Dean Baker

Recent Articles

Behind the Numbers: The Privateers' Free Lunch

The flawed mathematical assumption behind privatizing Social Security.

B ehind the various proposals for privatizing Social Security, in whole or in part, is one seductive assumption. By investing their savings individually in financial markets, rather than collectively relying on the Social Security system, workers supposedly will get a greater return. This premise is the basis of the proposals by two factions of the Social Security Advisory Council for government-mandated individual savings. It seems a reasonable belief, particularly given the stock market's stellar growth in recent years. But it turns out the claim is based on inconsistent assumptions about economic growth and stock market returns. The Social Security Advisory Council's own projections of growth are far too pessimistic to justify the projections for the stock market. An accurate comparison of all the costs and returns of private savings plans with the costs and returns of the existing Social Security system shows that a mandated savings plan, in which retirees invested their money...

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...

Depressing Our Way to Recovery

Deficit obsession is a sure recipe for sluggish growth.

Two and a half years after the official start of the recovery from the 1990--1991 recession, the U.S. economy is still experiencing weak growth and is generating relatively few jobs. (See the chart "A Feeble Recovery.") Employment has barely regained its pre-recession peak in 1990. More people who seek full-time work have had to settle for part-time employment. Comparatively well-paid manufacturing jobs continue to disappear, replaced by jobs in restaurants, hotels, and temporary employment agencies. Investment growth has also been the slowest of any postwar recovery. Yet remarkably, most of the nation's political leadership, whether Democratic, Republican, or Perotista, thinks the cure is further deficit reduction. A constitutional amendment to require a balanced budget by fiscal year 1999 (which begins in October 1998) has a very good chance of passing in this session of Congress. Conservative Democrats have joined Republicans in pushing the administration to accept deficit cuts...

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...

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