Aftershock

The Great Depression and the Great Recession has one thing in common - income inequality. Robert Reich, a professor at UC Berkeley and the author of the book “Supercapitalism”, argues that the fundamental reason of the two financial catastrophes is income inequality in his recent book “Aftershock”.

When we see statistics, income inequality does seem to coincide with the period of financial crises and prosperities.

The period of two crises saw unusually high income held by the wealthiest people. Top 1% wealthy individuals held more than 20% of total income generated in the country. On the contrary, in the period of prosperity (from 1947 to 1975) top 1% people had just around 10% of total income. In that era, maximum tax rate never went below 50%, people shared the growth of the productivities of the country, and individuals were able to see American dreams more than they are today.

Pendulum swings back and forth. After the period of prosperity, average hourly compensation of American workers did not increased or even slightly decreased despite the increase of their productivities. Accordingly, income of top 1% wealthy individuals began to increase again since 1975.

Why does inequality lead to the economic crisis? The reasoning is as follows: when you are an average worker, you want your living standards to keep the pace with the growth of the country, but your salary doesn’t increase at the same speed of the economy’s growth. Then to keep the game going, you have to cut your savings or borrow money from banks, and these activities pile up the huge debt. However, the game does not go on forever, and someday it will crash, leaving massive non-performing loans. This time, the final trigger was the burst of mortgage bubble.

Income inequality also leads to less consumption growth. It is logically understandable. If the marginal change of your consumption propensity on income increase is negative (I believe it would be the case for most of us), income inequality leads to lower consumption as a whole. Lower consumption means higher savings. The excess liquidity of the financial institutions is said to be part of the reasons of the latest financial crisis.

Based on the observations, the author suggests several measures to remedy current problems of the country:

1) Tax reform: reverse income tax, carbon tax, and higher marginal tax rates on the wealthy

2) Reemployment system

3) School vouchers based on family income

4) College loans linked to subsequent earnings

5) Medicare for all citizens

6) Increase in public goods

7) Money out of politics (limiting lobbying activities)

Though the author’s emphasis on the importance of income equality is understandable, to achieve it is getting more difficult in these days. Globalization and technology advancement collectively drives inequality between and within countries. Limiting companies’ outsourcing makes no sense at all, as the companies would lose in competition if they don’t conduct cost-cut as others do. New Deal program worked 80 years ago, but now we need 21^st century-version of it.

Bowling Alone

Robert Putnam, a professor of public policy at the Harvard University John F. Kennedy School of Government, presented his idea on social capital in his great book, "Bowling Alone".

Enormous statistics suggest the decline of social capital in US. Political, civic and religious participation are declining straightly. People feel less connected to their coworkers, altruism and philanthropic activities are diminished, and more now feel that people cannot be trusted.

Using statistics of correlation of events, professor Putnam explains potential reasons of the decline. The author guesses that 10 percent of the total decline is attributable to the pressures of time and money; as the economy develops people became to be busier than before and using their time for social activities may be more costly. An additional 10 percent is attributable to the suburbanization, commuting, and urban sprawl; people use more time for their commute and live in area with more strangers, making the civic engagement more difficult. Perhaps 25 percent of the decline may be due to the effect of electronic entertainment, among which TV proliferation coincides with the decline in civic engagement activities. The remaining is explained by the change in generation, the author argues; social habits and values of older generations are influenced by the great mid-century global cataclysm such as World War II, but younger generations did not explain the cataclysm.

Social capital matters, because it lessens communication costs of groups. It makes collective problems (like tragedy of commons) easy, makes communities more efficient, and empowers individuals. The author made index of social capital and evaluated the level of social capital strength of each state, and examined the relationship between the level and performance of the states. The result was striking: States with higher social capital score showed higher school performance (potential reason is children's mental health), lower murder and other criminal rates, longevity, and high tolerance to minorities (this suggests that the social capital here is not "bonding social capital" which sometimes leads to anti-outsiders, but the "bridging social capital" which brings about harmonization among different social groups). Even from practical perspectives, we can justify the importance of social capital.

Once the society looses social capital, it is not easy to rebuild it. Even though US in the last third of 19th century experienced a social capital crisis and succeeded in regaining it, we cannot apply the lessons of the past to the current problems. There is no panacea, and we need collective actions of different players: employer, urban and regional planners, politicians, religious leaders, journalists, and everyone.

The author identified the significant social change in US in this brilliant volume. The book is useful not just for understanding current status of the society, but for the way to conduct research of social capital in all other societies. Hope someone does the same analyses for east Asian countries.