Market Insight Editorial & Advice to Tenants: February 2009
Robert Reich Speaks: Financial Ruin to Recovery by Dan Mihalovich
We recently went to the Commonwealth Club to hear the answers from former Labor Secretary Robert Reich, now Cal Professor of Public Policy…his views in a 90-minute download on how the country arrived at this financial crossroad and where we’re heading. Below, paraphrased, were his sage opinions:
- The U.S. economy lost $7 TRILLION in 2008.
- No one can escape from the downdraft.
- Without effective Government intervention, unemployment (now 7.2%) will rise to 10% by the end of 2009. The U.S. lost 2.4 million jobs in 2008; the U.S. will lose 3 million more. The Dow will hit 7,050.
- How did we get here? Three theories:
- The housing bubble led to layoffs which led to a dramatic decline in consumer spending.
- Wall Street’s performance and a lack of regulations led the decline.
- Consumer income plummeted, causing the decline.
- Median incomes languished, adjusted for inflation since the 1970s. For the first time in history, in 2000 and more recently, median income actually dropped. To keep up spending, women entered the workforce in the 1970s. Americans worked longer hours, on average more than 350 hours/year longer than European and Japanese workers. We became a society of double-income…no-sex. Americans went deeper into debt, using housing as collateral. Then, Americans ran out of purchasing power. In 1980, the top 1% of earners took home 8% of total income. By 2006, the top 1% took home 23% of total income. Demand shifted to these heavy-income workers. But people at the top don’t spend like everyone else in the economy. Now consumers cannot borrow any further.
- Who is left to borrow?
- The Fed Reserve Board, headed by Ben Bernanke (student and scholar of the Depression), turned the FRB into a lever for interest rates. There is an astounding purchase of assets underway…all off budget, to the tune of $2.5 TRILLION.
- The Treasury Department, under Hank Paulsen (ex Goldman Sachs), created the TARP program (Troubled Assets Recovery Program)…a miserable failure so far. Money is not trickling through to Main Street. The first $350 BILLION of TARP funds went into dividends to shareholders; executive pay and bonuses; and mergers.
- About the Stimulus Package…Reich testified to Congress the week before this speech to recommend a $900 BILLION stimulus package to be spent over the next two years. At full capacity, our economy should produce GDP of $14 trillion. It was arguable that the stim package should be $1.3-$1.4 TRILLION. The Obama plan was for $500 Billion in spending plus $300 Billion in tax cuts.
- FDR didn’t do enough until we geared up for war in 1941. By 1946, the U.S. suffered under huge debt. Total debt divided by GDP was 108; today the ratio is less than 50. The major reason for the decline is due to increased GDP…SPENDING…getting the economy going.
- Now is the time for the Government (and others) to borrow cheaply. Now we have an opportunity to invest in water projects; port facility upgrading; highways; our grid; deferred maintenance projects; medical information technologies; renewable energies; broadband; bridges. Now is the time for investments we haven’t made for decades. This is no time for partisanship. The Dow Jones isn’t the whole story.
- FORECAST FOR “RECOVERY” (although we didn’t hear from Reich as to a recovery from WHERE…): According to Reich, the “Pollyanna” view from some economists is that the economy will rebound in 2010; the “Chicken Little” economists suggest that we’ll be another ten (10) years in the muck. Reich’s view? Another 2-3 years to go before we’ll see a “recovery”.
- Other Reich ideas (from the Q+A session):
- Fewer than 40% of all Americans out of work are covered by unemployment insurance. Coverage should be expanded.
- Expand the Food Stamp program.
- Lift the 60-month limit on welfare benefits.
- Provide huge cash infusions to State and localities, where $350-$400 BILLION shortfalls exist already.
- We must have greater regulations; full disclosure; a conflict-free environment; and executive pay controls.
About Robert B. 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. His weekly commentaries on public radio’s “Marketplace” are heard by nearly five million people.
In 2003, Reich was awarded the prestigious Vaclev Havel Foundation Prize, by the former Czech president, for his pioneering work in economic and social thought. In 2005, his play, Public Exposure, broke box office records at its world premiere on Cape Cod.
As the nation’s 22nd Secretary of Labor, Reich implemented the Family and Medical Leave Act, led a national fight against sweatshops in the U.S. and illegal child labor around the world, headed the administration’s successful effort to raise the minimum wage, secured worker’s pensions, and launched job-training programs, one-stop career centers, and school-to-work initiatives. Under his leadership, the Department of Labor won more than 30 awards for innovation. A 1996 poll of cabinet experts conducted by the Hearst newspapers rated him the most effective cabinet secretary during the Clinton administration.
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.
