Focus 580; The U.S. Economy and the Stimulus Package

Good morning and welcome to focus 580. This is our telephone talk program. My name's David Inge. Glad to have you with us this morning. In this part of focus we'll be talking about the economy here in the United States and also the plan that members of Congress believe will jump start the economy once again and get it out of its slump back in October. The House controlled by Republicans passed a stimulus package that relied mostly on tax cuts to do the job. That is tax cuts both for individuals and for businesses. The Senate controlled by Democrats they didn't like that package and they said they were more interested in trying to do something for people who were out of work and they wanted to extend the period for unemployment benefits they also wanted to work out some way so that people who had lost their jobs could hold on to their health insurance and their the deadlock has stood for some time. Now members of Congress are concerned because they're getting close to adjourning for the year and are trying to work something out in the latest reports that I've seen suggest that maybe they think there's a way that they can actually have it all have

everything that they want both tax cuts and benefits for people who are unemployed. This morning we'll talk about all of this with Dean Baker. He's an economist and co-director of the Center for Economic and Policy Research in Washington DC. Before that he was a senior research fellow at the pre-amble Center in Washington and the Century Fund in New York and before that was a senior economist at the Economic Policy Institute in Washington. He's his writing as appeared in many publications including The Atlantic Monthly. The Washington Post American Prospect he has been interviewed on programs like the NewsHour on PBS. Also NPR and other radio and TV shows. He's the co-author of several books and one I just mention because it's also one of the issues that's on the table these days. This book is titled Social Security the phony crisis published by the University of Chicago Press in 1999 and he's joining us this morning by telephone. And as we talk to anyone who's listening is welcome to call if you have questions comments. The only thing we ask of callers is that people just try to be brief so that we can keep

things moving and get as many people as possible. Anyone's welcome to call here in Champaign-Urbana 3 3 3 9 4 5 5. Also we have a toll free line so it would be a long distance call for you. Use that number 800 to 2 2 9 4 5 5 3 3 3. WRAL and toll free 800 2 2 2 w. Iowa. Mr. Baker Hello. Yes. Are you fine thanks and thanks for talking with us sir. Thanks very Mia. I'm interested I guess in your reaction to to both the strategies that have been now put forward by the Republicans and the Democrats. And I have I have a feeling I know what you're going to say but let me ask you first the Republicans what they initially started out talking about was providing tax breaks to corporations and also to individuals and said that that was the way to stimulate the economy again. Do you believe that indeed that would have some positive effect on the economy.

Well it would have some very very limited positive effect. I think the Republican plan was extremely cynical. I mean it was you know the Republicans basically have an approach that no matter what the problem is the answer is tax breaks for wealthy people and corporations and you know they really showed that with the stimulus package because among the other items in there was a plan to have retroactive tax cuts. And I mean if if you wanted to have anything that would prove the point you could give an argument and we could debate the point you know we do want to have tax cuts for corporations to give them incentive to have to invest more in the future. You know it's an arguable issue it has some affect how much that that's what economists to debate. We can change their behavior in the past. So when they say we want to have tax cuts retroactively I mean that. It's the same thing as if I just went there. Why don't you give me money to help the economy. I mean it's serious. Is that so. You know the death you know that was the basic theme of their approach you know again their tax cuts would have some positive effect on the economy the point when you want to have stimulus is to increase demand any which way you can. If you give more

money to corporations Well some of that is going to be paid out as dividends some of that will be spent. It will have some positive impact investment will be zero. So we'll have some impact on the economy just very very little so you know they're talking about roughly 100 billion dollars in tax breaks while some of that will help the economy not it's not the best way it's not the most effective way but you know it's not zero. And I guess here I have to say one of the points I'm a little bit confused about because I've tried to look at what's happened then. The the corporate tax breaks proved quite controversy a lot of people attacked the day the Republicans and said Here this is republicans doing what Republicans do. They want to pass legislation that would benefit the wealthiest and here we have corporations that sometimes pay little or no tax and we're just giving them an even bigger break. Is that still on the table I guess I'd thought that maybe they had said all right maybe we won't do that. There is death to a little bit I mean that is there was what passed the House no. There are two

parts of that the House bill had both the retroactive tax cut so they were eliminating this alternative minimum tax ensured that you know profitable corporations at least pay something for the luminary going forward and also money retroactively back to 1986. That was the retroactive tax breaks of firms would get refunded money that aren't in taxes. Then it had wanted to have the elimination of the Alternative Minimum Tax going forward. It was not the Senate Republicans I should say but were not insisting on the retroactive rate tax break now in negotiations. If apparently you know this is you know what's been leaked and I assume it to be correct. If apparently agreed to give up their plans to get rid of the alternative tax altogether elimination the alternative tax. So what they're asking for now by way of corporate tax breaks is accelerating the depreciation allowing friends to write off invest more quickly. And again now now we're in a realm you know when you talk about that here's something we could debate it's at least a serious proposal. You

know in that sense it is a step forward. Another item that was discussed is providing a new round of tax rebate checks like those that a lot of people received this summer and this fall. But this would be checks that would go to lower income people people who had not gotten a rebate the first time around. And I guess I'm I'm interested in first of the question that that first round of Jack's does these hundreds of dollars that people received. What happened to that. What did people do with that. Did they save it. Did they spend it. Did that have any any effect on the economy that you could see and then whether you think then this additional bit of cash that has that they're talking about saying to people would that indeed make any difference that we would see. Yes. Love the original rebates were on the order of 40 billion and clearly most of it was saved. But you know even if you say just you know just say a quarter of what

was spent 10 billion dollars and because we're talking over a fairly short period you know roughly two and a half months the same thing on an annual basis of you know about 50 billion dollars in additional spending so. So it's not trivial I mean it would have been nice it would have been good for the economy I should say. If people spent more at that point in time. But if but a greater stimulus but people surely spend some of it let's say 20 25 cents on a dollar which wasn't inconsequential in terms of where the economy was at the time so it was a good measure. It didn't go far enough it would have been better to see bigger rebates. I mean again we could think of other ways to stimulate the economy as well but you know in terms of stimulating the economy the bigger the rebate the more it would stimulate them. What we're talking about going forward is for lower income wage earners that didn't pay $300 per person in income tax they didn't get a full $300 rebate and some people got zero. So the current proposal is to give them rebates based on money they've paid in in payroll taxes Social Security Medicare taxes. You have a

lot of lower more moderate income wage earners who would get $300 checks. Now given the income brackets these people are in there's probably a pretty good there's a pretty good chance they will go out and spend it because you know a lot of these people who are you know really just scraping by to get in $300 they probably will spend it at least many of them. And again given where the economy is now that is what we want do I mean stimulus is a really complicated you want people to spend money that's what it means. And you know that's why again you know. Up on the Democrats plenty but you know in terms of the Republicans you can make an argument for tax cuts to wealthy people and they have they did. And the idea was they were going to save it. It was exactly you know when President Bush was proposing it was you know we're going to give money to wealthy people it's going to get every benefit everyone because they'll save it. And that saving will eventually lead to more investment more jobs. Well if he was telling the truth then that it's not good stimulus because you don't want to give money to people you expect to save it at least not if the point is to stimulate the economy because

saving will not stimulate the economy. Spending is what stimulates the economy. We're talking this morning with Dean Baker he is an economist. He is also co-director of the Center for Economic and Policy Research in Washington D.C. And so we're talking about there the economic stimulus legislation that's being debated in the Congress the House passed one kind of package. Then that was mostly the reflected the interest of the Democrats party the Republicans in the house then over in the Senate. That's where the controversy has because they're what they want to do reflects the interest of the Democrats they control that chamber. Looks like probably something's going to get worked out. I think the members of Congress want to work something out before they leave Washington for the holiday recess. Questions of course welcome 333 W. while toll free 800 to 2 to WLM. Well in the interest of bipartisanship here will give you an opportunity to to say something critical about the Democrats. The Senate Democrats what they say that they want to do is to do something for people who have lost their jobs. So what they want to

see is an extension of the period for which a person can receive unemployment. They also wanted to do something that would make it possible for people who have lost their jobs to continue to have health care. No one can see those things certainly should we expect that they would benefit people who are out of work. But I'm not sure what that does for the economy at large. Well they will keep spending up I mean the debt is what you want to do I mean what you know basically when you're in a recession you want to see spending of any stripe so you know that would be a step in the right direction a VERY SAME a biggest criticism of Democrats at this point is they're thinking too small. They're still in this box you know they had their lockbox their campaign rhetoric we have to pay down the debt. You know we have to save the Social Security surplus The scored well in focus groups it makes no economic sense. And you know they continue to be you know tied to their focus group economics and you know as a result they would rather just have a relatively small stimulus package. I think we need a very big one because you know we're looking at a serious downturn.

And you know one one area that I would look to do again point stimulus get people to spend money in an obvious way to do it. You have a lot of states in fact the vast majority of states are facing serious budget shortfalls and they have to make cutbacks. And that's a contractionary impact on the economy. So if you just had some revenue sharing you know perhaps another 50 60 billion dollars in revenue sharing that would make it unnecessary for state and local governments across the country to cut their budgets. And you know if we could do that that will help stimulate the economy. So you know I think they're still thinking you know just in you know way too small terms they're locked into this you know approach about saving the Social Security surplus which is to say it was based on focus groups not on economics. Well do you think that this the pressure to get something done before the holiday recess is going to lead to them working something out so as I'd suggested and that suggested by the most recent stories I've read they're going to try to work something out so that they can pass something then they can go home. And what they

pass will enable everybody to come away and say well we got what we wanted. Well if I have to place a bet it's somewhat higher than 50/50 I would say that you know they probably will pass something because you know they're sitting there waiting what are the advantages of you know blaming the other side first you know saying we did something. You know the Democrats the Republicans did make a big political mistake. House Republicans in passing something that really was that plane coming right in the wake of September 11. You know so it's a month after September 11. They're passing a measure that gave you know billions of dollars to the biggest corporations in the country you know for Enron was going to you know millions of dollars tens of millions of dollars in this. You know so so it looked it looked really really crude and the Democrats were happy to exploit that as an issue as a political issue. So so they're weighing the advantages of trying to say look you know here's here's here's the Republican stimulus package I just want to give money to the richest people the country at a time when you know the

nation's at war where is you know the alternative. There is a recognition people are hurting and you do want to be able to say you're going to do something. And you know that is a powerful pull So my guess is that they probably will try to find a compromise. So is the state more likely not to think that well but again the Republicans will certainly have to give something that they have. But this really will have to give some significant ground for it to be worth while. The Democrats you know meet them on it. One of the things that the Democrats Senate Democrats have been arguing for is some way to continue to provide health insurance to people who had been in employer provided programs who now have lost their jobs. And there seems to be some debate between the Democrats and Republicans over how this gets worked out because the what it what it seems the Democrats want to do is is as I said to to make sure that people who had health care through their jobs before

continue to have health care what the Republicans want to do is they want to have a tax rebate vailable to everybody whether they have gotten health care through their employer or not. And some people are arguing that what this is it's an attempt by the Republicans to to build a case for to break the connection between the work and the health insurance. The Republicans said that as much Bill Thomas the head of the Ways and Means Committee Lee said you know for him it's a philosophical issue. Some believe in employer provided health insurance or you know doesn't think that's the best way to provide it so it's not it's not just an accusation I mean you know it's his view. So you know death. You know he's been quite explicit he doesn't want to take the form of keeping people in the employer pools. You know I'd rather be in the form an individual tax credit. The very practical matter and that you know if you try to say you know what I make sure these people maintain coverage. Insurance companies do not want to insure

people that aren't healthy this is a problem that anyone's ever looked at Carrick nomics. You know has to cope with you know if your insurance company the best way to make money is you only insure healthy people and if you have these people have been in polls let's say someone in their 40s 50s they're not in great health. They have you know whatever some preexisting conditions they just go out into the market just say I want to get insurance well we can give them a 2000 3000 credit they won't be able to buy it or they could buy it by spending 10 15 or 20 thousand because the insurance companies simply will not insure them or at least not at you know rate that's going to be enforceable. So what the Democratic plan is intending to do is try and keep those pools in tax so that you know most people obviously are in reasonably good health. They would be fine under the Republican proposal but the ones who really need insurance the one that actually have problems you know the Republican tax credit isn't going to do them very much good. If we talk a little bit you talk a bit earlier about something that you think they could do that has increase federal revenue sharing has and give some more money back to the states

that and the states as we know here in State of Illinois other states are really hurting. They've they're experiencing budget shortfalls and they're looking at cutting back on all sorts of services that the state provides to their citizens. That one thing that the federal government could do that would actually benefit the economy and would help the states out would be to give them some more money. So that's that's one thing that maybe would be more of an economic stimulus than what it is we're talking we have been talking about and members of Congress are talking about. Are there some other things that you know if we said to if if we said OK what would be your economic stimulus plan. Some things that we could do. What would they be. Well in general if you give money towards low income people they're going to spend it because you know in general they're living in a mountain. They're not a position to say. So you know the $300 tax rebate you know that that proposal that's a good one if we're you know if were more if were more broadly based because even then you're giving it to working families you have a lot of families that aren't working for whatever reason or didn't work the full year. So you know if you get more money in that

form that would be a good good step. You know the health insurance proposals you know I don't know if this is the best time to address it but we do have to do something about our health care system it's you know you mentioned my book The Social Security a phony crisis of things that are very painful to me as we're arguing about the Social Security system that's basically sound. The problems that it faces and you know this is what everyone in the debate recognizes the faces are relatively small they're distant you know 30 40 years out in a big going to war we had the problems we had in the 50s the 60s 70s the 80s so you know there are not big problems. Health care costs are rising at the rate of 10 12 14 percent a year. You have more and more employers dropping people from their health insurance rolls or they're shifting more and more of their cost onto the workers so many workers are funny and affordable. We do have to do something about the health care system you know and every year we put that off. It becomes more it becomes harder and harder to deal with. So you know it might maybe a good time. Obviously takes time. You know we can't change the whole care system tomorrow and that

is the point the stimulus you do want to spend the money now but you know if we want a way to spend money certainly you can spend a lot in getting a health care system in order. Unfortunately probably would have to spend a lot you know maybe we could return to continue here for just a second. Maybe it's a slightly different topic but it's certainly related that is Social Security and Social Security reform. It may not have gotten a lot of attention but recently the commission came up with a recommendation going in the direction that I think the administration wanted to go certainly and that is giving people the option of taking some of that Social Security money and investing it at something that I that I know you and your partner have have said you're not really sure that that's such a good thing or at least maybe that's it. It doesn't need to be done and there are still there are additional risks and so forth. Do you think that indeed these this direction that Republicans have wanted to have been want to go in for some time that that's actually going to

that's the way we're going to go. I think it's very unlikely at this point. You know there were a lot of people that had allusions about the stock market in the 90s you know particularly late 90s when when the market rising 20 percent a year people people really are superstitious on the market I mean and it's really frustrating as an economist particularly talking with other economists on the issue because I expect them to be serious and they're not you know but they had to get a lot of people that had allusions you know the stock market is going to go up you know 15 20 percent a year every year you know. You know now to eternity. And you know I suppose if I blew something like that I'd probably say Sure well we put every penny we could find in the market you know all the rich. But that's not the real world. And you know what I've you know challenge every person in this debate all the economists in the debate I really at this point I just harassed them abused them because I think they're lying to people. You know they say if you think the market will give the returns you're projecting then write down the numbers because you know the stock should give you turn by the dividends or capital gains and you know the thing about Social Security the whole debate takes

place in this context where we think we know the whole world for 75 years our making projections 75 years out for you know wage growth life expectancy birth rates immigration rates everything in the world. You know that's that's the way the debate takes place. And I've told. You know all the economists who support privatization if you think this is the best way to go right down your projections for stock returns what are the dividend yields will get. What are the capital gains year by year or averages. I mean Carol it is a specific year but a 10 year average over the 75 year period. And let's see if that makes sense. And no one can do it. And I really I just have fun with them I actually at one point said here's a thousand dollars of your favorite charity if you could just put down the numbers. Not one person has. You know it's remarkable to me that they've you know just really tried to sucker the nation just making up in effect lies about the sort of returns of people who get on the stock market and that they'll be that much better off by investing in stock market run Social Security. So you know not that I think people are aware that they're just being completely lied to. You know the

proponents of privatization but the fact that so many people have seen the market fall on the last year and a half in many cases unfortunately have lost an awful lot of money that way. You know I think people have to have a different attitude towards the stock market. So even though you know we still have a lot of people trying to pawn off you know basically phony stories about how much money they can make. You know I think people have really been Shook and. Buy them on the market and you have a lot of people particularly those in their late 50s who you know had a lot mind for one case and lost it who were you know very happy that they have their Social Security benefit that they can turn to encounter. Our guest in this part of focus 580 economist Dean Baker He's co-director of the Center for Economic and Policy Research in Washington DC. Before that he was senior research fellow at the pre-amble Center also in Washington. He worked for the Century Fund in New York and was senior economist at the Economic Policy Institute in Washington. He's written for a number of publications or is writing has appeared in them at length monthly Washington Post others. He's been interviewed on radio television. He's the author of co-author of several books including this one that I mentioned at the beginning Social Security the

phony crisis and was published by University of Chicago Press in 1909 more recently. He's the co-author of the scorecard on globalization 20 years of diminished progress. Nice dog with us tele by telephone from Washington and you're quite. Comments are certainly welcome. The number here in Champaign Urbana 3 3 3 9 4 5 5. We also have toll free line now which going anywhere that you can hear us 800 to 2 2 9 4 5 5. The think I'm not sure when exactly that was but this fall. Economists concluded that not only were we in recession that actually we've been in recession for a while and at the same time though now people are saying well maybe we're at the end of it and we're poised for it. We're at the down the lowest point and we're poised to start going up again. What do you think about doubt about where we are and about the direction that things are going. Well first opening most people are saying we're about to you know bounce out of the recession all these

were people that didn't see the recession coming on to begin with. So you know I think you know what they're saying is be taken with you know a grain of salt here. I actually think we're looking at a pretty serious downturn. And the reason is that the cause of this recession are very different than than prior recessions prior recessions if you look back to you know the one in 1990 the one in the early 80s mid 70s the post-war recessions were caused by the Federal Reserve Board raising interest rates and that is when the economy and in each case it turns out they went a little too far that pushed into the recession. And in this case the Fed was raising interest rates in 99 2000 that did play a role. But the real story here was was the crash of the stock market the collapse of the tech bubble and you know what I mean by this we had the telecoms we had the dot coms we had a real investment boom based on the bank that we companies that could just go out and issue stock in you know raise a fortune. You know even though they were making a profit in a when they make a profit but they could raise a fortune in the stock market their way and then they were laying cable they were setting

up their dot.com companies. There's a huge burst of investment based on this. Well that collapsed that's collapsed over the last year and a half. So seeing a big fall off an investment and then on top of that because we had this huge stock bubble the stock market was way way overvalued. We've had a you know least a partial fallback of the market I think it has a lot more to go if you look at price to earnings ratio is still very very high. But we had a partial fall back in the stock market and this can lead to very large parts of consumption. So if you put numbers on that we look at a fall off an investment of more than 100 billion a year. We're probably as far from consumption and tops of the order 200 billion a year and then you just say okay well what is going to replace that. You know we've lost 200 billion consumption 100 billion of investment. What would we say is going to replace that. And you know there's nothing you can really put your finger on this is going to place three hundred billion dollars in lost demand. So you know we can point to a few things were going relatively fortunate we had low interest rates give the

reserve for credit for lowering interest rates quickly that they didn't do that in 1991 but they did do it this time and it was right thing to do that help the housing market help the auto market because the it was easier for you know the Big Three to have their zero interest financing which helped keep the economy going. But you know we see the end of the zero interest financing interest rates on home mortgages have already started to go up again. I just don't see you know the basis for any source sustained recovery at this point. So I think a lot of people are kind of grasping at straws you could look at a good number here or there. You know we just had a good number of housing starts. You know it's good news but a bad number but it's just very hard to see the basis for a real recovery at this point I think we're looking at you know a continuing rise in unemployment and probably you know quite a long and fairly steep recession. Maybe get a little bit more for a second here about the Fed. As you point out they have been very aggressive in cutting interest rates last

week. I believe it cut rates for the 11th time this year. Yes that's I mean it really is remarkable because if we're having this conversation last year the federal funds rate the interest rate direct under their control at that time 6 percent. It's currently one in three quarters percent. And you know if we're having this discussion I was trying to tell you you know this time you know 2001 you know the interest rate was going to be under 2 percent. You know you were the last many were left to me. I want to believe to myself you know so they've been very very aggressive in lowering interest rates and to say it was the right thing to do but it's you know and it has helped you know help keep the economy from sinking more than otherwise would have. But it seems it seems though in a way that the that the result has been rather modest compared with how dramatic the act. Sins of the Fed have been. Well that's right I mean the interest rates have a limited impact they're very good at staffing the economy you know so in other words you know when when the Fed raises their

interest rates you know as they did in 99 2000 or you know if we go back to the last recession in 89 and 90 they were very they raised their interest rates a lot. It does put a real brake on the economy. But the opposite when the economy's already headed down lowering interest rates has a good effect and it's positive but it can only do so much. And you know you say OK what's it going to fact it does have an impact on housing which you know both a lot you know pretty good housing sales through you know the summer and fall and a lot of people refinancing their mortgages you know freeing up money for consumption so you know that those are good things that helps with car loans. But from the standpoint of say business investment it doesn't you know no one at this point you know you have huge overcapacity in just about every sector so you know it's going to run out and start laying you know another round of fiberoptic cable or you know build another chip plant or whatever might be when there's already you know a huge amount of excess capacity just because interest rates are low you have to you have to see the demand there you have to see some basis as to why this investment

would make sense. So you know interest rates lower interest rates are good it was the right thing to do. But you know it can only go so far after a period when and in Washington they were rejoicing. Over budget surpluses and they get the idea that there was all of this extra money helped to justify and make the argument and help Mr. Bush make that argument that he that money ought to go back to the people who paid into the government the first place. Now after all of that it looks as if now both the administration and Congress is expecting that at least for the next few years we're going to be back to running budget deficits. And no doubt in next year being an election year there's going to be a lot of argument about just who was responsible for just who lost the surplus. I'm sure that they'll be a lot of that going on in India is that where we are is the budget surplus now gone and should we expect that we'll be running deficits again now for the next for the foreseeable future.

I think that's very probably will be running deficits. You know there's other factors people haven't even begun to include So you know one of things that I noticed and commented on and some my writings the past is that the Congressional Budget Office has to make over 100 billion a year in capital gains tax revenue and Keppel gains tax revenue these days comes almost exclusively from stock market gains. And you know you can get them in the stock markets you know going up you know 10 15 percent a year you can't get what's going down. So you know when they put more reasonable numbers there we're going to look an even larger deficit. Some people have been talking about it. But you know I think the whole debate over who launched the budget deficit you know again you know the focus groups it's not my area and you know maybe that's productive in the focus groups but from an economic standpoint it's really silly debate. We don't have to run budget surpluses there's no particular reason for us to be running budget surpluses. And it really gets in a world where we have artificial constraints. I mean you know there's if there's things that we have to spend money on you know whether it's our education of our kids health care or laying infrastructure you know if we have to rebuild our rails or

you know airport security I mean we can think of lots of areas where you know in principle money could be used effectively if we put that aside because we say we have to balance the budget or we have to run surpluses. It really is a very costly decision because you know these are all areas you pay a price for neglecting and you go OK well after you know 10 years or whatever date it was we're hoping to have the debt paid off you know maybe with the debt paid off and go so what. You know OK we've saved money and interest. But you know it's we we don't think it was very peculiar if you know we saw a family that was neglecting the education their kids or wasn't keeping up their house so they could put money in the savings account get 3 percent a year interest on it. I mean it does seem peculiar choice and that in effect we're committing ourselves to do it was just it was very very strange and you know was based on focus groups it wasn't it in economics. We have a caller to talk with let's do that. Somebody on our toll free line it's one number for Hello. Good morning. Yes. It seems to me that. Oh through

the 90s the Clinton administration. The economists and the financial writers were proclaiming that Greenspan was the miracle worker that they had prosperity so-called prosperity was not due to Clinton. It was all Greenspan. Well it seems to me that Greenspan a similarity is not. And I don't know where that has anything to do with it or not but it just it's it's been a rather musing thing to me. The way the media were calling GREENSPAN The Miracle Worker altering tons of ministration Greenspan still there. I want to mention about this interest business. I have some. I'm an old person and I am not in the stock market.

I don't dare take the risk. So what my investments are almost totally in government bonds and certificates of deposit. And in my latest return on a certificate signifies it is an AP Why two and a quarter percent. Your low interest rates are two edged sword I mean you know if your borrower better words more people are Bowers and lenders on this this front but you know obviously it's good news but you know people in your situation there are many there many elderly people who are you know have a significant portion their income coming from you know certificates of deposits bank accounts and as rates fall you know under 3 under 2 percent you know it's a real big cut in their income so you know that's right it's a two edged sword there's no two ways about that. But the other point you know was that Greenspan was a Clinton Well I'm happy to be

bipartisan here I'm going to blame both of them because the prosperity of the late 90s was to a very large extent in the illusion. We had a huge stock market bubble just like Japan did in the late 80s and both of them both President Clinton and with Alan Greenspan were completely irresponsible in not trying to do something to prevent the build up the bubble. I mean in fact we had on the order of 10 trillion dollars I mean think of that 10 trillion that's equal to the full year's output about. 40 about $30000 for every person in the country of bubble wealth the illusory wealth in the stock market and neither Clinton nor Greenspan did anything about that because they're very happy to you know source MOND say these are good times. Well you know Clinton was lucky in the sense that he got to leave town before the crash. Greenspan still sitting there. Yes I agree. I thought all the time on during that period of time that they were paper proud of paper profits and weren't real profits and all.

Yeah and the thing was he was easy to see. You know I was I could stay you know 20 writings in the times I'm not looking back with you know 20 20 hindsight I was writing this at the time but it wasn't that you know I had such great insight you could just say you know what would be a path of corporate profits. So it makes sense. Of the sort this time. You ations and they were unimaginable. No one would have said that. So it was easy to see that we had a very large stock market bubble and you know at some point I can tell you the date it was going to collapse but you know I knew it was going to I don't have my money there I'll tell you that I've fallen Kanan of it was in the stock market you know but it sure is going to collapse and the economy as a whole. You know we're going to pay a big price we're going to have a very bad downturn because of it. And you have a lot of individuals again to just think of the irony of the Social Security debate that we're arguing because you know some We're 35 years in the future we don't know exactly how will be able to pay all benefits. But here we are in 1909 2000 with a lot of people with you know

all their retirement money a very large portion of in the stock market and any reasonable person could see it's about to collapse. So you know we had really misplaced priorities. You know that period. Well at least I didn't lose anything in the stock markets. I'm not I'm not gaining very much but at least I didn't lose anything in the stock. Rob thank you very much. Thanks for the CO. I'm I'm sure that that if I say this some people would they would start screaming but I'm I guess there would be those people and perhaps these are that the Wall Street types who would make the argument that really what we've seen here is a correction a violent end. Painful one but that they have a long term faith in the market and that in fact the trend overall has been has continued to be upward movement and that the kind of changes in the American economy that we've seen and go on and on with that are there they're not going to turn around. That is those changes we're not going to go back that things will get

better again. That is just a matter of time and that people should just hold on. Well again what I always say to these people is just tell me you know the same before with the Social Security projections how much do you think profits will grow over the next decade or you know whatever time horizon you want you want 15 years you want 20 years you know pick your time horizon I don't care you know when the time horizon tell me how much they think profits will grow. And then you know we'll see what the stock price is makes sense. And the only way people can make them put down numbers that make sense of profit growth that is way way out of line with what the vast majority of economists you know think is plausible. And you know I'm saying this you know we have these projections all the time so you know we're talking about the budget debate you know we're looking at 10 years where the congressional budget office the Office of Management and Budget you know they have projections for profit growth will look like over the next decade. And it doesn't make sense there's no way it makes sense to you know current stock prices even with you know a drop of one third. It certainly didn't make sense of the stock prices when they were at their peak in March of 2000. Even now stocks are

still hugely overvalued. Compared to projections of profit growth that the vast vast majority of economists consider plausible. So what you really need is someone who's got a projection of proper growth. That's just a way out of line with you know the overwhelming majority of economists not economists could be wrong but I just I just think people should realize you know if you put your money in the stock market day you're betting that the vast majority of economists are way off about the future. We have as our guest this morning Dean Baker he is an economist and co-director of the Center for Economic and Policy Research in Washington D.C. We started out talking about the economic stimulus a debate that's going on now in Congress and also now we move to talking a little bit more generally about the economy your questions comments are welcome. We have three people waiting we have about. 10 minutes left so we'll get right back to callers. Next is taken in the order they came in I think and that should be a line one here first. Hello. Comment in a question.

My comment is I really done stand why when people recognize that the stock market is were valued well that nobody talks about that the games there then immediately become. How do we get out of selling our stock at this overvalued prize. You know and in other words find the next sucker down the road. And it seems to me that the that's what really got the privatization of Social Security going to figure that hey we've got you know this overvalued stock market. We get millions of people to do that in line to buy this overvalued stock and we can get out on top. That's my comment. If you want to see that I've got a question after that. OK. I think the main if you look at the amounts of money that plausibly could go into the stock market because it doesn't go want to go for long periods of time it cannot have

really supported the overvaluation in the market. I think if you want to look for some of that again and that the main story there is the financial intermediaries you know the insurance companies the brokerage houses that would handle the accounts because in principle they could get tens of billions of dollars a year in commissions and fees. So if you want if you want to point to someone who stood to profit I think that was how they profit by the fees they would charge on the accounts. Well I don't look at that but that's kind of surprising to think that the bubble in the market wouldn't be I wouldn't be able to be able to give you an idea of what we're talking about here at its peak the value of the market all stock was around 18 trillion dollars. The amount of money that would have flown into the market to plausibly under the various proposals that were being floated were probably 50 60 70 billion a year. So you know if you're trying to support a bubble on the order of 18 trillion with an inflow of 50 60 70 billion it can't it can't have that much impact it has some relative zero but it's not going supports and it's so hugely overvalued.

Well OK well we could argue about that but let me ask you this. You were talking about the 1990s increase in interest that Greenspan put out and his reason for doing that oppose the plea was he wanted to stop the liason and then in his mind the key component was increase of wages and salaries and it seems to me that they're always willing he's always willing to savage those people relying on increased salaries and wages and that the whole globalization thing is a way to you know just pick another victim here and lie without very much political clout and you haven't talked about globalization. What is the what's happening on that front. What weapon. But the possibility that that might be the way we are and I'd love to actually talk about globalization but let me talk first about the earlier issue you

raise because it's an incredibly important one. The Federal Reserve Board in people's reply where this they basically put a floor in the unemployment rate you know that when I was saying earlier they raise interest rates to bring on a recession actions that bring a recession to slow the economy. Specifically what they're trying to do is keep the unemployment rate from falling too much because the concern and I talk to people I mean they you know they say this isn't a secret. It's in all the academic papers and stuff. Their concern is that it low unemployment rates wages start rising more rapidly and that will cause inflation. Now prior to 1994 the almost universal view among economists and certainly those of the Federal Reserve Board is if the unemployment rate fell below 6 percent that inflation would start to rise and they were determined to keep that from happening if you go back to 1994 and 94. Alan Greenspan began to raise interest rates to raise them over the course here from 3 percent to 6 percent the following year because he didn't want the unemployment rate fall below 6 percent. And he did slow the economy a lot. What happened is the unemployment rate did fall to below 6 percent it got to

about 5.5 5.4 and there was no inflation and the one thing I'll give Greenspan credit for was that at depth point he began to lower interest rates again and he let an employment rate fall further but then when it got to 4 percent you know you had all these people saying well this can't stay there can't be we can't allow 4 percent unemployment. Inflation is surely going to escalate and you know you try to find some signs of that so in 1909 they get to begin raising interest rates because they want to get the unemployment rate up at least a little bit from 4 percent because they just thought this could be sustained. But it's very important for people understand the Federal Reserve Board really controls how could they control how many people in the country have jobs. We just. A couple minutes left I want to thank at least one more caller here. We'll go to Lie Number two a little. Unfortunately the previous caller answered several of my questions but it did raise a few others. I haven't heard very many people talk about the dot.com says using dot coms and the stock market collapse using essentially the result of the fact that they were using sort of a Ponzi

finance scheme in order to support their activities in terms of the relationship between the stock market collapse and the collapse of purchasing. I wonder what you would think about that. Also more generally you had some strong language earlier. You were saying that some of the economists involved in privatization of Social Security were essentially like you said lying several times. I'd be curious to know what you or what you believe the motive to be for these people to be lying. Why would they. What else would they be trying to do. What is there are other motives. And we've not talked very much about the capacity global capacity I wonder in terms of ending this recession or seeing an end to this recession. What is happening to capacity in the US economy. How do we have a lot of excess capacity. And it is because of that period of globalization. Should we be worrying now

about global capacity and the slowdown in other economies in the in the existence of capacity excess capacity on a global market. Give me a really full plate let me and I will no doubt about that. But going beyond I'm sorry we go we've got about two minutes to go. OK well answer and say Yes you know it is a big problem our capacity utilization rates but 75 percent it's just about the lowest we're approaching the low points of the 81 82 recession a very severe recession. Again to the other point about when the people were lying on this I'm saying this and I don't like to say people are lying but their way economists work and you know it's it's really frustrating me because with Social Security trustees report you could look in there and you have very detailed projections. For you know all these other things wage growth life expectancy birth rates immigration raids and all these things are discussed in great very great detail. So what I said to these economists that you know if you support privatization you support putting money in the stock market. Well let's just have the same sorts of projections which you know point giving me an argument as to why you would not do that for the

stock market. So you know we all went to the same sorts of grad schools I think we all do the same sorts of economics. And when I have these people they just refuse to write down the numbers. The only thing I conclude is they won't write down the numbers because when they're experimenting with it and talk them enough I'm sure a few of its done the same survey experiments that I've actually have written down the numbers and they realize they can't make sense of the numbers that they're going out and telling the public. So they're telling the public numbers that they know they can support. And again I don't like to call people liars but I don't know what else you could say about that. You know the truth is that they're making claims about stock returns that simply are not plausible. We're going to have to stop. I'm sorry to say and we have somebody else we can take we're just at the end of the time I'm sure though in future when in different ways we'll try to get back to some of these issues. But for the moment we want to say thanks very much Mr. Baker for talking with us. Thanks a lot for me and and good our guest Dean Baker he is an economist and co-director of the Center for Economic and Policy Research in Washington DC.