(The following is a transcript of a speech by economist, author, and former U.S. labor secretary Robert Reich at the Orpheum Theatre on October 3. It was part of SFU's weeklong Community Summit on the future of the B.C. economy.)

The economy has worn me down.

It’s not just the economy. I have come to you from the United States—the only advanced economy without a functioning government. It’s embarrassing. And there are connections between what’s happening in the United States and inequality.

I want to assure you, if you don’t know already, that although Canada and British Columbia are surging toward greater inequality— inequality of income, and wealth, and, arguably, inequality of opportunity—you’re nothing relative to the inequality we’re experiencing in the United States.

That is: you seem to be responding to the same forces that are occurring in the United States. 

What the United States has done—and again, if you’ll pardon me for saying this, I hope my compatriots will pardon me for saying this outside the borders of the United States—we have not done the job we needed to do over the last 30 years as the forces I’m about to talk to you about have had a separating effect on our population.

A centrifugal effect: making the rich richer, a smaller number of people getting better and better and better able to exercise wealth and power, and a vast number of people are less and less able.

The statistics, for example—the 400 richest Americans now have more wealth than the bottom 150 million Americans put together. That is the 400 richest Americans have more wealth than the bottom half of the United States put together. And anybody who thinks this has changed since the Great Recession ought to know this data as well: that is that 95 percent of the economic gains in the United States since the recession ended, since the so-called recovery began, 95 percent have gone to the top one percent.

In fact, median household income, median, I said median, not average. It’s important to distinguish between average and median.

Sometimes you hear economists and others talk about average wealth or average income. Whenever you hear average, watch your wallets.

The basketball player, Shaquille O’Neil, and I have an average height of 6’2”. You get my point.

People at the top bring up the averages. That’s why you want to look at the median. That is, the person right in the middle, half above and half below. And the median household income in the United States keeps on dropping, adjusting for inflation.

It’s now seven percent below what it was even in the year 2000. And the problem for any economy, for any society where you have the middle class under greater and greater stress is very practical. This is not just an issue of fairness or unfairness, of public morality or lack of morality. This is a very practical issue because when the middle class starts shrinking or the middle class doesn’t have the purchasing power to keep the economy going, then you have a very fragile economic recovery. You have an economic recovery that could easily fall into recession. You have an economic recovery that is really not being shared, a recovery that is anemic.

You have an economy that is prone to booms and busts. And you have a democracy itself that can’t work very well. A democracy that itself is prone to the voices of most people being drowned out by a small number, a relatively small number of people, at the top.

The great jurist, Supreme Court justice, of late 19^th century, early 20^th century of the United States, named Louis Brandeis once said—speaking about the United States in the late 19^th century, the last time we’ve seen this kind of yawning gap between a small group at the top and everybody else—he said the basic choice is we can have a democracy or we can have huge wealth in the hands of a very few people. But we can’t have both.

What’s happening in the United States—the divisiveness, the polarization—again, is related to this fundamental economic problem. Because when so many people feel that they’re working so hard, they’re working harder than ever, but they’re not getting anywhere. They’re actually falling behind. They feel economically insecure.

When all of those people feel that the game is rigged against them, they get angry. They get frustrated.

They’re very prone to demagogues on the left or the right—it doesn’t matter—who want to point the finger of blame at immigrants or at the poor or at the rich, at corporations or at government or at the trade unions. There’s a lot of blame to go around.

You think British Columbia politics is polarized? Let me tell you what polarization looks like.

When I came to Washington for the first time in the late 1960s, I was an intern in the office of Robert F. Kennedy. Well those were different times. But what I learned in those years, in the civil-rights movement, of which I played very very small part, the anti-Vietnam War movement, and other movements, I didn’t feel and many of my generation didn’t feel we had any choice but to be involved, engaged in politics.

Reich reveals how he met Bill Clinton

When I was 22 years old, I was crossing the Atlantic on the way to Oxford University. I was fortunate enough to get a Rhodes scholarship.

But it was a very stormy North Atlantic. And I retired to my state room, my little cabin actually, and I thought I would never come out. I was so sick. But there was a knock on my door.

And I opened the door and there was a kind of tall, lanky southerner who had chicken soup in one hand, crackers in the other.

He said "I hear you weren’t feeling too well. I thought these might help. My name is Bill Clinton."

Now what he did not say then but he said subsequently was "I feel your pain." He didn’t say that.

That was the beginning of a friendship. That was the beginning of a friendship that went right through and has exceeded a period of time when I was secretary of labor in the United States.

I don’t think we did enough. We presided over a very good economy: 22 million net new jobs in the United States, 22 million. And I was singlehandedly responsible for every one of them.

But we didn’t do enough to reverse the fundamental trends toward widening inequality.

Globalization is one of three fundamental forces

Why is inequality widening in Canada, in British Columbia, in the United States, in Europe, in China, in Japan? What are the forces that are driving this inequality?

Well, there are three fundamental forces.

One goes by the name of globalization. Globalization. Globalization is one of those words to have gone from obscurity to meaningless without any intervening period of coherence.

But let me explain, if I may. I mean we’re in a completely integrated global economy. Some people think that national competitiveness has a lot to do with the profitability and competitiveness of companies headquartered in your nation. That is less and less and less the case. Companies are being global.

I remember even when I was secretary of labor, I needed a new car. The family car broke down. I went to a local dealership. I found a car that met our needs perfectly.  It was a Toyota. And I remember going back to the office.

I hadn’t bought it yet. And my political adviser—you see, cabinet secretaries have political advisers—they are usually very young. But they say the obvious when you need somebody to say the obvious.

I said, you know, I found a new car. I’m very excited by it. It’s a Toyota.

He said “Mr. Secretary, can I remind you that you are secretary of labor of the United States?”

Immediately I understood why he was being paid what seemed like an outrageous salary. I went back to the dealer and I said, “No no no no, I need to go somewhere else.”

And I found another dealer, I went to a Ford dealer. An American, a Big Three American nameplate, and the next weekend, I asked that dealer, I said, I said I want a car, but you must tell me. I’m interested in this car. It was almost as good as a Toyota, to tell you the truth.

I said I’m interested in this but you have to tell, was this car made in the United States by Americans?

And he looked me for a long instance, tried to decide whether I was one of those or whether I was one of those. And he looked at me with a smile and said, “Which would you prefer?”

Everything is coming from everywhere. There is not any such thing as an American car, a United States car, a British car.

Everything, parts for almost every product, are coming from all over the world. We tend to think that everything is going to go to the place with the lowest wages. That’s another fallacy.

If everything were going to the place with the lowest wages, if everything were going to be made and wages were the most critical variable, then everything would be made where? In Southeast Asia or in Bangladesh. But that's not the case.

I had two new hips installed not too long ago. And I was talking about globalization and I realized hadn't made a very particular inquiry. I didn’t ask at the hospital where they installed my hips, beautiful new hips, by the way, I can’t show you, but you have to take my word for it.

I didn’t make a critical or substantial inquiry. I didn't ask where my beautiful new hips were actually made.

I went back to the hospital and it turned out my hips were actually fabricated in Germany.

Now it’s interesting because German wages are actually—the median wage in Germany in terms of purchasing power parity—is higher than the median wage in the United States.

So how can it be that my hips were actually made in Germany instead of Bangladesh?

The reason is what I ended up paying for, and I did end up paying indirectly for hips, was for the precision engineering. For the value added, because the technology and the skills in Germany were such or that a hip or any kind of precision manufacturing could be done there and generate enormous value.

It’s not just wages, in other words. It’s actually productivity, it’s innovation, it is value, and much of that in turn depends on education.

By the way my beautiful new hips, they were fabricated in Germany. But they were designed in France. I have French designer hips.

So the real issue here—and it’s an issue for California, for the United States, for British Columbia, for Vancouver, for Canada—the real question in terms of standard of living of any group of people is what those people add. The value they add to an increasingly integrated global economy.

If you add on the value, you will do very well. If you’re not adding very much value, you will not do well.

Technology replaces workers

Now I said initially there were three forces. A second force has to do with technology. Technological change.

There are a lot of new technologies around. This is not new itself. Technology has been replacing workers, or at least making certain jobs obsolete for, well, since the beginning of economies.

I remember when I first went to Washington as President Clinton’s secretary of labour, there was a garage, a.k.a. a gas station, down the road from where I lived. And I used to take my car down and I used to talk to gas station attendants. They'd to come out. We would have a conversation.

I’d roll down the window—roll down the window. There would be men I knew. There would be Charlie, there was Jim, and we would have conversations.

I developed a relationship with them. They’d say very personal things, like "Can we check the oil?"

But years later when I came back from Washington, Charlie and Jim were gone. That entire gas station, service station, was not even a service station anymore. There was no service. It was all automated.

Where did they go? What happened to them?

Well, they joined the legions of millions of others, millions of others.

We used to have a lot of bank tellers and telephone operators and all sorts of people. Where have they gone?

Many of them are still around. Most of them have gone into the personal-service economy: retail, restaurants, hotel, hospital, service transportation, some construction, childcare, eldercare. These are the growing occupations for many of the people whose jobs have been supplanted by technology.

The problem is most of these jobs pay very little.

By the way, when I got back from Washington and I got in my car—you know you’re no longer in the cabinet when you get to the back seat of your car and there’s nobody in the front seat. It’s a direct giveaway.

So again, what do we do if technology is displacing jobs? Where and who are the winners?

The winners in terms of technology are the people who can utilize the technology. The people who not only understand how to install and upgrade and repair and improve upon, but those people who can utilize the technology to expand the value that they already are adding.

They are the ones who have the right skills. They have the right education. They also have the right connections.

Natural resources are a blessing and a curse

Force number three—and this is particularly important in places like British Columbia.

Number one, again, is globalization.

Number two is technological displacement. Again all of that, pushing the workforce that we are creating to make a small group of people who are winners and a larger group of people who are losers, who are not getting ahead.

The third forces has to do with natural resources.

Now there is a fundamental challenge that any natural-resource-based economy faces. And that challenge is that while natural resources are a blessing, they are also an economic curse.

They’re an economic challenge and they are an economic problem for two major reasons.

Number one because those natural resources are normally owned by somebody or some group. And those owners usually do very well, particularly if there is greater and greater demand for those resources.

But the social costs of utilizing those resources or transporting those resources or extracting those resources often fall on others, who are not so fortunate or similarly well-situated.

So there’s a distributional issue right from the beginning with regard to a natural-resource-based economy. But there is a second issue as well, and that is that a natural-resource-based economy has a currency that is pumped up by the sale of those natural resources internationally.

And that pumped-up currency is a disadvantage to every industry other than the extractive industries that had generated that pumped-up currency to begin with.

Australia is a good example. Australia is becoming a mine and a beach for China.

I hope I’m not insulting any Australians here. It’s not an insult. I mean it’s a fact of the matter. Australia has wonderful natural resources. And its mining and the resources that it extracts are going to China and that’s great. It’s getting the benefits of that.

But the Australian currency, the Australian dollar, keeps on going up. And it makes it more difficult for Australian manufacturers to sell their goods worldwide.

It makes it more difficult for high technology in Australia to get very much of a grounding. You get my point.

A natural-resource-based economy can generate huge gains, but those gains come at a cost. And that cost and that benefit may be temporary, in any event.

Those natural resources are themselves subject to huge changes in the global economy. One minute you can be riding very high, and the next minute, you can be riding very low because commodities—and the demand for commodities—can go all over the place.

And those natural resources and that natural-resource base can be temporary in that it can be supplanted by other natural resources, other mines, other findings elsewhere around the world. So be careful. And I say this with an open and positive heart.

The United States is also to some extent becoming more and more a natural-resource-based economy and we see some of those same problems.

Growing inequality is not inevitable

But these three forces—globalization and technological displacement and a natural-resource based economy—don’t necessarily have to result in very widening inequality.

They don’t have to create social injustices. They don’t have to create median wages that are declining over time.

They don’t have to create an elite that is having more and more political influence, undermining democracy. No, there is not an economic determinism at stake here, an economic force that cannot be altered.

And here is where politics and democracy come in. Because an economy is not out there.

An economy is not in a state of nature. The only thing in the state of a nature is a kind of social Darwinist process in which the survival of the fittest operates and the survival of the biggest operates.

No, economies are based on rules.

And those rules come from where? From government, from courts, from legislatures, from agencies.

What is property? What is a contract? How are they going to be enforced? What’s liability? Bankruptcy rules, antitrust rules, everything else—that is what an economy is based on.

Those rules can be designed to maximize efficiency. That’s good.

They can be designed to maximize growth. That’s good.

They can also be designed maximize shared prosperity, which is also good. It’s up to us.

It’s up to the people of a society to determine what’s the right mix of those rules.

And unfortunately what we have in the United States—and what we see emerging elsewhere and around the world in advanced economies—are rules that may be doing fine in terms of efficiency and growth, but rules that are not doing well in terms of shared prosperity.

And this is where the danger lies with regard to an economy over time, and also with regard to a democracy. And on that upbeat note, and I am upbeat, I am really optimistic, and I will tell you why I’m optimistic in a little bit, but I want to get on with our program. I want to ask Anna Marie [Tremonti] to come back and we can have a conversation. I want to answer your questions as well.

Thank you very much.

(Robert Reich spent the next hour at the Orpheum taking questions from Tremonti, host of The Current on CBC Radio, as well as from selected videotaped participants and people using Twitter.)

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