The Sorry State of Our Economic Union
Robert B. Reich

In his State of the Union address, the president talked at length about the economy. What he failed to point out is that America now has two economies, and only one of them is recovering.

The recovering economy is on Wall Street and in large corporations. Profits are soaring. Big companies are sitting on a trillion dollars of cash. People with lots of financial assets, or who are deemed "talent," are doing extremely well.

But most Americans have been left behind. They're without jobs, or their jobs pay badly, and their benefits continue to shrink. They're still buried under debt. Their economy hasn't recovered at all.

In other words, our economic union is falling apart.

The president needs 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 selling to rich Americans (Christmas sales at Tiffany & Co. and Neiman Marcus were up, but sales have been down for downscale retailers).

But the most important key to the rise in corporate profits has been reduced costs, especially payrolls. The result has been fewer jobs and lower pay.

The Great Recession accelerated trends that started 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.

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.

It happened before. The last time in American history the richest 1 percent of Americans got more than 23 percent of total income was 1928. And we know what happened in 1929.

Corporations aren't to blame. After all, they're designed to make profits. But reaching out to corporations and naming their CEOs as economic advisors won't help. What's good for corporations isn't necessarily good for American workers.

Nor is it the fault of the rich who have played by the rules.

The problem is that the rules need fixing. Average Americans need a better economic deal. The president has to take the lead on this. In Tuesday's State of the Union address, he didn't go nearly far enough.

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 those earning from $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, the president should call for strengthening unions by increasing penalties on employers who illegally deter them.

Yes, he'll need to reduce the long-term budget deficit. But he 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.

Public investments 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 make college affordable by allowing federal loans to be repaid as 10 percent of earnings for the first 10 years of full-time employment.

Strengthening our economic union would be good for everyone. American corporations can't profit forever off of payroll cuts and foreign sales. Their long-term profitability depends on the revival of broad-based domestic demand. (Watch out for the upcoming "correction.")

Rich Americans, too, will do better with a smaller share of a rapidly growing economy than with a large share of one that remains in a deep hole.

Robert Reich, former U.S. Secretary of Labor, is professor of public policy at the University of California at Berkeley and the author of the new book Aftershock: The Next Economy and America's Future.

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