Reich’s flawed view of the financial crisis

By Robert Gavin
September 27, 2010

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Robert B. Reich wants you to know it’s not your fault. The monstrous credit card bills, the house you couldn’t afford, the home equity you blew on cars, vacations, and big-screen TVs. Not your fault.

You couldn’t help it. The rich made you do it.

This, believe it or not, is one of Reich’s arguments as he explores the causes of the economic crisis in “Aftershock.’’ If you’re a middle-class American seeking absolution for living beyond your means, or an MSNBC fan who can’t get enough eat-the-rich populism, this book is for you.

But if you’re looking for an original, evenhanded treatment of what went so wrong for the US economy, prepare to be disappointed. It’s a shame, too, because Reich, the former labor secretary, Friend of Bill, and Massachusetts gubernatorial candidate, puts his finger on one of the most vexing issues facing America: income inequality.

Reich’s thesis is that concentration of wealth, not subprime mortgages, caused the financial crisis. It’s no coincidence, he writes, that in both 2007, when the recession began, and 1929, the year that launched the Great Depression, the richest 1 percent of Americans held the same share of total income — about 23 percent.

In post-Reagan America, tax cuts and laissez-faire policies helped the rich accumulate much more money than they could use productively, Reich argues. That led to rampant speculation, inflating housing and financial bubbles that brought the economy to its knees.

Meanwhile, incomes for most families stagnated, forcing them to take on mountains of debt to maintain middle-class lifestyles and leaving them vulnerable to economic downturns. The result: foreclosures, bankruptcies, and the worst recession in 70 years.

It’s a reasonable argument, one that has been made by others. Reich’s solution: redistribute wealth by taxing the rich, giving some to the poor, and a lot to education, health care, and other programs to support the middle class.

Unfortunately, Reich’s economic case devolves into ideological and class-war blather. For example, he adopts the tired view that a Washington-Wall Street cabal saved big banks at the expense of little guys, and suggests we’d be better off if policymakers had let banks fail — just like Lehman Brothers.

Lehman’s failure, in case you forgot, plunged the global financial system into chaos and the US economy into freefall. It’s chilling to think where we’d be if Morgan Stanley, Goldman Sachs, Citigroup, and Bank of America followed. Reich should know better.

Reich takes his arguments to the most absurd when he turns to behavioral sciences to contend that middle-class Americans aren’t responsible for chuckle-headed financial decisions that contributed mightily to the recession.

It’s human nature to want what other people have, Reich argues. So, as middle-class families watched the rich get richer, they couldn’t help but borrow more than they could afford to keep up with bigger homes, fancier cars, and glamorous lifestyles.

If Reich’s goal is a better, fairer society through more active government, he’s aiming at the wrong target. The rich aren’t the great obstacles. The roots of anti-government feeling are in the middle class, in the Howard Jarvises and Barbara Andersons who spurred tax rebellions decades ago and today drive the Tea Party movement.

Progressives like Reich have no one but themselves to blame. Their tax-the-rich promises that middle-class families can have better schools, better health care, and better communities without paying for them have helped undermine support for revenues that make such programs possible.

And if the crisis has taught us anything, it should be this: Unless people put up their own money, it’s very easy to walk away.

Robert Gavin is a member of the Globe staff and can be reached at

AFTERSHOCK: The Next Economy and America’s Future

By Robert B. Reich

Knopf, 174 pp., $25