their share. The middle class, already burdened by high unemployment and flat or dropping wages, fights ever more furiously against any additional burdens, such as tax increases to support public schools or price increases resulting from regulations limiting carbon emissions. It's a vicious cycle.

The question, then, is how to move from a vicious cycle to a virtuous one—how to restore the widespread prosperity needed for growth, and how to get the growth necessary for widespread prosperity. The challenge is both economic and political. A fundamentally new economy is required—the next stage of capitalism. But how will we get there? And what will it look like when we do?