Robert Reich

Economy and democracy falter with low wages

Updated: 2013-09-04T00:54:47Z

By Robert Reich

Tribune Content Agency

Congress will reconvene shortly. But before the hostilities start again and we all get lost in political strategies and petty tactics, it’s useful to consider what’s really at stake for our economy and democracy.

For much of the past century, the basic bargain at the heart of America was that employers paid their workers enough to buy what American employers were selling. Government’s role was to encourage and enforce this bargain. We thereby created a virtuous cycle of higher living standards, more jobs and better wages.

But the bargain has been broken. And until it’s remade, the economy can’t mend and our democracy won’t be responsive to the majority.

First, a bit of history. Back in 1914, Henry Ford announced he was paying workers on his Model T assembly line $5 a day — three times what the typical factory employee earned at the time.

But Ford knew it was a cunning business move. The higher wage turned Ford’s auto workers into customers who could afford to buy Model T’s. In two years, Ford’s profits more than doubled.

Yet in the years leading up to the Great Crash of 1929, employers forgot Henry Ford’s example. The wages of most American workers stagnated even as the economy surged. Gains went mainly into corporate profits and into the pockets of the very rich. American families maintained their standard of living by going deeper into debt, and the rich gambled with their gigantic winnings. In 1929, the debt bubble popped.

Sound familiar? It should. The same thing happened in the years leading up to the crash of 2008. The lesson should be obvious. When the economy becomes too lopsided — disproportionately benefiting corporate owners and top executives rather than average workers — it tips over.

It’s still lopsided. We’re slowly emerging from the depths of the worst downturn since the Great Depression, but nothing fundamentally has changed. Corporate profits are up largely because payrolls are down. Even Ford Motor Co. is now paying its new hires half what it paid new employees a few years ago.

All over the American economy, employee pay is now down to the smallest share of the economy since the government began collecting wage and salary data 60 years ago. And corporate profits constitute the largest share of the economy since then.

This is a losing game for corporations over the long term. Without enough American consumers, their profitable days are numbered. Europeans are in no mood to buy. India and China are slowing dramatically. Developing nations are in trouble.

Republicans claim rich people and big corporations are job creators, so their taxes must not be raised. This is blatantly untrue. In order to create jobs, businesses need customers. But the rich spend only a small fraction of what they earn. They park most of it around the world wherever they can get the highest return.

The real job creators are the vast middle class, whose spending drives the economy and creates jobs. But as the middle class’ share of total income continues to drop, it can’t spend as much as before. Nor can most Americans borrow as they did before the crash of 2008 — borrowing that temporarily masked their declining purchasing power.

As wealth and income rise to the top, moreover, so does political power. Corporations and the rich are able to entrench themselves by keeping low tax rates and special tax breaks and ensuring a steady flow of corporate welfare to their businesses.

All of this continues to squeeze public budgets, corrupt government and undermine our democracy.

So as Congress reconvenes and the battles resume, be clear about what’s at stake. The only way back to a buoyant economy is through a productive system whose gains are more widely shared. The only way back to a responsive democracy is through a political system whose monied interests are more effectively constrained.

We must remake the basic bargain at the heart of America.

Robert Reich, a former U.S. labor secretary, is a professor of public policy at the University of California at Berkeley.

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