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Baker: Current policies more concerned with deficit than solving unemployment crisis

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington, and we’re at America’s Future Now! conference. And joining us is Dean Baker. He is the codirector of the Center for Economic and Policy Research in Washington, DC. Thanks for joining us.

DEAN BAKER, ECONOMIST Center for Economic and Policy Research: Thanks for having me on.

JAY: So I want to read a little quote from something you just wrote. “If the temporary jobs generated by the census are pulled out of the count, the economy created just 20,000 jobs in May. The average rate of growth of non-census jobs over the last three months has been just 133,000 a month, only slightly faster than the growth of the workforce. At this rate of job growth, it will take decades, not years, to get back to normal levels of unemployment. It’s time that we stop the happy talk about recovery and get serious about the country’s economic problems.” So what you’re essentially saying is we’re into long-term structural unemployment of 9, 10 percent or more. If you look at some of the, you know, numbers of talking about people still looking and off the rolls, we’re actually talking 15, 16, 20 percent. So am I getting this? We’re looking at decades of this kind of unemployment?

BAKER: Well, if we don’t have any policy response. I mean, it’d be astounding to me that we would just sit here and let that happen. But the point is we’re not on a steady—we’re not on a healthy recovery path. So you’ve had this whole, you know, rain of good news, you know, supposed good news. We had strong growth numbers in the fourth quarter. There’s lots of things that people are pointing to and saying, oh, this is good; the economy’s in a recovery. And the reality is the economy almost certainly is growing. So, you know, is it positive? Is it a negative? It’s a positive number. The growth rate is very slow, and it’s not nearly fast enough to bring down the unemployment rate, or certainly not at a speed that any of us would consider acceptable. So we aren’t doomed to this. I mean, we do know how to respond to it: we could have more stimulus; we could have the Fed be more aggressive in trying to expand the money supply. There are things we can do. But at the moment, at least, the economy is not on a healthy course at all.

JAY: And what we’re hearing about is that the real problem is the deficit. Peter Peterson and his foundation a few weeks ago had a conference that we did a story about—if people want to see, you can look it up on our website—essentially that you had—Peterson’s there, and Geithner’s there, and Bill Clinton comes there, and Greenspan comes there, and it’s all the same chorus: the real danger is the deficit. Let’s start with why do they think the deficit is such a problem. What is it that troubles them?

BAKER: Well, I can’t speak for what they think. All I can say is what they say. And they have these horror stories that if we get out 10, 15, 20 years, if you just look at baseline projections, you do get high ratios of debt to GDP. If you get really far out, you know, 30 years, 40 years, you get enormous deficits/debt to GDP ratios. The short-term story is that you get a high deficit because that’s what happens when your economy goes into the tank: you collect less taxes; you pay out more money in unemployment benefits. And, you know, back when I was in grad school, we were always taught that was a good thing, because otherwise the economy would be even weaker. So, yes, you know, you get a deficit in the short term, and to my mind that’s really good thing, ’cause otherwise we’d have lower growth and more employment.

JAY: But this can’t be just a philosophical divide. There must be a difference of interest here. Like, when they look at the economy—these are smart guys. They understand the economy. They know, you know, people on Wall Street who are the friends of these political people making these statements, and Peterson himself, have made fortunes understanding the way the economy works. So what are they worried about? I mean, it can’t just be, like, a theoretical disagreement. They look at their own assets and they’re worried about them being devalued, and I guess they’re more worried about that than they are unemployment.

BAKER: No, I don’t really think it’s a question of assets being devalued, ’cause this really is not a good mechanism to promote growth, and in many ways they’d be best with better growth. But I think what they are likely worried about is a higher tax bill. So what they’re doing is taking advantage of this deficit situation—created, I should point out, by them. You know, so it’s a little incredible that you have these Wall Street people—Robert Rubin, of course, I’m thinking of, you know, front and center, ’cause he was, you know, first in the Clinton administration pushing deregulation, touting the stock bubble, everything’s fine, you know, with an overvalued dollar. I mean, this guy at the center of policy. Then he went over to Citigroup and personally profited from this to the tune of $120 million as he ran the bank into the ground—it would have been bankrupt had it not been rescued by the US government. So the Wall Street people directly got us here, and now they’re taking advantage of the crisis they themselves created to try to undermine Social Security, Medicare, Medicaid, other bedrock social programs. Basically I see this as they don’t want to pay for them. So the taxes for—.

JAY: How are they paying for them now?

BAKER: Well, they aren’t paying for them now. They will pay for them in the future. Social Security has lent the US government $2.5 trillion dollars. That will be paid back from Peter Peterson’s pocket, he and other people like him. He does not want to pay it back. He said that absolutely explicitly. I heard him say—I’ve heard him say this many times, but he said this at the conference just a few weeks ago. He said: there is no Social Security trust fund. So for him he wants to zero that out. The Social Security from workers’ tax dollars, $2.5 trillion was lent to the US government to be paid back from income taxes that are paid by people like Pete Peterson. Pete Peterson said, I’m a rich and powerful person; I don’t have to pay back that $2.5 trillion; we’re just going to take that from the workers and tell them, sorry guys, nothing there for you. So that’s what it’s about. I think that’s very front and center. And Peter Peterson said it about as clearly as he possibly could. He wants to rip off people for their $2.5 trillion dollars of Social Security money.

JAY: Now, he wants to pay less tax, but they’re talking about a new tax, a value-added tax, and that seems to be the hot thing on the Street these days. So talk about that.

BAKER: Yeah. Well, value added tax is a way to get lots of money. It’s a sales tax, essentially. The idea is that you tax things at each point as a product gets assembled. So if you or I are to get a car, if you had a sales tax, you’d just pay it on the final sale. Well, value added tax would tax, you know, the steel when that gets made; it would tax the tires. It taxes each component. But more or less what it amounts to is a sales tax. And what’s important for people to understand, it ends up being a very regressive tax for two reasons. One is more low and moderate income people will tend to spend all their income or most of their income—if you’re Bill Gates, you know, you’re probably spending a half, third; you couldn’t possibly spend it all. What could you do? The other important point is that higher-income people are much more likely to spend their money outside the country. So if you’re spending your money in Germany and Japan, you’re not paying the sales tax here. I mean, you might pay their taxes, but the point is you’re already doing that. So it’s a good deal for a wealthy person who might have the opportunity to spend money out of the country and frequently will. They’re not going to pay the tax on their expenditures outside the country. So it disproportionately hits low- and middle-income people.

JAY: So if they have a mechanism—although I think it’s going to be terribly unpopular to try to pass a national sales tax. It’s going to be like what the draft was, I think, in the ’60s. But they have the plan for that. So they don’t want to pay more tax; they want ordinary people to pay more tax. But why would they be against more stimulus if what you say is true, which is even they’d do better when there’s more growth?

BAKER: Well, I think this is a rhetorical issue. A couple of things. One is that they want the crisis. So more stimulus would lessen the crisis. Suppose we did really did come out with a big stimulus package. The Fed was very aggressive in saying, you know, we’re actually going to promote inflation as a way to boost growth. And there’s—even conservative economist Greg Mankiw, Bush’s chief economist, advocated that. And so it’s not a wild idea. This is, you know, really across the political spectrum. People think that it’s a reasonable thing to do. If they were to do that, that would lessen the sense of crisis. The other—.

JAY: And they want to have this sense of crisis.

BAKER: They want to have this sense of crisis, because, you know, you’re talking about a national sales tax, you’re talking about Social Security, you’re talking about cutting Medicare—as you said, these are hugely unpopular items. But what they want to do is tell the American people, listen, the smart people—we’re real smart people. We’re honest people. You can trust us. You know, we’ve decided what’s best for you is, you know, this national sales tax, cutting Social Security. We know it hurts, we know it hurts, and we feel real badly about that, but you have—.

JAY: So we feel your pain.

BAKER: So—exactly. So they want this sense of crisis to bring about things that no one would ever agree to otherwise. They might not agree to it even with a sense of crisis, as you say, but they certainly—you know, you’re walking down the street and go, “How do you feel about a sales tax?” Well, you’d get chased away. Same as cut Social Security. The other thing, I think, is this idea that they want to treat this—it’s important for kind of—they may believe this themselves, but I think, more importantly, in terms of the world view that this is all kind of an accident that, you know, we’re sitting here, 10 percent of the workforce is unemployed, ’cause, you know, it’s like Katrina—there was this big hurricane. You know. No, it wasn’t that. It was the people who were running economic policy messed up. We don’t have to have 10 percent unemployment. Ben Bernanke didn’t have a clue. Alan Greenspan didn’t have a clue. Timothy Geithner didn’t have a clue. On down the list. You had all these people that are supposed to be very, very smart, and maybe they are. I’m sure they are. But when it comes to running the economy, they messed up as bad as you possibly can. And it’s a really remarkable story if you think about it, that, you know, if any of us messed up in our jobs as badly as that—I mean, this is like the school bus driver drives into oncoming traffic and kills all the kids, and then they give him the school bus to drive the next day. That wouldn’t happen.

JAY: Well, messed up or cashed out.

BAKER: Well, they did both. They did both. I mean, so you had people like Robert Rubin, you know, who literally cashed out. But, you know, most of them, at least to my knowledge—I don’t think Ben Bernanke—and, you know, I could be wrong, but as far as I know, he’s not gotten money under the table.

JAY: Certainly his allies on Wall Street have—.

BAKER: Have cashed out.

JAY: They cashed out, except they still get their jobs. They cashed out and kept their jobs.

BAKER: Yeah, that’s right, that’s right. So here you have the people that were responsible for the worst economic disaster since the Great Depression, and with very few exceptions they’re still in their job, they’re still doing just fine.

JAY: Who’s they? And what I mean by “who’s they”, is there really different economic thinking coming out of the Democratic party versus the Republican Party, given the kind of things we’re talking about right now?

BAKER: Well, there are differences. I mean, there are different strains, clearly. I mean, I don’t know. They don’t boil down strictly along party lines. But you have business-oriented Republicans who are very much in tune with business-oriented Democrats. You know, for example, I thought Ben Bernanke—I didn’t know he was a Republican for years. I didn’t know Christie Romer was a Democrat, I mean, President Obama’s chief economic advisor. So there’s a lot of overlap there. On the other hand you have sort of the extreme supply-siders. You won’t find those people in the Democratic Party; they’re in the Republican Party. So there’s a lot of overlap.

JAY: The policy you’ve been talking about during this interview is really coming out of—it’s coming out of this Congress and this White House.

BAKER: That’s right. You know, they’re very much in tune, and they have some Republicans that are—you know, you have, for example, Alan Simpson, you know, as President Obama’s pick to cochair his deficit commission, as Republican senator for Wyoming for decades. So you have some Republicans on board. But this policy that we’re talking about is strongly supported by, you know, President Obama and many of the Democrats in Congress.

JAY: Okay, there’s an election coming up in November. What would you say people should do when they go to an all-candidates meeting and they’re going to decide who to vote for? What are the key questions they should ask, and what should they be deciding when they decide what to vote?

BAKER: Well, I’d say, first and foremost, make these people reassert their commitment to Social Security. No cuts. There’s no reason for any cuts to Social Security. Here’s a program that the trustees of the Congressional Budget Office, they projected, could pay all future benefits till late ’30s, 2044, according to Congressional Budget Office. Even after that date, if you never, ever did anything, which is—you know, obviously, at some point we’re going to change the program; you change any program. But even if we never, ever did anything, Congressional Budget Office projects Social Security will always be able to pay a benefit that’s much higher than what current retirees receive. So, you know, one, no Social Security cuts. Two, I would say that they should get them to commit against a national sales tax, at least in the current context. I wouldn’t say under no circumstances would you ever want it, but this idea that, you know, the plan is this deficit commission will make its report after the election, and then we’re going to have a lame duck Congress decide this for—I mean, that’s close to crazy. This is not the way we’re supposed to do policy in the United States. I mean, you put it on the table; it’s debated by the public, debated in Congress. You know, the idea that we’re going to have this lame-duck, you know, before-Christmas session where we’re going to have some of the most important decisions for decades be decided, that’s close to crazy. So I think people should demand that their members of Congress support a normal democratic process and just say no to this sort of story. That’s not the way this sort of business should be done.

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

End of Transcript

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