Book Review

Aftershock – The Next Economy and Americas Future, by Robert B. Reich

Robert Reich, former secretary of labor under Bill Clinton and professor of public policy at Berkeley University in California, is making a bold statement with Aftershock. In the book he lays down the gauntlet at the feet of austerity economics and Timothy Geithner, whose book I have previously reviewed. 

Called a communist by Fox News anchor Bill O´Reilly and presumably much worse things behind closed doors by his detractors, Reich tries to look at what caused the devastating financial crisis that shook the world after the fall of Lehman Brothers, and draws some very interesting historical parallels to support his theory. In case you don´t want to read a book written by someone of a Marxist disposition, it is wise to remember that Reich began his political career in the Ford administration, Gerald Ford being a Republican and most definitely not a closet pinko. 

Depending on how old you are, you may or may not remember the great depression of 1929. If not, you will have to trust Reich when he tells you that it was the worst economic calamity that the world had ever experienced. You will almost certainly know about President Francis D. Roosevelt´s New Deal, the stimulus package that helped end the depression and bring the US back to its feet. After the Depression and World War Two there was a period when America was, indisputably, the wealthiest and most powerful nation in the world. It was a time where the wages of most people rose steadily and there were relatively good prospects of social mobility.  Reich refers to these years, between the end of the war and the late nineteen seventies, as The Great Prosperity. Armed with data that shows how median wages have remained stagnant since the late nineteen seventies, Reich argues that America has forgotten the lessons of the new deal and the Great Prosperity.

To understand exactly what he means, we must turn to a fascinating character that the book dredges up from the dusty cobwebs of history. In order to make sure you don´t doze off when I give a brief history lesson, I promise there will be a humorous metaphor coming soon that you can look forward to while you grit your teeth and fend off drooping eyelids. 

Marriner Eccles was a leading industrialist in the period leading up to the Great Recession. When the stock markets crashed his business were sufficiently diverse and capitalized to survive, but Eccles´s world view and basic beliefs emerged from those tumultuous times fundamentally changed. He was forced to confront the uncomfortable realization that what he used to believe about the nature of the economy had been false. Presumably he alleviated his discomfort and anxiety by puffing on a large cigar and pouring himself a glass of brandy, until he was ready to emerge from the chrysalis of painful realization a changed man. Several years before celebrated economist John Maynard Keynes wrote his General Theory of Employment, Interest and Money, Eccles had already grasped some of the fundamental insights of what was to become known as Keynesianism. At the heart of the great recession, argued Eccles, was not the frivolous and sinful spending of the masses, but a fundamental problem in the American society where growing income inequality was the villain. With most of the income and fruits of American labor going to those at the top, ordinary people lost their ability to leverage aggregate demand and consume what was being produced. Like a great suction pump, the money went to those who already had more than enough of it, and as ordinary people had to go deeper and deeper into debt, the wealthy engaged in a frenzy of speculation that eventually led to the crash. When Eccles became head of the Federal Reserve, he helped Francis D. Roosevelt to launch the New Deal, a massive stimulus package where the government, paradoxically enough, had to go deeper into debt in order to stimulate the economy by increased public spending.

All of this is heady stuff, as I´m sure you will agree, but what does it mean to us? Reich argues that when Lehman Brothers fell and the world tethered on the brink of a dark and foreboding precipice, Obama and his team one learned only one of the two fundamental lessons of the New Deal. Just as Geithner argued in Stress Test, government must act decisively to put “money in the window”, to prevent panic in the global market and make sure that the banks can keep lending. The market and the financial system must, for lack of a better word, be flooded with money so that the wheels of the economy doesn´t stop turning and banks don´t turn into zombie banks. This has nothing to do with eating other people´s brains, it simply refers to banks that limp along on life support and are too weak to fulfill their core function of lending money. All of this works, as is shown by the record streak of private sector job growth that the current White House touts as often as possible, but Reich goes a step farther and tries to answer why the recovery has been so stale, and why so many are still going through tough times

If the great financial calamity of 2008 was a boxer with a menacing scowl and bulging biceps, TARP and the much loathed Bailout was only the punch to the head in the head and body combo needed to knock out our imagined boxer. The devastating blow to the kidney never came and now the US, continuing our boxing metaphor, is leaning against the ropes, reeling from a dozen savage punches. Nothing was done, argues Reich, to address the vital issue of income inequality. Since so little of the economic gains go to the working people and the middle class, they lack the ability to consume and spend, which causes tepid growth and chronically high unemployment. Austerity economics is, reading between the lines, the bribed judge who keeps letting the boxer in the star spangled shorts get pummeled.

The connection between financial crises and income inequality is illustrated by a diagram that is both highly thought provoking and the proverbial cherry on top of Reich´s reasoning. If you study the share of income that goes to the wealthiest one percent of the population in the US between the early twentieth century and today, you find something ominous. The chart looks like a suspension bridge held up by two pylons, located at 1928 and 2007. Between them lies a sloping curve that reaches its lowest point in the late nineteen seventies and then begins to rise, in the vague shape of a slack steel cable hanging between the pylons. Just before the great depression of 1929 and just before the great recession of 2008, the top one percent took home more of the national income than they have done during any other time in history, nearly twenty-five percent.

There is also a connection, Reich explains, between where the money is concentrated and how power is distributed. Too much wealth amassed at the top has been proved to tilt the political system in favor of moneyed interests rather than those of the general population.

Reich gives concrete policy proposals that could alleviate this situation, but this is the least interesting part of the book. Reich is immeasurably more captivating when he focuses on his theory of how income inequality is to financial crises what a canary in the coalmine is to noxious fumes. An early warning sign, that is.

Despite a valiant attempt, Reich will probably not write the next Great American Novel, but the chapter with a short story about an imagined 2020 election is nevertheless fascinating. Inequality, he argues, gives rise to anger and populism, which stokes the fires of nefarious demagogues. This fuels a radical populist/isolationist-party to edge out the imagined establishment candidates (a Bush and a Clinton, obviously). It doesn´t have to go this far, argues Reich on a hopeful note, and reminds the reader of how great inequality, abject poverty and racism has been bested in the past. There is a way forward, as long as people are aware of the issues they face, he explains optimistically.

Aftershock is an interesting and thought-provoking read, especially with Stress Test still fresh in my memory. Even if you don´t happen to agree with Reich or his policy proposals (I wonder if Bill O`Reilly is reading?), his insights are worth considering and discussing, especially if you want a deeper understanding of US history and economics.