Setting the Rules: Dean Baker in conversation with The Straddler

On Monday, February 7th, The Straddler traveled to Washington, D.C. to speak with Dean Baker at the Center for Economic and Policy Research, where he is co-director. Baker, an economist, is the author of numerous books and articles which challenge the terms of debate at play in economic discourse. Beat the Press, his blog, examines how economic issues are reported in major outlets like the New York Times, Washington Post, and Wall Street Journal. His most recent book, Taking Economics Seriously (MIT Press), argues that market fundamentalism does not exist. Rapidly rising inequality over the past thirty years has been the result, according to this view, of conservative restructuring of the economy, not the natural workings of the market. Dean Baker, February 7, 2011 There is no such thing as just the market. You have to set the rules. Sometimes that might be fairly simple; often its very complicated. The idea that there is one group of people out there that wants an absolute free marketwhatever that could possibly meanversus another group that wants regulation is silly. The real debate is about how to structure markets. In other words, what are we trying to do? What are the goals? But we have a framing that says one side is for regulation and the other side is for deregulation. And yet, rarely does the side that says its for deregulation actually want deregulation. Take finance as an obvious example. When they were talking about removing restrictions on financial companies in the 1990s, you didnt find a lot of people who wanted to get rid of deposit insurance. And you didnt see a lot of people in September of 2008 saying get the government away from me. They didnt want to get rid of too big to fail. And you didnt see them saying they wanted to get rid of access to the Feds discount window. So I see a story where the side that is ostensibly for deregulation isnt really for deregulation. In the case of finance, what they want is an insurance policy without paying for it. Corporations themselves are creations of the government. You and I could have a partnership and were going to go do business and if we get into trouble, we get sued. But if we set up a corporation that does x, and x goes badly, were off the hook. Were not liable. They go after the corporation. Thats a rule made by the government. And that might be a good ruleIm not

saying its a bad thing to have corporations. But the point is, you cant tell me youre a strict freemarket libertarian and youre for corporations. Those are inconsistent views. Take the rules of corporate governance. One of the things that Ive argued is that the rules of corporate governance have been exploited in recent years so that to a large extent corporations are run for the benefit of top management. Thats why you get people receiving tens of millions a year and sometimes hundreds of millions a year in pay. Its not that theyre so brilliantin many cases theyre wrecking their companies, we saw that with the financial crisis. But they basically pick the people who are deciding their pay. Your friends are on the board, why shouldnt they pay you tens of millions of dollars? Those are rules of corporate governance. And we could have different rules of corporate governance that would make it very difficult for, say, General Electric or Citigroup to be run first and foremost for the benefit of top management. Another example is minority shareholder protection. Say weve got a great idea: were going to take over General Electric. Were going to get 50.1 percent of the stock and tell the remaining 49.9 percent theyre out of luck, we own the company. You cant just do that. There are very detailed rules that protect minority shareholders. There are all sorts of rules like this. So its hard to imagine how you could have corporations and not have rules. Economists and journalists often get very, very sloppy with their terms. Take free trade agreements, which are anything but. Usually, a trade agreement like NAFTA, or the one were currently talking about negotiating with Korea, frees up investment flows. But in almost all of these agreements, there is nothing about freeing up trade in highly paid professional services. Ive had any number of arguments with economists who tell me that there is free trade in professional services because the doctor they see was born in India. Its kind of the Mexican avocado theory of international trade. I can go to the grocery store and get an avocado that was grown in Mexico. Have I now proved that we have free trade in agriculture? Of course not. There are all sorts of restrictions, and the reality is that its very difficult for a person who was trained in India, even trained to U.S. standards, to come here and work as a doctor. And thats quite deliberate. Now, if instead of focusing on making it easier for us to produce our cars, our steel, our textiles in Mexico or India, we wanted to make it easier for someone in India or China or whatever country it is to get the skills, train to our levels, learn English if they dont know it, and come here and work as a doctor, wed get lower cost health care. Wed have doctors who were willing to work for much less than the doctors that we have in the United States. But no free trade economists are interested in that. All big proponents of free trade who talk about lowering the wages of auto workers and textile workers dont talk about lowering the wages of doctors, lawyers, and economists. They dont want to talk about that. They cant even think about that.

So theres this terminology of free trade that is picked up by economists and reporters, and behind it is this very important substantive point: what were calling free trade is pushing down the wages of a substantial segment of the workforce relative to those who are still protected. Now, there are a couple of issues here related to immigration. Some types of labor are space specific. So if we want people to pick crops in Ohio, they have to be in Ohio to do that. If we want to import finished products from Mexico, people can stay in Mexico. So that obviously brings up the issue of immigration. When we talk about the number of immigrants who come into the country its usually separated out from trade agreements. Very few people are willing to say, okay, were just going to have open borders, and Im sympathetic to that because that would mean youd have hundreds of millions of people coming to the United States because its a very attractive place relative to a lot of poorer countries. But the other issue is, insofar as you do have immigrants coming here, what are the terms on which theyre coming? The discussions about this havent always been totally honest. The fact that you have a lot of immigrants in low-wage areaswell, thats because we let them in. You have a lot of people in the United States who want to blame the immigrants for driving down wages, but if you want to blame someone, blame the employers. This is conscious policy. Everyone in government knew that there were millions of people working in restaurants, working in peoples houses as nannies or gardeners or housekeepers.That wasnt a secret. It was conscious policy to allow that. Theres interesting economic research on this. A lot of the research says many of these immigrants dont compete with U.S. workers. Now, Im skeptical of some of this research for reasons not worth going into, but accepting it at face value, the implication is that youve developed an underclass which is so far below U.S. wage standards that these jobs are no longer competing. That means two things. One is that we have this underclassweve brought in people who are earning at a level that is so low that even our people who dont graduate high school are not competing. Another point is that people who didnt graduate high school used to have a lot of those jobs. So if weve brought in so many immigrants that the wages are so low that people who didnt graduate high school wont take them, thats hardly reassuring. Still, you get this very strange discussion where people talk about a labor shortage. But if you believe in a market, what the market is telling you is that you have to raise wages. But instead of people saying raise wages, they say theres a shortage. Of course, if you raise wages, costs go up. I sometimes make a joke: I cant get a doctor to treat me for twenty bucks an hour. So is there a shortage of doctors? No, you have to pay a doctor more than twenty dollars an hour. Its

the same thing with restaurants. But somehow, that labor should be cheap. Why? The market isnt telling you that, because youre not getting people at those low wages. People have this preconception that people who take kitchen jobs in restaurants should do it for very low wages, and they think that its the market that makes those wages low. But in fact, the market is rigged to keep those wages low. Now, if restaurants have to pay their help in the kitchen more, and their valet parkers more, then theyre going to charge more. So fewer people will go to restaurants. But is that a crisis? I mean, its not like we have a fixed number of times we have to go to restaurants. So if restaurants cost twenty or thirty percent more, people would go to restaurants lesstheyd do something else with their money. Restaurant owners would lose, some restaurants would go out of business. But thats the way the economy always works. Some businesses go out of business. Thats the process of economic development. Theres a real effort to take the key economic decisions out of the political debate. Theres this idea, certainly among economists, that this is appropriate. Where you see this most clearly is with the central bank. Central banks are supposed to be apolitical. Theres a sense in which I would agree with that, but then a stronger sense in which I would disagree. I would narrowly agree in the sense that, for example, the Food & Drug Administration (FDA) should be an apolitical body. We dont want to think that there are Democratic drugs and Republican drugs. The idea that members of Congress would decide which drugs would get approvedI dont want that, no one in their right mind would want that. On the other hand, Congress absolutely oversees the FDA and gives them general guidelines. You know, do you err on the side of approving drugs quickly, so they can treat people, or do want to you err on the side of making sure theyre safe? Thats entirely appropriate as a political decision for Congress to make and for people to debate. You want people who are experts in medicine to decide is this drug safe, is it notbut you want them following certain parameters that are given them by Congress. Its the same thing with the central bank. The central bank should be deciding when to raise interest rates, when to lower them, and making other decisions like that. But Congressthe elected governmenthas to say here are the parameters you should be shooting for. So theres this idea that has gained a lot of prevalence around the world, and to some extent in the United States, that you focus on inflation and you ignore everything elseto my mind thats crazy, thats a real crazy view, and its entirely appropriate for that view to be debated by parliaments and elected officials. Is that what we want our central bank to be doing? The central bank will decide how best to do it, but is that what we want them to be doing? And the idea that debating this is

not appropriate, that its somehow outside of the political realmI find that incredible. Among the media, which I have watched very, very closely for a long time, there is often a laziness and an unquestioning deference to authorities. You were being neutral if you reported what the IMF or Alan Greenspan said as true. Thats the easiest thing to do. Its very lazy. Take the Argentine debt crises [of 2001-02, which resulted in the largest-ever default on debt by a sovereign nation]. It was easy to see at the time that their structural reforms were not working well. Theres this basic conceptual issue when it comes to economic reforms: we dont want the government to do things because its inefficient and corrupt, so were going to privatize it. So you have an inefficient and corrupt government running the privatizationwhat does that look like? Well, the privatization will be inefficient and corrupt unless somehow you envision thats going to be clean. So what happened in Argentina and a lot of other countries was that you got well-connected individuals who ripped off the government by getting things at way below the rates they should have paid, and they got all kinds of guarantees from the government. Its happened in country after country, Argentina being just one. And in the case of Argentina, what really nailed them was that they had adopted this horrible monetary policy where they had tied themselves to the dollar. Alan Greenspan was making monetary policy for the United States, not Argentina. He wasnt giving Argentina a lot of thought. So when he started raising the interest rates in the U.S., that really killed Argentina, because they had very high debt. So they got in this bind where interest rates got higher which made their deficits worse which meant they had to cut back further, and impose further austerity. They were in a recession, the recession was getting worse and worse, interest rates got higher and higher because people were questioning whether or not they could maintain this tie to the dollar, and eventually, at the end of 2001, they broke. They really had no choice. The country was coming apart, people were protesting in the streets. Now, when they broke, the IMF and all of these people in the U.S. were saying this was horrible. It was horrible that they broke with the tie to the dollar. Well, what was actually horrible was what was happening before. What was remarkable was that they broke with the IMF, devalued their currency, and defaulted on their debt. They had three months where the economy really plummetedsort of like what we had in the fall of 2008. Three or four months of freefall. But then it began to stabilize in the second quarter of 2002, and by the second half of 2002 it began to grow quite rapidly. And it continued to grow quite rapidly right up until the world recession in 2008-09, which brought it to a halt. So it clearly looks like this was the right thing for Argentina to do. They had very strong growth

for a prolonged period of timenot that there werent any downsides to it, there certainly were. But it certainly beat the situation they were in. But rather than look at that and say, okay, what were their options? How does this outcome look compared to outcomes that would have resulted from the path they were on? Instead of that you got all of these people just condemning Argentina and saying what an outrageous thing it was to do. Another issue with the media is that they feel the need to go to whatever administration is in office, and then insofar as there is a dissenting opinion that is represented by the leadership of the other party, they present that. But they arent going to search out the fringes. So on a lot of these issuescertainly on the decontrol that you saw in the 1990s, Glass-Stegall being repealed, the Commodities Futures Modernization Act, or for that matter Alan Greenspans general policies which were endorsed by both Democratic and Republican Presidents and the Congressional leadership, Democrat and Republican, the media felt comfortable that theyd done their job if they talked to a person on either side who agreed with those policies. They have also created this idea of entitlementswhich is Social Security, Medicare, and Medicaidand this additional idea that confronting entitlements is somehow courageous. So there are the brave people who want to confront entitlements, and then there are the people who dont want to confront entitlements. Well, first off, there is a totally different dynamic underlying Social Security and Medicare and Medicaid. Social Security does have some increasing costs due to the aging of the population; weve known about this for some time. I heard Alan Simpson talk about this once like the deficit commission had discovered the baby boom. No, we knew about the baby boom in 1964. We have pretty good data on births, so we spotted it a while ago. In any case, an aging population implies some increase in costs, which the program has largely accounted for. Now, you get out to 2037, we dont have everything one hundred percent paid for its about eighty percent paid for. So somewhere were going to have to do something. Do we have to do it now? No. Do we have to do it in five years, ten years? No. At some point we have to do it, but we dont have to do it today, and its not a cataclysm. Medicare and Medicaid, on the other hand, are being driven somewhat by aging, but more importantly by health care costs. We pay more than twice as much per person as any other country in the world. And we dont have the results to back that upwere not getting our moneys worth, in other words. We have a calculator on our website where we say, suppose we paid the same cost per person of every other country that has a longer life expectancy than the United States? Well, instead of having a huge budget deficit going out twenty, thirty, forty years, we have huge budget surpluses. So the story is a health care story. When I debate people on this, they invariable say, yeah, well health cares hard to fix. I thought these were the brave,

courageous people! In Washington, whats brave and courageous is to tell senior citizens that were not going to pay for their health care when we know most of them dont have the money to pay for it on their own. Its not brave and courageous to go to the drug companies, doctors, and the insurance industry and say, hey, you get way too much money. No, thats not brave and courageous. They dont want to go there. They want to go to elderly people, most of whom dont have much moneySimpson kept talking about people driving up to their gated communities in their Lexuses; well, his friends might, but the vast majority of the elderly do not live in a gated community and cannot afford a Lexus. But the debate has been totally reframed in a way that has nothing to do with reality. You can look at the case of the state budget crises, too. Just about every state in the union is looking at a budget deficit. The collapse of the economy has taken a big toll on their revenue. Its not that their spending has gone through the rooftheir spending hasnt even kept pace with inflation for the most part. The big squeeze has been the collapse of the economy. And the plunge of the stock market took about a billion dollars out of state and local pensions. Just to be clear, Im not saying there were no cases of wasteful spending. There were. And there were also cases where payments to pension funds werent made. New Jersey stands out as a particular culprit, but Im sure there are many others. The main story, however, is the collapse of the economy, the collapse of the stock market, and the collapse of revenues. In response to that, you get the conservative right turning around and saying that the problem in the states is all about public sector workers. Theyre fond of saying that public sector workers get more than private sector workers. And thats true, but thats not the way any economist ever looks at it. You control for experience, you control for education, and you find that public sector workers get somewhat less than private sector workers. Not a lot less, but somewhat less. When you throw in benefits, it probably ends up being more or less a wash. The idea that public sector workers are hugely overpaid is ridiculous. Still, you get the right saying lets take back pensions. Theres some talk of allowing states to declare bankruptcy so that they could default on these pension obligations. Yes, public sector workers do have better pensions and better health benefits, but thats largely a result of the deterioration of the private sector over the last three decades. Yes, you do hear about specific cases where people are allowed to retire at age fifty. I wouldnt mind seeing that changedbut those are the exceptions. In New York, the average pension is about $19,000 a year. So youre really hard pressed to make the case that these pensions are overly generous. Again, I can acknowledge that there are cases where people are able to exploit the system. But invariably the right is not talking about going after those cases. They want to go after the meat.

So theyre blaming the people on the bottom rather than the people on the top. Theyre trying to create this antagonism by saying that public sector workers are a privileged class. And, of course, you still have a very high unionization rate in the public sector. Youve seen an enormous weakening of private-sector unions over the last thirty years, but not in the public sector. If you go back to the fifties or sixties, unions used to be around a third of the private workforce. Today its around seven percent. As recently as 1980, somewhere around forty percent of the manufacturing workforce was unionized. Today its around ten percent. Its a little higher than the private sector as whole, but not by much. The whole private-sector workforce has been shellacked. But in the public sector, somewhere around thirty-seven percent of the workforce is unionizedthats close to its peak of thirty-eight or thirty-nine percent. That sort of gives you an idea of how many people would opt to be in unions if they didnt have to worry about losing their jobs, because for the most part public sector workers cant just be fired. I mean, in principle, you cant be fired for joining a union in the private sector but as a practical matter, there is almost no consequence for a private employers firing someone who they think is trying to organize a union. In the public sector, people arent forced to be in a union, but they opt for it, so you get fairly high unionization rates. The fact that so little of economic reporting is from a worker perspective is incredible. Steven Greenhouse [of the New York Times] might well be the last of the labor reporters. Ive known several who have lost their jobs at major papers like the St. Louis Post-Dispatch. The Washington Post used to have Frank Swabodahe left a while ago, and they never replaced him. In principle reporting from a workers perspective wouldnt just be reporting about unions. There all sort of things in the workplace that have a direct bearing on peoples lives, and they largely go unreported. The business reporters, the financial reporterstheyre just oblivious to this, because they are in a different world. Maybe this is changing now with newspapers coming under so much pressure, but generally business and financial reporters are more educated than the workforce as a whole, higher paid, and, at least until recently, in more secure positions. They really are out of touch. And theyre inclined to equate business with jobs. Well, no. General Electric made a lot of money outsourcing. The number of employees that they have in the United States has decreased drastically under Jefferey Immelt. Their profits havent. You can even argue, maybe this was good for the country. But it didnt create jobs. Not here, at least. Still, the media has played up the idea that corporations can make mistakes and we wont really hold that against thembut with unions there is this idea that they are sort of intrinsically bad. So even when you have extreme cases, someone like Angelo Mazilo at Countrywide

Countrywide was doing many of the worst of the subprime mortgages and Mazilo was selling his stock as the company was collapsing. And Countrywide was issuing positive statements the whole timeI dont know that they broke any laws, but that certainly doesnt look very good. So heres a guy who pockets hundreds of millions of dollars and the media will say, well, that wasnt that good. But hes still a respected figure. Robert Rubin is perhaps an even better example. There he was sitting at the top of Citigroup as the thing went down in flames and needed hundreds of billions of dollars from the U.S. government to keep it afloat. Hell still get a good audience, and he writes his column for the Financial Times. He gets very respectful treatment. Whereas unionstheyre blamed for everything. Now as far as what the unions have brought on themselves over the yearsId say its a mixed bag. Unions are democratic bodies, and its just like any other democratic body. That you are effective at getting elected in a democratic body doesnt always mean that you are the best person to carry through policy. Just like legislators, or governors, or presidents. Youve obviously got to be an effective politician to get those jobs. Does this mean that youre the best person to carry through policy? Sometimes yes, and sometimes no. The same thing is true of unions. In some cases you have unions that are good at being forward thinking and trying to help their members, and in other cases this is clearly not the case. Take the auto workers. My biggest complaint with the auto workers is that they went along with the companies. They went to bat for them. GM, Ford, and Chrysler were hugely dependent on these big SUVs, and when gas went to four dollars a gallon, they werent selling that well. It wasnt a very forward-thinking strategy. But the auto workers went to bat for the companies; theyd lobby people in congress against mileage standards. It was very bad judgmentbut again, they went along with the companies. It was the companies bad judgment, and you can blame the unions for going along with them. And I do. That was the wrong call. But they had the companies telling them this was the best path. Okay, now corporations have been making profits hand over fist. Profits in 2010 were back to pre-recession levels while unemployment has hovered around nine percent. Workers are very far from getting back to their pre-recession levels. Corporations are back to where they were before, and presumably looking to get even higher. Well, the rap on Obama has been that he has been anti-business and has needed to mend fences. If hes been anti-business, what has been the manifestation of that? Has he said some things that were critical? Krugman has called this Mommy, he looked at me funny. I mean, he has made some critical commentsremarkably few given the circumstances. We had the greatest downturn since the Great Depression, and the amount of additional regulatory restraints on business as a result of the Obama administrations

actions were pretty piddling. Even the health care actthe insurance industry is basically fine with it. The pharmaceutical industry will probably get more money than ever as a result of it. So its hard to call that an anti-business measure. There are some requirements about businesses making payments, but theyre fairly modest. You either insure your workers or its two percent of payroll. Its not a big expense. And the Dodd-Frank financial reform billyou talk to people on Wall Street, they think they got off easy, and I think they did too. Theyll have to curtail a few things here and there. Meanwhile, we have people unemployedand not because they messed up. The economy changed. And for millions of people to be in this situation is a disaster. There are disasters you cant do anything about. I mean, you get weather disasters and you do your best to respond to them. But this disaster was entirely brought on by bad economic policy. Could we have spent more money to mitigate the effects of this disaster? Could Obama have gotten more money through Congress? I dont know. But he certainly could have said we needed more money. We also could have looked at work sharing. Germany is a remarkable story here. Their unemployment today is lower than it was at the start of the downturn. And they had a steeper downturn than the United States. So its not that their economy is booming, but they give incentives to firms rather than lay people off. And they have everyone work ten to twenty percent fewer hours. That keeps people employed, it keeps them in the workforce, they acquire new skills, they get most of their income. I think we would be a different country if we had the same thing here. And I think its really tragic that the Obama administration showed no interest in that policy. I know conservatives who think that its a good policy. I dont think its an ideological issue. The government in Germany that is pushing it is a conservative government. In fairness, it got started under a coalition government, but the Christian Democrats are happy with it, and the employers are happy with it. In terms of seizing the opportunity to reframe the debate, well, Obama basically went back to pick up the pieces and put everything back in order. We gave all of this money to the banks under very generous termsthe debate on that has been kind of incredible. You regularly hear that the US taxpayer made money on this deal. This is kind of a game, because these are all smart people saying this. We loaned money at below-market interest rates. We got the money paid back. No one in their right mind would say that they made money. They made concessionary loans. If the going interest rate is eight percent and I give you money at two percent and you pay it back to me, I would be an idiot to go around and say I made money. And thats basically what the administration was saying about this deal, and they largely got away with saying it. Essentially, the administration reestablished the old order when you had an incredible

opportunity to say, look, out-of-control finance brought this on, we have to rein in this bloated financial sector, we have to really change the way these guys do business. This is not a good path forward. We had fundamental imbalances in the economy, first and foremost the trade deficit. Why did we have that? Because of an overvalued dollar. That never gets mentioned. But the administration had no interest in going in this direction. Its not a secret. Robert Rubin was, and still is, a very influential person in the Democratic party. A lot of his close friends, allies, protgs are sitting there in a lot of the top positions in the Obama administration. So it was a lost opportunity, from one perspective, but I dont think the administration saw it as an opportunity, or one that was lost, because they didnt want to go that way in the first place.