Consumption: A Prerequisite for Prosperity?

As noted in a recent blog post, we find the writing of Robert Reich, a former U.S. Secretary of Labor who has long been concerned about questions of inequality and prosperity, to be intriguing and enticing. But it is also challenging to those of us who have called for greater simplicity in the way consumers live.

In his latest book, Aftershock, Reich makes the argument that middle-class wellbeing is necessary for long-term growth and prosperity. Henry Ford understood this when he tripled the wage of his factory workers to $5 per day, creating new demand that led to a huge increase in auto production. President Franklin Roosevelt understood this in the New Deal. And postwar America understood this when it invested in everything from the interstate highway system to the GI bill and public universities, producing what Reich calls the “Great Prosperity” of 1947–75.

By contrast, governments that do not provide for a robust middle class and broad-based prosperity (for example, the U.S. from 1873 to 1929, and from 1975 to the present) foster inequality (as wealth concentrates at the top) as well as economic volatility. The volatility results because the rich, who save rather than spend a sizable share of their wealth, do not produce enough economic activity to sustain strong, job-producing economic output. For Reich, investment in the middle class (and consequently in greater equality) is important not just as a moral issue, but as an economic one: it is the basis of a broad-based prosperity that serves even the wealthiest.

Since the mid-1970s, U.S. policymakers have shown declining interest in public investments that reduce inequality. Indeed, Reich shows that the richest 1 percent of people held 23 percent of U.S. income on the eve of the Great Depression, that this share dropped substantially during the Great Prosperity (falling to 8–9 percent in 1978), and that it rose again to 23 percent by 2007.

The consequent stress on middle-class incomes since the 1970s led middle-income Americans to cope in three ways, Reich says: 1) by pursuing two incomes per family, 2) by working longer hours and second jobs, and 3) when those two had run their course, by borrowing. All three strategies have been exhausted, and when the economic bottom fell out in 2008, consumers had no choice but to focus on getting out of debt and therefore not spending, which dampens recovery.

Reich’s key message of interest to this blog: the economy, at least as it is currently structured, cannot provide sufficient numbers of jobs if the middle class is not spending.

This thesis is a challenge to the Worldwatch call for radically simpler lives, as argued most extensively in State of the World 2010: Transforming Cultures. If modern economies sputter and shed millions of jobs when recession forces a decline in consumer spending, won’t they do the same when people choose to spend dramatically less? This question has long lurked around calls for simplicity, but Reich’s book throws the challenge into relief, because of his view that robust levels of mass consumption are central to economic prosperity.

Worldwatch’s answer has long been that economies should dematerialize (to reduce the environmental impact of consumption) and that in any case, people will generally be happier with greater leisure time and less income. But how this would translate into economic reality—especially job creation—and how the inherent contradictions would be handled remains a challenging question.

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