Dean Baker is a noted economist, not a cheerleader, not a paint-and-body-shop guy eager to cover up the damage that's been caused to our nation's economy by terrible federal government policies. Below he discusses unemployment. You would never know to listen to most politicians and most economists, that we have a disastrous unemployment level in this country, with absolutely no national ideas or commitment from the federal government to try to put Americans back to work. All they talk about is war, more money for Wall Street, and keeping the rich people happy.
Baker: 2010 and The Unemployment Crisis
“The country faces a serious crisis in the form of a manufactured crisis over the budget deficit. This is a crisis because concerns over the size of the budget deficit are preventing the government from taking the steps needed to reduce the unemployment rate. This creates the absurd situation where we have millions of people who are unemployed, not because of their own lack of skills or unwillingness to work, but because people like Alan Greenspan and Ben Bernanke mismanaged the economy.
The basic story is very simple and one that we have known since Keynes. We need to create demand in the economy. The problem is that, as a society, we are not spending enough to keep the economy running at capacity. Prior to the collapse of the housing bubble, the economy was driven by booms in both residential and nonresidential construction. It was also driven by a consumption boom that was in turn fueled by the trillions of dollars of ephemeral housing bubble wealth.
With the collapse of the bubbles, both residential and nonresidential construction have collapsed. There is a huge amount of excess supply in both markets, which will leave construction badly depressed for years into the future. Together, we have lost well over $500 billion in annual demand from the construction sector. In addition, the loss of the ephemeral wealth created by the bubble has sent consumption plummeting, leading to the loss of an additional $500 billion a year in annual demand.
The hole from the collapse of construction and the falloff in consumption is more than $1 trillion a year. The government is the only force that can make up this demand. However, this means running large deficits. To boost the economy, the government must spend much more than it taxes.
The stimulus approved by Congress last year was a step in the right direction this way, but it was much too small. After making adjustments for some technical tax fixes and pulling out spending for later years, the stimulus ended up being around $300 billion a year. Even this exaggerates the impact of the government sector, since close to half of the stimulus is being offset by cutbacks and tax increases at the state and local level.
The answer in this situation should be simple: more stimulus. But the deficit hawks have gone on the warpath insisting that we have to start worrying about bringing the deficit down. They have filled the airwaves, print media and cyberspace with solemn pronouncements about how the deficit threatens to impose an ungodly burden on our children.
This is of course complete nonsense. Larger deficits in the current economic environment will only increase output and employment. In other words, larger deficits will put many of our children’s parents back to work. Larger deficits will increase the likelihood that parents can keep their homes and provide their children with the health care, clothing, and other necessities for a decent upbringing. But the deficit hawks would rather see our children suffer so that we can have smaller deficits.
In spite of the deficit hawks’ whining, history and financial markets tell us that the deficit and debt levels that we are currently seeing are not a serious problem. ....
The story is that we are forcing people to be out of work - unable to properly care for their children - because people like billionaire investment banker Peter Peterson and his followers are able to buy their way into and dominate the public debate. The reality is that we have an unemployment crisis today, not a deficit crisis. The only crisis related to the deficit is that people with vast sums of money (i.e. the people who wrecked the economy) have been able to use that money to make the deficit into a crisis.
And here he warns about the real estate bubble which he says is still inflated, and will still need to come down before it hits bottom.
2002 was the year [Dean Baker] published “The Run-up in Home Prices: Is It Real or Is It Another Bubble?” [He predicted the collapse of the housing bubble long before anyone else did].
Fast forward to 2010, and what’s his take on today’s housing market? “We’re still in a bubble,” that’s his blunt conclusion. Baker is a startling contrast to the recovery rhetoric of TV talking heads, and he doesn’t see our Great Recession housing market as a temporary thing:
“If anything, I expect housing to be weaker than normal rather than stronger over the next decade. People who say this is a temporary story, there’s no real reason to believe anything like that.
As a matter of policy I can’t see that we want people to buy a house in 2009 that’s 10-20% higher than it would sell for in 2011. ...
Dean Baker currently works for the Center for Economic and Policy Research, a Washington DC based “think tank” he co-founded with Mark Weisbrot. ...
Blackshaw: You have said that the tragedy of the economic crash is how preventable it was. Can you explain?
Baker: It was easy to see it was a bubble. We had an unprecedented run-up in house prices. If you look back a hundred years, from 1895 to 1995, housing prices nationwide were on track with the overall rate of inflation, but in the mid-1990s they began to hugely outpace inflation. By 2006, after you adjust for inflation, they had risen more than 70 percent. This created more than $8 trillion in housing “wealth.” It should have been easy for any economist to see, but Alan Greenspan, the chair of the Federal Reserve Board, either didn’t see it or, more likely, saw it but let it keep growing to ever more dangerous levels and just figured it would work itself out. The Federal Reserve Board is most directly responsible for preventing bubbles and could have taken any number of measures to prevent the run-up in house prices.
Critical Thinking in Economics
Here’s another gem from the interview, where he casually runs through his entire job description:
Blackshaw: At what point did you first become aware of the bubble?
Baker: I noticed it in 2002, after Greenspan gave testimony that there wasn’t one. His arguments did not make any sense. He cited four factors that supposedly provided a basis for the rapid rise in home prices: shortages of land, environmental restrictions on new construction, rising incomes, and growth in population. But they did not square up. Environmental restrictions had been in place since the 1960s and had not become stricter in the 1990s. Income growth was not particularly strong at that time, and population growth was actually slowing. There was no obvious reason why the supply of land should have suddenly pushed up housing prices. Plus, if it had been supply and demand in the housing market causing these huge price increases, one would have expected comparable increases on the rental side, but rents were going nowhere.
I started looking more closely at the historical trends and found that for forty-five years housing prices had kept in step with inflation, and suddenly they were outpacing it. That seemed like a bubble to me.
I remember reading years ago that Dean Baker had sold his family's home, and they were renting a house instead of owning. That is because he believed the real estate bubble had run its course, and the collapse was going to wipe out a lot of people. But not him.
In the 1950s, the average income was around $5,000. A new tract home cost between $15,000 and $18,000 or 3 to 4 times gross income. By 2000, the average family income was $55,000, yet many new homes were selling for $500,000 and higher, which is 10 times gross income. (I think the chart above shows national income vs. cost of all housing, not just new housing.) That increase in the cost of a home compared to average income is a good indicator of why the housing market needs to come down even more.
If people have to pay 11 times gross to buy a home, that means they never have enough money to weather a bad spell, or unemployment, or medical problems. It also means they will likely never pay off their home. The idea of home ownership becomes an illusion. Everyone is renter, they just like to think they own. When you owe $300,000 on your home when you retire, you don't really own it. You're just renting.
To return to a fair price, houses would have to come down to around $200,000 for a new home, which means used homes would be $150,000. That means we've still got a long way to go in the overinflated markets.
The point? Economists see and understand when our economy is being manipulated, but most of them don't say anything, allowing the manipulators to loot the nation, allowing the public to be victimized. We see the same thing over and over: a bubble is created, and the federal government people in charge of our economy stay silent. Is that silence purchased, sold to Wall Street? We have seen 50% of the public's investment in Nasdaq stolen from them and put into the pockets of Wall Street. We have seen houses run up by two and three times their worth by banks, real estate developers, and Wall Street which bought the shaky mortgages and turned around, put them in a blender and whirled, then sold off the mushed-up concoction to the publoic as "secure" investments. Lots of people make money, but most working people are the victims of these con jobs. Why is our federal government silent in the fact of this ongoing theft?
If, for example, Greenspan had simply publicly said that Nasdaq was being overvalued, people would have pulled their money out and it would have gone back down to a reasonable level. If Clinton and Rubin had not worked together to eliminate restrictions on financial institutions, then banks would have been restricted to only loaning 80% of the value of a home, and most of these bad loans would never have been made, real estate would not have run up in value because most people could not have afforded to buy at the inflated prices unless they were given 100% financing. Of course the government could have and should have halted any trade agreements as soon as they saw American jobs being taken to other countries. But they did nothing. And the result is that our economy is in the toilet.