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Robert Reich: Government sets the rules by which the market functions. All of these rules are necessary in order to construct a free market. The real question is, who do these rules benefit and who do they hurt?

In the last 30 years, as the structure of the economy began to shift, many of the rules governing our market began to shift, as well.

Today, we're going to try to explain the mystery of why inequality has been widening. Remember, the economy is growing all of this time. The economy continues to grow. Here is Gross Domestic Product growth from 1929 to 2011. The economy overall has done extremely well and productivity keeps on increasing. We are producing more and more and more value. That's a big, big success story.

But here is the problem, here is the puzzle because if you look at the average hourly earnings of production workers, the average hourly earnings continued to rise until the late 1970s and then something happened, flattening wages. Look at the gap. Something happened in the late 1970s. Something happened in the late 1970s folks.

In the late 1970s I was at the Federal Trade Commission. I was looking at a lot of studies about the direction that the economy was going in. More of American manufacturing was beginning to move abroad. It was the beginnings of a technological revolution. Financial markets were becoming a little bit more powerful. There was move to deregulate.

When you connect the dots and all of these begin to look as if they're connected somehow to this widening inequality. For example, we knew that labor unions were declining. That decline mirrored, almost exactly, the decline in the middle class' share of national income. The hard part is stepping back and seeing the big picture.

Many people, even to this day, say that the decline of unions really was attributable to Ronald Reagan taking on the air traffic controllers.

Protestors: Strike! Strike! Strike! Strike! Strike Strike! . . .

Ronald Reagan: I must tell those who fail to report for duty this morning, they have forfeited their jobs, and will be terminated.

Robert Reich: There's no question that beginning in the late 70s, but after Reagan fired the air traffic controllers, there was a major assault on unions. Employers did try to prevent unions from being formed much more aggressively than before.

Man: I'll go. You don't have to hang on to me.

Robert Reich: And employers fought to bust unions that were already there. But maybe they were doing so because they felt they had to in order to maintain their competitiveness given so many other companies that were non-union in the United States and also many companies abroad.

The major underlying issue was two interrelated things: globalization and technology. You hear the word globalization over and over and over again; globalization, globalization, globalization. Rarely has a word gone so directly from obscurity to meaninglessness without any intervening period of coherence.

Can anybody lend me their iPhone for a moment? Anybody have one? Great. Thank you. I don't have one and I've really wanted to have one. Where do most of your dollars go when you buy an iPhone? What do you think?

Let's go. Let's do the bidding. A little over 700 of you have these clickers, which is great.

You say mostly to the United States. Some of you say to China and then a few of you say Japan. Eleven of you think Germany.

Here's where your dollars go. Most of your dollars are going to Japan. Some of your dollars are going to Germany. In fact, Germany is the second biggest one, South Korea is the third, and here 6% of your dollars are going to the United States and only 3.6% of your dollars are going to China.

Now, it's assembled in China. Do you get this? It's assembled in China, but the assembly is of pieces from all over the place. Everything is coming from everywhere.

There may be small errors in this transcript.

This is a clip from "Inequality for All," the film starring Robert Reich. You can see or order it here. It's also available to watch instantly on Amazon, or you can get the DVD from Netflix. It is truly worth your time to see the whole movie — I promise! Fact-checks by Robert Reich's very capable crew.


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