Dean Baker: Most G-20 leaders are pushing the same policies that led the world into the Great Depression


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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington, and joining us now is Dean Baker. He is the codirector of the Center for Economic Policy Research (CEPR) here in Washington. Thanks for joining us.

DEAN BAKER, ECONOMIST, CEPR CODIRECTOR: Thanks for having me on.

JAY: So the G-20’s going to be taking place towards the end of June, and it seems like the message is going to be: the world is in dire threat, and the threat is the growing deficit. And we’re probably going to have a show of great unity, where all the leaders in the world are going to say, yes, we’re going to cut our deficits, and, you know, there’ll be a lot of focus on Greece and the possibility of it not being able to pay its debt. And there’s talk about Spain and Portugal, and, of course, the issue of the American debt. The drumbeats are very strong that the biggest challenge facing the American economy’s not unemployment; it’s debt. So are these leaders of the world right to be so worried about the debt? And if they’re not, why not?

BAKER: Well, they’re 180 degrees wrong. We’re reliving the Great Depression as though they have no understanding, no history of it. This is exactly what happened during the Great Depression, certainly in the United States. We had the New Deal that President Roosevelt put in place in 1933, and that was quite successful in bringing the unemployment rate down. We had very rapid growth, near double-digit growth, ’33 to ’37. And then the deficit hawks, the blue dogs of that day, persuaded President Roosevelt that we had to balance the budget, and we got a second recession. Unemployment shot up almost as it’d been in 1933, and the economy limped along until finally the wartime production in World War II eventually boosted us out of the Great Depression and got the economy going again. So, I mean, what’s going on here is that we’ve had a big increase in public deficits, the United States, around the world in response to the depression, in response to the downturn. So it’s not as though there was this big spending spree, tax breaks. We had countercyclical spending to counteract the effect of the collapse of private spending. That’s exactly what you want.

JAY: Well, they did. I mean, as you said, they did go into stimulus. The countries around the world were all saying, now we—in fact, they even used the words we have to avoid the mistakes of the 1930s. But now they’re saying, okay, we’ve done enough now, and now the deficit’s the problem. So why are they there when unemployment is barely down in the United States and most other countries?

BAKER: Well, I think what you’ve had here is basically the financial sector has regrouped. You know, back in ’08-09, you know, they were on the edge of bankruptcy. They were doing their best to get money out of the public trough in order to stay alive, literally. I mean, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, they would all be bankrupt companies today were they not rescued by—you know, from the public trough. They got what they needed. They’ve regrouped. They’re now confident again and they’re taking advantage of the crisis that they created to go back and say, well, we have this huge deficit; we’ve got to get rid of Social Security; we’ve got cut back Medicare. And they’re doing it both in the United States and around the world.

JAY: And why do they want to? Why does the financial sector want that? Wouldn’t they also benefit if there was lots of stimulus money out there and the economy was more vibrant? Doesn’t the finance sector do just as well then?

BAKER: Well, they can. I think there’s two parts to this story. One is that they [inaudible]very nearly as lenders, as bondholders. In that context they risk losing if there’s inflation. I’m not talking about hyperinflation. I’m simply talking about a story where, suppose instead of having, you know, let’s say the 1 percent inflation that we’re looking at now, the inflation rate were to go to 3 percent, 4 percent, well, that reduces the value of their bonds. You know, not hugely, but, you know, they’d rather not see that. So for them, you know, no; they’d rather have, you know, lower inflation, have their bonds worth more. The second issue is one about economic control, economic power. They would like to be the ones who dictate what goes on in the economy. They don’t like the idea that, you know, while we have 10 percent unemployment, we want to get rid of that. We know how to do that. The government could spend lots of money. They don’t like that idea. What that means is that this is up for debate, that we could have Congress go out there and go, hey, how are we going to spend $1 trillion in order to reduce the unemployment rate? That’s good for the economy.

JAY: And what do you think it would take to have a significant dent in the unemployment rate? I mean, how much stimulus do you think is needed?

BAKER: Well, I think we probably need a package that’s about twice as large or—we already had if we kept the last one in place for a few more years. But, I mean, we’d probably have to talk about stimulus close to $1 billion a year. And the logic of this is really fairly straightforward: we lost roughly $1 billion in private-sector demand when the housing bubble collapsed. So we lost somewhere around $500-$600 billion in construction demand—no one’s building houses, or for that matter nonresidential real estate, ’cause there was so much overbuilding. And then on top of that we lost around $500 billion in consumption demand because people lost $6-$8 trillion in housing bubble wealth, which had been supporting their consumption. That’s what we have to replace. So it’s not this mystical process; it’s not like we’re sitting there looking at tea leaves and trying to, you know, be brilliant people or whatever; it’s very straightforward. We had a very big chunk of demand. It’s as though we—you know, we’re a store and we had this huge customer that used to come in every day, and that customer’s no longer there. Well, how much do you have to make up? Well, how much did that customer buy? In this case it’s about $1 trillion. That’s what we’re looking at.

JAY: So how much inflation do you think, if you’re putting $1 trillion in—$1 trillion over how long?

BAKER: That’s a year. That’s an annual rate of spending.

JAY: So you think there should be a new $1 trillion a year of stimulus. For how long?

BAKER: Well, it depends on the response of the private sector. I mean, what has to happen—during the last decade, the economy was being driven by the bubble, both through construction and consumption. What we want to have is, instead of construction and consumption driving the economy, we’d like to see improvement in our investment sector, and then also export sector [inaudible]

JAY: But $1 trillion a year would be—how much inflation would there be?

BAKER: Inflation is a process that comes about when you have too much money chasing too few goods and services. It’s not something you have to worry about when you have 10 percent unemployment. If we get to a situation where we actually start to see the unemployment rate falling back to normal levels, we start to get close to capacity, then you pull out the stimulus. It’s really straightforward. So, again, it’s not a mystical process; it’s not that you put the money out there and then inflation goes up like that. What happens is it starts to generate demand in the economy. The inflation comes when the demand starts to exceed the economy’s ability to produce goods and services.

JAY: And their counterargument is it’s not so easy to control, that you can open up this Pandora’s box and you lose control of the process.

BAKER: Well, if you get them to be a little serious, yeah. And then you go, well, what does that look like? And they can’t with a straight face—well, I suppose maybe they can do it with a straight face; we’ll have to see the people. But, you know, what they have to do is say somehow it just goes [gesture]. You know, so we’re sitting here with 1 or 2 percent inflation, and then it’s jumped up to 8 or 10, which there’s really no historical basis for, there is no evidence for that sort of story. What all the models show and what all the historical evidence shows is that it’s a gradual process, so that we’re sitting here, we see unemployment rate. You know, let’s say, you know, they follow the Baker plan, it works, so the unemployment rate comes down to 9 percent, 8 percent, 7 percent; we’re sitting here a year or so from now and it’s down to 6.5 percent. Well, at that point, then, maybe we start to worry about inflation. Well, let’s start to cut it back. Now, maybe the inflation rate—you know, I’m okay with 3 percent, 4 percent. It doesn’t bother me too much. Maybe it’s starts to get a little higher, you know, but that doesn’t happen all at once.

JAY: Robert Reich had a piece recently on his website where he said the real problem is lack of consumer demand. But that to me means low wages, not enough people in unions, so you can’t get the wages any higher. It’s not just an unemployment issue. Like, you know, there’s a certain point that you can stimulate, unemployment goes down. But if you don’t deal with some of the underlying fundamentals of why people have to borrow money rather than just have enough wages to pay for stuff that you’re going to wind up back in the same problem again.

BAKER: Well, we had some long-term structural problems that give us both the stock bubble in the ’90s and then the housing bubble in this decade. If you go back during the sort of golden era, the postwar boom, there we had productivity growth translate into wage growth, translate into consumption growth, increase demand in new investment, more productivity growth. That was a healthy pattern of growth that in principle could have kept going. We instead got to this pattern following the sort of weakening of workers’ bargaining power the ’80s, where wages didn’t keep pace with inflation, which created a situation where you could have bubbles, because you had to generate demand from somewhere. So we saw this very explicitly in the ’90s, that Greenspan lowered interest rates ’cause he saw there was no inflation in the economy, and he said, well, it can keep growing without creating inflation.

JAY: And everybody go out and throw money and buy stuff.

BAKER: And that’s in effect would happened. And it was done on the back of the stock bubble in the ’90s, and then it was done on the back of the housing bubble in this decade. So over a longer-term, what we have to do is address those structural imbalances that laid the basis for the bubbles.

JAY: That doesn’t seem on anybody’s agenda that has the power in this country.

BAKER: No. I mean, there—.

JAY: I mean, I never hear the word wages. Like, one economic conference after another, at the White House or [Peter] Peterson’s foundation conferences, the word wages doesn’t come out of anybody’s mouth.

BAKER: Well, what they usually say when they talk about that is they might even show sympathy and say, “We’d like to see workers get more,” and they usually throw in a word about education that, you know, if we got everyone to be more educated. But the reality is that you could look at people have, of course, gotten more educated, so the workforce is much, much more educated today than it was 20 or 30 years ago. But the returns to, you know, say, people getting a college degree are much, much less. They’re not seeing—we have a lot of young people getting out of college. They themselves are finding it hard to get a job. So what you’ve done is this credentialing process. People are accumulating more and more credentials, but they’re not getting a return for them. The gains are going overwhelmingly to those at the top end—the top 10 percent, top 5 percent, even top 1 percent. So you could still say, you know, you have professionals—you know, doctors, lawyers—they’re still doing very, very well, but they’re doing that at the expense of basically everyone else.

JAY: So the kind of stimulus you’re talking about really is a transition. But there’s going to have to be a transition to something structurally different, no?

BAKER: Well, there certainly should be. I mean, you know, it’s sort of a question of putting out the fire. The fire today is 10 percent unemployment, so the stimulus is about getting that down to more normal levels. Now, ideally, we want a longer-term agenda that restores the balance that will allow ordinary workers to share in productivity growth. I mean, there’s a lot of other things we want to see as well. I mean, we have to do a lot to rebuild our infrastructure, get the US on sort of a sustainable growth path in terms of reducing our energy use, greenhouse gas emissions. I mean, there’s a whole long list of things that we should be talking about, should be doing, something that should could be part of the stimulus. But the point is the immediate issue is to deal with this situation when you have 10 percent of the workforce unemployed.

JAY: Thanks for joining us.

BAKER: Thanks for having me on.

JAY: And thank you for joining us on The Real News Network.

End of Transcript

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Dean Baker

Dean Baker is co-director of the Centre for Economic and Policy Research