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Dean Baker: Why Didn’t We Make These Guys Run Around Naked With Their Underpants Over Their Heads?

Dean Baker, co-director of the Center for Economic and Policy (CEPR) in Washington, DC. (Photo courtesy of Dean Baker)

Economist Dean Baker is co-director of the Center for Economic and Policy (CEPR) in Washington, DC. In his most recent book, “The End of Loser Liberalism: Making Markets Progressive,” Baker argues that the market is politically structured to ensure that income flows upward.

He provides a range of strategies to reframe economic debates and offers proposals to reshape the economy to serve the interests of the majority of the population instead of a small elite. The book is available to be downloaded for free at CEPR's web site.

Keane Bhatt: The prevailing economic model has been defended on the grounds of its dynamism and efficiency. But it's allowing 25 million people to be without adequate employment and 42 million to be on food stamps, while the private sector sits on $2 trillion in cash. There are millions of foreclosed homes standing idle despite the urgent need for decent housing. How do you evaluate this situation, where vast resources aren't being allocated efficiently in a time of such desperate poverty?

Dean Baker: There are two different issues, I think. One is the presumably short-term issue, but what's quickly turning into a long-term issue, of a serious downturn. The other is the more general issue of an efficient system with efficient outcomes. I don't think focusing on efficiency is a bad place to begin. My book argues that most economists are not honest about this. But in the short-term, which, as I said is becoming longer-term, efficiency is kind of moot. We have an incredible amount of idle resources and this is just totally self-inflicted stupidity. We know how to get out of this: we just have to spend money.

You can spend it on better or worse things, but it's really simple. You have a vast amount of idle workers, idle capacity and idle resources in just about every sector of the economy. So what you really need to do is spend money, have the Federal Reserve Board be more aggressive in its monetary policy and eventually we will have to get the dollar down to get something closer to balanced trade. That's the major imbalance in the US economy. But these aren't efficiency questions; it's a question of putting resources to use. There are political obstacles – there's nothing inherent in the economy. We weren't in this situation four years ago – there were plenty of problems in the economy, but huge amounts of idle resources were not one of them. But because of political obstacles, it's totally possible that we'll have a decade of high unemployment, vast amounts of idle resources and waste.

KB: Your book argues that financial crises don't have to lead to “lost decades” of massive pain and suffering and, even more importantly, that the US never even experienced a true financial crisis.

DB: There's a lot of real sloppy thinking here. The main promulgators of this view are Kenneth Rogoff and Carmen Reinhart and they say that they look back over 600 years of history and find that in almost all these cases, countries took over a decade to recover. It's painful, because I'd like to think – and one would expect that they'd like to think – that we know more economics than we did 600 years ago. If we don't – and we really haven't learned anything – why do you guys get paid high salaries? I say that only partially facetiously. If we were to look back through time, a very high percentage – probably the majority – of newborn babies didn't survive to age 5. You'd be an idiot to say that the past trend holds today – we have modern medicine, so we have a very good reason to expect that the overwhelming majority of children will survive to age 5. We have learned something in economics over six centuries, so it's not some curse, they're concrete problems.

Finance gets very mysterious and complicated. There are instruments that are hard for people to understand; they're hard for me to understand. The basic story is not complicated: we need demand. As I say in the book, there's very little about the financial crisis that explains where we are today. People who want to buy homes have no problem getting credit – you can't go 0% down, but someone who, say, 15 years ago was able to get a home mortgage can expect to get a home mortgage today. In terms of businesses, the US, unlike Japan, has a very large capital market where firms can directly access capital through commercial paper and bond financing. The current rates are extraordinarily low in both nominal and real terms. So the idea that the banks being crippled would impede the economy doesn't follow when hundreds of the largest firms can go straight to the market and get financing.

Let's imagine that the big firms can get credit but the small ones can't. That would create a situation in which the big firms are running wild, grabbing market share at the expense of smaller competitors crippled by lack of access to capital. This is not happening.

There's a survey that the National Federation of Independent Business has done for a quarter century that asks businesses what are the biggest problems to expanding. And currently, almost no one mentions finance – either access or cost. So clearly the problem is not finance.

KB: They mention a lack of consumer demand, right?

DB: Consumption is still higher than normal as a share of income. The saving rate is just above 5 percent. Through the post-war years prior to the bubbles, it averaged over 8 percent. So there's zero evidence that finance is a real big obstacle in the economy today.

KB: So, apart from right-leaning economists who construe years of high unemployment as almost a natural law that the public must accept, there's also a tendency among liberals and even the left to view the problem as largely financial. There's little reference to the fallout of the $8 trillion housing bubble and resulting decline in wealth and spending. Why is this so widespread?

DB: I think there are very different rationales. For conservatives, or mainstream economists, saying there's nothing we can do about it creates very low expectations. They can say, “Don't be upset at us, that's the way of the world. Grin and bear it.” They, of course, are not bearing it at all. They're employed at very well-paying jobs. Among the left, there's always been a catastrophe-strain which believes capitalism is a horrible system and there's nothing you can do about it. In my view, capitalism has all sorts of problems, but the reality is, that's what's there. Saying that it's a horrible system is fine, but that's what we have to work with. It can't be an excuse for inaction.

KB: Your book makes a strong case that the neoclassical school's appreciation of markets is mediated by power relations. For example, immigration quotas, which block freer movement of professional labor that would undercut overpriced US lawyers and doctors, are an unchallenged form of protectionism. At the outset of the 2008 crisis, however, it seemed that even this selective belief in efficient markets would implode. But it seems to stagger on as a zombie ideology – Alan Greenspan seems to have actually retracted his mea culpa for being so wrong in the past. Do you see any hopeful signs for a new, more accurate economics?

DB: It's been very interesting. I think part of it is that people are wrong to say it was free-market fundamentalism because it wasn't – they weren't being honest. So it gives Greenspan an easier out because it's a really confused ideology. If you're an honest Ayn Rander – and I'm not putting words in his mouth, she actually was Greenspan's hero and his book mentions how much he admired her – you would've expected this. What was going on? You had these Wall Street honchos that were stealing. They were stealing from everyone. Stealing from the people taking out bad mortgages; stealing from the people that bought these junk mortgage-backed securities; and they were stealing from their shareholders – that's because they were taking on enormous risk and a lot of shareholders like Bear Stearns and Lehman Brothers lost their shirts. But what would Ayn Rand say? These were supermen, they were great guys, they're not bothered by that. So Greenspan should've expected this. If the cops – and he's the cop – are on the sidelines saying, “Go ahead: steal, steal, steal,” well, what do you expect? These brilliant guys who are out for themselves are going to steal and that's exactly what happened.

Part of the point of the book, I think, is to clear up some confusion here. We were not living in a world of laissez-faire. These guys were in a situation where they were allowed to steal by state structures like the implicit guarantee of too-big-to-fail, which basically gave them the green light. And after the fact, nobody pays any consequences. There have been no serious investigations of higher-ups; only a few lower-ranking people here and there.

KB: Bernie Madoff stole from the rich, right?

DB: Yeah, so Madoff got it. But the people at Citigroup, AIG and Countrywide have largely gotten off. There was a civil suit against Angelo Mozilo of Countrywide and he ended up paying somewhere around $47 million to the Securities and Exchange Commission [SEC], but still walked away with hundreds of millions.

KB: And Goldman Sachs reached a relatively small settlement with the SEC that allowed them to deny any wrongdoing.

DB: It's sort of like being a bank robber, getting caught robbing the bank and giving back two of the 10 sacks of money that you stole. And then they tell you to go on. And that's the extreme case – most didn't even get punished at all. In the cases where you actually did have some legal action, it was less than a slap on the wrist because for the most part, they're still better off doing what they've done even after they're caught.

KB: One of the state structures that facilitated the ripe conditions for this robbery was the Federal Reserve, which plays a very prominent part of your book. Why are its decisions so important, yet so little known? You note that progressives “spend far more time arguing over jobs bills that will have a trivial impact on employment compared to the Fed's monetary policy,” and “devote major lobbying efforts to tax or budget items that don't have a tenth of the impact on the debt as the Fed's decisions on its asset holdings.”

DB: The Fed has the responsibility for maintaining growth and stability in the economy. As much as people complain about deregulation, the Fed had all the authority it needed to prevent this bubble. Greenspan just looked the other way. Either he didn't see it, or more likely, he thought it was cool. We'll find that out when we get all the minutes, but that's exactly what happened with the stock bubble. I remember hearing him give a talk in January 2004, where he was patting himself on the back, saying, “Yeah, we did the right thing with the stock bubble. We let it run its course and picked up the pieces.” Then I went down to hear a talk by Ben Bernanke where he explained why we still had a 1% federal funds rate. And he said, “Actually, the labor market is still very weak,” more than two years after the recession. So obviously it wasn't that easy to pick up the pieces but that's the lesson that Greenspan took away and so did most economists for that matter.

KB: You've attributed the Fed's willingness to “pick up the pieces” to a couple of factors, but what sticks out is that bankers, the Fed's primary decision makers, are “likely to be less concerned about a 1 to 2 percentage point rise in the unemployment rate than autoworkers, sales clerks, or custodians. It is unlikely that many bankers, or their friends and family members, will lose their jobs if the unemployment rate were to increase by this amount.” And the only reason they tolerated a low interest rate after the tech bubble was that they knew a crushed labor force couldn't demand higher wages, a motor for inflation.

DB: That's right, because you did have the hawks of that day yelling, “What are you doing? A 1% interest rate?” And Bernanke said, “Look at the numbers – employment is weak.” The point is that it was not an easy bubble to recover from, but that's the mythology and that's certainly what Greenspan was saying. But they had all the tools they needed to rein in the stock bubble. I've always emphasized that the Fed could have attacked the bubble but did nothing. At the most basic level I always ask, “Why didn't you even talk about the bubble?”

People love to ridicule that and I say, “Fine. Let him do it and see what happens.” I really have a hard time believing that if Greenspan's staff had been putting out stuff along the lines of what I was writing, showing that stock prices were out of line with any plausible projection of profit growth – not mumbles of “irrational exuberance,” but real documentation – that the Fed would have been ignored.

KB: Later, with the housing bubble, he defended it by saying that the unprecedented rise in housing prices was based on solid fundamentals.

DB: So he argued 180 degrees the wrong way. If he had clearly made the case again and again through speeches, testimony to Congress, Federal Reserve publications, people wouldn't have ignored that. They may not have agreed, but there was no argument on the other side. I challenged the chief economists at Fannie, Freddie, the Mortgage Bankers Association; I was in the middle of this and no one had any arguments that held water.

In addition, he had enormous regulatory authority. He didn't exercise it and said, “We only control one-third of the mortgage market.” This is nonsense stuff, because the Fed's regulations are the gold standard. If he had said, “Here are the mortgages that we think are okay,” it's inconceivable that no one would care. Plus, all the other regulators looked to him. So the other regulatory bodies would have likely followed suit.

KB: So in your view, the housing bubble – the primary cause of the US economic crisis – could have been headed off by an active Federal Reserve, and all this without having to raise interest rates.

DB: I would say 99 percent for sure. If that were inadequate, yes, you raise interest rates and Greenspan has raised interest rates, like in 1994. I would be very, very reluctant to do that, because the economy was weak and it would mean raising the unemployment rate further. But it would've been better than where we ended up. I think almost certainly, though, it wouldn't have proven necessary if they had really used the authority they had to rein in the bubble.

KB: You write about how achieving low inflation – the reason the Fed raises interest rates – leads to greater unemployment. And while financiers would prefer to have lower inflation so the value of their assets doesn't depreciate, why is it that regular working people seem to support lower inflation in surveys, even if that means higher unemployment? Does this imply a need to better educate the public on this matter?

DB: Asking people what they think about inflation abstractly won't likely give you well-informed answers. People think of inflation as eating away at their wages. So if you ask, “Suppose you have 5% inflation but your wages grow 5% a year,” people don't really conceptualize that.

What we can do is look at what actually happens in economies where wages are rising substantially and there's substantial inflation. And in those cases, incumbent parties tend to get reelected, which would suggest that they're not that upset about inflation. Most people don't have their nose in the books; they're not thinking carefully about all prices and wages rising together. They're just thinking, “I'll have to pay 5% for gas, food and rent,” and that sounds really bad. So there are serious limitations to doing surveys in that way.

This has been less of an issue lately, in terms of the Fed keeping the unemployment rate high, because we haven't had occasion. Bernanke has at least done the right thing – not as aggressively as he should – but he has been trying to spur growth. I wish he did a lot more but at least he's going in the right direction. But if you go back to 1994, we literally did have this case. The unemployment rate fell to 6% and that was almost universally seen as close to the floor that unemployment rate could hit without kicking off inflation. And they started to raise rates – the short-term interest rate rose from 3% to 6% over the course of the year. And it absolutely slowed the economy. It was striking how little attention was paid to this effort, basically, to raise the unemployment rate, which is exactly what it was.

This is an example where a lot of people at the time were saying, “We have a great jobs program, we want to do this project and that one.” But if Alan Greenspan has his foot on the brake, it doesn't matter how great your jobs program is. It might create jobs for those people, but that's at the cost to someone else, because Greenspan wants to see the overall unemployment rate at 6%. So you can help one group of people and it's good for them. But you won't bring down the unemployment rate as long as the Fed has a policy of making sure unemployment doesn't go below 6%.

To Greenspan's great credit, this is the one thing that he did that was 100 percent correct and against the consensus in the economics profession at the time: After he raised interest rates from 3% to 6%, the unemployment rate was still around 5.6% to 5.7% in the summer of 1995. But the economy was very weak and was experiencing slow growth. And Greenspan lowered interest rates and had big arguments with Clinton appointees – good, smart economists like Janet Yellen and Larry Meyer, both Democrats – who argued that there would be too much inflation. They were both giving the absolute dogma of the profession and no one disputes this; I think all three have written about it. In the end, Greenspan carried the day because he was the Fed's chair and had a lot of standing and said, “I don't see inflation.” He was 100 percent right, he allowed the unemployment rate to fall not just to 5%, but eventually to 4% and millions of people had jobs who wouldn't have had them otherwise. It was the only time since the early 1970s that the US experienced robust wage growth up and down the income ladder. But he went against the dogma within his profession and had you not had this quirky character – because whatever you say about Greenspan, he's not a mainstream economist – you wouldn't have seen this strong wage growth in the 1990s.

KB: You're one of a few Ph.D. economists who dismiss the nostrum that unemployment must be kept at some specified level, or inflation will ensue. You even say that economists don't even really understand the process by which inflation becomes a problem. Your colleague Ha-Joon Chang has also talked about how Asian countries, in developing into advanced economies, dealt with 20 percent inflation rates, which is just unfathomable within the economic orthodoxy. So, the Greenspan example is a case of competing priorities – basically a political choice about how many people should have jobs – and, therefore, it should be open to greater public debate and input.

DB: I would certainly think that it argues for that. And there's very little owning up in the profession that they had really blown it. Greenspan's view was certainly in the minority and liberal Democrats took issue with it. Paul Krugman has changed a lot today, but he wrote a piece in 1995 denouncing those skeptical of a predetermined point in unemployment – like, say, 5% – where going below that causes inflation. He called them “politically motivated hacks.” He's moved to the left since then, but even back then, he was left of center in the profession. At the very least, that point where inflation rises is not stable, because we got the unemployment to 4% with little acceleration of inflation. There eventually was an uptick in inflation in 2000, but it was due to commodity prices in world markets; this had little to do with the unemployment rate in the US

As you try to look for evidence of higher inflation slowing growth, it's actually fairly weak. And given the deepness with which this view of maintaining 2% inflation is held, you'd think that there would be a large body of research that showed that things get really bad when inflation goes to 3% or 4%, because that's how central banks look at it. If the relationship were really so unambiguous that inflation at 5% is so bad – leaving aside Ha-Joon's example of 20% – it should be easy to show and the fact is, it's not. That doesn't rule out any negative effect, but it can't be nearly as bad as these people are claiming.

KB: In the book, you note that the Federal Reserve Transparency Act passed with a majority of Republican votes, but only a third of Democrats supporting it. Is this an example of loser liberalism?

DB: I think you have a lot of Democrats who buy into this idea that we should leave the operations of the economy alone and then, because we're good people, we'll redistribute some from the winners to the losers. That's my idea of loser liberalism: liberals help out the “losers.” And in my book, I argue that it's really bad policy for a lot of reasons that conservatives raise: government programs tend to be bureaucratic, inefficient and prone to fraud. It's not the best thing to allow the market to generate extreme inequality and deal with poverty and ensuring health care to pick up the pieces after the fact.

And it's horrible politics. It creates this idea that the people who work hard are taxed to help the people who don't work hard and aren't successful. And I recognize that it's not the real story, but the point is that you're easily stereotyped and basically asking to be caricatured if you say, “We let the markets work and pick up the pieces afterward.”

KB: You mention some very interesting examples of the economic crisis provoking a bit of a shake-up within the profession. The International Monetary Fund's (IMF) chief economist, Olivier Blanchard, has advocated targeting inflation at 4 percent. In your book, you say that finance nowadays “is not about allocating capital to its best uses or making savings more secure, it's about finding clever ways to rip off taxpayers, productive businesses and other actors. The economy will benefit from having less of this sort of inefficient rent seeking behavior. While this may have seemed like a radical assessment a decade ago, even the IMF now recognizes that … governments should adopt policies to reduce the sector's size.”

Even more fascinating is a study you cite by the Organization for Economic Cooperation and Development (OECD), which found that in wealthy countries, “the number of patents per capita was the most important factor determining the extent to which income was redistributed upward from those at the middle and bottom to those at the top over the last three decades.” This flies in the face of all the narratives of US inequality resulting from stiff global competition, which even President Obama has asserted.

DB: Olivier Blanchard has always been a very good economist and while he's certainly within the center of the profession, he's a creative thinker. What's surprising is that he says this as chief economist of the IMF. Not to say that it's been totally accepted – how many people within the mainstream of the profession have criticized the European Central Bank for raising interest rates during a downturn? They should have, but if they did, they did it very quietly, despite vocal criticism for other things.

It's great to get those voices out there, though. The IMF and other mainstream people are saying that there's a lot of rent seeking going on in the financial sector and we want it to be smaller. To my mind it's just common sense: finance is about directing capital from those who want to save to those who want to invest. You want a small sector – that's an efficient sector. So when it gets very big, there's a prima facie case that it's not efficient. What are they doing better to allocate capital? You'd be very hard-pressed to say that.

On the OECD, I should actually point out – and this is kind of fun because this is typical of economists – that their reason for correlating patents per person with inequality was actually to use it as a measure of technology. So it's one of these great stories where what they were saying was, “There's a very strong correlation between technological progress and inequality, so it's really technology to blame.” Well, patents are most immediately a measure of … patents. And presumably patent rents. So it may or may not have anything to do with technology, and I, of course, would be very skeptical, because at the end of the day, technology doesn't depend on patents – it depends on your ability to increase productivity. So why not just use a direct measure like productivity or multifactor productivity? My guess is they didn't use them because it didn't show the results they wanted and neither of those measures appears in their regressions. So in any case, I was very struck by the result but they weren't interpreting the result the same way I was.

KB: Why is it that so many academics in the profession – experts in labor and macroeconomics – insist on cutting social programs despite the economic contraction that will inevitably result? The former Chair of the Council of Economic Advisers to Obama, Christina Romer, was considered the progressive end of the spectrum during her tenure there. But she strongly agreed with the Bowles-Simpson proposal, which would cut Social Security, a program that is legally prevented from having any impact on the budget deficit.

DB: She was playing the progressive role in the administration, but it's a deeply held view among economists. She's very much a consensus figure. There's a sloppiness there and you'd think that someone like Romer would know better, but when you lump Social Security together with Medicare and they're totally different stories. The numbers are unambiguous: Medicare goes through the roof because of health care costs and for those who say it's unsustainable, of course it is. The answer is we have to fix health care. If you were to privatize health care and leave the system as is, you'd be telling tens of millions of people that they're not getting health care. The Congressional Budget Office estimated that the Paul Ryan plan, which proposed that, would add $34 trillion to the cost of Medicare over their 75-year planning horizon in 2011 dollars. That's real money, about 6% of GDP over this period.

Social Security goes from 4% of GDP to 6% of GDP – it's hard to see that as an intolerable burden, considering that we increased defense spending by that much from 2000 to 2003 when we had peak wartime spending and we're still at that level. I won't say that it had no impact on the economy, but I don't think anyone with a straight face can say it devastated the economy. The cost increases that are associated with aging are easily manageable – not trivial – but easily manageable. The costs associated with health care are enormous, but that's a different issue.

KB: Can you explain how our privatized medical system, which costs twice as much as those of other advanced countries and performs worse on basic health indicators, ends up affecting the public budget?

DB: In the US, there is a very small public health care system – the Veterans Administration and some public hospitals – but the vast majority of our health care system is private. So when we look at the big public sector programs, Medicare and Medicaid, the vast majority of what they pay is to private providers. So if they have to pay more to doctors and pay more for various medical tests and drugs, all that goes to the private sector. So the story is that there are massive run-ups in private sector costs and at this point a little more than half of all health care is paid for through the public sector, so it's a huge burden on the budget. But again, it's the private sector that's driving that, because they're buying health care in the private sector.

KB: In your book, you write that “as the debate over President Obama's health care reform bill made clear, there is no realistic prospect of fixing the domestic health care system given the current distribution of power in the United States.” You outline a detailed proposal that uses free trade in medical services to lower the bloated costs in the US, instead of advocating an efficient single-payer system found most everywhere else. So, are you fleshing out your model that thoroughly so that progressives adopt it at some point, or just to better illustrate the hypocrisy in market-oriented ideology?

DB: First and foremost, it's to illustrate the hypocrisy, because people have to get over the idea that somehow the winners won because they're smart, work hard and so on. That could well be true – I'm sure most doctors are smart and do work hard – but that's not why they came out ahead. It's because they cheated. So we have to make that really clear: they're not free traders, they're protectionists. There's no doubt about that.

That said, there are ways to take advantage of this. So medical trade is an example. People are already doing this and they'll continue, given the alternative. It's not ideal, but if you have a medical procedure that costs $200,000 in the United States and you can go to a modern facility in India or Thailand and have it done for $20,000 or $30,000, that's great. It's a horrible way to get health care – it's absurd – but that's the world we live in. That's a great way to put it in peoples' faces: picture a lot of people who go overseas to get their care receiving $50,000 from their insurance policy, because their insurance company shares the savings with them. That rubs it in your face that we don't have the best health care system in the world because people are voting with their feet. So we have to try to find ways to create openings.

Back in the mid-1990s, there were complaints that we were getting too many foreign physicians practicing in the country and it was driving down the wages of doctors. There were a few pieces about it in the New York Times and the Washington Post and I'm sure others. And what was fascinating were the two sides of the debate. One side said they were driving down the wages of doctors and the other side said, “No, no, these foreign doctors are serving inner-city areas, rural areas and places native-born doctors don't want to go to.” There was no one making the economist's argument: “Yeah, they're driving down the wages of doctors and that's good! It lowers costs for everyone.” What's funny is, I've raised this with trade economists and invariably, they look at me and ask me, “What are you talking about? That has nothing to do with me.” That speaks volumes about the profession, because if I were talking about a tariff on steel, they would know it inside out. Well, we spend a hell of a lot more money on doctors than on steel. So you would think they would want to know about that.

KB: One of the other proposals that you outline in the book – eliminating pharmaceutical companies' temporary monopolies on drugs – would save $3.4 trillion over a decade, while repealing the Bush tax cuts for the rich would provide only $680 million during the same timeframe. While accepting your point about the need to correct the rigged outcomes of the economy that happen before taxes and redistribution, why not also advocate for the higher marginal tax rates of the Nixon or Eisenhower eras, especially if the alternative right now is borrowing from rich investors and paying them interest?

DB: As long as we're in a serious downturn, it's pretty hard to design taxes that are only going to hit people that aren't going to spend it. So you're almost certainly cutting into spending some. It matters much less if you tax Bill Gates and affect his spending as opposed to someone earning $100,000 a year. But it's very hard to design taxes where you're just going to hit Bill Gates. Because if it's just hitting Bill Gates, he'll move it. It's hard to have confiscatory taxes because you run into Constitutional issues, but also practical issues: at some point, Bill Gates will leave the country and his money will go with him, so you're not going to get it.

The other thing is, on the politics, I want to change the structures that allow these people to accumulate such enormous wealth. Bill Gates got to be enormously wealthy because we gave him the green light to make a mockery of antitrust law.

I remember when I first came to Washington, D.C., I was working at the Economic Policy Institute and got a call from a reporter who wanted to write a piece about an antitrust investigation on Gates. And the way this reporter described the issues to me, I said, “That can't be right.” She said that Gates had been signing agreements with Compaq and Hewlett-Packard, the major computer companies at the time, where they would agree to pay him for every computer they shipped, whether or not it used DOS, the precursor to Windows. When I taught antitrust to undergraduates, the classic example was how John D. Rockefeller had the railroads pay him for every barrel of a competitor's oil that they shipped. People dispute whether it's true, but this was basically the same story: I was told that Bill Gates was having Compaq pay him for each computer that they shipped that had one of his competitors' software systems. I didn't believe it, but she said, “No, this is true,” and she sent me all the documents on it. And it was in fact right.

They didn't end up bringing the case, they ended up dropping it and they got a settlement where Microsoft agreed to stop doing it. At this point, Bill Gates controls 90% of the computer market. So you just let this guy do the most blatant violation of antitrust law imaginable, secure a monopoly for all practical purposes and tell him not to do it again. I mean, come on, these are blatantly anticompetitive practices. You're much better off not letting the monopoly develop than thinking, “we've let the monopoly develop, now let's figure out a way to tax it.”

KB: You attribute a lot of the problems that working people face in the US to “stupid policy” that's “self-inflicted.” But stagnation, high unemployment and the destruction of social programs are welcomed by elite sectors, as long as corporate profits stay strong and wages stay low. There's no reason for them to worry about the lack of demand for their products and services as a whole, at least not yet. And as long as there's elite control over the political system, it's hard to see how all of this is “stupid” instead of intentional.

DB: Obviously there are powerful forces for these policies and people stand to gain. In the case of antitrust, Bill Gates gained enormously and was prepared to use whatever power he had. There are real forces behind this – no doubt about it. But it's important to understand where the points of vulnerability are. I don't expect to appeal to Bill Gates and have him say, “I'm a bad guy, I'm going to give up everything,” but where we have force, we should use it in a way to make the most impact. I'm an economist down in D.C. and I didn't know that Bill Gates was using every slimy hook and crook in the world to build an illegal monopoly – not a clue.

And I can go on with a long list of things, so we can talk about NAFTA [North American Free Trade Agreement]. NAFTA and CAFTA [Central American Free Trade Agreement] were bad, I agree. They're about securing higher profits, not creating jobs – that's a joke and everyone knows it's a joke. But why not talk about lowering the value of the dollar? Insofar as we have power, we should focus on where we would expect to have a much bigger impact, if we got anywhere.

And some cases are so much more unambiguous: the Federal Reserve Board bailing out the big banks, for example. While we didn't want the financial system to collapse, why didn't we make these guys run around naked with their underpants over their heads? We could have kept Citigroup alive so we didn't have the cascade of collapses. But we could've said, “You're not going to be Citigroup anymore.” And I don't mean changing the name, I mean changing the way it operated. We should have said, “You're not going to give your executives millions or tens of millions of dollars, you're not going to engage in speculation, we're restructuring you guys, and your choice is to take the money and do what we tell you, or go out of business and tell your shareholders why you cost them every last penny.” And the shareholders won't be pleased because it's almost criminal.

We have to find where the pressure points are – it doesn't mean you'll win them, but at least if you do win them, you'll have done something. Whereas in other cases, we can defeat CAFTA and celebrate that – I think that would be a good thing; it's probably not good for us and more importantly, for Central America – but it's not going to accomplish very much.

KB: One of the points you've made for years and reiterate in this book, is the government's use of coercion to infringe on the liberty of workers to support one another. You write: “If the workers at a restaurant go on strike and then arrange for the Teamsters to refuse to deliver food to honor the strike, the restaurant can enlist the government to deliver injunctions and impose fines against the Teamsters. If Teamsters officials ignore the injunction (e.g., they don't tell their members that they cannot refuse to deliver food to the restaurant), they can face imprisonment.”

As you lay out long-term proposals despite the current political obstacles to their implementation, would you consider shifting control over economic decisions from CEOs and shareholders toward those who work in productive enterprises and the communities in which they are situated? Would you advocate for abolishing corporate personhood and limited liability?

DB: There are several different issues here. I don't have a problem with corporations, but even Justice William Rehnquist, a very conservative judge, said they're creations of the government and we can do whatever the hell we want with them. And that's always how I understood them – they are creations of the government.

You and I could form a partnership and if we did something harmful like poison our neighbors, they could sue us and take everything we own. Being able to form a corporation, so that we could say, “No, you can take the corporation but we're okay” – that's government involvement. The government is constitutionally obligated to endow something it creates with the same rights as an individual. That strikes me as pretty bizarre, so I think that's a really, really strange ruling that goes against a lot of conservative legal doctrine.

When I raised the issue of corporate governance in my book I didn't get too in-depth, because I'm not an expert on it. My point is that the issue of corporate governance should be understood as a problem of government. You allow CEOs to pick the people who will determine their pay and the CEOs give them $300,000 a year to be directors and come to meetings four times a year? Why aren't libertarians all over this? This is not the free market, this is incredible corruption.

And we don't let corporations do whatever they want – there are elaborate rules in corporate governance, most of them designed to protect minority shareholders. So we can't take over 50-plus-1 percent of IBM and tell the other 49 percent that they're screwed. We don't allow a purely free market for obvious reasons. We want to maintain a sound capital market. You don't have nearly the same problem in East Asia or Europe of runaway executive salaries, but in the US, we've created this situation where you have this incredible bloat where basically the CEOs are running the show for their own benefit. That's a governance problem, not an issue of the free market, and that's how this issue should be understood.