Opinion An equal recovery

That’s because the real problem has to do with the structure of the economy,not the business cycle. No booster rocket can work unless consumers are able,at some point,to keep the economy moving on their own. But consumers no longer have the purchasing power to buy the goods and services they produce as workers; for some time now,their means haven’t kept up with what the growing economy could and should have been able to provide them.

This crisis began decades ago when a new wave of technology — things like satellite communications,container ships,computers and eventually the Internet — made it cheaper for American employers to use low-wage labour abroad or labour-replacing software here at home than to continue paying the typical worker a middle-class wage. Even though the American economy kept growing,hourly wages flattened. The median male worker earns less today,adjusted for inflation,than he did 30 years ago.

But for years American families kept spending as if their incomes were keeping pace with overall economic growth. And their spending fuelled continued growth. How did families manage this trick? First,women streamed into the paid work force. Second,everyone put in more hours. What families didn’t receive in wage increases they made up for in work increases. By the mid-2000s,the typical male worker was putting in roughly 100 hours more each year than two decades before,and the typical female worker about 200 hours more.

When American families couldn’t squeeze any more income out of these two coping mechanisms,they embarked on a third: going ever deeper into debt. Eventually,of course,the debt bubble burst — and with it,the last coping mechanism. Now we’re left to deal with the underlying problem that we’ve avoided for decades. Even if nearly everyone was employed,the vast middle class still wouldn’t have enough money to buy what the economy is capable of producing.

Where have all the economic gains gone? Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s,the richest 1 percent of American families took in about 9 per cent of the nation’s total income; by 2007,the top 1 percent took in 23.5 per cent of total income.

It’s no coincidence that the last time income was this concentrated was in 1928. I do not mean to suggest that such astonishing consolidations of income at the top directly cause sharp economic declines. The connection is more subtle.

The rich spend a much smaller proportion of their incomes than the rest of us. So when they get a disproportionate share of total income,the economy is robbed of the demand it needs to keep growing and creating jobs. What’s more,the rich don’t necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe where they’ll summon the highest returns — sometimes that’s here,but often it’s the Cayman Islands,China or elsewhere.

Meanwhile,as the economy grows,the vast majority in the middle naturally want to live better. Their consequent spending fuels continued growth and creates enough jobs for almost everyone,at least for a time. But because this situation can’t be sustained,at some point — 1929 and 2008 offer ready examples — the bill comes due.

This time around,policymakers had knowledge their counterparts didn’t have in 1929; they knew they could avoid immediate financial calamity by flooding the economy with money. But,paradoxically,averting another Great Depression-like calamity removed political pressure for more fundamental reform. We’re left instead with a long and seemingly endless Great Jobs Recession.

The Great Depression and its aftermath demonstrate that there is only one way back to full recovery: through more widely shared prosperity. In the 1930s,the American economy was completely restructured. New Deal measures — Social Security,a 40-hour work week with time-and-a-half overtime,unemployment insurance,the right to form unions and bargain collectively,the minimum wage — levelled the playing field. As America’s middle class shared more of the economy’s gains,it was able to buy more of the goods and services the economy could provide. The result: rapid growth and more jobs.

By contrast,little has been done since 2008 to widen the circle of prosperity. Policies that generate more widely shared prosperity lead to stronger and more sustainable economic growth — and that’s good for everyone. The rich are better off with a smaller percentage of a fast-growing economy than a larger share of an economy that’s barely moving. That’s the Labour Day lesson we learned decades ago; until we remember it again,we’ll be stuck in the Great Recession.

The writer is a former Secretary of Labour in the Clinton administration