Weekly Briefing

Five basic things you should know about the state of the economy

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Key takeaways from last week’s talk by acclaimed economist Dean Baker

Economics can be a dry and difficult subject. Unfortunately, this reality has often led many progressives to simply cede the field to conservative free market fundamentalists, who typically have – not surprisingly – better funding from the corporate powers-that-be and bigger and taller platforms from which to hold forth. This problem has been especially acute in recent decades; a period during which right wingers have flooded the airwaves.

It’s gotten so bad that even many liberal politicians, who favor robust investments in public structures and systems like education, health and the environment, often make their policy arguments with an almost apologetic voice.

Fortunately, smart and increasingly influential progressive economists are fighting back to counter this trend. Spurred on by powerful research and common sense observations of the American and global economies over the last 30-plus years, these economists are giving voice to an alternative viewpoint – one in which the economy is seen as something citizens and their elected officials intentionally construct and mold rather than as some kind of angry deity that we simply endure and pay tribute to.

One of the best examples of this new wave of progressive economists is Dean Baker. Baker, the co-director of a Washington, DC think tank known as the Center for Economic and Policy Research has written several books, his latest being “Getting Back to Full Employment: A Better Bargain for Working People.” He was in Raleigh last week to speak to 100-plus attentive listeners at an NC Policy Watch Crucial Conversation luncheon.

You can watch his entire talk by clicking here (it begins in earnest at around the 9:30 mark), but if you’d like the abridged version, here are five key takeaways that caring and thoughtful people would do well to take to heart:

#1 – The persistent hard times and tepid recovery that continues to plague both North Carolina and the nation are no great mystery. As Baker explains, the downturn at the close of the George W. Bush years was brought on, first and foremost, by the collapse of the housing bubble. In the years leading up to the collapse, American housing prices had escalated at absurd and virtually unprecedented rates. Rather than more or less tracking inflation as they had for a century, housing prices shot up to unsustainable levels. This rise in prices spurred a construction boom, a spending boom (as Americans cashed in their equity) and a kind of Wild West free-for-all in the mortgage market.

When the bubble burst, as it inevitably had to, consumer wealth and demand for goods and services collapsed with it. As Baker puts it: “The problem the economy faces now is that there is nothing to replace that demand.” To those who ask “What’s wrong? Why the slump?” Baker replies “Why would you expect otherwise?

#2 – Unemployment data confirms that things aren’t going to get significantly better soon. While the official unemployment rate is down substantially nationwide since the nadir of the Great Recession (just as we’ve been hearing a lot in North Carolina of late) actual employment numbers remain notably weak. The fall in the rate remains attributable in large measure to the fact that many, many people have simply abandoned seeking work.

This is a bad sign for the economy. As Baker and his co-author Jared Bernstein noted in their book “Getting Back to Full Employment,” it was the genuine full employment of the late 1990’s – a period in which the real rate fell to below 4% that marked the last time (and one of the few times in recent decades) that lower wage workers were actually seeing hikes in their incomes that tracked the growth in worker productivity. In other words, not only is near-full employment good because it means more people have jobs; it’s good because it gives workers the chance to bargain for real growth in wages and benefits. If the U.S. could lower the real unemployment rate by one percent for a decade, wages for lower income workers would rise by 10% or more.

Baker also notes that some of the problems in the U.S. employment picture are attributable to the fact that older workers are staying longer in the workforce because they haven’t been able to afford to retire or to do without health insurance (something the Affordable Care Act is at least partially addressing).

#3 – Consumption, business investment and housing construction are not going to rise significantly anytime soon. Baker notes that many observers argue that Americans are not consuming (and thereby driving a more robust recovery) simply because they are pessimistic. The key, they say, is to address that pessimism. Baker says this analysis is wrong. Yes, people are consuming less than they did at the height of the housing bubble, but this is because they have roughly $6 trillion less wealth in the form of housing equity. When consumption is compared to wealth, it remains at very respectable levels.

Similar conclusions can be drawn when it comes to business investment. Though down slightly, current business investment is basically in line with historic levels. Thus, a huge spike is unlikely merely because of some shift in attitude or, say, cuts in tax rates.

It’s the same story with housing. Vacancy rates remain high so the idea of a construction boom leading a new economic resurgence is unlikely. At some point, as population grows, construction will pick up gradually, but don’t look for any big spikes.

#4 – The big villain in the story today is the giant American trade gap – Because the U.S. buys much more abroad than it sells, it is creating demand for goods (and services and workers) there rather than here. In the late nineties, the U.S. filled this gap in demand at home with the flawed mechanism of the stock bubble. In the last decade, it was the housing bubble that filled the gap. Is there a way to solve the problem without creating another unsustainable bubble? Baker says there is, but that both potential solutions are tough sells politically.

The first solution is to run larger federal budget deficits. A federal infrastructure program of $300 to $400 billion per year would do wonders to jumpstart the economy. Baker says the obsession with the deficits is overblown and that the failure of the Obama administration and Congress to produce a sufficiently large stimulus package back in 2009 and 2010 explains much of the current economic malaise. That said, of course, political support for larger deficits seems unlikely to materialize – especially now that the deficit is shrinking rapidly.

In light of this reality, Baker say the only other realistic solution is attack the trade deficit directly through trade negotiations that would lower the value of the dollar. If the U.S. negotiated such an arrangement, the price of domestic goods would fall and the price of foreign goods would rise. Demand for domestic products would surge as would domestic production and employment.  Here in North Carolina – the home to countless outsourced factories – this argument makes obvious sense.

#5 – The chief roadblock to lowering the dollar and the trade gap is the corporate lobbying machine – Unfortunately, and as you might have guessed, many giant American corporations are resistant to such an approach. Wal-Mart and other giant retailers want to keep their flow of cheap, foreign goods. Computer and drug companies want trade negotiators to press for other concessions from China and other partners over things like patents and trademarks. Thus, while lowering the dollar is always on the Obama administration’s “to do” list, it never rises to the top.

Summing up

The good news in Baker’s story is this: The U.S. has the tools at its disposal to address its economic malaise. Economies are complex beasts, but they are not divine; we know much about what makes them tick and have the capacity to construct them in such a way so as to benefit the masses. What we lack right now is the political will to overcome the power of the corporate lobbying establishment and the market fundamentalist ideologues that do their bidding. Let’s hope that, as more and more people hear Baker’s common sense analyses, that’s an equation that begins to change.