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ISSN 1822-8011 (print)
ISSN 1822-8038 (online)
INTELEKTINĖ EKONOMIKA
INTELLECTUAL ECONOMICS
2013, Vol. 7, No. 1(15), p. 121–125
ROBERT REICH: HOW TO REDUCE SOCIAL-ECONOMIC INEQUALITY
Ona Gražina RAKAUSKIENĖ
Mykolas Romeris University, Ateities g. 20, LT-08303 Vilnius
Issue N2 of Intellectual Economics in 2012 presented the book Aftershock: The Next
Economy and America’s Future by world-famous American scientist Robert Reich. This
author assuredly showed and proved that the main reason of world economic crisis is
not state debts, but increasing social and economic inequality crossing the limits of any
sobriety and economic security. It seems that this problem obtains the actual sounds
to Lithuania.
The investigations conducted by us indicated that, according to integrated social
and economic inequality index, Lithuania is the last country in the European Union.
This means that social and economic inequality in Lithuania is the highest among the
27 EU member states. Therefore, according to us, the decreasing of social and economic disparities is one of the main economic problems of Lithuania, hampering the take-off from the continuing economic crisis in the country. The solution of this problem
would allow Lithuania to append state budget with additional revenues and to achieve
economic recovery.
Robert Reich sees the two main threats in formation of high social and economic
disparities among people and countries. The first one is related to economic threat. If
the middle class will not be able to regain the socially right share of welfare it can’t consume the appropriate share of Gross Domestic Product (GDP) created in the country
without getting deeply into the debts. Inevitable outcome of this is the slow down of
economic growth and of economic vulnerability, due to booms and steep downturns.
The second one is political threat. The increasing inequality and the conviction of
Americans that the large business and Wall street are in agreement with Government
seeking to ensure that the rich would become richer allows to get powers of ultraright and ultra-left demagogues. They acquired power because of economic failures
redirect dissatisfaction of population towards specific politicians and political groups.
Usually such demagogues become people ready to scarify gross country prosperity to
skim their private shares. They are able to do a lot of bad things for the country. If such
tendencies would continue the middle class holding the huge financial burden on their
shoulders would not acquire enough payable demand to sustain economic growth. This
would throw a wrench to wealthy people as well.
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Robert Reich proposes ways to overcome economic crisis but doesn’t state that his
proposed measures would cure the country however he proves that these are important
steps for economic recovery. Some of these reforms would be expensive, however, he
proposes means which would not increase state debts, but would generate additional
and significant revenues to state budget. Doing nothing would be more costly, according to the well-known professor. The economy, which is working just on a quarter
of its power, is a waste of resources, especially human, and an unsatisfied society is
potentially unstable.
Robert Reich proposes the following measures:
The reverse income tax. This tax would allow recovery of more equal income distribution. The reverse income tax would allow increasing of the salary of the middle class.
Instead of paying the tax for the Government from their salaries, the people contrary
would receive the bonus from Government to their salaries. The analogical idea was proposed by Nobel Prize winner Milton Friedman. Nowadays this scheme is being applied
for employees receiving low salaries and is called tax-off for received income. This measure allows reducing poverty and increasing the family income, which are ready with high
probability to spend the additionally acquired income and to create new jobs. In 2009 the
USA tax-off was the biggest programme of the state for tackling the poverty. This bonus
to the salary was acquired by more than 24 million families in US. Taking into account
what is happening with the income of the middle class population (they are constantly
decreasing) the size of tax contributions should be further increased.
R. Reich proposes the plan according to which the people working all day and receiving up to $20 thousand per year should acquire a $15 thousand bonus. With the increase of income this bonus is shrinking. For people having an income up to $30 thousand, this bonus would be $10 thousand; for income up to $40 thousand—accordingly
$5 thousand; and from income of $50 thousand the bonus would not be payable. The
tax tariff for people receiving from $50thousand to $90 thousand should be reduced by
10 per cent from their income. The income tax for income from $90 to $160 thousand
should make 20 per cent not depending on the income source. This would cost the
Government about $600 billion USD and the reduction of tax for middle income families—one more billion dollars, however this will be compensated by the introduction
of tax on carbon dioxide (CO2) emissions and by increasing tariff by 5 per cent for the
highest income group.
Tax on carbon dioxide. It is necessary to introduce taxes on fuels (coal, oil, natural
gas etc.) based on the carbon content of fuels. If the profit received from introduction
of CO2 tax would be use for the salary bonus the Americans receiving middle and low
income would gain a lot.
The marginal tax for rich. If the country faces the huge differences between rich
and all other people it is wise and logical that the rich should pay higher income tax not
depending on their income. R. Reich proposes that about 1 per cent of the richest people (receiving $410 thousand) would pay 55 per cent and 2 per cent of people receiving
a little bit lower income ($260 thousand) would pay 50 per cent of income and those
who receive $160 thousand (15% of people) would pay 40 per cent of total income.
Robert Reich: How to Reduce Social-Economic Inequality
123
R. Reich proposes to tax profit from investments at the same rate as profit from
income and salary. The people with income from $50 thousand to $90 thousand would
pay 10 per cent tax even then the biggest share of their income are from invested capital, i. e. this is significantly less that current 15 per cent profit tax from invested capital.
The same situation would be then the people having several million dollars would pay
marginal 55 per cent tax. In 2007 the 400 the richest tax payers in US receiving each
$300 million per year paid 17 per cent tax from their income and capital investments.
This is a mockery of the progressive tax system.
It is necessary to stress that marginal taxes in other periods (economic booms) and
in other countries were higher and made 70 per cent and more—92 per cent.
R. Reich emphasizes that he didn’t propose to rob the rich and transfer booty to the
poor. The proposed scheme of salary bonus and tax reductions for middle class would
allow then to increase consumption and spending and this on turn would allow economy to work at full power and to grow. In such situation the rich would be better as well.
The support for returning to job instead of support for unemployment. The
mature system of unemployment insurance was created seeking to help people to survive the depravity until return to job. Today people lost their jobs don’t return to jobs
and the long-term unemployment rate is constantly growing. Long-term unemployment is huge burden for social security system. Today the new system is able to fasten
and facilitate the way for unemployed people to get jobs are necessary.
One of the main elements of this system is the insurance of the salary. The people
loosing one job but getting the new one less gainful have the right to receive 90 per cent
of the difference for a maximum of 2 years. In 2 years most of the people gain experience and work more effectively and can acquire the higher salary the same which they
were receiving before.
The labour salary insurance would stimulate the fired people to switch to less gainful jobs instead of waiting for the job with the higher salary. In this way the means for
unemployment benefits and social insurance will be saved.
Now the employee will not compensate the expenses of dismissal of employers including additional benefits for unemployed people and transfers for suffered families. It
is logically to stress that if company would have to cover all these expenses it would not
be so willing to fire their employers. Therefore it is necessary to collect the one-time fee
for dismissal of employer equal to 75 per cent of the annual salary of dismissed worker
if the employer has received the salary lower than average and equal to 50 per cent—
for the salaries higher than average however not higher than double average salary.
Such fee stimulated the considering of employers and would help to pay the insurance rates of the salary and for the employers training in the system of support of
returning to job.
The compensation of expenses for secondary education. In the long-term perspective the optimal way for Americans to steep increase of salaries is increase of qualification and education level. Therefore for the payment for education in state education
system the vouchers should be issued contrary proportionally to family income. The
family has the right to pay for education in vouchers in any school. For example the
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average education expenses make about $8000/child and are distributed in US accordingly: $14,000 for each school age child in pour family and for $2000 for each child in
the richer family. Such system would increase the school operation as would include
the competitiveness element. The schools having more children from poor families
would get significant revenues from vouchers.
The credits for higher education. The students are forced to pay for higher education by credits. Therefore most of them refuse to seek for higher education as are frightened by not paying the credit. Such system of financing higher education is the heavy
burden for students. Such system stipulates the reduction in the number of students.
It is necessary to change the ways of higher education financing. R. Reich states
that studies in state universities should be free of charge. The students selecting the
private universities should have the opportunity to get credits from the state. It is necessary to establish the system that after finishing the private universities and acquiring
credits the absolvents have to repay to the funds financing state higher education institutions the certain amount of credit for example 10 per cent from taxable income in
the first 10 years. In 10 years these financial obligations would end and credit is being
considered as repaid.
Health insurance for all population. The most effective way to ensure that all
Americans are provided with qualified medical services—to provide all Americans
with medical insurance and to subsidise medical expenses of low income population.
US are the only rich country in the world which does not ensure health insurance for
all inhabitants. In 2010 45 million people didn’t have a health insurance. The US is the only
rich highly developed country where citizens are forced to use private commercial health
insurance. The result is negative, expensive and socially unfair. IN 2010 the US president B.
Obama adopted a new Law on health protection however this is just first step in the health
reform. The research conducted by Harvard medical school indicated that more than 30 per
cent of health protection expenses or more than $1000 per inhabitant per year is allocated
to expenses for administration. For example the state administration expenses according to
the health insurance Project “Medicare” in Canada are significantly lower than analogical
expenses of large private companies and makes 3 per cent of total expenses comparing with
individual insurer administrating expenses totalling to 40 per cent.
The public services. It is necessary to increase the size of public services: public transport, public parks, resorts and museums, libraries etc. They should be free of
charge to everyone using these public goods. These institutions increase the quality of
life of people, compensating the frozen salaries and pensions. The public sector also
creates jobs and increases the demand in economy for example the extension of railway
and reduced environmental pollution (GHG emissions).
Money and policy separately. The money of sizable Wall Street companies, they
managers and traders have increasing impact on political solutions and increasing
the social—economic disparities further. It is necessary to separate these things. The
means of some sizable capital provided for elections should be repaid for them. The
money and political services are the indications of the political corruption. All contributions for election campaigns should be transferred via so called blind trusts seeking
to ensure that candidate wouldn’t know who paid one or another sum. The Law forc-
Robert Reich: How to Reduce Social-Economic Inequality
125
ing to donate for election campaigns via blind trusts ensuring anonymity would not
exclude anyone form making noble and opulent gesture.
These plans are not utopian as it can prove from first sight according to R. Reich
however their realisation requires the solidarity of all society layers. The crisis stipulates this. Sooner or later the managers of sizable American corporations and Wall
Street banks will fell the concern about the economic security and low growth. The
companies would not get profits year by year if the middle class would not be able to
afford provided goods and services. Just sizable American corporations would be able
to compensate these losses on foreign markets. Therefore they would understand that
to protest against these changes necessary for facilitating situation of all nations is to
become a victim of inequalities created by them. If US would not take any measures to
overcome these negative trends the society would become even more confronted.
However the line separating nation would be not between right (republicans) and
left (democrats), but between “establishment” (sizable business managers, political
dealers, bank managers and mass media magnates) and the rest share of angry society
claiming that someone wants to take America from them.
In the result the certain marginal and wide party would gain the power. No one in
US will be able to live calmly and happy where the small share of people are acquiring
the increasing share of national income and the rest share allocated for the rest of nation is shrinking constantly. Such disturbances not just stopping economic growth but
also hit the social structures.
From the first sight it can appear that there is nothing similar between US and
Lithuania and that it is not possible to compare huge and rich country with such small
and poor country as Lithuania.
However first of all economic efficiency does not depend on the size of country.
The big size countries economy can be effective and not effective as well as small size
countries economy. The economic efficiency depends on other factors, such as effective
and professionally implemented policies, ability to see and to tackle with background
problems of economy. In this case the size of the country does not matter:
The second, the results of Neoliberal and monetary mode of economic globalisation, is the unequal development of world economy. This model is favourable for economically strong countries and large corporations and has a negative impact on less
developed countries and middle size business positions. However the world research
show that the current formed social and economic inequality is the key and deep problem and this problem becomes a break of all world economy growth. This problem is
stopping economic growth not just in economically weaker countries but in countries
leaders as well and according to R. Reich and other well now scientists the social and
economic disparities are the main reasons of the world economic crisis.
Third, maybe not all the measures proposed by R. Reich for the decreasing social
inequalities can be currently applied in Lithuania however strategically these measures can be considered as right guidelines for future policies development in Lithuania.
Some of these measures even now can be beneficial for Lithuania as the basic precondition of R. Reich that the middle class should regain its earned shares for its input in
economic is evidently economically well-grounded and socially fair.