The Tinder-Box Society

povertyThe Dow Jones Industrial Average hit 13,338 Tuesday, its highest since December, 2007. The S&P 500 added 16 points. Wall Street will remember May 1 as a great day.

But most of these gains are going to the richest 10 percent of Americans who own 90 percent of the shares traded on Wall Street. And the lion’s share of the gains are going to the wealthiest 1 percent.

Shares are up because corporate profits are up, and profits are up largely because companies have figured out how to do more with less.

Payrolls used to account for almost 70 percent of the typical company’s costs. But one of the most striking legacies of the Great Recession has been the decline of full-time employment — as companies have substituted software or outsourced jobs abroad (courtesy of the Internet, making outsourcing more efficient than ever), or shifted them to contract workers also linked via Internet and software.

That’s why most of the gains from the productivity revolution are going to the owners of capital, while typical workers are either unemployed or underemployed, or else getting wages and benefits whose real value continues to drop. The portion of total income going to capital rather than labor is the highest since the 1920s.

Increasingly, the world belongs to those collecting capital gains.

They’re the ones who demanded and got massive tax cuts in 2001 and 2003, on the false promise that the gains would “trickle down” to everyone else in the form of more jobs and better wages.

They’re now advocating austerity economics, on the false basis that cuts in public spending — including education, infrastructure, and safety nets — will generate more “confidence” and “certainty” among lenders and investors, and also lead to more jobs and better wages.

None of this is sustainable, economically or socially.

It’s not sustainable economically because it has resulted in chronically inadequate demand for goods and services. That’s meant anemic growth punctuated by recessions. Without a larger share of the economic gains, the vast middle class doesn’t have the purchasing power to buy the goods and services an ever-more productive economy can generate.

It’s not sustainable socially because it has resulted in rising frustration over the inability of most people to get ahead.

Austerity economics in Europe is fanning the flames, as public budgets are slashed on the false crucible of fiscal responsibility. In the United States, an anemic recovery and plunging home prices are taking a toll: a large portion of the public believes the game is rigged, and no longer trusts that the major institutions of society — big business, Wall Street, or government — are on their side. In Europe and America, 30 to 50 percent of recent college graduates are unemployed or underemployed.

Inequality is also widening in China, where the scandal surrounding Bo Xilai and his family is serving as a public morality tale about great wealth and official corruption. Students in Chile are in revolt over soaring tuition and other perceived social injustices.

It’s a combustible concoction wherever it occurs: increasing productivity, widening inequality, and rising unemployment create tinder-box societies.

Public anger and frustration can ignite in two very different ways. One is toward reforms that more broadly share the productivity gains.

The other is toward demagogues that turn people against one another.

Demagogues use fear and frustration to advance themselves and their own narrow political agendas — scapegoating immigrants, foreigners, ethnic minorities, labor unions, government workers, the poor, the rich, and “enemies within” such as communists, terrorists, or other conspirators.

Robert ReichBe warned. The demagogues already are on the loose. In Europe, fringe parties on the right and left are gaining ground. In America, politics has turned especially caustic and polarized. (The right is even accusing people it doesn’t like of being communists.) No one knows where China is heading, but reformers and ideologues are battling some of it out in public.

May 1 may be a good day for the Dow Jones Industrial Average, but the future depends on the job prospects and wages of the average worker.

Robert Reich
Robert Reich’s Blog

Republished with permission.

Posted: Tuesday, 1 May 2012.

Published by the LA Progressive on May 1, 2012
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About Robert Reich

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine.

Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.