How Economists (and Pundits and Politicians) Helped Steer America Off a Cliff

By Joshua Holland, AlterNet. Posted February 12, 2009.

As the economy crashes around us, Dean Baker's star has been on the rise, and for good reason.

While most of his colleagues were following the herd, swept up in the irrational exuberance of an economy fueled by the growth of a massive housing bubble, Baker, co-director of the Center for Economic and Policy Research, was one of the few voices warning of the housing market's impending crash.

When AlterNet interviewed Baker in mid-2006, there was no talk of "subprime" loans and "toxic securities," yet he warned that the crash of America's "debt bubble" -- mortgages, consumer debt and all the rest -- could decrease Americans' average wealth by as much as 40 percent.

At the time, he said that he hoped he was wrong, but unfortunately he wasn't.

In his new book, Plunder and Blunder: The Rise and Fall of the Bubble Economy, Baker explains the rise of the speculation-fueled bubble economy following the relative prosperity of the New Deal era, offers insight into how so many of his colleagues could have gotten the situation so wrong, and calls out politicians, pundits and corporate America for getting us into a mess that's threatening the entire global economy.

AlterNet caught up with Baker recently to discuss his new book, and to find out where he thinks we should be going from here.

Joshua Holland: You describe this virtuous cycle of prosperity following World War II, where productivity growth was widely distributed in wage gains, which increased consumption, which increased corporate investment and expansion, which led to increased productivity growth, etc., etc. And, you point out that the bubble economy grew in the mid-'90s, after two decades in which that cycle was broken and wages were flat for most Americans. Briefly, how did that fundamental shift occur, and how did it fuel the creation of the bubble economy?

Dean Baker: Well, I'd say what happened was, we had a period -- and this is highly debated, and you'll get different people give you different answers on this -- we had a period in the '70s where things weren't working, that we saw an end to that virtuous cycle. Several things went on, which I think explain the shift.

We had extraordinary shocks to the system in the form of much higher food prices and much higher oil prices. There was a lot of inflation. Now, my view is that if we had kept the same policies, we might have gotten back to somewhere like where we were in the '60s, but we didn't keep the same policies. Reagan got into office, and he quite deliberately set about weakening the power of workers, the power of unions.

He broke the air traffic controllers' strike, which really changed labor relations. Before that, companies negotiated with their workers when they went on strike. They didn't fire them. But suddenly, following the lead of the president, it became common practice in the private sector to start firing workers. So, there were many instances where you had workers fired when they went on strike, and that hugely weakened their bargaining power. Suddenly, if they went on strike they had to fear that they'd be fired.

Also, the National Labor Relations Board became much more hostile to unions. Then there was the trade policy. We had a high-dollar policy that made it difficult for workers in sectors that are open to competition, most importantly manufacturing, and made it difficult for them to keep their wages up.

At the same time, you had deregulation of many major sectors. The airlines, trucking … telecommunications. Several major sectors, employing millions of people with good-paying jobs, were all deregulated. And this was quite consciously an effort to reduce the power of workers and lower their wages.

So, I'd say that's really what changed in the '80s. And, as a result of that, we stopped seeing wage growth for most workers. And, it wasn't until the '90s, late '90s, where we did get low rates of unemployment, where we began again to see some wage growth for workers.

But basically, that was brought about by the stock bubble, which led to strong growth and low rates of unemployment, so finally workers were in a position to share in some of the wage gains from productivity growth. But, that was after a long period of time in a very different environment.

JH: And what, if any, is the connection between that long period of stagnating wages and the emergence, in the mid-'90s, of this kind of bubble economy that started, obviously, with the tech sector?

DB: Well, I think that because you didn't have wage growth, because you didn't have strong unions, workers had less bargaining power, and there was less fear of inflation. This might sound a little perverse, but [Alan] Greenspan quite openly said this. He was prepared to have very low interest rates, let the economy keep growing. Because, he said, workers don't have any bargaining power. You don't have to worry about inflation. He wouldn't have done that if we'd been back in the '70s world. So, it was only because you had broken down that pattern of wage growth that Greenspan allowed for the sort of low interest rates that are conducive to the growth of a bubble.

Just to be clear, I don't have a problem with low interest rates. I think they're great. I think it was great the economy did have good growth in the late '90s. But on the other hand, I do have a problem associated with the bubble, because that's not going to last. It's not going to be enduring, and it has very bad consequences, as we see.

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Joshua Holland is an editor and senior writer at AlterNet.

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