Baker graduated from Swarthmore College (B.A., 1981), the University of Denver (M.A., 1983) and the University of Michigan (Ph.D.). As a grad student at the University of Michigan, Baker participated in, and was arrested at, two sit-ins protesting Rep. Carl Pursell's votes for military aid to the Contras. In 1986, Baker defeated Donald Grimes in the Democratic primary and ran unsuccessfully against Pursell to represent Michigan's second Congressional district.

Baker wrote his thesis on consumption theory. He argues that analyzing consumption requires categorizing objects, which cannot be done using only physical characteristics. The words for objects must be used, e.g., chair. These words imply socially understood uses, which define the object, e.g., a chair is used to sit on. Individuals have preferences over these uses of objects. This is at odds with consumption theory, which makes no assumptions about how individuals derive utility from objects. Baker also argues that objects' use values change with their social context, rejecting consumption theory's claim that consumption is private, and not influenced by society.

Before co-founding the Center for Economic and Policy Research in 1999, Baker was a senior economist at the Economic Policy Institute and an assistant professor of economics at Bucknell University. "He has also worked as a consultant for the World Bank, the Joint Economic Committee of the U.S. Congress, and the OECD's Trade Union Advisory Council."

From 1996 to 2006 Baker was the author of a weekly online commentary on the New York Times' and Washington Post's economic reporting. From 2006 he continued this commentary on the weblog Beat The Press, where he critiques economic reporting in the leading broadsheets, NPR and other mainstream news sources.

Basing his outlook on house-price data-sets produced by the US government and Yale economist Robert Shiller, Baker was among the first economists to assert there was a bubble in the US housing market in 2002, well before its peak in late 2005 and one of the few economists to predict that the collapse of this bubble would lead to recession. He has been critical of the regulatory framework of the real estate and financial industries, the use of financial instruments like CDO, and the incompetence and conflicting interests of US politicians or regulators, such as Hank Paulson.

Baker opposed the US government bailout of Wall Street banks on the basis that the only people who stood to lose from their collapse were their shareholders and well-paid CEOs. As regards any hypothetical, negative effects of not doing the bailout, he has explained that, "We know how to keep the financial system operating even as banks go into bankruptcy and receivership," citing US government action taken during the S&L crisis of the 1980s. He has ridiculed the US elite for favoring it, asking, "How do you make a DC intellectual look less articulate than Sarah Palin being interviewed by Katie Couric? That's easy. You ask them how failure to pass the bailout will give us a Great Depression."