Corporations thrive, Americans don't

IN his State of the Union address, President Barack Obama talkedat length about the economy. What he failed to point out is thatAmerica now has two economies, and only one of them is recovering.The recovering economy is on Wall Street and in large corporations.

Profits are soaring. Big companies are sitting on a trilliondollars of cash. People with lots of financial assets, or who aredeemed "talent," are doing extremely well.

Most Americans have been left behind, however. They're withoutjobs, or their jobs pay badly, and their benefits continue toshrink. They're still buried under debt.

Their economy hasn't recovered at all.

In other words, our economic union is falling apart. Obama needsto be clear about what has happened, and why.

Corporations are profiting from sales of their foreignoperations, especially in China and India. Here, they're selling torich Americans -- Christmas sales at Tiffany & Co. and Neiman Marcuswere up, but sales have been down for downscale retailers.

Reduced costs -- especially shrinking payrolls -- have been themost important key to the rise in corporate profits, though. Theresult has been fewer jobs and lower pay.

The Great Recession accelerated trends that started in the 1980s -- outsourcing abroad, automating work, converting full-time jobs totemps and contracts, undermining unions and getting wage and benefitconcessions from remaining workers. The Internet and software havemade all this easier.

The U.S. economy is now twice as large as it was in 1980, but thereal median wage has barely budged. Most benefits of economic growthhave gone to the top. In the late 1970s, the richest 1 percent ofAmericans got about 9 percent of total income. By the start of theGreat Recession, they received more than 23 percent. Wealth is evenmore concentrated.

This is the heart of our problems. Most Americans no longer havethe purchasing power to get the economy moving again. Once the debtbubble burst, they were stranded.

It has happened before. The last time in American history therichest 1 percent of Americans got more than 23 percent of totalincome was 1928. We know what happened in 1929.

Corporations aren't to blame. They are doing what they aredesigned to do: make profits.

But, reaching out to corporations and naming their CEOs aseconomic advisers won't help. What's good for corporations isn'tnecessarily good for Americans.

Nor is it the fault of rich people who have played by the rules.

The problem is that the rules need fixing. Average Americans needa better economic deal. Obama has to take the lead on this. In theState of the Union address, he didn't go nearly far enough.

For starters, he should propose to expand the Earned Income TaxCredit (essentially, a wage subsidy) all the way up through themiddle class.

He should make the tax system more progressive: The rate on thefirst $50,000 to $90,000 of income should be 10 percent; the next$90,000 to $150,000, 20 percent; and the next $150,000 to $250,000,30 percent. Make up the revenue lost by increasing taxes on incomefrom $250,000 to $500,000 to 40 percent; from $500,000 to $5 millionto 50 percent; and anything over $5 million to 60 percent.

Then, tax capital gains the same as ordinary income.

In addition, Obama should call for strengthening unions andincreasing penalties on employers who illegally deter them.

Yes, he'll need to reduce the long-term budget deficit. But hemust make sure to distinguish between public investments that buildfuture productivity (education, infrastructure and basic research)and expenditures that improve our lives or keep us safe today.

Public investments shouldn't be cut at all. Indeed, they shouldbe substantially increased. A "capital budget" separate from theregular federal budget would help draw this fundamental distinction.

Finally, he should make college affordable by allowing federalloans to be repaid as 10 percent of earnings for the first 10 yearsof full-time employment.

Strengthening our economic union would be good for everyone.American corporations can't profit forever off of payroll cuts andforeign sales. Their long-term profitability depends on the revivalof broad-based domestic demand.

Rich Americans, too, will do better with a smaller share of arapidly growing economy than with a large share of one that remainsin a deep hole.

Robert Reich, former U.S. secretary of labor, is professor ofpublic policy at the University of California at Berkeley. He blogsat www.robertreich.org.