Dean Baker

Recent Articles

After the Fall

A lan Greenspan is known for his guarded pronouncements, carefully crafted in order to soothe financial markets. But in his semiannual testimony before the House Banking Committee this February, Greenspan did not mince words. He pointedly explained why stock prices should only rise as fast as disposable income. This would imply a growth rate for stock prices of just 5 percent annually. For investors who have come to expect double-digit returns, this is quite a letdown. On closer inspection, the situation looks even worse. Currently, dividend payouts are only slightly higher than 1 percent. So if Greenspan is right, the total return from holding stock (dividends plus capital gains) will be around 6 percent, approximately the same yield offered by perfectly safe government bonds. It makes no sense to hold risky stock if the return is no better than on government bonds. This year some air has already come out of the inflated market. The NASDAQ is down about 30 percent from its peak, and...

Bull Market Keynesianism

What if the reasonable growth, low unemployment, and low inflation of the last few years are in fact the vindication of Keynesian theory about consumption spending? And what if this spending has been driven not by government but by the stock market run-up? And what if the stock market collapses? 

A s we wait for the dust to settle from the current global financial turmoil, it is a good time to assess the lessons to be learned from the nineties business cycle. First, it is important to get the basic numbers right. Although the economy experienced robust growth in 1996 and 1997, on the whole this business cycle has had the slowest growth of any in the postwar period. [See Jeff Madrick, "The Treadmill Economy," TAP, September-October 1998.] Growth rates are best judged from peak to peak, taking the entirety of the business cycle into account. The average growth rate since the last business-cycle peak in 1989 has been 2.3 percent. This compares with a growth rate of 2.7 percent in the eighties cycle, 3.2 percent in the seventies cycles, and 4.4 percent in the sixties cycle. The rate of job growth has also been slower than in previous cycles. The economy added jobs at the rate of 1.6 percent annually in the nineties. This compares with rates of 1.8 percent in the eighties, 2.5...

The Inflated Case Against the CPI

A consensus seemingly has emerged that the consumer price index exaggerates inflation. But before we change the numbers, we had better look closely at the arguments. They don't hold up.

T here is now the appearance of an expert consensus that the government's most important measure of inflation, the consumer price index (CPI), seriously overstates the true increase in the cost of living. This sudden enlightenment is less the result of new research than political convenience. A cut in the CPI would reduce government payouts and ease the path to deficit reduction. Even better, it would do so via a technical adjustment that left few political fingerprints. Tax brackets and government benefit programs such as Social Security are indexed to the CPI. If the CPI overstates inflation by 1 percent, as the Senate Finance Committee's Boskin panel has proposed, and the index is adjusted accordingly, this would reduce benefits and the deficit by a cumulative total of $634 billion over 10 years. Not bad for a technical fix. Doubtless, the way we measure inflation requires continuous refinement. The Bureau of Labor Statistics (BLS) takes this task seriously, and has made myriad...

Energy Insurance

T he vast majority of scientists who study climate issues now agree that carbon emissions are a potentially disastrous problem. However, economic fears have obstructed even the mildest remedies. Particularly in the United States, voters resist taxes that would raise fuel costs, and there has been little political support for massive investment in new technologies or mass transit systems. Yet there are also some less painful ways to cut greenhouse gases. One is to change how the nation buys its automobile insurance. If people paid for insurance on a per-mile basis, instead of in a lump sum, it would provide a substantial disincentive to drive--about the same disincentive as a $1.50 per-gallon gas tax. This in turn would reduce the number of miles driven by 10-20 percent. Less driving would mean fewer accidents, which would then lower the cost of insurance. So "clean" (pay by the mile) insurance may be the biggest free lunch...

Patent Medicine

A bsurdly high prices have put lifesaving prescription drugs out of reach for millions of Americans and for hundreds of millions of people in developing countries. In large part, patent protection is to blame. The patent system is a trade-off: Consumers pay a monopoly price on a drug for 17 years to provide incentives for firms to undertake research that yields large profits. But the patent system is not the only way to support drug research. Alternatives that have a proven track record of success already exist--specifically, research supported by foundations, universities, and the government. Shortening patent terms and putting most pharmaceutical research in the public domain would cut costs for consumers as well as for government. And contrary to industry propaganda, doing so would not reduce innovation. This idea may sound radical, but look at the numbers. The drug industry currently spends around $18 billion a year on socially useful research. If research spending grows at a real...

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