Aftershock - critical summary review

Globalization has undoubtedly made the world smaller. There’s no question that it’s been a great thing for the most part. Increased free trade and competition, as well as faster and clearer communication between nations, are only two of globalization’s most obvious advantages. 

However, it has its downsides as well. For one thing, it leads to thousands and thousands of lost jobs in the developed world. “How,” you wonder? Well, it’s pretty obvious once you think about it: to maximize profits, all that companies need to do is transfer jobs to lower-cost countries. 

What does this mean for powerhouses such as the United States?

“The rich get richer, while the poor get poorer.” According to American economist and former Secretary of Labor Robert B. Reich, the adage rings as accurate now as it was a century ago: “the rich get richer, while the poor get poorer.” 

Meanwhile, the middle class, even though it constitutes the majority of the population, is once again left isolated. 

Yes, we’re talking about you – because there’s a good chance you are one of the 200 million Americans who consider themselves to be middle class.

In Reich’s “Aftershock,” incorporating the middle class in the long-term financial policies of the US is essential for the economic recovery of the country. In an instant, you’ll find out why!

The financial crisis of 2007-2008

If you think that the financial crisis of 2007-2008 is a thing of the past, think again! For better or for worse, history tends to repeat itself. If we don’t learn anything from it, we’ll probably end up making the same mistakes all over again. So, let us rewind for you a decade or so and remind you of the worst financial crisis since the Great Depression.

It’s 2007, and the world is shocked to learn that the United States is in the middle of an economic crisis. Companies are going out of business. Investment banks are filing for bankruptcy. There are even talks of a possible collapse of the world financial system. In a nutshell: if worse, it would have been apocalyptic.

But, how did it get there? According to the politicians and analysts, it was the people’s penchant for getting into debt that did the job. Yet, Reich suggests that it was the fact that most Americans had to borrow to cope with not earning enough, mainly because of deaf politicians ignoring their pleas for help for years and years before.

Let’s break this down a bit by going even further back in history. 

The Great Depression of the 1930s

On Jan. 5, 1914, Henry Ford announced that he was paying workers on the Model T assembly line in Highland Park, Michigan, $5 per eight-hour day.

Since this was about three times what a typical factory worker earned at the time, most of Ford’s associates and fellow-owners dubbed him “a socialist” or “a madman” – even both.

He was, in retrospect, what he is best known for today: a very clever businessman.

You see, Ford intuitively realized that the only way for his business to prosper was doing everything he could to turn more people into customers. And by paying his autoworkers more, he did precisely that. In time, as he expected, they became rich enough to afford $575 for a Model T, and thus return some of those $5 paychecks to Ford.

Unsurprisingly, his profits more than doubled by 1916, from $25 to $57 million! Unfortunately, though, Ford was the exception at the time: most factories paid their workers far less to maximize their profits.That is, until the economy collapsed – the Great Depression.

Soon after, Marriner S. Eccles, an American banker and chairman of the Federal Reserve Board, realized why this might have happened.

He theorized that mass production had to be accompanied by mass consumption to work out in the long run, and this should lead to a distribution of wealth in turn. Otherwise, what’s the use of so many products floating around? Who would buy them?

Well, it seems that the answer is a counter-intuitive “everybody,” because people who cannot afford them don’t just stop buying, but start borrowing to stay in the game. In time, of course, this is bound to lead to all sorts of problems, the collapse of the economy being a somewhat predictable outcome.

Keynes and the period of great prosperity, 1947–1975

Eccles’ views anticipated the theories of a giant of modern economic thought, an economist often described as “the man who single-handedly saved capitalism,” John Maynard Keynes.

Described as “tall, charming, [and] self-confident,” Keynes was born in Cambridge, England, in 1883, the same year Karl Marx died. This coincidence has some irony in it because, at some point during the Great Depression, Marxism threatened to succeed in other theories that were favored by classical economists, putting capitalism entirely out of the picture. In the end, Keynesian theories supplanted those of Marx.

Keynes, however, firmly believed that there’s no better system to achieve a civilized economic society than capitalism. However, he did believe it had two major faults: “its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.” 

Until these were corrected, he argued, capitalism would continue to be unstable and vulnerable to economic booms, because the market would never correct those by itself. It is the government’s only job to fix these faults, Keynes added, by redistributing the wealth among the people, and converting the majority of the population into a pool of regular consumers.

European social democratic governments heeded to Keynes’ advice quite literally: they nationalized industries, and regularly took from the rich to give to the poor. Advised by Eccles, Franklin D. Roosevelt – who never understood Keynesian economics – approved somewhat different measures in the United States, actively creating the conditions for the middle class to fully share the nation’s prosperity. 

After the Great Depression, the U.S. government started nudging the economy toward full employment, creating a more progressive income tax, building up Social Security, enhancing the bargaining power of average workers, and providing them with a strong safety net when they couldn’t work.

The measures ultimately worked: what followed was a period of great prosperity that lasted for more than three decades. 

“It is still possible to find people who believe that government policy did not end the Great Depression and undergird the Great Prosperity,” quips Reich, “just as it is possible to uncover people who do not believe in evolution.”

The broken bargain: Getting into the same mess yet again

So, until the recession (with a brief exception during the late 1970s), the U.S. economy showed a continuous upsurging trend. 

However, once again, the income of the middle class came to a halt and even started dropping. In other words: there was lots of money floating around as before, but it was all ultimately going to the rich’s  pockets.

And the rich people didn’t spend any of it on creating new jobs. They spent all of it on fairytale mansions and blockbuster yachts. Thus, borrowing evolved to become the middle-class way of blending in. 

Before long, things started to get really messy yet again. 

Even though the disparity between the rich and the middle class was growing ever more prominent, the politicians didn’t seem to bother with it. All they talked about was “financial economy,” all the while ignoring the problems of the “real economy.” Translation: the 1% population and Wall Street speculations ran the economy, not the 99% and the consumer demand. And it got even worse from thereon.

Because the middle class, as has always been the case in Western societies, didn’t fight back, but just accepted the state of affairs. And everyone forgot that, as history has taught us, this could only lead to one and one thing only: total collapse of the system. And it works as hellishly easy as one-two-three!

It all starts with a family member not earning enough money. Coping mechanism number one: all family members move into paid work. Then, when this doesn’t provide the family with enough money either, everyone starts working longer hours. That’s coping mechanism number two.

Soon enough, everybody realizes that even longer hours don’t make things better, because the salaries remain pretty much the same, and the prices and the cost of living go higher. Finally, everyone starts borrowing. And, before long, everyone starts living on other people’s money.

Does it ring any bells? Reich says it should. Because it happened to your great-grandparents in the 1930s, to your parents about a decade ago, and it would happen to you quite soon in the future if you don’t learn this history lesson. 

Fortunately, Reich has.

His instructions as to how the government should prevent this from happening ever again follow below.

The bargain restored

To sum up: you'll borrow money if you don't have enough and buy stuff nevertheless. The economy, however, will eventually collapse because of excessive debts. 

So, the government must make sure that you have the money, by forcing the rich to employ you and give it to you. The good part is that the rich will get some of their money back in due course. Because, once you’ve earned enough, you’ll spend more and more freely. 

It’s a win-win situation. Reich calls it “the basic bargain.” To make things better, the government needs to restore this bargain. 

So, in the last part of “Aftershock,” he argues for a new deal with the middle class, including several pretty unpopular measures:

• A reverse income tax. This would be “the most immediate way to reestablish shared prosperity.” Under Reich’s plan, people who earned less than $50,000 per year should receive wage supplement instead of paying a tax, ranging from $15,000 for workers earning $20,000 to $5,000 for full-time workers earning $40,000.

• Higher marginal tax rates based on people’s earnings. In layman’s terms: the tax rate should increase as the income of the individual rises. If, for example, you earn about $160,000 per year, you should pay about 40% taxes on your income. However, if you make $410,000, it’s only fair that you should pay a bit more, say, 55% taxes. 

• A carbon tax. In addition to providing a large part of the wage supplements, the carbon tax should incite energy companies to invest in new ways to reduce greenhouse gases and, by stimulating such investments, it should boost aggregate demand.

• A reemployment system rather than an unemployment system. According to older theories, unemployment forces less competitive people to accept lower wages. We’ve learned that this is not the case: nowadays, most people that lost their jobs never get their jobs back. So, Reich proposes a reemployment system instead, under which any unemployed person who takes a new job that pays less than his previous job would be eligible for 90% of the difference for up to two years.

• School vouchers based on family income, because the best way to boost the earnings of the poor is to improve their skills and education;

• College loans linked to subsequent earnings: graduates of public universities, and borrowers of federal loans, should be required to pay 10% of their taxable earnings for the first ten years of their full-time work into a fund that would finance back public universities and provide loans to students attending private colleges;

• Medicare for all: that’s pretty self-explanatory;

• Increase in public goods spending (public transportation, public parks, and recreational facilities, and public museums and libraries) with an ultimate goal to make most of them free of charge to users;
• Money out of politics, encompassing strong campaign-finance laws, more generous public financing of elections, stricter limits on campaign contributions, and limits on so-called issue advertising.

Final Notes

Despite tackling a rather serious topic, “Aftershock” is an informative book, and relatively easy to read too. Written in a down-to-earth language, it is an in-depth analysis of causes to the economic crises of the past and a thought-provoking “how-to-stop-them-in-the-future” manual. 

Reich’s suggestions to fix the economy – i.e., eliminate inequality – revolve around the necessity of an interfering government. Regrettably, most Americans don’t like that from their government, and they believe that the only thing that makes sense in terms of the economy is the unfettered, laissez-faire free-market capitalism.

12min Tip

To learn more about the failings of capitalism and the income inequality issue, reserve 12 minutes of your day to read our summary of Thomas Piketty’s immensely influential work, “Capital in the Twenty-First Century.” It'll be worth it, believe us!