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

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

But, when you see it growing exponentially, as it had over the last three decades, well, that should have set off all sorts of warning lights. That's a real problem.

So we want to rein in that sector, and I think the best way to do that is with a modest financial transactions tax. You have one in England. They tax stock trades a quarter of 1 percent per trade. I think we should have something like that. You could raise a ton of revenue. I did some calculation with [University of Massachusetts economist] Robert Pollin, a friend of mine, a few years back, and we found it could easily raise over [$]100 billion a year in revenue. That's real money.

And, it does that by reducing the size of the financial sector. If we want to regulate the financial sector effectively, I think we have to have it be smaller, because part of the story that we saw during the bubble years was that the financial sector used its political power to prevent effective regulation. So there were people at different points, in different places, who wanted to rein in some of the abuses that we saw. But they were prevented from doing so by politically connected people who were tied to the financial industry.

There are other issues. We're way behind the rest of the world in several areas, health care first and foremost. Our health care system's just incredibly dysfunctional. We spend more than twice as much per person as the average of the other wealthy countries, all of whom have longer life expectancies than us. So, we have to get our health care system in order.

You have all these people running around there with these projections, how we have this deficit of $60 trillion. Real scary numbers. And, that whole story is health care. If we had our health care fixed, we wouldn't have a deficit problem, or at least not a serious one. We may have to raise some taxes here or there, but no one would be running around the country talking about this nightmare story if we had our health care system fixed.

We also have to improve the bargaining position of workers. One of the bills that will be before Congress in this session is the Employee Free Choice Act that will allow workers who want to organize unions the opportunity to do so without the fear of being fired.

If we could do things that will increase the bargaining power of workers so they're better able to ensure themselves a share of productivity growth, and that would help to restore the sort of virtuous cycle that we had in years past.

JH: Now, let me ask you. You discuss in the book these hedge funds, the massive kind of house of cards of derivatives that sprang up, you know, actually as a result of deregulation, and other unregulated tools of capital that are out there. How would you address that issue?

DB: I mean, the transactions tax would take a lot of the profit out of [speculation]. Part of the story with the transactions tax, and one of the reasons why I think it's so nice is that it basically directly discourages the activity you want to discourage.

If we're looking to save up money for our retirement, we're going to buy shares of a stock, or buy a mutual fund, whatever it might be, and we'll pay the tax when we buy in, and we'll pay the tax when we sell. A quarter of a percent. We'll be happy about it. It's just not going to be that big a deal.

On the other hand, if we're talking about people who buy at 1 o'clock and sell at 2 o'clock, well, a quarter of one percent on each side, it's going to end up being a big deal. Because, if you make a one percent gain, buying at 1 o'clock and selling at 2 o'clock, you're golden. I mean, that's great. You know, you made 1 percent in an hour. I mean, that's fantastic.

On the other hand, if you have to give up a half percentage point in taxes, well, your gain's cut in half. And of course, no one was promising you a gain of 1 percent. A lot of those deals don't give you a gain of 1 percent. So, it suddenly becomes a really big-risk proposition to buy at 1 o'clock and sell at 2 o'clock, which means you have many fewer people doing it.

It's not going to put the hedge funds out of business. It's not going to shut down the speculators. I don't know we'd want to do that -- but you certainly would reduce the amount of money that's going to that sort of speculation very substantially.

JH: Let me ask you, one of the things that I think is so important about your contributions to all of these debates is that you take really complex issues and make them rather accessible. Tell me a little bit about high-dollar policy, trade and how that has played into the development of the bubble economy.

DB: Well, the high-dollar policy has been a really important part of this story, and it's unfortunate that its implications are rarely talked about. We have a very large trade deficit. It's come down last year. But we had, until very recently, a trade deficit that was close to 6 percent of GDP. It peaked out at over [$]800 billion in 2006. And that was a direct outgrowth of the high dollar. Because that's what determines whether someone buys an imported good or not.

And, what we want to do, at least to my mind, is bring the dollar down a lot so that we could get the trade deficit down somewhere closer to balance.

Now, the reason why this fits in with the bubble story is that when we start importing a lot, and we export less, we run the big trade deficit, there's less demand in the economy.

See more stories tagged with: baker, financial crisis, bubble economy

Joshua Holland is an editor and senior writer at AlterNet.

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