Poking a hole in the bubble theory

Dean Baker, co-director of the Center for Economic and Policy Research.

TEXT OF INTERVIEW

KAI RYSSDAL: It was back to the good old days of last fall on Wall Street today -- 3, 3.5 percent losses on the major indices. The Dow at its lowest level since the 1st of December.

Nothing like the fallout from a bubble economy to make the markets crazy. Problem is, those bubbles make the rest of us crazy, too. They're bad enough on the way up, let alone on the way down. Like now.

Economist Dean Baker explores the causes and solutions in his new book, "Plunder and Blunder." Welcome to the program.

DEAN BAKER: Thanks for having me on.

RYSSDAL: You know, you start this book by saying that bubbles aren't natural. But, I thought the way economies and capitalism worked was that everybody gets excited about something, bids it way up, the enthusiasm goes away, there's a crash, and then we do it all over again like eight or 10 years later.

BAKER: Well, you could identify, certainly, many different bubbles in the history of capitalism, but you could also identify long periods of time where we didn't have any bubbles. So, for example, if we look at the post-war period from '45 right through the '70s, there was nothing resembling any significant bubble of any consequence for the economy. During that period you had an economy in which prosperity was broadly shared. Workers were getting their share of productivity growth. And you had what -- at least what I would call, or I should say many people would call -- a virtuous circle where increased productivity led to greater wage growth, which led to more consumption, more investment, more productivity. So, I wouldn't say that you necessarily are going to have bubbles as part of a capitalist economy. You can, but I think that's a sign of a mismanaged economy.

RYSSDAL: Let me pick up on your timeline there. What happened 30 years ago to change things?

BAKER: I associate a lot of this with policies that were pursued by the Reagan administration -- in many ways quite deliberate and explicit policies to weaken the power of labor unions, weaken the power of workers, which had the effect of redistributing income upwards. So, you had policies, for example . . . He quite explicitly wanted to weaken unions by . . . Well, he fired the PATCO, the air traffic controllers back in 1981. And that set a new standard where suddenly workers who went on strike could be fired. That really wasn't done prior to that.

RYSSDAL: There's been a Democratic president since Reagan. Did Bill Clinton have anything to do with this?

BAKER: I think in many ways he continued the policies of the Reagan era. In some ways he was different, but in some ways he continued them. Most notably with trade, for example. His trade agenda was very much about putting U.S. manufacturing workers in direct competition with low-wage workers across the world. So that puts downward pressure on wages. And that's really just straight out of the economic textbooks. That's what the gains from trade are supposed to result in is cheaper cars. But a side effect of that is we paying our autoworkers less money, their getting lower wages. So, I think in many ways Clinton actually picked up on some of the policies of the Reagan era that led to this upward redistribution of income.

RYSSDAL: Continue on this presidential timeline that we started with here. Let me know what you think about President-elect Obama and where his policies might take this economy in terms of avoiding these kinds of bubbles.

BAKER: I think an awful lot is up for grabs at this moment. Because his decisions are going to restructure the economy in very fundamental ways -- whether he wants to or not. You know, if he adopts policies that are quite consciously designed to promote, say, the bottom and middle half of the workforce -- promote manufacturing, promote construction -- then I think it might take us back on the path of sort of broadly shared prosperity that we had in the three decades following World War II. At the same time, though, he obviously has people who are very closely tied to the financial industry holding high positions in his administration -- certainly Larry Summers, his pick for national economic adviser; and Timothy Geithner, his pick for Treasure secretary -- and they may want to take the economy a different direction. So, this is going to be a very big battle in the first years of the Obama administration.

RYSSDAL: Dean Baker is the co-director of the Center for Economic and Policy Research in Washington. His new book is called "Plunder and Blunder: The Rise and Fall of the Bubble Economy." Mr. Baker, thanks a lot for your time.

BAKER: Thanks for having me on.

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