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The State of the Union: What the President should say

Robert Reich, professor of public policy | January 24, 2011

The President will have to devote a big part of his speech to the economy, but which economy? Corporate profits are up but jobs and wages remain in the doldrums. People with lots of financial assets, or who are deemed “talent” by large corporations, are enjoying a solid recovery. But most Americans continue to struggle.

In order for the public to understand what must be done, the President has to be clear about what has happened and why. Corporations are profiting from sales of their foreign operations, especially in China and India. Here at home, they’re catering to rich Americans. But an important key to their profits is their reduced costs, especially payrolls. The result has been fewer jobs and lower pay.

The Great Recession accelerated trends starting three decades ago — outsourcing abroad, automating work, converting full-time jobs to temps and contracts, undermining unions, and getting wage and benefit concessions from remaining workers. The Internet and software have made all this easier.

He should point out that the U.S. economy is now twice as large as it was in 1980 but the real median wage has barely budged. Most of the benefits of economic growth have gone to the top. In the late 1970s, the richest 1 percent of Americans got about 9 percent of total income. By the start of the Great Recession they received more than 23 percent. Wealth is even more concentrated.

This is the heart of our problem. Most Americans no longer have the purchasing power to get the economy moving again. Once the debt bubble burst, they were stranded.

The President should make it clear corporations aren’t to blame. After all, they’re designed to make profits. Nor is it the fault of the rich who have played by the rules. The problem is the rules need fixing. He should stress that a future with no jobs or lousy jobs for most Americans is not sustainable – not even for American corporations, whose long-term profitability depends on the revival of broad-based domestic demand. (Watch out for the upcoming “correction.”)

The solution is to give average Americans a better economic deal.

For starters, he should propose to expand the Earned Income Tax Credit (essentially, a wage subsidy) all the way up through the middle class. And he should make the tax system more progressive: The rate on the first $50,000 to $90,000 of income should be cut to 10 percent; the next $90,000 to $150,000, 20 percent; and the next $150,000 to $250,000, 30 percent. Make up the revenue by increasing taxes on the next $250,000 to $500,000, to 40 percent; from $500,000 to $5 million, to 50 percent; and anything over $5 million, 60 percent. Tax capital gains the same as ordinary income.

In addition, he should call for strengthening unions by increasing penalties on employers who illegally deter them.

He will have to call for reducing the long-term budget deficit, but must make sure to distinguish between public investments that build future productivity (education, infrastructure, and basic R&D) and expenditures that improve our lives or keep us safe today. The former — essentially the nation’s “capital expenditures” — shouldn’t be cut at all. Indeed, they should be substantially increased. A “capital budget” separate from the regular federal budget would help draw this fundamental distinction.

Finally, he should recommend that Congress make college affordable by allowing federal loans to be repaid as 10 percent of earnings for the first 10 years of full-time employment.

Importantly, he should make it clear this isn’t redistribution. These measures would be good for everyone. Rich Americans will do better with smaller share of a rapidly-growing economy than a large share of one that remains in a deep hole.

Cross-posted from Robert Reich’s blog.

Comments to “The State of the Union: What the President should say

  1. “Let me address my opening remarks to the American people. I understand the quality of life for most of you is not getting better it’s getting more expensive. I am anxious to do what can be done to help but in a democracy, I don’t get to do whatever I want. You must be involved. You must decide what you need and what you can afford. In the last election many of you spoke and I heard you. I understand you not only want change, like health care, banking and immigration reforms, but you want them done fairly and in a cost effective manner. I pledge to you tonight that I will work with Congress to facilitate job creation, to implement cost-effective health care reform, to ensure reforms in the banking industry and to address immigration in a way that does not steal human dignity from those seeking a better life for their children. It is not supposed to be about me, it’s about us, working together to address the ever changing realities of our time. As I look forward to the year ahead let me tell you and Congress what we have accomplished and what we can accomplish, if we work together…”

  2. You can’t have a healthy, equitable economy based solely on finance, computer games, retail sales, alcohol consumption, spectator sports, university degree mills, and government regulations. But that’s about what the US has left after exporting it manufacturing base ti the Far East. We need a new generation of civic minded WASPY robber barons to rebuild our industrial might — preferably ones WITHOUT Ivy League degrees.

  3. I do not understand why you wish to call for stronger unions – I only see the negatives of public sector unions, and I know their wages have increased over time at the expense of higher employment. Look at Vallejo with its recent bankruptcy – instead of reducing wages to police and firefighters, the junior officers resigned and the seniors stayed rich and happy. I think you disagree with my assessment though, so if you could enlighten me on why you don’t find this aspect of unions important, I would like to know. This is not a comment on unions in the private sector.

    Also, as for college affordability, what metric do you use to judge when college is too expensive? Do you not believe in the efficiency benefits of increased tuition and better financial aid? I see financial aid as working pretty well – it could be better targeted but not without more enforcement. So what about our current financial aid situation is wrong which makes you conclude that college is unaffordable?

    • A natural born working citizen with 35 years in private sector, 5 as owner-operator and 5 years with the state. I will not retire with a pension, and it’s my belief that all municipal state/federal/local govt employees should contribute toward their own pensions.
      Unions are simply protection for the working class, otherwise many employers would have employees working 7 days a week without benefits. Unfortunately Unions do not listen to the rank & file, either.

      College is unaffordable because the everything else is more expensive including housing,food,transportation etc.

  4. I’m all for re-progressive-izing the tax structure. But it has to get past both houses of the legislature. I agree it’s not really ‘redistribution’, but the richer few who will pay more will cry about it, nonetheless. They care more about controlling the shrinking pie, than sharing a bigger one.

  5. I may not disagree with anything here, but boy am I hoping that the POTUS has something more inspirational and aspirational to say in the SOTU.

    I think it should be centered around inventing and manufacturing the future through investments in education and R&D using government’s funding of creation of computers, the Internet and GPS as examples of how government has managed to spur entirely new economies.

  6. The great thing about Obama is that he is by far the best President we have had for decades.

    Thank God he is superior to Clinton who enabled our Decline while focusing on self-gratification, and Bush who caused our Fall because he didn’t understand anything.

  7. China’s eating our lunch? Thank McDonald’s and KFC. Our gastronomic weapons of mass destruction will soon bring them to heel.

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