The 'heart of our economic dilemma': getting American consumers to spend again(Read article summary)
The middle class isn't spending because the values of their homes have plummeted, they've lost much of their savings, and their wages are dropping. Reich argues that Obama has a way to correct this, or at least not make it worse.
Pablo Martinez Monsivais/AP
The question at the core of Americaâ€™s upcoming election isnâ€™t merely whose story most voting Americans believe to be true â€“ Mitt Romneyâ€™s claim that the economy is in a stall and Obamaâ€™s policies havenâ€™t worked, or Barack Obamaâ€™s that itâ€™s slowly mending and his approach is working.
If that were all there was to it, last Fridayâ€™s report from the Bureau of Labor Statistics showing the economy added only 96,000 jobs in August â€“ below whatâ€™s needed merely to keep up with the growth in the number of eligible workers â€” would seem to bolster Romneyâ€™s claim.
But, of course, congressional Republicans have never even given Obama a chance to try his approach. Theyâ€™ve blocked everything heâ€™s tried to do â€“ including his proposed Jobs Act that would help state and local governments replace many of the teachers, police officers, social workers, and fire fighters theyâ€™ve had to let go over the last several years.
The deeper question is what should be done starting in January to boost a recovery that by anyoneâ€™s measure is still anemic. In truth, not even the Jobs Act will be enough.
At the Republican convention in Tampa, Florida, Romney produced the predictable set of Republican bromides: cut taxes on corporations and the already rich, cut government spending (mainly on the lower-middle class and the poor), and gut business regulations.
Itâ€™s the same supply-side nonsense that got the economy into trouble in the first place.
Corporations wonâ€™t hire more workers just because their tax bill is lower and they spend less on regulations. In case you hadnâ€™t noticed, corporate profits are up. Most companies donâ€™t even know what to do with the profits theyâ€™re already making. Not incidentally, much of those profits have come from replacing jobs with computer software or outsourcing them abroad.
Meanwhile, the wealthy donâ€™t create jobs, and giving them additional tax cuts wonâ€™t bring unemployment down. Americaâ€™s rich are already garnering a bigger share of American income than they have in eighty years. Theyâ€™re using much of it to speculate in the stock market. All this has done is drive stock prices higher.
The way to get jobs back is to get American consumers to spend again. Consumer spending is 70 percent of the nationâ€™s economic activity. Most of it comes from the middle class and those aspiring to join the middle class. Theyâ€™re the real job creators.
But hereâ€™s the problem. Middle-class consumers wonâ€™t and canâ€™t spend because their savings are depleted, their homes are worth a fraction of what they were five years ago, their wages are dropping, and theyâ€™re worried about keeping their jobs.
And theyâ€™re no longer able borrow against the rising values of their homes because the housing bubble burst â€” which means they can no longer pretend theyâ€™re in better financial shape than they really are.
This is the heart of our economic dilemma.
Last Thursday night at the Democratic convention in Charlotte, North Carolina, President Obama suggested a way to correct this, or at least not make things worse: Raise taxes on the wealthy rather than cut programs the middle class and poor depend on (such as Medicare and Medicaid), give tax incentives to companies that create jobs in the United States, and invest in education.
Itâ€™s start but Americaâ€™s middle class and poor need far more. They need to be able to refinance their mortgages at todayâ€™s low interest rates. They need a larger Earned Income Tax Credit â€“ a wage subsidy for lower-paying jobs. And a higher minimum wage thatâ€™s automatically adjusted for inflation.
They need stronger unions to bargain for a larger share of the gains from economic growth. And a Social Security payroll tax that exempts the first $25,000 of income and eliminates the ceiling (now $110,100) on income subject to it.
And they need an industrial policy designed to create high-wage jobs in America.
In accepting his partyâ€™s nomination for president, Obama said the â€śbasic bargainâ€ť that once rewarded hard work and gave everyone a fair shot had come undone.
Heâ€™s right. And the U.S. economy wonâ€™t return to normal until that basic bargain is remade.
If Obama gets a second term, recreating that bargain will be his central challenge â€“ and Americaâ€™s.