Progressives too often focus on taxes and social programs, Dean Baker argues, and overlook the deeper policies that steer wealth upward. (More)

The End of Loser Liberalism, Part II: The Fulcrums of Power

This week Morning Feature considers Dean Baker’s The End of Loser Liberalism: Making Markets Progressive. Yesterday we looked at what he calls The Great Redistribution a thirty-year policy arc that has enriched the wealthy at the expense of American workers. Today we examine his Fulcrums of Power, how Federal Reserve, Treasury, trade, and labor policies combine to steer economic benefits toward the wealthy. Saturday we’ll conclude with his proposals to build more progressive markets that would give working Americans a more appropriate share of the fruits of their labor.

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is frequently cited in economics reporting in major media outlets, including the New York Times, Washington Post, CNN, CNBC, and National Public Radio. He writes a weekly column for the Guardian Unlimited (UK), the Huffington Post, TruthOut, and his blog, Beat the Press, features commentary on economic reporting. He received his Ph.D in economics from the University of Michigan.

“You first”

Freshman Rep. Rick Crawford (R-AK) shared a common conservative message with his constituents last July:

“We will get through this. We always do, because this is America,” he said. The recovery will happen because Americans will work together for a common cause, he said. He spoke of rationing during World War II and other sacrifices made by Americans for the good of our country.

“We may have to tighten our belts a little bit more, but we will get through this,” he said. “We owe it to our kids to leave them something better.”

Sarah Palin agreed last August:

We need to tighten our belts… reform entitlements – it will be a tough pill to swallow for a lot of people but that’s what we are going to have to do to get the debt and deficit under control….

Swiss investment maven Marc Faber had was even more explicit last October:

I will tell you what the US needs. The US needs a Lee Kwan Yew who stands in front of the US and tells them, listen you lazy bugger, now you have to tighten your belts, you have to save more, work more for lower salaries and only through that will we get out of the current dilemma that essentially prevents the economy from growing.

When wealthy conservatives say working Americans need to “tighten our belts,” I offer a two-word response: “You first.” While that may seem flip, I think it’s the best frame for talking about the deeper policies that Dean Baker describes as steering an ever-rising share of U.S. income to the wealthy.

Fulcrums of Power: Federal Reserve and Treasury

Dr. Baker discusses two primary fulcrums of power – the Federal Reserve and Treasury Department – whose policies are poorly understood and rarely part of our political dialogue.

  • The Federal Reserve – Dr. Baker goes into some depth on the history, structure, and function of the Federal Reserve Board, and his discussion is worth reading in full. In summary, the Fed’s has two mandates – to control inflation and encourage full employment – but only one primary tool: interest rates. If inflation is too high, the Fed can raise interest rates to discourage borrowing and reduce demand, but at the risk of rising unemployment as businesses lay off unneeded workers. If unemployment is too high, the Fed can lower interest rates to encourage borrowing and boost demand, causing businesses need to hire more workers, but at the risk of rising inflation. In practice, Dr. Baker says, the Fed was set up to be controlled by bankers and is most responsive to lenders’ interests. Inflation hurts lenders, because rising prices reduce effective interest rates. (If you lend someone $1000 for one year at 5% interest but prices rise by 5% during that year, the $1050 you receive in payment at the end of the year will buy no more than the $1000 you lent; that loan earned you zero interest in inflation-adjusted dollars.) Thus, when the Fed raises interest rates to limit inflation, lenders benefit at the expense of the workers who are laid off due to falling demand, and the net effect steers income from workers to the wealthy.
  • Treasury Department – The primary task of the Treasury Department is to control the nation’s money supply, issuing or withholding bonds and/or currency to influence both domestic and international markets. A strong dollar, relative to other currencies, favors Americans who travel or do business overseas, as each dollar buys more stuff ‘over there.’ That also makes imported goods cheaper in the U.S., and makes U.S. exports more expensive ‘over there.’ Americans who travel and do business overseas are, generally, wealthier than ordinary working Americans, so they benefit more by the better exchange rate. American workers also lose from the depressed demand for U.S. goods overseas, and the competition with imported goods in the U.S. Again, the net result of a strong dollar is to steer income from workers to the wealthy.

Dr. Baker presents charts showing that the effects of Fed and Treasury policies greatly exceed those of the Bush tax cuts for the wealthy, or the social safety net programs that progressives usually discuss. The greater flow of pre-tax income to the wealthy is framed as the “natural forces” of the “free market,” and progressive arguments about taxes and social safety net programs framed as “government intervention” to “redistribute income.”

Yet as Dr. Baker argues, the Fed chooses whether to let inflation reduce lenders’ and investors’ real interest rates, or whether to put the burden on workers by raising rates, reducing demand, and increasing unemployment. The Treasury chooses whether to favor wealthy Americans who travel and invest overseas, and overseas workers whose products are imported here at lower cost, or to favor U.S. workers and the products they make. None of those is a “natural force.” Each is a policy choice, a government intervention, and for three decades those choices have almost always favored the wealthy over American workers.

Labor and Trade Policy

Again, there is no “natural state” for labor or trade relations:

  • Labor – Government can choose to set rules to protect workers who try to organize and bargain collectively, enable them to hold free elections to vote on unions and contracts, enforce union contracts in courts, and allow unions to charge mandatory dues for workers who benefit from those efforts. Or government can choose to let employers bully or fire workers who try to organize, let employers delay or rig elections, ignore union contracts in courts, and prohibit unions from charging dues for the workers who benefit from their efforts. Either way, government chooses to act on behalf of employers or workers … and Dr. Baker argues that for the past 30 years both the federal and many state governments acted on behalf of employers, steering income from workers to the wealthy.
  • Trade – Government chooses whether to let labor, goods, and/or capital flow across our borders, and what kinds of each, on what terms. While conservatives wave the banner of “free trade,” Dr. Baker makes a compelling argument that our trade agreements are tailored to force less-educated U.S. workers to compete with less-educated workers overseas … while shielding highly-educated U.S. workers from competition with highly-educated workers overseas. Coupled with a strong dollar policy, the net effect is fewer and lower paying jobs for Americans who lack college and especially graduate degrees, and higher incomes and import purchasing power for Americans with such degrees.

If American steelworkers must compete with steelworkers in China or India – who can do the work for less pay because their cost of living is lower – why shouldn’t American lawyers, doctors, accountants, architects, and CEOs have to compete with professionals in China or India … who could also do the work for less pay because their cost of living is lower?

This is one of Dr. Baker’s strongest arguments, and he cites comparative statistics on surgical costs in the U.S. and other developed countries. A procedure that costs $150,000 or more here often costs $15,000 or less in Singapore or Brazil. Why should Medicare or Medicaid pay U.S. doctors and hospitals $150,000 to perform that surgery? Why not instead spend $15,000 to fly the patient to Singapore or Brazil, pay $15,000 to doctors and hospitals there to perform the surgery, give the patient a $30,000 payment to cover lost work and rehabilitation expenses … and still save over half the cost of doing the procedure here?

How long would such a program last, Dr. Baker wonders, before U.S. health care providers – and other highly-paid professionals – realized that they, too, will have to “tighten their belts?”

You first….

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Happy Friday!