Macroeconomic whaaa?

An interview with Macroeconomist Dean Baker on building a better economy

By: austin c. yenne


"Macroeconomics is a branch of economics that deals with structure, behavior and decision making of an economy as a whole. Too often we hear how our economy is almost at full employment and stocks are at an all time high, but income inequality is also at an all time high. Macroeconomists study GDP, unemployment rates, national income among other things to explain how our economy is functioning and offer suggestions to improve it. I reached out to Dean Baker who is one of the top Macroeconomists in our country to get his thoughts on what could help our economy improve in the long term. He was kind enough to take time out of his busy schedule to answer my questions. The transcript of our conversation is below."

Austin: What got you interested in studying macroeconomics?

Dean: I felt that economic arguments were often used to justify inequality. I was skeptical that they were right, but I had to understand them to know better and it helps hugely to have the credential of an economics PhD to be taken seriously.

Austin: You were one of the first people to predict the housing bubble that would lead to the great recession as early as 2002. How did you catch that?

Dean: I had seen the stock bubble. It seemed to very clear to be me in 1998-2000 that the market was in a bubble and that it would burst. There was really no way to justify the price to earnings ratios in the stock market at the time.

I also saw that almost all economists ignored the stock bubble. This was both in their economic projections -- no one expected the market to crash, which caused the recession in 2001. Also, economists went ahead making absurd projections of stock returns in plans to put Social Security money in the stock market. This was true not only for Republicans who wanted to create individual accounts, but also Democratic economists who proposed putting the Social Security trust fund in the market.

Anyhow, this led to me to realize that economists could completely ignore things that were right in front of their face. They also mostly did not think for themselves, they just deferred to the wisdom of someone they considered more authoritative. This experience also gave me confidence in forcefully arguing a position that challenged virtually the whole profession.

I saw that house prices were rising rapidly in 2001 and 2002. This was easy to see in publicly available data sets. The run up was also driving both construction, which was at extraordinarily high levels, and consumption through the wealth effect of higher house prices. I began asking whether the run-up in house prices could be explained by the fundamentals of the housing market or whether we were in fact seeing another bubble.

Alan Greenspan was very helpful on this point. He gave congressional testimony in the spring of 2002 saying that the run-up was driven by fundamentals. I read through the testimony carefully and saw that the four reasons he gave were complete nonsense, which told me that the Fed chair could not come up with a fundamentals-based explanation for the rise in house prices. I also saw that rents were just following their usual pattern, rising in step with inflation. And, there was already an extraordinarily high vacancy rate, not something you expect to see when prices are soaring.

A little later we began to see the wave of subprime and Alt-A loans. These were hardly secret, bad loans became a topic of jokes in the business press. To me the real question is not how I saw the bubble, but rather how did so many professional economists who have this as their job missed it. Of course they all got a collective "who could have known?' amnesty, so almost no one paid any price in terms of their career.


Austin: You were also against bailing out the banks when they crashed. What was your reasoning behind that?

Dean: This was an opportunity to totally wipe the slate clean with the financial sector. We could have put any terms we wanted into the bailout, they had no choice, virtually all the banks would have otherwise been bankrupt. This could have meant downsizing, breaking up financial conglomerates, and strict limits on CEO pay. We held all the cards.

The media managed to turn reality on its head and say that we had no choice but to save the banks on their own terms. They repeated nonsense about a second Great Depression, which literally no one can defend. As long as the government knows how to spend money we will not be faced with a decade of double-digit unemployment. But the members of Congress were scared to death and they would not let the market work its magic on the Wall Street banks.


Austin: We often hear from our politicians on both sides of the aisle and throughout the news about concerns of the large deficit we have as a country. You've dismissed these concerns as absurd. Could you explain why it's not as big of an issue as they make it out to be? Does having a large deficit harm our economy?

Dean: The classic story of a deficit problem is that it leads to high interest rates and high inflation. Interest rates remain at extraordinarily low levels and the inflation rate has been consistently below the Fed's target of a 2.0 percent (average) rate. With the facts refusing to back up the fears of the deficit hawks they start making up nonsense stories about how there could suddenly be a run on government debt, with no one willing to hold it. While we can have a Martian invasion, serious people do not use this as a basis for economic policy.

Japan has a debt equal to 250% of GDP, compared to around 100 percent for the U.S. (including Social Security), it's inflation rate is around 1.0 percent and until recently investors were paying the country to lend it money. The debt fears are just not serious. This doesn't mean that we may not at some point run into problems if our deficits get large enough, but we are not close to that point now.

I should also point out that it is outrageous that deficit hawks never talk about patent and copyright monopolies. The government grants these monopolies as an alternative way to pay for things. For example, we could directly finance drug research. Instead we tell drug companies to do the research and we give them a monopoly on what they develop.

These monopolies impose a hugely larger burden than the debt. By my calculations they cost us around $370 billion a year in the case of prescription drugs alone or almost 2% of GDP. This is more than twice the annual burden of the debt in the form of interest payments (net of money refunded by the Fed). How can someone be concerned about the burden of the debt and completely ignore the much larger burden imposed by government granted patent and copyright monopolies? I see no honest way.


Austin: Near the end of January it was reported that 82% of all wealth went to the top 1% for the year 2017.[1] There seems to be a consistent problem with income inequality in our country. What are some solutions do you think we could enact that would level the playing field?

Dean: There is a long list, including full employment policies by the Fed, changing corporate governance rules so that CEOs can't write their own paychecks, creating alternatives to patent and copyrights for funding innovation and creative work, and beating the financial sector down to size with a financial transactions tax. People should read my (free) book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.


Austin: You've talked about bringing in foreign competition for our doctor's to lower their wages. How would something like that work? Would they need to get re-licensed to practice medicine here in the U.S?

Dean: We currently require doctors to complete a residency program in the United States to practice here. Doctors in countries like Germany and France receive comparable training to our doctors. We should be able to set clear criteria that doctors in other countries can meet and then work in the United States just like U.S.-trained doctors There are enormous potential gains from freer trade in the services of doctors and other highly paid professionals. These gains would swamp the gains from freeing trade in steel and clothes. But we don't see much movement in this direction because the people who make and write about trade policy are far more likely to have friends and relatives who are doctors than autoworkers or textile workers.


Austin: While we’re talking about doctors’ wages it seems extremely expensive to go to med school so by the time you come away with your degree you're in debt on average $250k; wouldn't that justify the higher prices they charge?

Dean: We should change the way we finance medical school, just like college. We shouldn't have people coming out of school with massive debt. But I'll raise two points in this issue. No one gave a damn when millions of manufacturing workers lost their jobs and often their health insurance and pensions, due to import competition. I have a hard time seeing that we have a greater moral commitment to people who went to med school than people who worked in factories for 20 or 30 years, often at great cost to their health.

The other point is that it is almost certainly cheaper to educate a doctor in other countries than in the U.S. This may lead to a situation where we end up with very few U.S.-trained doctors and get most of our doctors from other countries. I have no problem with that, just like most of our farm workers are immigrants. (We should compensate the countries that train doctors for us, so that they can more than replace the doctors that come here -- that is easy to work out.)


Austin: You also talk about how we're on track to spend over $370 billion more on prescription drugs because of our trade deals. In what way could we fix this problem to lower drug prices?

Dean: We should be looking to finance the research directly and then have all the results placed in the public domain. All new drugs would then be sold at generic prices. The next great cancer drug may then sell for $300 instead of $300,000. I discuss this at more length in chapter 5 of Rigged. In addition to lower drug prices, this would get rid of most of the abuses that have plagued the pharmaceutical industry. No one will be making payoffs to doctors to get them to prescribe a drug that sells for $30 a prescription.


Austin: One of the problems with policing Wall Street and the problems that arise from it is the revolving door with regulators. For example Theo Lubke who previously worked for the New York Fed for 15 years and was in charge of reforming the private derivatives market, then left to go work for Goldman Sachs to work around those reforms.[2] How can that be fixed?

Dean: I would hugely strengthen our rules on conflict of interest so that there were long periods (e.g. five years) between when someone left a regulatory agency and could work in a related area. We should look to reinforce the idea of career civil servants, like you see in much of Europe. Also, if we do take the money out with a financial transactions tax and other reforms, the financial sector will be considerably less lucrative.


Austin: Alongside the revolving door, there’s also a potential regulatory issue created by the overrepresentation of finance alumni in the financial regulation space at the expense of other groups, such as academics or labor advocates. Do you see this as an issue, and if so how would you recommend it be addressed?[3]

Dean: We have to beat down the financial sector with a sledge hammer. A financial transactions tax could reduce the size of the sector by more than $100 billion annually (more than half of a percent of GDP) and possibly as much as 0.8% of GDP. This will lower pay in the sector.[4]

We also have to get universities and pension funds to stop giving gifts to private equity and hedge fund partners by investing with them and losing money, but giving them multi-million dollar salaries. I thought places like Harvard and Yale were about research and educating students, but apparently their presidents place a higher priority on giving these folks huge salaries.


Austin: Speaking of the New York Fed its importance on financial oversight, there's controversy going on right now with what looks to be the nominee John Williams.[5] John Williams is currently president of the San Francisco Fed. Is there a big difference on switching jobs if he is picked?

Dean: Yes, the NY Fed has hugely more responsibility both in overseeing the Wall Street banks and in their status on the Fed's Open Market Committee. The head of the NY Fed plays a key role in structuring the debate on monetary policy that the other bank presidents do not. We have had a serious problem in the past with NY presidents not taking their regulatory responsibilities seriously. When he was Treasury Secretary, Timothy Geithner actually testified to Congress that he has never been a bank regulator. I don't think he was trying to lie, this was how he perceived his responsibilities as NY Fed president.


Austin: Our current president often complains about trade deficits we have with other countries. Is that a bad thing to have?

Dean: The overall trade deficit is a problem for two reasons. First, it affects the composition of demand. We have less employment in manufacturing than if we had a smaller deficit. If we snapped our fingers and had balanced trade we would likely be looking at 2 million more manufacturing jobs. Since these tend to be relatively high-paying jobs for less-educated workers, this would be a big lift to the bottom half of the wage distribution.

The other issue is that the trade deficit creates a shortfall in demand. Our money is creating demand in Japan, China, and other countries rather than the United States. This is the cause of the "secular stagnation" that has left us with so much unemployment the last decade. We could fill the demand gap with large budget deficits, but as we know politicians don't like large deficits. The other routes we have chosen were the stock bubble and the housing bubble, neither of which ended well.


Austin: With our current economy, jobs are still being created, but wages are either stagnant or slowly growing.[6] Why do you think that is? Is the simple solution just to increase minimum wage?

Dean: We should increase the minimum wage, but that only helps a small portion of the workforce. We should let the labor market continue to tighten, I would love to see the unemployment rate fall to 3.5% or maybe even 3%. We also should beat down wages at the top. The money that goes to doctors, CEOs and Wall Street types is money out of our pockets. It shows up in higher prices for health care and a wide range of other goods and services. The right understands this when it comes down to beating down the wages of ordinary workers, we should understand this logic when beating down the wages of high end workers. Their pay is a cost to the rest of us.


Austin: Our current president points to the stock market to show that our economy is doing well. Is that a good measure?[7]

Dean: Okay, let’s step back for a moment and ask what the stock market is supposed to be telling us. The stock market is not a measure of economic well-being even in principle. It is ostensibly a measure of the value of future corporate profits, nothing more.

Suppose the successful teacher strike in West Virginia spills over into strikes in other states, as now appears likely. Suppose this increased labor militancy spills over to the private sector and organized workers are able to gain back some of the money lost to capital in the last dozen years. That would not be good news for Mr. Lowenstein’s stock portfolio, but it would certainly be good news for the vast majority of the people in the country.

But this is the result of private actors, Lowenstein is upset about a president’s action’s tanking the stock market. Well, let’s give another one that would likely have an even larger negative impact on Mr. Lowenstein’s stock portfolio.

Suppose the next president announces that she will raise the corporate income tax rate back to 35% from its current 21% level. Any bets on what this does to stock prices?

Let’s take another step back. In principle the market is supposed to reflect expected future profits, but as we know, the big bucks folks on Wall Street are subject to bouts of irrational exuberance from time to time. We saw this in the 1990s stock bubble and then again in the last decade with the housing bubble.

Suppose that President Clinton had used his State of the Union address in 1998 or 1999 to carefully explain (with data and charts) why current market valuations did not make sense and that prices were likely to fall back to earth in the not distant future. Alternatively, suppose President Bush had done the same with the housing market in any of the years from 2003 to 2007.

In both cases, this sort of analysis coming from the White House likely would have sent markets tumbling. In the first case, Clinton would have been showing that unless stockholders were willing to hold stock for returns that were far smaller than had been the case historically (and were roughly the same as the returns available on government bonds at the time) or future profits rose way faster than anyone economists were projecting, stock prices at the time could not be justified.

Bush would have been showing how nationwide house prices had diverged from a century long pattern in which they had just kept pace with inflation. He could have also pointed out that this did not appear to be driven by the fundamentals of the housing market since rents continued to rise pretty much in step with inflation and we were seeing record vacancy rates. He also could have talked about the explosion of bad loans, which were widely talked about in the business press even before the collapse of the bubble.

In both cases, the Lowensteins of the world could have blamed the president for tanking their stock portfolios and they would be right. Their truth telling would have destroyed trillions of dollars in paper wealth and it would have been a very good thing.

Illusory wealth has a habit of disappearing in any case, and it is generally better that it happens sooner rather than later. To see this point, imagine there is some master counterfeiter who, along with his conspirators, is able to slip trillions of dollars of phony money into circulation.

As long as this gang of counterfeiters is able to get away with it, they are creating trillions of dollars of wealth. This money is generating demand in the economy, although the money is going first and foremost to meet their needs and desires.

When the counterfeiters get uncovered and their money is destroyed, the economy has lost trillions of dollars of what it had considered wealth. Will this be a big hit to the economy?

It certainly could be, but if the folks in policy positions respond appropriately then it need not be. Congress should pass fiscal stimulus and the Fed should lower interest rates to sustain demand. The destruction of the counterfeiters’ money should allow us to have demand in areas that meet the needs of the rest of us rather than the counterfeiters.

The same story applies to a drop in stock prices. If it turns out that stockholders have less wealth, and therefore spend less money, Congress and the Fed could take steps to boost demand so that needs of people who don’t own so much stock can be met. Of course, Congress and the Fed may not take such action, which is a really big problem, but that is not a reason to blame the folks who caught the counterfeiters.

None of this justifies Trump’s tariff policies, which I have argued are half-baked at best. But the basis for the criticism is not the potential hit to the stock market.[8]



Once again a big thank you to Dean for answering my questions. You can follow him on Twitter @deanbaker13. You can also check out his work at His latest book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer available for free on his site at or you can always buy a copy (which I personally recommend doing) at




[3] As much as I want to take credit for this question my good buddy Andrew Dolan (who should do an interview with me soon I might add) came up with this one.




[7] See his Twitter account or almost anytime he speaks.