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"It's a Question of Priorities"

Friday 12 February 2010

by: Leslie Thatcher, t r u t h o u t | Interview

Dean Baker. (Photo: Polipoint Press)

On Thursday, February 4, 2010, Leslie Thatcher spoke with economist and frequent Truthout contributor Dean Baker over the phone about his new book, "False Profits - Recovering From the Bubble Economy," as well as about the ongoing economic crisis and its possible remedies.

Leslie Thatcher, Truthout: Why this book now?

Dean Baker: It would have been six months sooner if I had had my way. I had no intention of writing anything like it, but I was so frustrated by the way the economy was being discussed. The vast majority of reporters and commentators missed the whole story of the creation of the housing bubble and now, even after the fact, we're still in a situation where obfuscation rules. Take the example of NPR's Planet Money: there's a really extensive effort to make it sound like it's a supernatural force that hit us, some kind of hurricane no one could have predicted, but to my mind, it's all really very very simple. I don't doubt Ben Bernanke is highly intelligent or that Larry Summers is really very smart. But these very smart people did something really stupid and the consequences were disastrous. It's bad enough that the bubble was not talked about while it was inflating, but now, even after it has burst, there's been no acknowledgement of the high level incompetence that brought us here.

In "False Profits," you lay out detailed plans for stimulating the economy and for effective regulation of the financial sector. The administration's just-out budget, the reconfirmation of Ben Bernanke as Fed chairman and the watered-down regulatory proposals out there suggest that so far your recommendations are falling on largely deaf ears.

It's a question of priorities. When the financial industry was on its back, the authorities were ready to move heaven and earth to save the banks, and there's no question that without what they did, the bulk - Goldman Sachs, Morgan Stanley, Citigroup - if not all of the big banks and many smaller ones would have gone under. This near-disaster for the financial industry was sold as something that urgently required fixing if we were not to have a second Great Depression. That was nonsense.

Undoubtedly, it was better to keep those institutions alive, but we should have handed the money over with real conditions. We don't allow al-Qaeda to run guns in the US; we could ensure that CEOs won't get paid more than $2,000,000 or some other benchmark: that's total compensation, including incentive pay, bonuses, stock options, etc. We know how to do this. It isn't rocket science. They put in some kind of wording about compensation, but I don't believe it has any real effect.

We could have changed the way the banks do business; we could have told them they had to write down principal on mortgages. Instead, we made sure they did not suffer any consequences for their actions. The Obama administration has not pulled out all the stops for the American people the way they have for the banks.

The public understands this. The public is exactly right. They may not understand the details; they may not know what a credit default swap is or an asset-backed security, but they see that the administration has moved heaven and earth to save Goldman and they don't see them doing that for the unemployed, for those losing their homes, for those facing medical bankruptcy.

I testified in front of Congress right before Larry Summers about my right to rent idea and Summers testified afterwards and said, it was a reasonable idea and everything, but that it would "interfere with the sanctity of contract."

On another occasion, Summers was asked by a Washington Post reporter about the short work week idea that's been used so effectively in Germany and elsewhere to reduce unemployment and Summers' response was "that's not the American way."

I don't know how he decided what's "the American way," but throwing people out of their homes and their jobs, that's the American way?

Returning to your quote about the sanctity of contract, I read a recent Baseline Scenario posting that argued, in effect, that would-be Hayek followers had destroyed the sanctity of contract and thereby the foundation of free market operation by creating unintelligible contracts ...

Simon Johnson has played a great role in these debates, not something one necessarily expects from a former IMF chief economist. He has played a particularly valuable role in the debate over the role of the Consumer Financial Protection Agency.

A contract that isn't intelligible - for example, an Adjustable Rate Mortgage contract written so the borrower really cannot understand that it will automatically adjust to a rate of interest that increases his mortgage payment by so much - is not a real contract. Arguably, this kind of fraud could just be fixed through the legal system if the courts would rule that it's not a valid contract and that the banks just gave away their money to the homeowners. A proper contract is supposed to involve a "meeting of the minds." There can be no "meeting of the minds" when one party cannot understand the terms of the contract - by design.

You have argued very eloquently against the deficit reduction panel proposed by the deficit hawks under the influence of investment banker Peter Petersen. Now that's been voted down in the Senate, but there will be a president's deficit reduction panel created by executive order charged with recommending policies to achieve "primary balance" by 2015. Where will this lead?

My guess is that there will be a lot of yelling and they'll end up coming up with nothing. The whole point is to find some back door way to cut Social Security and Medicare, because they know such cuts are hugely unpopular. This is one area where the Internet has been tremendously helpful in getting the word out, in preventing this kind of backdoor manipulation that can fool even well-informed, educated people.

For example, if you call for an "across the board spending cut of 10 percent," the average person might think that's a great idea, until you say, "what about cutting Social Security by 10 percent," which was implicit in the first recommendation. So they'll put something like that on the table and hope that by wrapping it up in some attractive language, they'll be able to disguise the objective of cutting Social Security and Medicare.

Although a recession is not the time to be preoccupied with getting the deficit down, the legitimate ways to do that are simple: cut military spending, reduce Medicare expenses by a real reform of the medical system, tax the very rich.

Any package for a 2015 balance would mean big cuts in Social Security and Medicare, so I just don't think that will happen.

Can you address why and how military spending no longer pulls the economy out of a recession?

Military spending still provides some stimulus, and given the context where we're well below full employment, we do need stimulus. However, suppose we took the $700 billion defense budget and spent it on improving homes and restoring infrastructure: that would provide more stimulus and more jobs.

Much military spending is capital-intensive, that is, it pays for equipment and defense contractor executive salaries, but doesn't provide many jobs for the dollars. Also, a lot of military spending goes overseas. Our bases overseas are partially supplied from non-US sources. There are simply many military expenditures that do not stimulate our economy.

You argue and I totally agree that we should be looking at effective stimulus rather than deficit reduction, but why is it that the same people who clamor most aggressively for deficit reduction never talk about health care reform as the deficit buster it could and should be?

I don't think it's a matter of crude corruption, but they literally don't think of these things. For example, drugs would be less expensive without patent protection: we've spent $250 billion in 2009, projected to go to more than $400 billion on prescription medications by the end of the decade, amounts that could be dramatically reduced without patent protection. American doctors earn twice what Western European doctors earn, but nobody sees that as a problem. American auto workers certainly don't earn twice as much as their Western European counterparts. Partly, it's a pure class issue at work. People who make and write about policy have friends and family who are doctors or who profit in some way from drug royalties. They don't want to argue that their friends and family shouldn't earn as much as they do.

What hopes do you have for financial sector reform?

Lees verder: http://www.truthout.org/its-a-question-priorities56726