Dean Baker reduces uncertainty

In my previous post, I linked to Dean Baker's fisking of today's Friedman column. I wrote about Friedman's column before reading Baker. Friedman only alludes to the lack of consumer demand and I mentioned it in my previous post, but Baker really focuses on it:

The main problem facing the U.S. economy of the last decade was a lack of demand. This was in large part due to the fact that China lent to us. China's lending was its policy of propping up the value of the dollar in order to maintain its export market in the United States. (At the start of the decade, the Clinton administration had also tried to promote an over-valued dollar.) The over-valued U.S. dollar made imports from China and other countries very cheap in the United States and made our exports expensive in other countries. This led to a large and growing trade deficit over most of the business cycle. The trade deficit replaced domestic demand, preventing the economy from approaching normal levels of employment (even with the boost from the housing bubble) until just before the crash.

There is no reason whatsoever to believe that China's decision to prop up the dollar was in any way affected by the Bush tax cuts. In other words, neither the Bush tax cuts nor the growth in entitlements had anything to do with our borrowing from China. The issue was China's decision to lend and thereby prop up the dollar. Given the weakness of demand through most of the decade, these expenses could have been easily filled by domestic production without borrowing from abroad.

After the tech bubble burst in 2000, Greenspan had to keep interest rates low to fight deflation. This along with deregulation led to the unsustainable housing bubble.

Baker says there's no uncertainty, just a lack of demand for labor and a slow uptick in the hours worked per worker:

Of course there is no reluctance to hire, there is simply a lack of demand for labor. A reluctance to hire would be reflected in an increasing number of hours per worker, as employers sought to meet their demand for labor by working the existing workforce more hours.

This is not happening. There is a modest uptick in hours from the low point of the downturn, but the increase in hours per worker is certainly no more rapid than in other recessions and the average workweek is still far shorter in just about every sector than it was before the downturn.

Baker rightly criticizes Friedman's misinformation on Germany on multiple fronts. Baker points out that European's universal health care systems are much efficient than ours,* something I failed to catch. It's really impressive how much Friedman gets wrong - not somewhat wrong, but exactly wrong. Baker ends his fisking with the following summation:

If Friedman's intention was to scare us, he succeeded. After all, if senior economic policy makers in the U.S. and Germany are as badly misinformed as Friedman implies, then we can expect some very bad times ahead.

Yeah but as I said Friedman is advising more fiscal stimulus in the face of "unusual uncertainty" - code for a lack of demand - so hopefully "senior economic policy makers" will as well. The most likely scenario for me is slow growth and a slow reduction in unemployment. The question is whether there will be another asset bubble. I don't see persistent deflation because Bernanke has sworn to prevent it.

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*That's a nice double-gotcha by Baker. Friedman mischaracterizes Germany's welfare state as the "sick man of Europe" and asserts America's health care reform is costly and adds to the debt, when in reality Europe's universal health care systems are more efficient than ours and Obama has moved us in their direcetion which will help reduce the deficit.