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Dec 092010

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.

  7 Responses to “Consumption: A Prerequisite for Prosperity?”

  1. I have long felt that the key to a low impact economy is not spending less, but spending on the right things. Economic activity is economic activity, the economy doesn’t care if you spend $1000 acquiring the largest hoard of cheap plastic junk possible or $1000 buying local food and paying neighbors for services. (Actually I expect the latter is better but have no economic proof.) A robust middle class focused on quality and quality of life rather than quantity and price will be able to keep a sustainable economy going, especially if policies encourage more of the poor to join the middle class.

  2. Planned obsolescence was the old rationale for keeping a manufacturing economy alive, even when saturated with durable goods. The answer, I think, it a twofold approach that markets where there is demand, without any expectation of product obsolescence, while recognizing that after all (this didn’t seem true, a few months ago) what will work will be a services economy–increased value ascribed to art and culture, and enterprises such as ecotourism, to supplant the effort that used to go into replacing things.

  3. Paul might be on the right track. Maybe an economy that is truly healthy would have us buying less stuff but paying more for higher quality things that we truly need and that bring value to our lives, like healthy foods, outdoor recreation, greener public infrastructure.

    Supposedly, Americans have some of the cheapest food on the planet and yet so much of the food we consume is terrible for our bodies. In a greener economy, I envision us paying more for our food but consuming much healthier food. Higher prices for food might mean higher profit margins for farmers and, hence, less incentive for farmers to cut corners on conservation. We spend less tax money trying to clean up the environment and we have more to spend, again, on those things that matter most.

  4. The world has too many people and too few resources. The redistribution of wealth has already begun from the poor and middle class of the western economies to those in the rest of the world who are much worse off. The only way the consumer based growth economy can survive is to make all products recyclable while reducing the population. It is highly unlikely that this will happen. Therefore, we need a new economic system which measures success differently than the current economic system.

  5. Paul, Robin, Joe, and Douglas–

    I’d love to have you all over for dinner. Your insights and capacity to think outside the current economic box would make for a stimulating evening.

    That’s what we need, isn’t it: a new economic framework that allows us to think about production, consumption, and employment in novel ways. High-quality, long-lasting goods that enhance wellbeing and are priced to reflect their true value would be the foundation of quite a different economy. Whether they would create enough employment is not clear. Reich would likely say no.

    But Reich’s analysis is made from within the conventional, consumer-driven model, where an economy of simplicity may well be an economy of permanent recession. Strip away the need for high incomes (because fewer goods are required, while more energy is directed to low-material input, low-cost experiences like community concerts) and you need less full-time employment.

    My question: where do we find the evidence that gives us confidence that this vision is viable, to the extent that it becomes a realistic political option?

    Thanks for all your thoughtful responses.

  6. [...] Gary Gardner:  Consumption: A Prerequisite for Prosperity? [...]

  7. From my perspective the problem is being looked at in the wrong way. First we must list mans needs; food, shelter, education, health care, transportation, safety and, socially enhancing activities. After defining the needs how are going to organize our economy so that all can buy into it, work for it, and benefit from it. Defining what belongs to the commons and what doesn’t is all so part of the equation. By defining our needs in the context of a sustainable plant, will make building a viable economy a little eiser.

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