Dean Baker’s prescription for the American economy

Economist and writer Dean Baker, the co-director of the Center for Economic and Policy Research and the author of the well-known blog, Beat the Press, spoke at the UMass Lowell Inn & Conference Center today as part of the Parker Lecture Series. Baker’s topic was “The Housing Crash Recession” and he gave a fascinating account of the causes of the current recession, the reasons why a recovery has been so elusive, and his prescription for healing the economy.

Baker began by laying full blame for the recession on the housing bubble of 2002 to 2007. As one of the few economists who warned early-on that rapidly rising real estate prices would inevitably harm the economy, he has extra credibility when discussing this topic. He said the housing bubble created $8 trillion in wealth which in turn created lots of consumption which thereby fueled the economy. When housing collapsed, all that wealth disappeared and with it went consumption – people aren’t spending money because they don’t have the money to spend.

The only way to have revive this faltering economy, according to Baker, was an enormous government stimulus measure, far greater than what was enacted. Only government spending would be sufficient to resume the levels of consumption needed for the economy to recover. Because this did not happen and because the political will to do it is completely lacking, Baker predicts that the economy will continue to sputter with unemployment rising above 10% in early 2011.

Baker said that the longterm solution to our economic difficulties is to increase our net exports. To do this, the dollar must decrease in value, something that is happening now as a result of actions of the Federal Reserve. (A low dollar makes US products more attractive to overseas markets). In the shorterm, Baker made the case for more government stimulus, saying that deficit worries are “nonsense.” He also said that the Federal Reserve should raise its target inflation number to 3 or 4% rather than the current 1%. Higher inflation will help homeowners burdened with excessive debt and will motivate businesses now sitting on hoards of cash further reason to use it for production. Finally, Baker said the US should adopt a German-style “job sharing” program in which companies, rather than eliminating jobs, cut the hours of employees with the government making up most of the difference. Employees in this category would work 20% less time but receive only 4% less in salary. Baker said that this type of program is receiving bipartisan support in Congress so it’s one of the few things that has a chance to pass.

During the Q& A, Baker was asked why there is no consensus on the best solution to our problems. He explained that in economics there’s a “premium on complexity” because “they don’t want this to be simple.” He further said that not a single policy maker had been fired or otherwise penalized for this huge failure. Because policy makers suffered no consequences for being so wrong, they are free to continue advocating the policies that got us into this position in the first place.

As for the President, Baker said he has to “come to grips with what happened” and that his team “is too close to the financial industry” so their policies were structured for the benefit of the financial industry. Obama might not have been able to get more stimulus from Congress, but he could have made the case for more stimulus. Instead, he completely lost the framing of the debate to the opposition. As for social security and medicare, Baker said social security will be stable and solvent until 2039 but that Medicare posed a huge problem. That problem had nothing to do with Medicare, per se, but was entirely a consequence of skyrocketing US health care costs. If we get health care costs under control, Medicare will take care of itself.

Congratulations to the Parker Lectures and to UMass Lowell for bringing such a well-respected and nationally-known speaker here to Lowell. Coming on top of last month’s lecture by chairman of the Boston Fed, Eric Rosengren, this afternoon lecture series has brought attendees right to the front lines of the intellectual battle being waged over the proper prescription for fixing our ailing economy.

One Response to Dean Baker’s prescription for the American economy

  1. JoeS says:

    I’m not buying into the German job-sharing tactic to replace unemployment payments, because once the workers are used to 20% less work time for 4% less salary, that will become the norm. It will be difficult to ramp back up without a greater than 4% salary increase.

    It also seems there should be a more comprehensive solution to the trade deficit than just letting the dollar depreciate. The current policies penalize the American worker by laying on taxes and other costs to his work that the foreign competitor does not have. We should take care of these inequities before using dollar depreciation to settle the accounts. There is a correlation between low savings rates (as indicated in the 2005-2008 period) and the account imbalances (which peaked at over $800B during that period). It seems that just pushing the consumption button only continues that structural imbalance.