It may not be what you think.
Dean Baker is one of the smartest and most prophetic economists in the country, and so it was a treat to hear him recently.
Baker, the co-director of the Center for Economic Policy and Research, spoke at the University of Wisconsin campus Friday on the economic crisis and the way out. He was invited by the Madison Institute and had an appreciative audience of roughly 100 people.
Baker, who was astonishingly prescient about the Great Recession, had several insightful nuggets to offer about our current economic muddle.
“The only mystery is why this is a mystery,” Baker quipped. “The economy is too simple for economists to understand.”
The weak recovery is not surprising, Baker explained, when you take into account that a good portion of the economy was tied to the housing market, which hasn’t yet fully recovered.
Before the recession, “the construction boom was at a record rate,” Baker said. “And there was a bubble-generated equity loan binge. You can’t take out equity if you don’t have equity in your home.”
The span from 1947-1979 was a golden age for workers, Baker asserted, when wage earners at the bottom and middle had the ability to put sustained upward pressure on salaries. That has vanished in the past three decades, apart from the late 1990s, he said.
“The late 1990s were an exception because Alan Greenspan, no matter what you think of him, was a non-orthodox economist,” Baker said. “Fed Reserve board members were yelling at him to raise interest rates to stop inflation. He responded, ‘I don’t see inflation.’ ”
Baker recalled an informal debate he had during that time period with two Fed Reserve board members: Janet Yellen, now Fed Reserve chair, and Alan Blinder. Both, he said, were dismissive of the idea that unemployment could dip below 6 percent without igniting inflation. Both, of course, were proven wrong.
Now we live in very different circumstances.
“This recession is the opposite of other recessions,” Baker said. “Consumers are spending a lot, but the wealth is gone. The investment share of the GDP is almost back to the pre-recession levels. It’s housing that is still depressed, and it won't get back to normal levels till 2016.”
Baker focused at length on the giant U.S. trade deficit.
“Economists don’t like to talk about it, but money spent that goes abroad doesn’t generate demand in the United States,” he said. “The $500 billion gap, which is 3 percent of the GDP, translates into 6 million American jobs.”
So how does the United States emerge from this morass? Baker had a number of ideas.
First, he said, we need a big stimulus package, not the inadequate one that the Obama Administration put together at the start of his presidency.
“There’s no argument among economists of the need of a stimulus in times of slack demand,” he said. “The evidence is overwhelming.”
Secondly, we can go to a higher rate of inflation—say 3 to 4 percent—instead of being obsessive about it and harming employment.
Third, he said, we have to make the dollar cheaper vis-à-vis other currencies in order to make exports competitive.
Baker added that we also need a work-sharing program on a national level, such as the one in Germany, where firms generally cut the hours of all workers in hard times instead of laying off some. The government then makes up for much of the reduction in wage to the affected workers.
“Germany hasn’t been a booming economy—they’ve had the same growth as the United States,” he said. “But they have a 5.1 unemployment rate, as compared to our 6.7 percent.”
Twenty-six states have work-share programs, Baker revealed, but these programs are so little known that only 30,000 workers are currently taking advantage of it nationwide. The concept has strong bipartisan support, he said.
Baker ended on an upbeat note, citing state and local drives for minimum wage increases and paid parental leave.
“There is a long way to go," he said, “but there are grounds for optimism.”