Aftershock

Sebastian Mallaby reviews Robert Reich’s latest book, Aftershock: The Next Economy and America’s Future (Fairer Deal, NYTimes, 9/24/10). Reich argues that the stagnation of middle-class buying power has been a drag on growth in the American economy.

At some point in the not-too-distant future, Reich warns, C.E.O.’s may find that limousines are being purposely scratched and mobs are picketing their offices.

According to Mallaby, Reich sees at least part of the cure in measures such as:

• a more progressive income tax, including negative taxes for anyone earning below $50,000
• a top income-tax rate of 55 percent
• income from capital gains, now taxed at 15 percent, taxed at the same rate as income from salaries
• wage insurance — temporary compensation for workers who take big pay cuts when they shift jobs
• investments that make public transportation and Medicare more available.

I haven’t read the book, but the arguments and solutions appear quite reasonable to me. Mallaby agrees to a point but questions wether economic resentments will really take hold. He concludes with an amusing bit of history.

Toward the end of the Depression, in the late 1930s, a sociologist named Alfred Winslow Jones conducted field research around the violently strike-prone factories of Akron, Ohio, expecting that bitter industrial conflict might have created equally bitter class divisions. To his surprise, he found little evidence of such polarization.

Thus reassured, Jones migrated from sociology to journalism to finance. Ultimately, in a twist that Reich might grimly appreciate, he invented a fantastically profitable investment vehicle. He called it a “hedged fund.”