You are hereTruthout: Dean Baker: Why Didn't We Make These Guys Run Around Naked With Their Underpants Over Their Heads?

Truthout: Dean Baker: Why Didn't We Make These Guys Run Around Naked With Their Underpants Over Their Heads?

-by Keane Bhatt

September 14, 2011- Economist Dean Baker is co-director of the Center for Economic and Policy (CEPR) in Washington, DC. In his most recent book, "The End of Loser Liberalism: Making Markets Progressive," Baker argues that the market is politically structured to ensure that income flows upward.

He provides a range of strategies to reframe economic debates and offers proposals to reshape the economy to serve the interests of the majority of the population instead of a small elite. The book is available to be downloaded for free at CEPR's web site.

Keane Bhatt: The prevailing economic model has been defended on the grounds of its dynamism and efficiency. But it's allowing 25 million people to be without adequate employment and 42 million to be on food stamps, while the private sector sits on $2 trillion in cash. There are millions of foreclosed homes standing idle despite the urgent need for decent housing. How do you evaluate this situation, where vast resources aren't being allocated efficiently in a time of such desperate poverty?

Dean Baker: There are two different issues, I think. One is the presumably short-term issue, but what's quickly turning into a long-term issue, of a serious downturn. The other is the more general issue of an efficient system with efficient outcomes. I don't think focusing on efficiency is a bad place to begin. My book argues that most economists are not honest about this. But in the short-term, which, as I said is becoming longer-term, efficiency is kind of moot. We have an incredible amount of idle resources and this is just totally self-inflicted stupidity. We know how to get out of this: we just have to spend money.

You can spend it on better or worse things, but it's really simple. You have a vast amount of idle workers, idle capacity and idle resources in just about every sector of the economy. So what you really need to do is spend money, have the Federal Reserve Board be more aggressive in its monetary policy and eventually we will have to get the dollar down to get something closer to balanced trade. That's the major imbalance in the US economy. But these aren't efficiency questions; it's a question of putting resources to use. There are political obstacles - there's nothing inherent in the economy. We weren't in this situation four years ago - there were plenty of problems in the economy, but huge amounts of idle resources were not one of them. But because of political obstacles, it's totally possible that we'll have a decade of high unemployment, vast amounts of idle resources and waste.

KB: Your book argues that financial crises don't have to lead to "lost decades" of massive pain and suffering and, even more importantly, that the US never even experienced a true financial crisis.

DB: There's a lot of real sloppy thinking here. The main promulgators of this view are Kenneth Rogoff and Carmen Reinhart and they say that they look back over 600 years of history and find that in almost all these cases, countries took over a decade to recover. It's painful, because I'd like to think - and one would expect that they'd like to think - that we know more economics than we did 600 years ago. If we don't - and we really haven't learned anything - why do you guys get paid high salaries? I say that only partially facetiously. If we were to look back through time, a very high percentage - probably the majority - of newborn babies didn't survive to age 5. You'd be an idiot to say that the past trend holds today - we have modern medicine, so we have a very good reason to expect that the overwhelming majority of children will survive to age 5. We have learned something in economics over six centuries, so it's not some curse, they're concrete problems.

Finance gets very mysterious and complicated. There are instruments that are hard for people to understand; they're hard for me to understand. The basic story is not complicated: we need demand. As I say in the book, there's very little about the financial crisis that explains where we are today. People who want to buy homes have no problem getting credit - you can't go 0% down, but someone who, say, 15 years ago was able to get a home mortgage can expect to get a home mortgage today. In terms of businesses, the US, unlike Japan, has a very large capital market where firms can directly access capital through commercial paper and bond financing. The current rates are extraordinarily low in both nominal and real terms. So the idea that the banks being crippled would impede the economy doesn't follow when hundreds of the largest firms can go straight to the market and get financing.

Let's imagine that the big firms can get credit but the small ones can't. That would create a situation in which the big firms are running wild, grabbing market share at the expense of smaller competitors crippled by lack of access to capital. This is not happening.

There's a survey that the National Federation of Independent Business has done for a quarter century that asks businesses what are the biggest problems to expanding. And currently, almost no one mentions finance - either access or cost. So clearly the problem is not finance.

KB: They mention a lack of consumer demand, right?

DB: Consumption is still higher than normal as a share of income. The saving rate is just above 5 percent. Through the post-war years prior to the bubbles, it averaged over 8 percent. So there's zero evidence that finance is a real big obstacle in the economy today.

KB: So, apart from right-leaning economists who construe years of high unemployment as almost a natural law that the public must accept, there's also a tendency among liberals and even the left to view the problem as largely financial. There's little reference to the fallout of the $8 trillion housing bubble and resulting decline in wealth and spending. Why is this so widespread?

DB: I think there are very different rationales. For conservatives, or mainstream economists, saying there's nothing we can do about it creates very low expectations. They can say, "Don't be upset at us, that's the way of the world. Grin and bear it." They, of course, are not bearing it at all. They're employed at very well-paying jobs. Among the left, there's always been a catastrophe-strain which believes capitalism is a horrible system and there's nothing you can do about it. In my view, capitalism has all sorts of problems, but the reality is, that's what's there. Saying that it's a horrible system is fine, but that's what we have to work with. It can't be an excuse for inaction.

KB: Your book makes a strong case that the neoclassical school's appreciation of markets is mediated by power relations. For example, immigration quotas, which block freer movement of professional labor that would undercut overpriced US lawyers and doctors, are an unchallenged form of protectionism. At the outset of the 2008 crisis, however, it seemed that even this selective belief in efficient markets would implode. But it seems to stagger on as a zombie ideology - Alan Greenspan seems to have actually retracted his mea culpa for being so wrong in the past. Do you see any hopeful signs for a new, more accurate economics?

DB: It's been very interesting. I think part of it is that people are wrong to say it was free-market fundamentalism because it wasn't - they weren't being honest. So it gives Greenspan an easier out because it's a really confused ideology. If you're an honest Ayn Rander - and I'm not putting words in his mouth, she actually was Greenspan's hero and his book mentions how much he admired her - you would've expected this. What was going on? You had these Wall Street honchos that were stealing. They were stealing from everyone. Stealing from the people taking out bad mortgages; stealing from the people that bought these junk mortgage-backed securities; and they were stealing from their shareholders - that's because they were taking on enormous risk and a lot of shareholders like Bear Stearns and Lehman Brothers lost their shirts. But what would Ayn Rand say? These were supermen, they were great guys, they're not bothered by that. So Greenspan should've expected this. If the cops - and he's the cop - are on the sidelines saying, "Go ahead: steal, steal, steal," well, what do you expect? These brilliant guys who are out for themselves are going to steal and that's exactly what happened.

Part of the point of the book, I think, is to clear up some confusion here. We were not living in a world of laissez-faire. These guys were in a situation where they were allowed to steal by state structures like the implicit guarantee of too-big-to-fail, which basically gave them the green light. And after the fact, nobody pays any consequences. There have been no serious investigations of higher-ups; only a few lower-ranking people here and there.

KB: Bernie Madoff stole from the rich, right?

DB: Yeah, so Madoff got it. But the people at Citigroup, AIG and Countrywide have largely gotten off. There was a civil suit against Angelo Mozilo of Countrywide and he ended up paying somewhere around $47 million to the Securities and Exchange Commission [SEC], but still walked away with hundreds of millions.



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