Aftershock: The Next Economy and America's Future Read Online Free PDF Page A

economy enabled government to repay a substantial portion.
    The Great Recession that started at the end of 2007, however,has produced no new economic order. Instead, the government stepped in quickly with enough money to contain the downward slide. America had at least learned the superficial lesson Marriner Eccles had offered to deal with downdrafts of this magnitude: When demand evaporates, government must act as purchaser of last resort, temporarily filling much of the vacuum created by fast-retreating consumers, and it must make borrowing so cheap as to keep banks solvent and credit moderately available. In 2008 and 2009, the Obama administration and the Federal Reserve played their parts with $700 billion in bank bailouts, a subsequent stimulus package of similar magnitude, and a massive expansion of the money supply.
    The government thereby averted what in all likelihood would have become another Great Depression. No rational person could wish for a repeat of that. Yet, ironically, President Obama’s success in forestalling economic collapse reduced the urgency of dealing with the larger challenge. Apart from extending health insurance coverage, little was done to reduce the underlying, cumulative problem of widening inequality—Eccles’s insight into what caused the Great Depression. After the stimulus and loose money wear off, therefore, it is unlikely that growth can be sustained. We are almost certainly in store for many years of high unemployment. The underlying trend of the last thirty years will continue: Median incomes will remain flat or decline, and most families will stay economically insecure. Inequality will continue to widen. Consequently, the middle class will not be able to buy nearly enough to keep the economy going. Neither richer Americans nor foreign consumers will fill the gap. All of this will constitute the Great Recession’s aftershock. From it will emerge either a political backlash—against trade, immigration, foreign investment, big business, Wall Street, and government itself—or large-scale reforms that reverse the underlying trend.
    * There is no strict definition of the “middle class.” For the purposes of simplicity and clarity, I define it broadly to include the 40 percent of American families with incomes above the median family income and the 40 percent below.

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The Basic Bargain
    On January 5, 1914, Henry Ford announced that he was paying workers on his famously productive Model T assembly line in Highland Park, Michigan, $5 per eight-hour day. That was almost three times what the typical factory employee earned at the time. In light of this audacious move, some lauded Ford as a friend of the American worker; others called him a madman or a socialist, or both.
The Wall Street Journal
termed his action “an economic crime.” Ford thought it a cunning business move, and history proved him right. The higher wage turned Ford’s autoworkers into customers who eventually could afford to plunk down $575 for a Model T. Their purchases in effect returned some of those $5 paychecks to Ford, and helped finance even higher productivity in the future.Ford was neither a madman nor a socialist, but a smart capitalist whose profits more than doubled from $25 million in 1914 to $57 million two years later.
    Ford understood the basic economic bargain that lay at the heart of a modern, highly productive economy. Workers are also consumers. Their earnings are continuously recycled to buy the goods and services other workers produce. But if earnings are inadequate and this basic bargain is broken, an economy produces more goods and services than its people are capable of purchasing. This can lead to the vicious cycle Marriner Eccles witnessed after the Great Crash of 1929 and that the United States began to experience in 2008. (Global trade complicates this bargain but doesn’t negate it, as I will discuss later.)
    In his time, Ford’s philosophy was the exception. From the 1870s to the