(By Robert Reich, Fmr Secretary of Labor)
America’s two economies are getting wider apart.
The Big Money economy is booming. According to a new Commerce Department report, third-quarter profits of American businesses rose at an annual record-breaking $1.659 trillion – besting even the boom year of 2006 (in nominal dollars). Profits have soared for seven consecutive quarters now, matching or beating their fastest pace in history.
Executive pay is linked to profits, so top pay is soaring as well.
Higher profits are also translating into the nice gains in the stock market, which is a boon to everyone with lots of financial assets. And Wall Street is back. Bonuses on the Street are expected to rise about 5 percent this year, according to a survey by compensation consultants Johnson Associates Inc.
But nothing is trickling down to the Average Worker economy. Job growth is still anemic. At October’s rate of only 50,000 new private-sector jobs, unemployment won’t get down to pre-recession levels for twenty years. And almost half of October’s new jobs were in temporary help.
Meanwhile, the median wage is barely rising, adjusted for inflation. And the value of the major asset of most Americans – their homes – continues to drop.
Why are America’s two economies going in opposite directions? Two reasons.
First, big profits are coming from overseas sales of goods and services made abroad, not here. The world’s fastest-growing markets are China and India, whose inhabitants are eager to buy “American” products, and just as eager to work for the American companies that sell them. The U.S. market is barely moving.
Increasingly, American corporations are able to extract healthy gains from their global operations without adding much in the United States except executive talent.
Second, American businesses are boosting productivity by having U.S. employees do more work for less pay. According to the Bureau of Labor Statistics, between the third quarter of 2009 and the third quarter of 2010, productivity rose 2.5 percent, output increased 4.1 percent, the number of hours worked was up 1.6 percent, and unit labor costs dropped by 1.9 percent.
In other words, American workers are losing even more bargaining power as a sizeable chunk of corporate profit goes into software and digital equipment that can do what people used to do – but more cheaply.
So what is Washington doing about all this?
Making the tax code more progressive so more Americans reap the benefits enjoyed by those at the top? Increasing the bargaining power of American workers? Forcing Wall Street banks to reorganize under bankruptcy mortgage loans that are dragging down the housing market? Expanding early childhood education, hiring more teachers, putting fewer kids into each classroom, and making higher education more affordable – so more working and middle-class kids can become tomorrow’s high-priced “talent”?
No. None of this. In fact, Washington is busily separating the two economies even further.
It’s extending the Bush tax cuts – the lion’s share of which go to the very wealthy; reducing the reach and rate of the estate tax; and giving corporations additional tax breaks for investing in software and equipment. Meanwhile, the states are cutting back on pre-schools, firing teachers, and yanking up tuition and fees at public universities.
Oh, and yes, Washington is also extending unemployment benefits for the long-term jobless. Which is the least it can do, given that their ranks continue to swell.
The deal the President struck with Republican leaders is an abomination.
It will cost $900 billion over the next two years – larger than the bailout of Wall Street, GM, and Chrysler put together, larger than the stimulus package, larger than anything that’s come out of Washington in years.
It makes a mockery of deficit reduction. Worse, the lion’s share of that $900 billion will go to the very rich. Families with incomes of over $1 million will reap an average of about $70,000, while middle-class families earning $50,000 a year will get an average of around $1,500. In addition, the deal just about eviscerates the estate tax – yanking the exemption up to $5 million per person and a maximum rate of 35 percent.
And for what?
Wealthy families won’t spend nearly as large a share of what they get out of this deal as will middle-class and working-class families, so it doesn’t do much to stimulate the economy.
The deal further concentrates income and wealth in America — when it’s already more concentrated than at any time in the last 80 years.
The bits and pieces the President got in return – extended unemployment benefits, a continuation of certain small tax benefits for the middle class – are peanuts. After last week’s awful jobs report, Senate Republicans would have been forced to extend unemployment insurance anyway.
It’s politically nuts. Polls showed most Americans are against extending the Bush tax cuts for the wealthy. It would have been a defining issue for the President to use to show whose side he’s on (the middle and working class) and whose side the Republicans are on (not the middle and working class). And given that the House turns over to Republicans in January, the President probably won’t have another chance like this one.
It loses him even more of his “base” – by which I mean people who think of themselves as Democrats and are committed to the ideal of equal opportunity and don’t want the nation to become even more of a plutocracy (a government that serves the rich).
It makes him look weak – Republicans got everything they wanted. And when a President looks weak, he is weak.
House and Senate Democrats should reject this abomination. The President should get himself new advisors.