Low-Hanging Fruit
Jon Schwarz interviewed Dean Baker about progressive economics—it's an excellent interview that everyone should read and contemplate.
I just want to use this short piece to bring attention to the excellent 19 August 2022 piece “A Progressive Vision for the Economy” where Jon Schwarz interviews Dean Baker. I personally can’t think of a better interview that I’ve ever seen, so I urge everyone to read—and contemplate—it.
Baker is one of my favorite economists—he challenges central mainstream notions and grounds his arguments in Econ 101 and arithmetic. Check out his free 2016 book Rigged if you haven’t already. And see below my summary—that I added hyperlinks to and organized by topic—of the interview.
Baker Encounters the Establishment
Schwarz says: that Baker stands up to “the intellectual bullies” in “defense of regular people”; that Schwarz thinks that Baker inspires “other people to think that they can stand up to this bullying, too”; and that Baker is “continually coming up with ways to use the tools of economics, some of which are very valid, to make life better for everybody”.
Baker says that his approach for the last 25 years has been to keep in mind that—when it comes to various policy debates—there might be a lot of “low-hanging fruit” where the economics establishment “thought through the angles” and where there’s “a lot of very simple things in front of their face that they’re not seeing”. His approach is to never assume that there are “no easy pickings there”.
Baker “came to Washington in 1992” and started to work on Social Security. There was a bipartisan effort to cut Social Security—“plenty of Democrats” wanted to cut it, including Daniel Patrick Moynihan and Bill Clinton. Baker regards Social Security as “a tremendously important program” because “tens of millions of people depend on it”. And also because it’s “a fantastic model” to point to if you like social programs—it “does exactly what it’s supposed to do very efficiently”.
Baker went into the Social Security debate assuming: that “the leading lights in the profession” had “thought through the angles”; that “there weren’t easy ways to get them”; that “you had to really do your homework, and read things carefully, and look through things 10, 20, 30, 40 times, because they had gotten all the easy ones”; and that “it was gonna be very, very difficult”.
But he was “amazed” at “what the profession missed”—his experience with Social Security changed his attitude toward the economics profession.
First, it was “really very much consensus within the profession” that the consumer price index (CPI) was overstating the true rate of inflation—the “overwhelming majority of economists weighing in on this were saying” that the CPI “overstates inflation, one percentage point, maybe more, but one percentage point”. People’s Social Security benefits were—and are today—“increased in accordance with the rate of inflation” as the CPI measures inflation, so the idea was that Social Security had to be cut so that the increase would reflect the true rate of inflation.
But Baker pointed out the illogical implications of saying that the CPI “overstates the true rate of inflation by one percentage point”. Regarding the past, this would mean “that we were poor”, since it would mean that real wages and real incomes had “been rising by one percentage point more rapidly than we thought”—sticking to the simple arithmetic and ignoring compounding, “we’re actually 30 percent poorer” 30 years ago “than if we just looked at the data”. And “what you could show is that in the fairly recent past, most of us would have been living in poverty”—looking back from 1995, the “median household income in 1960 would be below the 1995 poverty level”.
And regarding the future, it’s “very hard to raise income growth by a percentage point a year”, so if “incomes are growing one percentage point more rapidly than we thought” then our kids will “be way wealthier than we ever could have imagined” in 20 or 30 years.
Baker tried to explain—regarding the CPI—what he thought was “simple arithmetic” and “definitional”. And yet economists looked at him “with blank faces”, so he’d talk “to them—not deliberately—but like they were third graders”. Baker was amazed that what he was saying wasn’t instantly understandable. And that he “had such a hard time convincing economists at elite universities” that “you can’t just change the [CPI], say it’s been overstating inflation by a percentage point, and not have a totally different view of our recent past and what we think about the future”.
Second, there was a situation where Larry Summers, Martin Feldstein, and most of the “prominent economists in the country” were saying that you could expect to get 7% real returns from the stock market over a long period like 10 years or 20 years. The Democrats wanted to put much of the Social Security Trust Fund into the stock market—this policy was being sold based on the idea of fantastic real returns that would make Social Security “much better off”.
But Baker tried to explain—regarding the stock market—that it was illogical to project 7% real returns. You could take the “projections of profit growth in the Social Security projections”, do “simple arithmetic”, and see that 7% real returns would either require (1) an impossible story “where they’re paying out more than all their profits as dividends” or (2) impossibly high price-to-earnings ratios “of like 200 or 300 to one”.
There was “nothing complex about this”—it “was about as simple as it could be”. And yet Baker “had a hard time” on this front just like with the CPI issue.
Schwarz comments: that he helped to fact-check Baker’s 1999 book Social Security: The Phony Crisis; that there are many phony crises where the argument collapses upon inspection; that the story about Saddam Hussein and WMDs is an example of a phony crisis; and that Schwarz “would encourage people to understand” that “you can just nudge these things just a little bit” and “the entire edifice collapses into dust”.
The Great Recession
Baker points out that the US had “a pretty bad recession in 2001” due to the stock bubble’s collapse—the US “went four years without creating jobs”, which was “the only time that had happened since the Great Depression”.
Baker started to write—in 2002—about the possibility that a housing bubble was driving the US economy. He became “very convinced” that there was a bubble when Alan Greenspan gave nonsensical testimony about why there wasn’t one.
It “was very evident” to Baker that “when it burst it was going to be really, really bad news”. It “wasn’t like you needed some magic crystal ball”—you just had to look at the extent to which residential construction was driving the economy, look at the extent to which people were consuming based on their houses’ prices, and ask what would happen if both of these sources of demand suddenly disappeared.
And like Baker had been warning about since 2002, the US saw—when the housing bubble finally burst—a “massive fall-off in demand that could not be easily replaced”. That irreplaceable fall-off was “the basis of the Great Recession”.
The Economy Under Biden
Baker says that there’s “been this real effort in the media to just trash the economy under Biden”—Baker has “really never seen anything like it”.
It’s standard for roughly 20% of the American population to be struggling economically even at “the very best” of times economically—tens of millions of Americans were “struggling to put food on the table” in 2000 or 2019 or in other years that people regard as good economically. But under Biden, the media has chosen to spotlight struggling people in a way that the media didn’t choose to do in 2000 or 2019—this media decision doesn’t reflect economic reality. Most of the people at the bottom probably aren’t any worse off today than in 2019—the current economy allows people to quit their job and get a better one.
The media has gotten “a little bit bitter” regarding inflation—there’s been a tendency to unfairly blame Biden’s American Rescue Plan for inflation.
As for the consequences of the media’s anti-Biden slant, there are the obvious “electoral implications” regarding the upcoming 2022 US elections. And there’s also the danger that the Federal Reserve will throw “a lot of people out of work for no good reason”—it’s “a very, very big deal” in Baker’s book if the Fed raises “the unemployment rate two or three percentage points” in order to combat inflation that isn’t genuinely due to overheating.
Baker comments that it’s “striking” that you see the complaint that “things are so bad for these low paid workers” alongside the contradictory complaint that “workers are quitting their jobs all the time”—those complaints conflict with each other, since workers who are quitting their jobs “have the option to take better jobs”.
Creative Work
Baker has proposed a system where everyone would get a sum—for example, $200—that they could use to support creative work like music and journalism. He thinks that this system would support “a lot more creative work”, democratize creative work, “hugely transform creative work”, and “just change the dynamics”.
Schwarz says that Baker’s system is “one of the most exciting and sort of promising ideas that there could be”. A sum of $200 would mean that “if you just were able to get 500 fans who liked you so much that they wanted to give you all of their $200” then “you would be making $100,000 a year”—this sum of $200 would be “really significant in terms of creating a middle class of people who are doing creative work”, would “really change the equation of how people are able to be creative in America overnight”, and would cause an “explosion of creativity” that’s “kind of latent in America”.
Prescription Drugs
Baker points out that the US will “spend about 530 billion this year on prescription drugs”, that this sum is “about 2.2 percentage points of GDP”, and that this sum is “about 70 percent of the military budget”.
Eliminating “patents and related protections” would mean that “drugs could be produced as cheap generics tomorrow” and that “anyone in the world could produce them”—safety standards would still be met, drugs “would be cheap”, and the US would “almost certainly be spending less than $100 billion a year”.
We’re therefore “talking about a situation where you’d be saving somewhere around $400 billion a year”—that’s $4 trillion over a decade, which is an amount that “dwarfs anything we ever argue over”.
It would also “change the whole equation for medicine” if drugs were cheap—there might be an issue as to whether you should “spend $250,000 a year to keep someone alive who probably doesn’t have that long of a life expectancy anyhow”, but there’s no issue if the question is whether to spend $1000 a year to keep someone alive. We’ve implemented protections that drive up drug prices—sometimes 1000 times above the free-market price—and we’ve therefore “made this horrible problem for ourselves”.
We don’t “have to pay these ridiculous prices”—it’s “a problem we create for ourselves” and “we don’t have to do it”.
I Googled “Biden economy” and these were the articles that came up.
https://www.washingtonpost.com/business/bidens-economy-has-the-best-growth-record-since-clinton/2022/08/31/45734024-2925-11ed-a90a-fce4015dfc8f_story.html
https://www.bloomberg.com/opinion/articles/2022-08-31/biden-s-economy-has-the-best-growth-record-since-clinton
https://www.politico.com/amp/news/2022/09/26/recession-fears-biden-economic-message-00058724
https://www.politico.com/news/magazine/2022/09/09/how-bidenomics-got-a-lot-more-progressive-00055653
https://rollcall.com/2022/09/28/why-bidens-economic-spin-doesnt-hold-up/
https://www.heritage.org/budget-and-spending/heritage-explains/the-truth-about-joe-bidens-economy
https://www.cbsnews.com/amp/news/pete-buttigieg-employment-strong-as-hell-defends-president-joe-biden-administration-economic-policies-face-the-nation/
https://www.americanprogress.org/article/the-biden-boom-economic-recovery-in-2021/
https://www.nationalreview.com/the-morning-jolt/democrats-all-but-admit-their-economic-policies-didnt-work/
https://cepr.net/report/sotu-2022/
The rest of the results either referred to polling or were White House press releases. So, I see 4 more or less positive articles about his economy, and 3-4 more or less negative ones. One of the positive ones was from Baker's Think Tank. The negative ones are all from right-wing media. The rest of the positive ones are from non-right wing media. So, to say that “the media” in general is trashing Biden’s economic agenda seems unfair at the outset. Data analysis on coverage would be helpful in this case instead of operating on a gut feeling.
The discussion on Biden's economy is an example of the typical partisan bickering in media outlets you typically see where one side vehemently defends their side and the other attacks it. Nothing more, nothing less. The question is whose messaging people trust more. It seems in this case they are not buying Biden’s economic messaging for whatever reason.
Other than that, I found the interview to be interesting and insightful! Especially on pharmaceuticals.