Dean Baker has published a new book (hat tip, Ezra Klein), and it’s free: The End of Loser Liberalism: Making Markets Progressive. From the blurb:
Progressives need a fundamentally new approach to politics. They have been losing not just because conservatives have so much more money and power, but also because they have accepted the conservatives’ framing of political debates. They have accepted a framing where conservatives want market outcomes whereas liberals want the government to intervene to bring about outcomes that they consider fair.
This is not true….
Dean Baker is founding co-director of the Center for Economic and Policy Research (cepr). As early as 2002 he spotted the housing bubble. Among his frequent contributions is a critical study, co-authored with David Rosnick, questioning how sustainable U.S. productivity growth was from 1995 to 2007 and how broadly its benefits were shared. He also observes the foibles of the news media at Beat the Press.
In Loser Liberalism Baker argues that progressives are fighting the wrong battles—like today accepting the terms of the Republican right and obsessing over federal debt and deficits, when the primary goal must be to get people back to work. This is just one example of policy failure contributing to a major development over the past thirty years which, for Baker, is the redistribution of income upward into the hands of the top 10% of households. Policy must target the way government, intentionally or not, supports this trend.
Key chapters explain two “fulcrums of power”—the Federal Reserve’s control of interest rates, and its dual mandate to maintain stable prices and promote full employment; and , secondly, the Treasury’s control over the dollar in international currency markets. Both of these tools directly affect employment and income. For instance, the thirty-year trend of U.S. trade deficits is largely the consequence of a strong dollar policy, which makes imports cheaper and puts domestic industries and workers at a disadvantage. Clearly, lowering the dollar against other currencies would reverse this trend. But deficit hawks insist that government deficits are the problem and believe that lowering deficits will lead to stronger exports. Here is Baker’s counter-argument:
No one ever opts to buy an imported product instead of a domestically produced item because of the budget deficit. They choose to buy the imported product because it is cheaper. However, if the dollar stays high, then reducing the budget deficit will not affect trade—unless it leads to a decline in GDP and employment. In short, if the goal is to reduce the trade deficit by reducing the budget deficit, then the intention must be to lower the value of the dollar or raise the unemployment rate. Anyone who wants to combine a low budget deficit and a high dollar, and still have a low trade deficit, wants a high unemployment rate. There is no plausible way to avoid this conclusion. (p. 82, n68)
This is a good example of Baker’s way of reducing a complex issue to a basic rule of economic logic. Implicit here is the foundational rule of an accounting identity (which Baker mentions further on):
Figure 1 is the long view, from the earliest available quarterly data (1947) to the present. It plots, as a percentage of GDP, the accounting identity stated at the top of the chart for the net saving (surplus/deficit) position of the three sectors of the economy: Private, public, and foreign trade (current account balance):
Net Private Saving + Net Public Saving = Current Account Balance
or abbreviated: PrivS + PubS = CAB
An accounting identity is true by definition. As Baker says, “there is no way around this fact” (83). For instance, if there is a long-term foreign trade deficit (the green line on the chart, 1983-present), then there must be either a long-term public net deficit (red line) or a long-term private net deficit (blue line) large enough to balance the trade deficit.
(Notice that, from late 2001 to mid 2008, all three sectors are in deficit. This appears unusual, and it is, but it still adds up to an accounting identity (at the end of 2007):
PrivS (- 2.3%) + PubS (- 2.1%) = CAB (- 4.4%).
From 1980 forward the trade deficit has been balanced almost continually by a large public sector (government) deficit—with the one exception of the Clinton surplus, from late 1997 to mid 2001. (Notice how the Clinton surplus is balanced by a deep private-sector deficit—the effect of elevated private spending based on the illusion of dot.com wealth.) The private sector never really recovers from the losses due to the dot.com bust and remains in deficit until the housing bust and financial crisis hit in 2007-08. During this period, private-sector consumption is aided in no small measure by the Walmart effect: the availability of cheap and abundant imported goods. Thus a public whose incomes and jobs are hurt by the strong dollar, can still afford to shop at Walmart and its imitators—while, in the process, adding to the trade deficit.
Baker has worked hard to make available to non-economists a basic understanding of economic principles like this accounting identity, one that he has shown is largely ignored by policy makers. The book makes this and a broad range of such principles accessible to anyone interested in the forces that shape the economic outcomes affecting our lives.
So, do read the book. It’s free!