Dean Baker: Main Street’s Economic Pain Is a Result of a Policy Failure

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Image courtesy of the Center for Economic and Policy Research.

Even though the recession officially ended over four years ago, unemployment remains stubbornly high and the median income is still significantly lower than it was when Wall Street crashed in 2007.

And the real tragedy, according to economists Dean Baker and Jared Bernstein, is that all of this economic pain is not merely a natural effect of the housing bubble’s burst — its grinding nature is the result of a policy failure.

In their new book, Getting Back to Full Employment: a Better Bargain for Working People, Baker and Bernstein outline how we could kick the economy into gear, reduce joblessness and help working people secure a much-needed raise — if only lawmakers were responsive to the needs of Main Street.

Moyers & Company spoke with Dean Baker about the book. Below is a transcript of our discussion. It has been edited for clarity.

Joshua Holland: We’re in a recovery that’s been slowed by round after round of spending cuts. Paul Krugman recently pointed out that you would have to go back to the demobilization following World War Two to find a time when government spending was cut more rapidly than it has been over the past three years. We just had a budget deal that locks in most of the austerity of the so-called sequester for two years.

How do you explain the fact that these destructive policies appear to have won the day?

Dean Baker: I think the problem is we have a bipartisan consensus around it. On one hand, the Republicans are very happy to push policies that leave us with high unemployment as a macro story, and then, as a micro story, cut areas of government that they don’t like. They’re not interested in seeing the military cut, but they’re usually fine with seeing cuts to programs like Head Start — programs that help low-middle income people.

But the distressing thing is that the Democrats have largely bought in as well. I date this back to the Clinton era. The takeaway for the Democrats from those years was, ‘Oh, we balanced the budget, we made the hard choices, the economy boomed, and that was the right thing to do. That vindicates deficit reduction, and then those damn Republicans, under George W. Bush, took over, and look at that, they spent all this money… And then, on top of that, tax cuts for the rich.’

They always talk about the wars that weren’t paid for as though it would’ve been okay if they were paid for. And the point I’ve always made was that the deficits the Republicans ran were good. The causes of them were very bad. You don’t fight wars you don’t have to fight, and that’s not a good way to stimulate the economy. And if you’re going to have tax cuts, you give it to people who are going to spend the money — low and moderate income people, not the rich, which is what the Republicans did.

But we actually needed those deficits, because the economy went into a recession in 2001. It wasn’t George W. Bush’s fault. There was a stock bubble that had been built up in the Clinton years, and that was what was actually driving the economy, and when it burst that gave us the recession.

So the actual story there is about 180 degrees opposite of what the Democrats like to tell. But they want to preserve this idea of the Clinton era being this golden age because we balanced the budget. They want to preserve this idea that there’s this great economic virtue in reducing deficits, balancing the budget, rather than telling the truth. So we have this bipartisan consensus that’s 180 degrees at odds with the economic reality.

Holland: It certainly doesn’t help that the Obama Administration brags about how much it’s reduced the budget, or echoes these economically illiterate points, like we have to tighten our belts when families are pulling in their belts. These things do not help.

And the media don’t help either. You run a blog called Beat the Press, where you call out bad economic reporting. Brendan Nyhan recently wrote a column in the Columbia Journalism Review arguing that while political journalists normally don’t take positions on issues, when it comes to deficit reduction they tend to ignore the fact that there are competing views and treat it like an unvarnished good. What do you think about that?

Baker: Well, I think that very much hits the mark. At Beat the Press, I’m writing about this all the time. You routinely hear it, and not just from Fox News. I’m talking about The New York Times, Washington Post, National Public Radio, PBS News Hour. They have set the bar for budget negotiations as a question of how much deficit reduction you’re going to achieve. It’s like saying we have a badly overweight patient who has to lose 50 pounds or he’s in jeopardy of having a heart attack. That’s literally the way they talk about it.

So here we just had this budget deal between Rep. Paul Ryan and Patty Murray in the Senate, and they’re saying, ‘Oh, but it didn’t do this, it didn’t do that…’ Well, it didn’t do a lot of things. But they have an agenda, which is cutting Medicare, cutting social security and they’ll also include some tax increases. And because it didn’t follow that agenda — and I’m saying the agenda of the media — they’re saying, ‘Oh, it’s a limited agreement, it’s a failure.’ Well, that’s their agenda. That’s supposed to be on the opinion page. That’s not supposed to appear on the news pages.

One of the things the agreement didn’t do was give a big boost to demand to get us back to full employment. That was a decision that, in my view, they should have made and they didn’t make, and that should’ve been talked about in the reporting. But you won’t find that.

Holland: Let’s talk briefly about your profession. It seems like everyone becomes a Keynesian at the worst point of a crisis. And we got a big stimulus package in 2009, when we were bleeding hundreds of thousands of jobs a month.

What happens when the situation stabilizes to a degree? Right now we’re in a very anemic recovery. Are there economists who don’t believe that when demand for goods and services is below trend in the private sector, the government has to step in as the buyer of last resort?

Baker: It’s hotly debated in economics. I don’t think the evidence warrants the debate, because at this point there’s an awful lot of research on the effects of stimulus and I just don’t see much ambiguity in it. I could play with regressions and I could get you the opposite result — that stimulating the economy won’t increase demand — but it’s hokey, and I think anyone who looks at those regressions knows they’re hokey. The story at this point, in terms of measuring the impact of stimulus on growth, on employment — it’s really not ambiguous. Enough people have done it from enough different directions, different methodologies. You can’t make it go away.

Now, let’s imagine we’re back in 2000 when the unemployment rate was four percent. If I say, ‘Oh, let’s have a big government spending program,’ then okay, that’s not going to stimulate the economy in that circumstance. There’s a very plausible story that when you do that interest rates will go up and whatever you get by way of increased jobs from the government spending you’ll lose through other channels. I’m inclined to think that’s true, and the research does show that. But when you’re in a situation like we are today — where we’re nowhere near anyone’s measure of full employment, where the short-term interest rate is zero percent, so the Fed has no easy tools — you’d be very hard-pressed to make the case that we can’t stimulate the economy, increase growth and reduce unemployment with more spending.

Holland: We know how the unemployment crisis impacts the unemployed themselves. It’s very tough, especially for the long-term unemployed. They are discriminated against just for the fact that they’ve been unemployed for a long time. They often end up with bad credit records, which employers routinely check. It’s very hard for them to get back into the workforce for a whole variety of reasons.

But I’m not sure that everyone really understands how getting back to full employment would help people who do have a job. Can you explain that piece of it?

Baker: This is one of the main points that Jared and I wanted to emphasize in writing this book. For large segments of the workforce, their ability to get pay increases, to share in the benefits of economic growth, really depends on having a tight labor market. And what really opened our eyes on this was our experience in the late 1990s. Jared and I were both working here in Washington at the Economic Policy Institute. At that point, they thought around six percent unemployment was the best we could do. We got down to four and half percent, and then four percent as a year-round average. And then we saw real wage growth up and down the income ladder — even people at the bottom end of the labor force were actually seeing good real wage growth during that period. And the basic story was that in a tight labor market, there was an increase in demand for people to work as checkout clerks at Wal-Mart, or to work at McDonald’s. When there’s tight demand for those people then they’re in a position to actually get wage increases, and that’s what we saw in the late ’90s.

We’ve done a lot of work on this, and you can’t make that result go away. So in this sense, it’s not just the unemployed, or even the underemployed — underemployment is a big deal as well, because a lot of people at the bottom also don’t get as many hours as they want — but it’s also about people who do have a job getting more pay because they’re in a position to bid up their wages.

When you have tight labor markets, Wal-Mart’s going to have to pay people $15 dollars an hour. It’s not a question of them just being nice guys or anything. If they want workers, they’ll have to pay them $15 bucks an hour.

Holland: A few weeks ago, Ezra Klein wrote that inequality isn’t the defining economic issue of our time. He said underemployment and unemployment were, and that launched a big debate. So was that a false choice, if I understand what you’re saying now?

Baker: On my own blog I said it missed the issue to make them separate points, because a big chunk of the story with inequality is the fact that you have so much unemployment. And, again, the reason why people are working at Wal-Mart for $7.25 an hour is because they don’t have alternative employment.

It’s really kind of a striking — if you go back and look from ’38, when we first created the national minimum wage, the Fair Labor Standard Act, until 1968, the minimum wage actually tracked toward activity growth. It didn’t just increase with inflation. Workers at the bottom were getting their share of productivity growth, so they were sharing in the gains of growth over those three decades. If the minimum wage had continued to keep pace with productivity growth from ’68, when it was at its purchasing power peak, until the present, it’d be about $17 dollars an hour today. And it’s not that I think we could raise the minimum wage to $17 dollars per hour tomorrow and not effect employment. Of course it would. But the point is that we had an economy that could support jobs that paid the equivalent of $17 dollars an hour for the person working as a checkout clerk at Wal-Mart.

So you can have a much higher wage economy, and a big part of that story is having low rates of unemployment.

Holland: In the book, you and Jared offer several policy prescriptions for how we could get back to full employment. Can you give us just a few of them?

Baker: Well, the one we already talked about is to simply increase government spending through stimulus programs. And it isn’t just throwing money at things – there are lots of things that need to be done. There’s infrastructure, of course, but we have a lot of needs in terms of improving education, retrofitting buildings so that we can reduce our greenhouse gas emissions — there’s a lot that could be done there.

The second one has gotten less attention, but perhaps almost as important is trade. We have a very large trade deficit, and that’s money just drained right out of our economy. Currently our trade deficit is about $500 billion a year. That’s money that’s earned here but which isn’t creating demand here — it’s creating demand in other countries. We have a very big gap to fill. We filled the gap in the late ’90s with the stock bubble, we filled it in the last decade with the housing bubble. If we don’t want to do it with a bubble, then we have to get the value of the dollar down to make our goods more competitive. That will get our trade deficit closer to balanced.

The last point is hugely important. We can control the number of hours people work. The thing people should realize is that the story of unemployment is actually a story of us being too rich. That sounds strange to people, because we know we have an awful lot of people who aren’t too rich and don’t have enough money. But the point is that we’re producing the things that we’re consuming. People for the most part have housing, they have food, they have medical care, and we still have somewhere around 10 percent of the workforce unemployed, underemployed, [or] out of the labor force altogether.

So, in effect, what’s happened is, because we’re so productive, we end up with a situation where we don’t have enough work for people. Rather than that being a source of poverty for those people who are unemployed or underemployed, wouldn’t it be much better if we all just worked fewer hours?

Now, it’s not that easy to get from here to there, but the comparison that we make in the book — and I think it’s worth people keeping in mind — is that if you look at Western Europe — Germany, France, the Netherlands, Denmark, pick a country in that list — they work about 20 percent fewer hours than we do in the United States on average. And if you just snapped your fingers and said, ‘okay, we all work 20 percent fewer hours, it would result in 20 percent more jobs.

Now, in the real world, it will never be that simple, but that’s more or less what we’re talking about. So, to my view, a great way of dealing with unemployment is encouraging people to work fewer hours. It’s a great way to increase employment, and also make people’s lives better. People value having paid vacation, they value having paid sick days when they’re not feeling well or they have a family member who’s not feeling well. They like paid family leave when they have newborn kids or an elderly family member they have to care for. So that’s a really good way to try to deal with the problem of not having enough jobs.

You can download a free electronic copy of Dean Baker’s book, Getting Back to Full Employment: a Better Bargain for Working People, at the Center for Economic and Policy Research website.

Joshua Holland was a senior digital producer for and now writes for The Nation. He’s the author of The Fifteen Biggest Lies About the Economy (and Everything Else the Right Doesn’t Want You to Know about Taxes, Jobs and Corporate America) (Wiley: 2010), and host of Politics and Reality Radio. Follow him on Twitter: @JoshuaHol.
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