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The biggest risk to the economy in 2012, and what’s the economy for anyway?

Robert Reich, professor of public policy | January 31, 2012

Treasury Secretary Tim Geithner, speaking at the World Economic Forum in Davos a few days ago, said the “critical risks” facing the American economy this year were a worsening of Europe’s chronic sovereign debt crisis and a rise in tensions with Iran that could stoke global oil prices.

What about jobs and wages here at home?

As the Commerce Department reported Friday, the U.S. economy grew 2.8 percent between October and December – the fastest pace in 18 months and the first time growth exceeded 2 percent all year. Many bigger American companies have been reporting strong profits in recent months. GE and Lockheed Martin closed the year with record order backlogs.

Yet the percent of working-age Americans in jobs isn’t much different than what it was three years ago. Yes, America now produces more than it did when the recession began. But it does so with 6 million fewer workers.

Average after-tax incomes adjusted for inflation are moving up a bit. (They increased at an annual rate of .8 percent in the last three months of 2011 after falling 1.9 percent in prior three-month period. For all of 2011, incomes fell .1 percent.)

But beware averages. Shaquille O’Neal and I have an average height of six feet. Exclude Mitt Romney’s $20 million last year — along with everyone else securely in the top 1 percent — and the incomes of most Americans are continuing to slip.

Consumer spending picked up slightly in the fourth quarter mainly because consumers drew down their savings. Obviously, this can’t last.

Meanwhile, government is spending less on schools, roads, bridges, parks, defense, and social services. Government spending at all levels dropped at an annual rate of 4.6 percent in the last quarter – and that’s likely to continue.

Some economists worry this drop is a drag on the economy. But it also means fewer public goods available to all Americans regardless of income.

Congress still hasn’t decided whether to renew the temporary payroll tax cut and extend unemployment benefits past February. If it doesn’t, expect another 1 percent slice off GDP growth this year.

Tim Geithner is surely correct that the European debt crisis and Iran pose risks to the American economy in 2012. But they aren’t the biggest risk. The biggest risk is right here at home – that most Americans will continue to languish.

All of which raises a basic question: Who or what is the economy for? Surely not just for a few at the top, and not just big corporations and their CEOs. Nor can the success of the economy be measured by how fast the GDP is growing, or how high the Dow Jones Industrial Average is rising, or whether average incomes are turning upward.

The crisis of American capitalism marks the triumph of consumers and investors over workers and citizens. And since most of us occupy all four roles – even though the lion’s share of consuming and investing is done by the wealthy – the real crisis centers on the increasing efficiency by which all of us as consumers and investors can get great deals, and our declining capacity to be heard as workers and citizens.

Modern technologies allow us to shop in real time, often worldwide, for the lowest prices, highest quality, and best returns. Through the Internet and advanced software we can now get relevant information instantaneously, compare deals, and move our money at the speed of electronic impulses. We can buy goods over the Internet that are delivered right to our homes. Never before in history have consumers and investors been so empowered.

Yet these great deals increasingly come at the expense of our own and our compatriots’ jobs and wages, and widening inequality. The goods we want or the returns we seek can often be produced more efficiently elsewhere around the world by companies offering lower pay, fewer benefits, and inferior working conditions.

They also come at the expense of our Main Streets – the hubs of our communities – when we get the great deals through the Internet or at big-box retailers that scan the world for great deals on our behalf.

Some great deals have devastating environmental consequences. Technology allows us to efficiently buy low-priced items from poor nations with scant environmental standards, sometimes made in factories that spill toxic chemicals into water supplies or pollutants into the air. We shop for great deals in cars that spew carbon into the air and for airline tickets in jet planes that do even worse.

Other great deals offend common decency. We may get a great price or high return because a producer has cut costs by hiring children in South Asia or Africa who work twelve hours a day, seven days a week. Or by subjecting people to death-defying working conditions.

As workers or as citizens most of us would not intentionally choose these outcomes but as seekers after great deals we are indirectly responsible for them. Companies know that if they fail to offer us the best deals we will take our money elsewhere – which we can do with ever-greater speed and efficiency.

The best means of balancing the demands of consumers and investors against those of workers and citizens has been through democratic institutions that shape and constrain markets.

Laws and rules offer some protection for jobs and wages, communities, and the environment. Although such rules are likely to be costly to us as consumers and investors because they stand in the way of the very best deals, they are intended to approximate what we as members of a society are willing to sacrifice for these other values.

But technologies for getting great deals are outpacing the capacities of democratic institutions to counterbalance them. For one thing, national rules intended to protect workers, communities, and the environment typically extend only to a nation’s borders. Yet technologies for getting great deals enable buyers and investors to transcend borders with increasing ease, at the same time making it harder for nations to monitor or regulate such transactions.

For another, goals other than the best deals are less easily achieved within the confines of a single nation. The most obvious example is the environment, whose fragility is worldwide. In addition, corporations now routinely threaten to move jobs and businesses away from places that impose higher costs on them – and therefore, indirectly, on their consumers and investors – to more “business friendly” jurisdictions. The Internet and software have made companies sufficiently nimble to render such threats credible.

But the biggest problem is that corporate money is undermining democratic institutions in the name of better deals for consumers and investors. Campaign contributions, fleets of well-paid corporate lobbyists, and corporate-financed PR campaigns about public issues are overwhelming the capacities of Congress, state legislatures, regulatory agencies, and the courts to reflect the values of workers and citizens.

As a result, consumers and investors are doing increasingly well but job insecurity is on the rise, inequality is widening, communities are becoming less stable, and climate change is worsening. None of this is sustainable over the long term.

Blame global finance and worldwide corporations all you want. But save some blame for the insatiable consumers and investors inhabiting almost every one of us, who are entirely complicit. And blame our inability as workers and citizens to reclaim our democracy.

Cross-posted from Robert Reich’s blog.

Comments to “The biggest risk to the economy in 2012, and what’s the economy for anyway?

  1. The real “biggest risk to the economy” and all progress for humanity into the long term future is our escalating failure to control our environment. Too many civilizations before ours have failed to heed this number one fact of life and have disappeared from the pages of history.

    Our most perilous failure is focusing on the short term without doing anything to protect the long term future for our newest and future generations.

    The economy may seem relatively bad today, but the economic forecast for a future for people who don’t protect the environment is unacceptable quality of life.

    We never, never learn to save ourselves from our number one failure regardless of how good we think our education system is, especially today when we have more advantages than any other time in history.

    And no one on who posts on Berkeley Blog is providing leadership to avoid calamity that NATURE magazines late Editor in Chief Sir John Maddox warned us about many times before he passed away.

  2. As usual, Professor Reich, your analysis is spot on. Thank you for articulating these painful truths.

  3. When I was a kid in the 60’s all you liberals told us that defense was taking up too much money and all we had to do was decrease it and we would be ok. Now that it’s down from 11% to 6% of GDP you are still crying. We are 14 trillion in debt, constantly raising the debt ceiling, and printing and borrowing money like there is no tomorrow. And who is getting all this money? Obama. This crisis is caused by 6 years of Democrat controlled government, liberal policies and all the things your interest groups have done to wreak havoc on the economy. The only time you are troubled by money in the political process is when it is spent by people who oppose your economic interventionist, crony capitalist and liberal ideological stands. If you really want to reverse this crisis in capitalism then reverse all the crap that has gone on. But you won’t because you represent your own corrupt special interests while pretending to be on the side of the common man. I notice that you never respond to this blog, you are probably laughing your head off because of the odds of anyone being able to do anything about are pretty slim. I’m an old geezer and I’d rather have 200 years of Ron Paul than one day of Obama. Anyway, my pick is Rick Santorum – now you must really hate me!

    • “Anyway, my pick is Rick Santorum – now you must really hate me!”

      I, for one, don’t hate you. I’m guessing that you are part of the 99%, and you probably have been victimized by the trends that Prof. Reich blogs about just like so many others have.

      I just wish you would direct your outrage at the right target.

      Maybe the day is coming when the (white) American working class will wake up and vote for its own interests. In every other country in the world, working class people organize politically to push for what is best for them as a group. When they start doing that here in the US, once again, that’ll really be something.

      • Jake, the point I am trying to make is not only does Reich blog about these trends, his ideology and aristocratic ruling class created the trends and then he tells you what to do to fix the situation by using the exact same methodology that created the trend in the first place.

        There is class warfare, but it is warfare against the shrinking middle class waged by Obama and his statist supporters. What better way to destroy someone by pretending to be your friend, gaining all your trust and then taking all you have and blaming it one someone else – the evil bankers, the evil Wall Street people, the evil whatever

        Do you know anyone who has been the victim of an embezzler? I do – they use the same m o, I’m here to help you, help run your business, take care of the money and see that all the bills are paid and the employees are taken care of. The next thing you know you are out $15 trillion and counting by people who are supposedly here to help you.

        Sometimes the reason I write some pretty strong stuff is that liberals need to have their whole vision of reality brought into line with the way the world really works. If you punish the people who create jobs and wealth, create a ridiculous tax code, confiscate money from the most productive members of society, force banks to make loans to people who can’t afford them (that exact idea was seriously proposed when I took macroeconomics at UC Berkeley) then you have the economic disaster we are living with today. The entrenched special interest groups that Reich represents like it this way because somehow they are able to prosper (largely by picking the pockets of taxpayers) and it keeps others from being able to compete.

        So in a nutshell, and this is a bit of a simplification the news media is really entertainment designed to misinform and mislead. The academia is around to keep people ignorant and susceptible to the propaganda machine of the liberal welfare state. Berkeley is actually a conservative institution in the real sense of the word, conserving the power of the elites, the wealthy and the intellectuals who thrive in the current system.

        The Tea Party are the true liberals because they actually believe in freedom, liberty, a real intellectually honest education and to allow people the opportunity to pursue their dreams to the fullest. The function of this blog is to continue to demonize those who challenge the status quo and reinstate the principles this country was founded on, which incidentally led to us becoming the greatest nation in the history of the world.

        I’m just hoping that someone will read my words, maybe even just one person, and realize that have been had by their own government and start changing how they vote, think and maybe ending influence another person along the way. That, and I can’t stand the injustice of having people like Reich write this crap and not get it challenged.

      • Amen, brother.

        I am a recovering right wing Bush Republican. A fellow right wing Republican said to me in the summer of ’08 (before Obama), “Bush drove this country right into the ditch, didn’t he?” That’s when I started to wake up.

        I listed to a certain right wing radio host for years (he came from here). I remember vividly him making fun of Reich during the Clinton Administration. Now I see why he did that; because Robert Reich makes a lot of sense.

  4. Absolutely every American adult is complicit, because until we’re willing to take a long look in the mirror and face the truth, we’ll never dig our way out of the hole we’ve dug for ourselves. Main Street is already disappearing, we make purchases on the internet, instead of supporting local merchants. Our recently departed hero, outsourced thousands of local jobs, and when he got away with it, everyone else did it to. Politicians will come and go but the person in the mirror will always be with us. No one can save us but ourselves.

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