Economist and co-director of the Washington, D.C.-based Center for Economic and Policy Research. He is a frequent commentator and columnist, and his blog is called "Beat the Press." He is the author of several books, including The United States Since 1980 and The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer.
reporter and editor at The Indypendent newspaper. His latest piece is "Obamanomics: Why the Stimulus Plan Will Not Revive the Economy."
President-elect Barack Obama is warning the US deficit will top $1 trillion this year, leading to what he says could be extensive cuts to government budgets. Obama made the warning Tuesday as he meanwhile prepares an economic stimulus package that will cost almost the same amount. We speak with Dean Baker of the Center for Economic and Policy Research and Arun Gupta of The Indypendent newspaper. [includes rush transcript]
President-elect Barack Obama is warning the US deficit will top $1 trillion this year, leading to what he says could be extensive cuts to government budgets. Obama made the warning Tuesday as he meanwhile prepares an economic stimulus package that will cost almost the same amount.
PRESIDENT-ELECT BARACK OBAMA: My budget team filled me in on — Peter Orszag now forecasts that at the current course and speed a trillion-dollar deficit will be here before we even start the next budget, that we’ve already looked — we’re already looking at a trillion-dollar budget deficit, or close to a trillion-dollar budget deficit, and potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery that we are working on at this point.
So, the reason I raise this is that we’re going to have to stop talking about budget reform. We’re going to have to fully embrace it. It’s an absolute necessity. And it has to begin with the economic recovery and the investment plan that Congress will soon be considering. We’re going to be investing an extraordinary amount of money to jumpstart our economy; save or create three million new jobs, mostly in the private sector; and lay a solid foundation for future growth. But we’re not going to be able to expect the American people to support this critical effort unless we take extraordinary steps to ensure that the investments are made wisely and managed well.
The pledge to restrain spending, while at the same time preparing a huge investment of taxpayer money, means some big decisions will come in the weeks ahead. But what are the details of Obama’s stimulus plan? And will they help revive the economy?
I’m joined now by two guests here in the firehouse studio. Arun Gupta is with us, a reporter and editor at The Indypendent newspaper, not to be confused with Dr. Sanjay Gupta, who may be the next Surgeon General of the United States. Arun Gupta’s latest piece is called “Obamanomics: Why the Stimulus Plan Will Not Revive the Economy.” It’s online at indypendent.org. Joining us in Washington, D.C., Dean Baker, economist and co-director of the Center for Economic and Policy Research.
We welcome you both to Democracy Now! Dean Baker, what is your assessment of the plan as it’s put forward so far?
Well, we still haven’t seen that much of it, but I think — I am concerned that it isn’t large enough. He’s talking about around $750 billion. And keep in mind, that’s over two years. So we’re talking about somewhere on the order of $370, $380 billion in year one. And roughly 40 percent of that now is going to be tax cuts. We know tax cuts will have less stimulatory impact than spending. So I’m concerned that we’re not talking about a big enough package.
And frankly, I find the talk about the budget deficit just a little perverse. I know the Washington Post here has a jihad going after the budget deficit, but that’s the last thing we should be worried about now. It’s a little crazy. It’s kind of like if your house is on fire, you’re worried about watering the plants. It’s a bit loony. We need to spend lots of money to get the economy going, and unfortunately, I’m not sure that President Obama’s plan will go far enough.
Arun, start with the issue of tax cuts.
Well, one of the big problems with tax cuts, as Dr. Baker pointed out, is they don’t really stimulate the economy that much. They are talking about $100 billion in tax cuts just to businesses, $300 billion overall. Business tax cuts give about twenty-five to thirty cents on the dollar. The best way to stimulate the economy is infrastructure spending. And this is a dirty secret conservatives never want to talk about, getting the money in the hands of poor people, because they are the most likely to spend it, such as food stamps, unemployment benefits. And it’s the multiplier effect that matters. So, twenty-five to thirty cents for every dollar spent for business tax cuts versus unemployment, infrastructure, food stamps, you get about $1.60, $1.70. So it has a much bigger stimulus effect.
And if you’re talking about $300 billion in tax cuts, some of them, yes, they may target workers, so they will have an effect, but there’s still a problem of leakage. With the stimulus plan last year, the $150 billion, a lot of it leaked out, in terms of savings or in terms of purchasing of imported goods. It’s much more important to spend it on infrastructure.
And I think there is an important subtext. Larry Summers, who — he’s the one who’s really going to be in charge of the economic plan. He had an opinion piece in the Washington Post a couple months ago, where he said we need to address entitlements. And what that is, is codeword for “We need to cut Social Security and Medicare.” And that’s a terrible idea. Now, if you need to cut money, cut it from the military. You’re talking about a budget that’s almost a trillion dollars, if they need to talk about cutting spending. But I agree, this is the wrong time to be talking about cutting spending. We need to increase it. We need to restructure the economy right now.
What about cutting military spending? What would that look like? What would it bring into the US economy?
Well, it depends how you do it. And this is actually kind of a thing that I think many progressives haven’t grappled with, that military spending actually does have a stimulus effect. It’s called military Keynesianism. That’s what was done during World War II. It was done during the Reagan administration. But it’s a very destructive type of stimulus effect, because you’re not producing anything productive. It’s what you do with the savings, though, and how you restructure the economy.
For instance, there’s a lot of talk about, well, we need to save the auto industry. And I think you can make valid arguments for it, but it’s how you’re saving it and who you’re saving it for. And again, the Obama administration doesn’t want to have this debate, because once you start to have a debate about national economic priorities, it would call into question the role of the free market. If we’re going to be saving the auto industry, if taxpayers are going to be saving it, then we need to own it. It’s our money. And it’s, what are we saving exactly? It’s not just auto manufacturers. It’s the domestic auto parts suppliers. It’s dealerships. It’s restructuring of this whole industry.
And then, to properly save it, what you need to do is have a national healthcare plan; you need to shore up the Pension Benefits Guarantee Administration — Corporation; you need to have a fuel tax to encourage consumers to move away from gas guzzlers to hybrid vehicles, if you’re going to be mandating that Detroit should be building hybrids.
Dean Baker, do you agree with Arun Gupta?
Well, I agree with part of that. I don’t know if I really want the US government to own the auto industry, but I certainly do think we have to restructure in substantial ways. In terms of military spending, obviously, there’s a huge amount of waste there. We should be looking to cut it back, although that wouldn’t be my first priority. I mean, I’d certainly want to cut back our involvement in the wars in the Middle East, but in terms of — you know, we don’t need the savings today. Again, this is a really important point that I can’t emphasize enough. We really do need to spend money. That doesn’t mean we want to spend money in harmful ways. But this is not the time to be focused on looking for savings.
On the other issues, the entitlements, absolutely, we don’t need to cut entitlements. Social Security, we’ve paid for. Anyone who talks about Social Security, we’re basically defaulting on bonds held by the Social Security Trust Fund. If we think we have to default on bonds, let’s default on the US government debt more generally. I really don’t understand why we should default on the bonds held by workers, but not on the bonds held by Citibank. So, you know, that’s kind of ridiculous. The real problem with entitlements, as, you know, everyone really knows who’s looked at it, is healthcare, our healthcare system, because if we fixed our healthcare system, we don’t have an entitlements problem. So, we should be talking about fixing the healthcare system. Then we could tell Larry Summers we don’t have to worry about entitlements. He knows the numbers as well as anyone, and that’s really just garbage to talk about entitlements.
But explain that further, on the issue of healthcare. Some people call the auto industry a healthcare company that makes cars, that they spend more on healthcare than steel, that they’re competing with companies that have single-payer healthcare in their countries, so they don’t have to pay these onerous amounts.
Well, our healthcare costs are hugely out of line with the rest of the world. And I did a calculation just a few weeks back. I said, suppose that our healthcare costs were the same per person as what they were in Canada. Then, GM would have had higher profits, making no other changes, higher profits that would equal $22 billion over the course of the last decade. They wouldn’t have to be running to the government for help. Our healthcare costs are just crazily, ridiculously out of line.
I kind of have fun with a lot of economists on this, because they’re all protectionists. They like to envision themselves as free traders. But I say, suppose we made it easier for people in the United States to get healthcare in the rest of the world, we made it easier for foreign doctors to come to the United States, pushed down the cost of our doctors, pushed down the cost to the United States. That would have a huge impact on our healthcare expenses. Economists don’t like to talk about that because they’re protectionists. They want to make auto workers compete with low-paid auto workers in Mexico and China, but they want highly paid professionals like themselves to be protected. So, really, the big problem in the US is healthcare, both in terms of Medicare or Medicaid and also in the private sector with companies like General Motors that have enormous healthcare expenses.
Arun, final comment?
Yeah, the thing about the auto workers, they become a convenient whipping boy for conservatives. But the fact is, all the wages and benefits only account for ten percent of the cost of a car, the direct cost to the Big Three. Fifty percent of the cost is auto parts, actually. And so, what Detroit’s problem is, is that they have poor relationship with their auto parts suppliers. And if we’re going to be talking about restructuring the industry —
— we need to be talking about these things, such as healthcare, such as a tax on oil, and such as shoring up pensions.
I want to thank you both for being with us, Arun Gupta — his pieces can be found at The Indypendent — and Dean Baker with the Center for Economic and Policy Research.