A conversation with the author and co-director at the Center for Economic and Policy Research.

Question: How has Obama done so far?

Dean Baker: It’s a very mixed picture. I mean, he’s done some things that are very big, very important. The stimulus package got passed in his first month in office. That was important. It’s a big step towards combating the downturn. He’s gotten healthcare on the agenda. He has plans in his budget to start on healthcare and he’s worked with Congress to have it included in the reconciliation process which means the Republicans can’t filibuster it. He’s also put forward ambitious plans on energy, which is part of the stimulus. So he’s done a number of big, important things: extended employment benefits, changed the formulas so that a lot of people that had not been covered previously are now covered and provided healthcare benefits. People who are unemployed will have 65% of their healthcare benefit covered by the government, which makes it affordable for a lot of people that could not otherwise afford health insurance once they’ve lost their jobs. So a lot of good things.

Where I give him bad marks is his dealing with the financial system. We had a really big problem with finance run amok. That’s what got us here. That’s what led to the downturn and it has to be reined in and he doesn’t seem prepared, at least he hasn’t seemed prepared at this point, to really take the hard steps to rein in Wall Street. And what I worry is that we’re going to get out of this, one, costing the tax payers huge amounts of money because we’re looking at spending at least hundreds of billions, and quite possibly over a trillion dollars to bail out the banks. And, two, basically, leaving them in shape, leaving them as they were being prepared to run amok again. So, I think that would really be unfortunate. It’s a really big drain to the tax payers. It’s a huge amount of money. We’ve had big fights over sums that were less than a hundredth as large, and then on top of that, not to wrestle back the sector when it’s really crying out for serious regulation. It really has to be reined in. Wall Street has to serve the rest of the economy. When you have an economy that’s being run to serve the financial sector, you’re asking for trouble.

Question: Does Obama mark the end of Reganomics?

Dean Baker: Well, it’s a mixed picture. I don’t think it will ever fully end. I mean, Reaganomics, to put it simply, was trying to get low taxes for wealthy people. And [wealthy people] are still there pushing for low taxes. So President Obama said, and he’s expected to carry through on this, that he will restore the Clinton era tax rates so high-end people will pay somewhat higher taxes. But it’s not as though the people pushing for lower taxes are about to go away. And basically, it’s going to depend on President Obama’s performance: if he does well in office, if in 2012 we see the economy recovering—I don’t expect it to be fully recovered; I don’t think anyone does—but if the unemployment rate is down and heading in the right direction and if the economy is growing strongly, he’ll get reelected and that’s going to push back the people who want to have lower taxes. But they’re still there.

Now, as far as the larger, pro-business agenda, all that’s very much up for grabs. Again, I was referring to Wall Street. Is Wall Street going to be reined in? You could say that’s part of Reaganomics, i.e. Wall Street running amok. I would. And we don’t know that at this point.

Healthcare reform is a huge issue. I think President Obama’s pushing the right way but it’s far from a done deal that he’ll get any healthcare reforms. It’s certainly not a done deal that he’ll get, to my mind, effective healthcare reform which would involve, first and foremost, a creation of a good public plan that will compete with private insurers. So there are a lot of question marks there. He’s certainly taking a different path than what President Bush did or what Senator McCain would have done if he had become president but it’s way too soon to pronounce the era of Reaganomics dead.

Question: What financial reforms does the Obama team favor?

Dean Baker: As best I can tell, their view is to basically set things back to where they were before the crisis. They’re talking about some pro forma changes but it seems to me very little real substance will change if they have their way. Now, I don’t take it as a done deal that they’ll have their way because obviously there’s huge anger at the financial industry, at Wall Street, and much of the public including some people in Congress would like to see things change. But the reality is that even in spite of what we’ve just seen, Wall Street remains an incredibly powerful lobby. They give huge amounts of money to candidates in both political parties. So I think it’s very much up in the air. If I were placing a bet simply to try and win some money, I bet that not much changes.

Question: Is Obama investing enough in Green technologies?

Dean Baker: One of the things I should’ve said in there is getting money to state and local governments because they’re making cutbacks right now. And that’s the quickest way to boost the economy, not to have the cutbacks. But in terms of infrastructure in green tech, there’s a lot of good things that we can and should do, but the problem with that as stimulus is that I’m not sure we could do much more than we’re doing at the moment. So basically, Obama’s team—and I think they’re pretty conscientious about this—they looked over the budget and they tried to think of everything reasonable they could spend money on. Not to say they got every last thing but they tried to look at everything reasonable that they could spend money on in 2009 and 2010 and they threw out as much money as they thought they could get through Congress.

There are some things I shouldn’t say they necessarily overlooked, but things they might have decided otherwise and perhaps made the wrong decision. One thing that jumps out at me is why not subsidized mass transit? Suppose we just said that we’ll subsidize every ride that anyone takes anywhere in the country. It would be a little more systematic than this but say “We’ll pay a buck a ride.” Well, that will give people a lot more incentives to use mass transit and also put money in the pockets of people who use mass transit who tend to be lower and middle income people. That would have been a good thing to do. It would not have been a huge amount of money, probably in the order of 15 to 20 billion dollars a year, but that would’ve been a very good thing to do. So there are some other things like that.

But in terms of having some massive green program, we could have gone on a much larger scale than what President Obama did. Now, if we want to lie something out for 2012, 2013 or 2014 then that might well be worth doing. And frankly, given the state of the economy, I think it’s extremely unlikely that we’re going to be fully recovered or anything close to that by 2011. So if we look to spending that took a little bit longer to roll out, I think that really is fine. So I think we should look to do some more by way of conservation, promoting alternative forms of energy than is in the stimulus package. But I don’t think that will be the major source of stimulus for the economy.

Question: Should we have let insolvent banks fold?

Dean Baker: In an orderly way. I mean, we did have a problem. If you go back to September of 2008 when Lehman went under and the financial markets froze, that was a problem. I wouldn’t say that was a good thing. We don’t want to see that happen again. I’ll say 2 things about that.

One, that was not the end of the world—I don’t want to be there again, I’ll be real clear about that, I don’t want to be there again—but it was not as though the world was about to end. We would’ve been in an unpleasant circumstance where if things kept going down that path, the Fed basically would have had to step in and take over the banks. They actually had a plan to do that in the ‘80s when Latin-American debt had left many of the big money center banks on the edge of insolvency. And as I heard from the former head of the FDIC, the Fed at that time had a contingency plan that, had Mexico or one of the other big debtors outright defaulted, it would simply step in and take over the banks. Presumably, we have looked at that sort of situation. That would have been good but the idea that the economy just would have come to a screaming halt and that we would all be sitting here without being able to use our credit cards, not get access to our money in our bank account—that might’ve been 24 hours, something like that, a scary period but the economy would not have ground to a halt. So the worst case scenario, just to be clear, it was not that we would all be sitting here with a 21st century economy but no means of payments. That would not have happened.

The second point is we have a lot of mechanisms, a lot of safeguards that were put in place post-Lehman. So we now guarantee deposits up to 250,000 dollars. We guarantee all money on interest bearing deposits. We guarantee money market mutual funds. So there are a lot of safeguards in place today that were not in place back in September of 2008. So if we have a controlled bankruptcy of a Citigroup, of a Bank of America, I’m fairly confident that we can get through it. I can’t say for certain that we won’t have the sort of panic that we had back in September but I think there are good reasons to believe that we won’t have that. And again, even in that very worst case scenario, which I don’t think would happen, but even in that very worst case scenario, we are prepared to deal with that with extreme measures, which, again, none of us want to see. But I think the risk of that might be better than just giving as much as a trillion dollars to the banks.

Question: Why didn’t economists predict the housing bubble?

Dean Baker: I think what you have is a situation where there is enormous pressure for conformity and certainly among economists. So when you had top economists, certainly Federal Reserve Board Chair Greenspan and Bernanke, his successor, saying there was no bubble and many other prominent economists agreeing with that view, most economists didn’t want to step out of line and contradict them. Or for the most part [economists] probably never even looked at it closely. I was out there talking about this since 2002. There are a few others, not a lot, but we are easy enough to ignore. So I think most economists are relatively narrowly focused on their careers and picking a fight with the Federal Reserve Board Chair generally isn’t the best way to advance your career.

To take the flipside of this, if you ask who has suffered a price, who has lost their job, or let’s put it more narrowly: who’s missed a promotion because they didn’t see the housing bubble? You will probably be hard pressed to find anyone. So looking at economists the way economists would look at other people, you would ask: what is the structure of incentives? Well, the structure of incentives that go around talking about a housing bubble just doesn’t pay because, one, you could be wrong. I was pretty confident of what I was saying but none of us are perfect so you could be wrong in which case you’ll be a laughing stock. And in the meantime, if you go the other way, if you just say the same thing that Alan Greenspan says, no one holds it against you. So you take a really big risk by stepping out of the line. There is very little obvious pay off. I mean, I get some more interviews or whatever but I haven’t gotten rich off this. And if you just say the same things as everyone else, you basically bear no risk and no consequence.

Question: Why aren’t investment firms using TARP money to create new loans?

Dean Baker: It doesn’t surprise me they’re not lending out the money. We were given many, many different explanations for the TARP [Troubled Asset Relief Program] at the time they were trying to push it through. Basically, they were throwing everything against the wall and seeing what would stick. What made sense was that you had banks that were on the edge of insolvency and needing money to keep from going under, and I think that was true. And in that context, it’s not the least bit surprising that they’re not anxious to lend money. They have to build up their lost reserves. On top of that, one of the big reasons why they’re not lending money is that there aren’t good debtor options out there. So they’re not seeing people come to them who look like a good credit risk right now so they’re going to be very hesitant to lend money. So that’s not all that surprising to me.

Now, Goldman Sachs’ story is one that’s really amazing. They’re saying that they don’t want [TARP money], that this is no way to run a business. That’s what Lloyd Blankfein, the CEO, said at Goldman Sachs. Well, no, it’s not. But on the other hand, you just took $12.9 billion of public money given to you through AIG. You did business for the bankrupt company so you’re out of luck there. But the federal government stepped in and said, No, we’re going to honor AIG’s obligations even though we have no legal or moral obligation to do that. And we handed them $12.9 billion through AIG no strings attached. On top of that, he borrowed $25 billion with an FDIC guarantee. I haven’t looked at the market spreads closely but I have to believe that must save him at least two percentage points against what he would have to pay if he didn’t have a government guarantee, so that comes to $500 million a year. On top of that, he has access to several different Fed lending facilities. We don’t know how much he’s borrowed from there but what that means is he could count on getting money from the Federal Reserve Board at a lower rate than he would pay through the market almost without limit. I assume at some point Ben Bernanke, the Fed Chair, would say, I’m not going to lend to you, but certainly you can get tens of billions of dollars, if not hundreds of billions of dollars without limit. So he’s telling us, I’m happy to get money through all these three channels that have no strings attached but when it comes to your TARP money, there’re strings attached, so, no, I don’t want it. Well, yeah, I understand him wanting to do that but I don’t have much sympathy for that. So I’m more inclined to say, fine, give up all your money, give us back the $12.9 billion, repay those loans that you took out with the FDIC and swear off going to the Fed windows. Then [you can have] no strings attached. But this is classic nanny state. He wants the money, he doesn’t want the strings. We would all like to have that but most of us aren’t CEO at Goldman Sachs.

Question: How is Wall Street changing?

Dean Baker: Well, it definitely will undergo a downsizing simply because the climate doesn’t exist for it to maintain its preexisting form. You saw two big investment banks, Bear Stearns and Lehman Brothers, go under. The sorts of risks that they had been taking simply aren’t viable because people won’t lend them the money. The key part of the story of what was going on in ’04, ’05, ’06, up to the crash in ’07 or ‘08 was that you had investors all over the world who trusted Wall Street. They believed the investment grade ratings on the mortgage-backed securities and other instruments coming out of Wall Street. They don’t believe [Wall Street] anymore. So without having basically an endless supply of gullible investors, Wall Street has no choice but to downsize. So it is certainly going to be smaller at least for the immediate future. But the question is whether the structure is going to change. And that’s what I’m not sure of. If the structure doesn’t change then what I worry about is, overtime, we just get back pretty much to where we were. And that’s not a good place to be.

Question: Will executives self-regulate their pay?

Dean Baker: Well, it’s a good question and I’m not sure at this point. I don’t think that’s their intention. There was an article in The New York Times just a couple of days ago talking about Goldman Sachs. It was about Wall Street more generally but Goldman Sachs was the real model: they’re basically back to where they were in terms of salaries to the pre-crash days. They are pretty much what they were back in 2007 so they don’t intend to change. So if there’s not something that forces it on them, they’re not going to change. Now, it could be forced in different ways.

On the one hand, you have a lot of stockholders at these places that are very angry and with good cause because they were paying out very high salaries and they lost their shirts. The value, mostly stocks, certainly of Bank of America and Citigroup is down by 90%. It would be down probably a 100% if weren’t for the government bailouts. But yet, the people who nearly put these companies out of business, they walked away with huge salaries and many of them are still there. So stockholders may change on their own. Part of the story with many of the hedge funds is they got their money from state and local pension funds, or in some cases, private pension funds that are basically being ripped off because in many cases they weren’t getting returns to justify that. The story was: give us your money, will give you this 20% return and you shouldn’t mind that we’re walking away with salaries of hundreds of millions of dollars a year. Well, they weren’t getting 20% returns. A lot of that was bogus and certainly through the crash many of them did very poorly. So basically, they’re ripping off pension funds. One hopes that these funds will turn around and stop doing it.

But you might well expect, and I would like to see government regulation. The simplest regulation I could envision is changing the rules of corporate governance. Again, the government sets rules of corporate governance now so it’s not as though we would be doing an intervention we don’t currently do. We just need different rules because they’re not effective. Many of the rules of corporate governance are designed to protect minority shareholders. We can’t [protect] 50.1% of IBM and tell the other 49.9% they’re out of luck. They protect the minority shareholders. Well, they also have to protect the shareholders against abuses by the executives and they’re clearly not doing that right now. Basically, the top executives appoint the boards who are then very happy to approve very high pay packages for the top executives. It’s not a big surprise. That’s the way things work. So what you have to do is try and redress that balance. The best thing I could think of is simply to require that pay packages and compensation packages to the top paid people get sent out to shareholder approval at regular intervals: three years or five years. And also, that this be a serious vote: that non-return proxies—this is a scam with corporate votes that they’re allowed to count non-return proxies as supporting a management position. I always say it’s like we had our elections for Congress and everyone that doesn’t vote is counted as voting for the incumbent. I mean, it’s very much a rigged election. It should be a real election. You’re only going to count the votes that are returned. And if they don’t approve your pay package, you have to come back with another pay package.

Question: Will the unemployment rate get worse?

Dean Baker: I’d be very surprised if we’re not looking at an unemployment rate over 10% by the end of the year and quite likely crossing 11% sometime next year. In a good case scenario, we’ll start to see the unemployment rate coming down in 2010 but it’s still likely to be in double digits by the end of 2010. But that’s what is really front and center. Now, how long does it take us to get back to a more normal unemployment rate? That’s going to depend a huge amount on policy. I think we very badly need another stimulus, probably even larger than the last round. At this point, there’s little political will in Congress and certainly in the Obama administration to take the lead on that. But my hope is that as the economy continues to deteriorate—I don’t hope that it continues to deteriorate but I think it will; there are no two ways about it—you will see more pressure on Congress to do something about it so that by the summer you do have people talking about another round of stimulus. So if that happens, we do get a big boost to the economy. Then, the economy could start to recover more quickly. And perhaps next year we will see the unemployment rate under 10% by the end of 2010.

Question: How would public healthcare boost the economy?

Dean Baker: Well, the reason I say national healthcare is that, for stimulus, you want to be able to look somewhere you could spend a lot of money quickly. And healthcare has the advantage that it’s a huge, huge sector. It’s a $2.4 trillion industry which is about 17% of the economy, so you could reasonably look to expand that and you could look to expand it relatively quickly. The way I proposed doing that was an employer tax credit where we have around 30, 40 million workers that don’t get employer-provided health insurance. So if we give employers a tax credit of, let’s say, $3,000 a worker to give those workers healthcare coverage then my guess is that an awful a lot of them would do that. What that would do fairly quickly do is, on one hand, it would employ people in the insurance industry which is not something I’m anxious to do but a stop gap is a good thing to do. It would give people healthcare, employing people in the healthcare sector and to some extent, of course, these people, if they don’t have insurance, they’re paying it out of pocket. So what that would mean is they will pay much less out of pocket, they’ll have more money to spend and these tend to be more modern income people so they are likely to spend it. So I thought that could give a good boost to the economy. Now, to actually transform healthcare, we have to go further. I want to see a public plan that people could buy into but the idea would be, let’s take advantage of the fact that we actually just need to create demand. So in a certain sense, we don’t mind the waste. Waste right now is fine. But what we could do is, one, give people coverage at the word go and then, say, 2011, 2012, presumably we’d have a national healthcare plan ramped up that people could buy into if they chose. And then, we’d have a mechanism in place that could start to control cost. So I think that would be a very good way to look to do something. It would be a short-term boost to the economy and really jumpstart us towards national healthcare insurance, which has to be top priority in anyone’s, to my mind, on anyone’s agenda right now.

Question: How else can we stimulate the economy?

Dean Baker: The other good way to do stimulus, big stimulus I should say, is what I’ve called a pay-or-play tax credit, pay-for-play I should say, which would give employers a tax credit for providing workers with paid time off. So the way it would work is we pick a sum of money, let’s say $2,500 per worker, and we tell employers that we’ll pay them to offset any amount of paid time off that they give their workers up to $2,500 a year. And the paid time off could take the form of paid sick days, paid parental leave, paid vacations or shortening the standard work week. And what that would do is, on the one hand, it would directly get money into workers’ pockets but more importantly we’re giving a benefit that people are likely to value. We’re way behind the rest of the world in this front. Everywhere else, if you look to Germany, Britain or any country you pick, they all have paid sick leaves, paid vacation and paid parental leave. We’re really the outlier in that way so it jumpstart us that way. But in terms of the economy and stimulus, let’s say we got employers and 100 million workers to take advantage of this and they shorten the work time of the workers an average of 5%. We’re seeing just as much demand as they did previously because the workers have just as much money in their pocket as they did previously but they get 5% fewer hours. In principle, what they’re going to want to do is hire 5% more workers. That translates into 5 million jobs. So the nice part of the story is that instead of 5 million people being unemployed, we have a 105 million people now employed and they’re all working much shorter hours and taking, instead of unemployment, leisure time, paid vacations, paid parental leave or whatever it might be. So I think that’s a very good way to deal with this basic problem. We don’t have enough demand in the economy at the moment. One, we do want to increase demand but, two, why not just let everyone work shorter hours?

Question: How should income tax be reformed?

Dean Baker: Well, I think restoring the tax rate to the Clinton era rate is a good one; maybe go a little bit higher. I’m worried about going too much higher because I think there is something, not so much the disincentive effects. The classic story that the conservatives like to tell us if we tax people 50% then they wouldn’t work. I don’t believe that. I just worry more that you create a lot of incentives for gaming, for tax shelters. So I don’t mind the Clinton era top rate of 39.6% on the highest income people. You can certainly knock that up two, three, or four percentage points and I don’t think you’re going to have big problems. But if you push it too much higher, I think you would have problems. I would want to get rid of a lot of the unfairness in the tax code. One of the things that jumps out at me that President Obama actually is addressing in his budget is what I call the fund manager’s tax break, where if you run an equity fund or hedge fund, you pay taxes at the capital gain tax rate rather than the normal income tax rate. That allowed many of the wealthiest people in the country to pay a tax rate of 15% as opposed to a firefighter who pays the 25% tax rate. That was pretty unfair so I would like to get rid of that along those lines. I actually would like to see capital gain income tax at the same rate as ordinary income as well, which was actually a Reagan era form. So that’s not that radical a notion from 1986. They had capital gain income tax at the same rate as normal income. So those would be some of my priorities.

The last one that I think is a really good way to raise money, both since it raises a lot of money and also reins in the financial industry, is a modest tax on financial transaction, stock trades, sales of options and futures. If you had a very modest tax, England taxes the stock traded at a quarter of 1%, so if you buy a share of stock, you pay a quarter of 1%, same when you sell it. They raise the equivalent relative to their economy of $30 billion a year on that. I would apply it to broader instruments. I’d also have an options, future, credit default swaps, the whole range, lower rates on those instruments but the whole range of financial assets. You could easily raise over a hundred billion dollars a year that way and that’s a tax that would have a minimal impact on people who are investing. Again, they won’t like the tax. No one ever likes to pay taxes. But no one who’s looking to hold stock for five or 10 years is going to be that affected by paying a quarter of 1% when they buy and a quarter of 1% when they sell it. But they will have a very big impact on the people who are actively trading, buying at 2:00, selling at 3:00. And also, the other big impact will be on the financial industry. It will take a chunk out of the hide of the financial industry which I don’t have a problem with. It has grown too large. This is a very good way to rein it in and the way I think about it is that if you go to gamble at Atlantic City, you get taxed. You pay about six percent tax on your gambling. Not on your winning. Just on your gambling. We could do the same on Wall Street.

Question: How can we leverage immigration to restore the economy?

Dean Baker: Well, there are a couple of points in immigration. First off, we have to be clear what’s going on. We’ve had a policy of people coming over to work here and that’s been an explicit policy even though it violates the law. And the idea was that gave cheaper labor than you could’ve gotten by hiring domestic workers. And that has two effects. Obviously, we have all these people come in from poor countries working at lower wages. And secondly, it does have an impact on the less educated portion of the work force. I know there’s some economic literature that finds mixed results but I’m inclined to agree with those that do find an effect on the face of it. When you talk about having more than 10 million workers come and competing with you, it’s a little hard for me to believe that it doesn’t have a downward impact in your wages. But anyhow, what I would say is that we do want to give those people full rights, let them become citizens if they choose, let them have green card status, et cetera. We want to ensure they have full rights just like workers in the United States and enjoy being in a position where they could improve their situation on the job and improve their living standards. You are going to need to regulate immigration going forward, which has to be done at the employer level: there have to be serious sanctions.

Now, the high-end workers: we have, in fact, had employer sanctions. You can’t have hospitals and law firms and universities just bring in huge numbers of immigrants and undercutting their existing workforce. That’s actually against the law and no one really tries that because if they did they would be cracked down on. So you don’t get Wal-Mart university or Wal-Mart hospital bringing in a huge number of professionals from India or some other country. And I think that’s actually unfortunate because I think it will benefit the developing countries, benefit the United States to allow more free flow of highly skilled immigrants. And it will benefit us because we would get—it’s exactly the same argument we make about trade, except it will be at the high-end rather than low-end—we would get medical services, legal services on down the list at much lower prices if we allow people from developing countries who are willing to work for lower wages because their wages in their home country are so low that it will still be a big jump up if they work for two-thirds the wages that our professionals receive. So we will get a huge benefit that way. Those workers themselves hugely benefit and there was a huge increase in living standards. And we could structure it so that the [home] countries benefit. We in effect would have some sort of tax associated with basically repaying them for their training cost in India, in China, whatever country it might be so that they might be able to educate two or three doctors for every doctor that came to work in the United States. So I think we could structure this in a way—economists like to talk about trade as being a win-win. It’s often not that way. You have a lot of losers in that story. We could structure this in a way that actually is a win-win, where people in the United States would gain, the immigrants coming to work here would gain and the home countries gain as well if we ensure that a portion of those wages were repatriated to educate more workers.

Question: Does bankruptcy law need reforming?

Dean Baker: Well, it’s interesting. It seems you’re referring to the bankruptcy reform passed a few years ago. It’s striking that one of the issues that’s been hotly debated in Congress is an effort to change bankruptcy law so that people who are going into bankruptcy could have the terms of their mortgages reissued. Right now mortgages enjoy privileged status: that contract alone cannot be reworded by a bankruptcy judge. They could write down credit card debt, car loan debt, any other form of the debt but residential mortgages cannot be rewritten. And one of the arguments that the industry, the banking industry, has trotted out is they’ve talked about the sanctity of contract, that we don’t want to create uncertainty. Now, back a few years ago, they changed the bankruptcy law to make it much harder for people to declare bankruptcy. Then, they actually did reword contracts so you could’ve borrowed money under the old bankruptcy regime where it was, I won’t say easy, but at least much easier to go into court and have your debts annulled. And then, they change the terms of the contract on you so it became much, much harder. So this inconsistency is striking, but I would argue that, in general, you do want people when they’re in over their heads to be able to go into bankruptcy and alleviate much, if not all their debt.

There are two reasons for this. One is a moral issue: typically people who—and we have data on this—end up going into bankruptcy, it’s not that they were irresponsible. Instead, they’ve lost their job, there’s a family break-up or there’s a health problem in the overwhelmingly majority of cases. Really, people are generally falling in bad straights.

The second is an economic consideration. What we’re saying if we have the punitive bankruptcy laws that we really have now is that we’re, in effect, imposing large taxes. We’re having the government chase after people to tax their income, often at very high rates. And all these people complain about taxes. Well, it’s exactly the same thing if you’re having your wages taxed to repay old debts. So rather than having the government chase after people to force them in five, 10, 15 or 20 years to pay debts that they incurred, maybe when they’re very young, I think it makes much more sense to say, if you end up in bad straights, you’re not going to have to repay the debts. And let’s flip this over. No one gets into debt like that unless someone lent them money. So what this means is that there was a bad decision on the part of the lender. They judged credit risk poorly. And thinking from a free market standpoint, if you judge credit risk poorly then maybe you’re not a good business person and maybe you shouldn’t be in business. So in effect, what we said with the change in bankruptcy law is we are rewarding bad business practices. You had a lot of businesses that had made loans to people who couldn’t afford to pay them back and rather than telling those businesses to next time be more careful who you lend money to, we said, we’re going to help you get that money back. And I think that’s absolutely the wrong way to go.

Question: Do small businesses deserve special protections?

Dean Baker: I take a very mixed stance on small business. I think we want people to be able to start business. We want to create opportunities for them and make sure that there is a level of playing field. But I think in many ways, we’ve gone overboard. There are all sorts of provisions in the tax code on various regulations that have exemptions for small businesses: special loans that are available that amount to very large subsidies. You have to ask yourself, how much money do we want to give someone just because they’re opening up a business? [Opening a small business is] a reasonable thing for you to do but should tax payer, should an ordinary worker, should someone who’s working at a clothing store have to pay more money in taxes because someone across the street from them opened up a business which might well go under? For a lot of people opening a business is a bad choice for them. Most small businesses fail. I understand people wanting to give it a try and everything but we’re not necessarily doing them a favor to say, take all your life savings, borrow to the hilt, and then struggle for three years and end up with nothing. We’re not necessarily doing them a favor. So I just say we need clear eyes on this.

Some of the practices I mentioned in the book, we exempt small businesses from safety regulation. I was particularly struck by this with mining: if you’re a mine owner and you’re below a certain size, you’re not subject to safety regulation. I’m no more anxious to see a miner die in a small mine than in a large mine. I mean, it just doesn’t make any sense to me. So you have to look at this with clear eyes. So we do want people to have opportunities to open small businesses. I think it’s a good idea to have special loan facilities to be sure they have adequate access to capital. When we award government contracts, we should make sure that they’re accessible to small businesses. These sorts of things that we do, we should do more of that are reasonable in terms of allowing a level playing field between larger and smaller businesses. But on the other hand, I think we often have gone overboard. It doesn’t make sense to tax people to give money to someone just because they’ve opened a small business. That’s not a badge of honor. I don’t think anyone should pay higher taxes just because their neighbor opened a small business.

Question: Is social security going bankrupt?

Dean Baker: Well, it’s only threatened politically. There’re a lot of people who want to cut it back, but in terms of the viability of the program itself, we don’t have the latest, post-crash from the Congregational Budget Office. But the projections that they put out last summer show the program could pay all benefits through the year 2049 with no changes whatsoever. And even if we never did anything, it could still pay about 75% of projected benefits, which will be higher than what retirees are getting today. So what that would mean is if we just put the thing on autopilot, never paid any attention to it at all, come 2060, 2070, 2080, retirees in those years will be getting considerably more money than retirees do today. So this idea that there’s some huge problem is simply not true.

There’s a long range problem. It stands from the fact we’re projected to live longer, which hopefully will be true. So somewhere down the road we’ll have to make adjustments and that could take the form of raising taxes at some point in the future or we might decide to raise retirement ages. Maybe people have to work a little longer in their life, but it’s a distant problem. It’s very different from the way it’s being portrayed that here’s this program that’s about to go bankrupt. And it’s particularly pernicious that people are talking about doing something to it now. Because the workers in their 40s, their 50s, even 60s who are about to retire, they are just seeing everything they work for disappear. If they had equity in their home, much of that equity has just disappeared. They had put money in the 401-k. Most people, of course, haven’t put very much in 401-k retirement plan but let’s say they had, they just lost 30%, 40% of that. So the idea that you will take money away from these people at the age of retirement who just lost trillions of dollars, that’s really pernicious. And it’s remarkable to me that there are so many politicians that are willing to get out there and say that. Actually, I shouldn’t say that because they usually don’t put it in those terms but that is what they’re trying to do. So it faces a very real political threat.

Remarkably, the biggest threat is from the people who brought on this disaster. Look at Peter Peterson, certainly a big advocate of social security benefits. Here’s a man who worked on Wall Street, got very rich working at Wall Street and he’s using much of the money that he earned to try to undermine social security so that other people can’t enjoy a decent retirement. So his effort to take away the money from people who’ve worked for this is incredibly pernicious. They paid in for those benefits. We’re not giving them a gift. They paid for them. They paid taxes for them. And secondly, that the people are leading the charge are exactly the same people who brought on this economic disaster.

Question: Should we follow the European economic model?

Dean Baker: Well, I don’t know if there’s a single model we want to learn from. I think you want to take bits and pieces from a number of different models. But if you look to Europe some of the things you could say pretty much across the board and I’m thinking of Western Europe obviously, countries that are closest to US in living standards, that they do work many fewer hours. And that is something that people there value. I know many Europeans and I think many of them don’t even believe me when I say that people here don’t have vacations. Obviously a lot of people do but there are many, tens of millions of people that don’t and there’s certainly no guarantee of a vacation. So paid time off [is very valuable] where people know they could get four or five weeks vacation, which is absolutely standard in Europe. Denmark has 6 weeks. So I think that’s something that’s very valuable, giving people time off.

And parental leave: Conservatives like to see women stay home with their kids. I don’t care whether its women or men but the idea that people have that option, I think that’s very good because it’s a real strain for people to juggle a job and work. So that makes a big difference.

On energy use across Europe, average energy use and greenhouse gas emissions are about half of what they are in the United States. So even though they have very comparable living standards, they use much, much less energy. Part of that is that there is more mass transit. Part of it is that it is more concentrated, people live closer together. People wrongly say the United States [is less concentrated] because we’re such a big country. That’s really not the case. Obviously we are a big country but that’s not why we’re so spread out. We have land use policies that basically promote sprawl and in Europe they’ve quite consciously designed policies that have been intended to fight sprawl. I think it would make sense for the United States to do that as well. Make it easier for people to live in the cities. Make nearer suburbs rather than build out 90 miles and have people commute an hour and a half each way each day. So there are a number of different practices that we could take from across Europe. And again, I don’t think there is any single country we would want to hold up as a model but I think there are common practices that take different forms. We could look to Europe, and Canada also. It’s not just Europe. We really are the outlier among the wealthy countries in a wide range of areas.

Question: Is the World Bank a force for good?

Dean Baker: Well, the World Bank has often played a fairly pernicious role over the last few decades, really supporting a lot of bad development projects. A great example here is building an oil pipeline in Chad where everyone knew that the government of Chad was corrupt. The World Bank made a big point of insisting that they were going to have all these safeguards to ensure that the money from the pipeline went to helping the poor people in Chad, one of the poorest countries in the world. And lo and behold, what happened was the money went to the government that used it to buy arms. That’s just an example. It had things like that all over the world.

They’ve also promoted privatization in a wide range of areas. I think it was often inappropriate. One I am most familiar with is the social security in Latin-America where they’ve gotten almost every country in Latin-America, Brazil is the big exception, to either wholly or partially privatize the social security system. And almost invariably it’s led to very high cost, poor coverage rates—really not very good outcomes. And they’ve done it with water systems. So they very much promoted an agenda which certainly serves a lot of corporate interest but often has not served the people who they are suppose to serve, which is the poor of the world. So in principle the World Bank’s mission, if you go into the building, it’s really kind of remarkable because it’s a very opulent building. No one objects to people having nice offices but it’s really quite opulent with this big fountain and big atrium and up on the wall, it says, “Our dream is a world free of poverty.” It’s amazing they did that. There’s no sense of irony to that? Anyhow their mission’s a very noble one. Unfortunately, I just don’t see them having done very much to advance it over the years

Question: How do you describe your economic views?

Dean Baker: I definitely say I’m progressive. In terms of some of the roots, they are very much coming out of Keynesian tradition. I think that the main economic problem we often face is shortage of demand. In contrast with the conventional economic view certainly in this century, the 20th century as well, of seeing the main shortfalls being scarcity. I think we do see scarcity at times in terms of too much demand, too few goods and services. But I think, more typically, we actually do see too little demand. I think that is more typically the case. But the other place where I think I differ with some of my friends, which really just comes from thinking through things is that I think it’s important to distinguish between wanting a role from government as an end in itself as opposed to seeing the government as a stearer of markets. And I think a lot of progressives have wrongly created this dichotomy between progressives liking government and conservatives liking markets. And what I’ve tried to argue in much of my writings, certainly the book “The Conservative Nanny State”, was that conservatives really do like the government. They want the government to play a very big role in the economy but in effect, they want the government to set up structures so that income flows upward. And what I’ve tried to look at is how we can undo that, how we can reverse that. So how we could have the government basically structure markets so that income flows to those at the middle and bottom. And that doesn’t necessarily mean a bigger role for government than what the conservatives envision. In some cases, it might mean a small role. I talk about copyrights and patents. Well, copyrights made Bill Gates a very rich man. I don’t want copyrights but copyrights a real big government intervention, same with patents, drug patents. Drugs are very expensive because the government gives a patent monopoly. If we didn’t have a patent monopoly, we could buy all our drugs at Wal-Mart or nearly. I don’t do Wal-Mart commercials but here I will. We could buy all our drugs from Wal-Mart for $4 a prescription. But we can’t do that with many of the drugs we often need because Pfizer or some other company has a monopoly and they’re going to charge $500 for a prescription. So I would say that there’s not any link between progressivism and big government. It’s really a question of how we structure markets. And I just think we have to think more carefully about the way markets are structured today to cause income to flow upwards and then think of how we could structure that in different ways so that income flows downward.

Question: What positions do Libertarians take?

Dean Baker: Most of the people—I shouldn’t say most because I haven’t done a poll—many of the libertarians or self-styled libertarians really are not. They want the government to structure markets in ways that cause income to flow upward and they call themselves libertarians because they don’t want to pay any taxes. You do have more honest libertarians that won’t always come to the same conclusions with me but they do raise a lot of the same issues. They recognize copyrights and government interference. They recognize that patents are government interference in the market. They recognize that the government does a lot of things to push income upwards. So I think there might be some room for common cause with at least some of those people.

But one of the things I would say in general where I am very sympathetic to libertarian philosophy is that we should be very conscious of where the government is forcing people to do things and ask ourselves if that’s really necessary. I’ll just give you a very concrete example. Obviously, I’ve worked a lot on social security. I very much want to preserve that pretty much as is, not necessarily 100% but the basic story of core retirement income I think is a very good one. We want to preserve that principle. We are mandating that. You don’t have a choice. Anyone who works pays into it and I think that’s right. Now, basically, our private pension system has collapsed. Private benefit plans are going down very quickly. Very few people in the private sector have them anymore. Defined contribution plans, most people haven’t put much into it and as we see there’s no security there. So what do we do? I would like to see us have a second tier added on to social security that wouldn’t be mandatory but you would be pressured into it. Here I’m working on some behavioral economics in recent years, that if we said, you contribute three percent of your wages to this pension plan unless you choose not to, unless you ask not to. So the default is you contribute three percent of your wages.

I think we could do something like that and probably get the vast majority of people to contribute three percent. Three is not a magic number but a ballpark that I think would be appropriate for this second tier that’s not mandatory but not fully optional either. And what you say in that case, or arguments I’ve had with some of my friends on this is that some people won’t contribute. And I would say that’s right. Some people won’t but my guess is that probably close to 90% of the people will consider contributing most of the time. Now, the question I’d ask is how much work do we want to go through to get that other 10%, to make them contribute? So if you have 10% that actively are saying, I don’t want to contribute to this, I just think as a political matter it probably doesn’t make sense. We’re going to make it so it’s real easy for you to do it. You’re going to have jump through some hoops not to do it. But if you’ve sat back and you’ve decided, no, I’m going to take my chances, we already made you contribute to social security and I don’t want to touch that. But if you want to say no, I’m not going to contribute another three percent, I’ll either provide for my retirement in other ways or I don’t care, I’d say it’s probably not worth our while to use political pressure to force people to do it. It’s just not good judgment. So I think that’s where I give the libertarians a lot of credit. We have to think carefully where we want to use the power of the state. And it will be better if everyone did it but is it worth the power of the state to force those 10% that really say they don’t want to do it? I’d say no, probably not.

Recorded on: April 28 2009