The Economist behind the Curtain

SO A PHYSICIST, an engineer, and an economist find themselves shipwrecked on an island, and their only food is a can of tuna. As they have no tools, they have to figure out how to open it. They each work quietly on the problem for a few minutes and then present their findings to each other.

The physicist begins, “If one of us climbs seventeen feet up that tree and throws the can at that rock with an initial trajectory of 57 degrees..” and so on. The engineer breaks in and alters the trajectory slightly, arguing that the impact must be enough to open the can without splattering its contents. Finally, they turn to the economist and ask for his contribution. His reply: “Assume a can opener...”

ASSUME A YOYO ECONOMIST

Economics, often listed in college catalogs under the heading “social science,” is a unique science. It does not, like the so-called hard sciences of math or physics, progress toward objective truths about reality. Unlike those sciences, it is based on assumptions about how “economic actors,” or people, behave with regard to activities such as saving, consuming, investing, and so on. Its laws, like the “law of one price,” are unlike the laws of physics, such as the based on a logical assumption- the same good should cost the same everywhere in the same area - but at least where I live, I see it broken every time I drive down the street and pass a few gas stations.

Given its scientific softness, economics tends to have a strong ideological component, and for the last few decades, it has taken a conservative turn. But before then, from the Depression to the Carter years, the discipline of economics looked quite different, as did its implications for the society that applied its insights.

This shift in ideology is not merely of academic interest. Not to put too fine a point on it, economic policy has been instrumental in the demise of WITT and the rise of YOYO. That change was not ordained from above (or below). Neither has it been simply an intellectual evolution, as new ideas and evidence supplant the old. The shift in economic ideology has strong political roots and an even stronger class bias. Filtered through our particular brand of heavily money-laden politics, today's economics supports outcomes much more favorable to the very wealthy and the very politically connected than the tradition it replaced.

The Revenge of the Nerds

     Economists, especially those who work for politicians or lobbyists, can be powerful people in an advanced economy like ours. Alan Greenspan, for nearly two decades the chairman of the Federal Reserve, arguably became more powerful than the president on matters economic. By throwing their support one way or the other, economists in high places can affect the lives of millions, both today and in years to come. The decisions they influence - to support or oppose a policy to lower taxes or to build up massive federal budget deficits -can reverberate over generations. To take but one example, when Greenspan threw his support behind the massive

Bush tax cuts in the early 2000s. Their passage became assured. Any lawmakers who were wavering about the wisdom of slashing the government's revenue so dramatically were knocked off the fence once Greenspan weighed in. Now we're stuck with budget deficits that are already hobbling the government's ability to meet pressing social needs. Citing the very deficits they created by enacting those tax cuts, Congress has begun to cut funding for Medicaid, the system of public health care provision for the poorest Americans, even as the rolls of both the poor and the uninsured continue to climb.

These problems will only get worse if we fail to correct the damage and replace the lost revenue. The situation is not entirely Greenspan's fault, in that he didn't propose the tax cuts, but his fingerprints are all over the structural deficits. 1 The result is that Congress can't stop trying to pass more tax cuts -“Hey, Greenspan said we could” - while arguing that the deficits mandate spending cuts in Medicaid, food stamps, worker training, and college aid. It's a potent example of the destructive power of the intersection of these two ideologies: contemporary economics and YOYO.

Different Goals, Different Questions

As explained below, since about the mid-1970s some conservative economists and their university departments helped shift the focus of economics. In broad terms, the old economics had two main policy goals: (1) ensuring that we as a society tap our collective potential and fully employ our economic resources, especially people, and (2) providing individuals with ample protections and publicly provided insurance against undesirable market outcomesweak job creation, high unemployment, rising poverty rates, and falling real incomes - and other challenges like aging out of the workforce or becoming disabled.

    Today’s economics also has two goals: (1) getting rid of the policy set associated with the old economics and (2) making sure that individuals are offered the optimal incentives, the ones that should lead them to behave in ways that, according to the mathematical models, bring about the most efficient results.

When the goal of economic policy makers shifted from full employment for the society to the optimal incentives for the individual, YOYO was born. Today, we're seeing the outcomes: greater inequality, a fiscally bankrupt government, the shifting of risk from the government and the firm to the individual, and the loss of the systems and institutions- like pension coverage, minimum wag es, overtime rules, and a durable safety net- that insulated workers from market failures and inequities.

With this change in the thrust of economic thinking, the central question of economic policy went from, What can government do to be sure that everyone can contribute to and benefit from the available resources? to, What can government do to get out of the way? The former question considers the challenges inherent in national economies since Adam (Smith, of course) and points to collaborative solutions; the latter, especially when mixed with our unique brand of heavily lobbied government, ignores workers except to tell them, “You're on your own. Here's a tax cut. Now go out there and optimize.”

It is extremely unlikely that we as a society will be able to implement WITT policies under the current economic regime. What's needed is a shift in the way we talk, think, and plan for dealing with the risks and opportunities in today's economy. The first step to building an All Together Now movement requires exposing the class biases inherent in YOYO economics and stressing the advantages of a different approach to government, economic policy, and risk sharing. A brief history of how we got to the present state of affairs should help set the stage.

 Prior to the Great Depression, economics was far more laissez-faire than it is today. Until his recent retirement, one of the most powerful persons in the world was a crusty central banker named Greenspan. A word from this oracle with thick glasses moved international markets (once you figured out what he was talking about - the's a master of elliptical speech), and presidents had to seek his approval for their economic plans. But the Federal Reserve Bank did not exist at the beginning of the twentieth century: it was created in 1913 to regulate banks more strictly and to give the government more control over economic variables such as interest rates and the money supply. As noted previously, early progressives like Louis Brandeis played a key role in promoting such market regulations, but by the 1920s, the idea that the government should intervene in the markets to ensure a better collective outcome was well out of vogue.

So, when economic tragedy struck, beginning with the market crash in 1929, policy makers did not react, assuming the system would self-correct, or they made mistakes like erecting trade barriers and raising taxes. The Federal Reserve essentially stood by while thousands of banks failed, ensuring that the slump would become the deepest in our history. As a result, we suffered unheard-of levels of unemployment. Today, economic downturns tend to be associated with jobless rates of 7 to 10 percent. Then, measured unemployment surpassed 25 percent, but even that value presents too rosy a picture of the extent of privation.

From an economic perspective, this meant a vast underutilization of human resources. Economic science, however, had yet to evolve to a point where we knew how to correct that imbalance.

Enter the great British economist John Maynard Keynes.

Keynes plays an important role in this story. In helping to construct an economic system to respond to the internationally pervasive slump of the 1930s, his response had something in common with that of Paine to the question of independence. Both men recognized that the institutional systems in place were failing to adequately and fairly serve the collective good, and both recognized that “times that try men's souls,” in Paine's words, call for a radical departure from business as usual. While the Keynesian revolution was a far tamer affair than the American one, both men were responsible for major leaps forward in the quest for realizing human potential.

It was then generally believed that left to its own devices, an “invisible hand” would guide the market economy to the best outcomes, including the highest achievable growth rates, enough jobs for those who wanted to work, and incomes that grew with the economy's productivity. Sure, you needed property rights and other legal protections, but once they were in place, rational economic agents would engage with each other in ways that would automatically produce the best results for all parties. Any interventions, including well-intentioned efforts to help the downtrodden, would only lead to counterproductive market distortions, including layoffs, spiraling price increases, and slower real growth. ( Keep these ideas in the back of your mind, because they form the basis of today's approach to economics, labeled “neoclassical,” because it harks back to these earlier days.)

Keynes, however, looked out at the ravaged landscape of the 1930s and realized that sometimes the invisible hand is all thumbs. His key insight was that left to their own devices, economies like ours as often as not fail to effectively utilize their available resources, including people, an insight that came pretty easy when unemploy- ment had passed 25 percent and poverty was rampant. Keynes and his followers thus rejected a reflexively anti-interventionist stance in favor of a more active approach that would look for ways to push the invisible hand around a bit, specifically through managing the business cycle with fiscal, monetary, and safety-net policies, including the direct creation of jobs by the government itself when labor demand was inadequate.

The Arrival of WITT

To this day, we're arguing about whether Keynes was right. But back in the 1930s, it became a no-brainer that Keynesian economics was the best way forward. Something had to be done. Franklin D. Roosevelt, who had run against Hoover's budget deficits in 1932, initially resisted Keynes's logic, and when the president and Keynes met in 1934, they appear to have mostly perplexed each other. Yet, as the Depression wore on, Roosevelt implemented a Keynesian program . The “alphabet soup” agencies and others- the NRA, WTA, CCC, and others- were designed to promote public works, rebuild the nation's infrastructure, and reduce unemployment. But those years also saw the creation of lasting set of federal policies that fit perfectly under the banner of “We're in this together,” or WITT. Social Security for the elderly, unemployment insurance, a federally mandated minimum wage, collective-bargaining rights for workers, the first federal safety net for the poor- those were the policies of the day.

The aim of those policies was to share risks, to combine our resourees to protect the most vulnerable from pervasive and frequent market failures. It was the exact opposite of the intention today. Some of what we are currently debating, like Social Security “reform,” is an unabashed attempt to reverse course. As noted in chapter 1, the current Bush team tried to do the same thing with unemployment insurance, turning it into personal accounts to be managed by the unemployed. Although even the Republican dominated Congress tried to stop them, administration officials successfully went after time-and-a-half pay for overtime work, instituted during the Roosevelt era. In the wake of Hurricane Katrina, wages must be paid on government-funded projects. (Congress later forced the administration to reverse the suspension.) Those actions took place in broad daylight. Others, like allowing inflation to whittle away at the federal minimum wage until it has become almost meaningless, have been stealth attacks.

YOYOs will argue that Keynesian policies or any similar ideas that intervene in private markets are incompatible with freewheeling global economics. But the policies currently under siege do not pool risk -the risk of unemployment, of an impoverished old age, of large government contractors undermining market wages -for sentimental reasons. They also constitute good economic policy, in the “WITTian” sense that they do not accept undesirable market outcomes, like weak job creation, failing real wages, and insecure retirement, regardless of their cost to society. They help shape market outcomes to achieve two of the central goals of a WITT society: to provide ample and gainful job opportunities and to pool risk across large numbers and thus efficiently protect individuals against market failures. At the same time, they don't assume that the level of economic activity- the extent of consumer demand or the number of available jobs, for example- is ordained from on high and must not be messed with.

On this point, ensuring full employment, Keynes was first and last a hard-nosed macroeconomist: that is, he considered the effects of the policy on society as a whole. Thus, he was motivated by the basic economic principle of fully utilizing the available resources. Far from being incompatible with today's economic landscape, this principle is especially crucial now. Increased trade between nations creates many positive economic opportunities for the citizens of those nations, but in our country, global trade is draining too much demand from our markets, especially our labor market. It is absolutely possible- in fact, it's essential - to craft policies to counteract this effect. As I stress in the chapter, these ideas are not about reducing global trade. They are designed to replace the demand sapped by such trade, a principle as valid today as it was when Keynes first introduced it.

It would be easy to dismiss WITT economics as the warm and fuzzy preferences of soft-headed liberals but for the fact that these policies accomplish the basic goals of society- economic security and rising living standards -more effectively than YOYO does.

Paradoxically, by clearing the path of the barriers that stand between individuals and their potential, WITT policies facilitate American individualism more than the hyper-individualist YOYO approach, which concentrates resources among those at the top of wealth scale. YOYO policy makers are urged to ignore the plight of individuals stuck in long-term unemployment, an impoverished retirement, or poverty (excepting short periods when natural disasters put them on the front page). WITT policy makers actively pursue measures to reemploy the jobless, provide opportunities to the poor to overcome the barriers they face, and pool resources to enrich the later years of those who have earned the right to a secure retirement.

The Great Depression provides a critical lesson that forms the core of WITT political philosophy. Individuals, families, and communities need economic security to realize their potential, and thus, that should be one of government's core functions. At the heart of contemporary conservatism is the desire to get the government to “leave us alone,” so we can live the lives we choose. At the heart of WITT is society's desire to undertake to solve the challenges we face, so that we can live the lives we choose. Of course, YOYO conservatism has convinced the majority that government cannot solve problems but can only make them worse, and this view is obviously inconsistent with the WITT agenda. As discussed next, it is also inconsistent with reality.

The Rise of Incentive-Based Economics

In the 1970s, the collision of painful economic events and the ascendancy of some very conservative economists discredited Keynes's ideas. By stimulating a weak economy, Keynesian management is supposed to reduce unemployment. If it pushes too far, however, it can overheat the economy, leading to faster price increases. So Keynesian economists, perhaps in an overconfident mode, began in the 1960s to talk about calibrating, or fine-tuning, the economy between the two extremes of too little economic heat (producing weak job creation and high unemployment) and too much heat (producing excessive demand that leads to uncomfortable levels of wage and price inflation). Such hubris came under attack by economists like Milton Friedman, who argued that Keynesian interventions interfered in the movements of the invisible hand and would thus do more harm than good.

Enough time had passed since the Depression that it was possible to generate such opposition. Then, right on cue, we entered a trying period of “stagflation” (high inflation and high unemployment), two characters that are not supposed to show up on the same stage. Even though it is now clear that this condition had more to do with a sharp increase in the price of foreign oil than Keynesian efforts to stimulate the economy, a loud chorus of “told you so” resounded from economics departments across the country.

But again, this story is not just one of academic interest. The changing of the intellectual guard did not simply mean that a new generation of grad students was subjected to a different set of equations and theorems. The rise of individual-focused economics was a perfect intellectual complement to the rise of risk-shifting YOYO politicians, whose ascendancy continues to shape our lives in harmful ways.

Jimmy Carter appeared flummoxed by the economic (and global) challenges of the late 1970s, and Ronald Reagan, with his “get the government off our backs” platform, showed up to put the nail in the Keynesian coffin. The ascendant economists backed him up with models that “proved” that if the interventionists tried to push the unemployment rate below its "natural level"- their actual language - havoc would break loose in the form of upwardly spiraling prices. For the record, those models fit the data for this period and haven't since, 2 but the confluence of stagflation, Reagan, and the rise of the YOYOs put Keynesian economics on the run. (This occurred even though Reagan's "military Keynesianism"- large deficit spending on defense-was a key factor in the economic recovery of the early 1980s.

    The economics that replaced it has had a variety of names. Friedman's variety came to be called monetarism, Robert Lucas introduced the term rational expectations, but, as noted above, most just call it neoclassical economics. There's nothing all that “neo” about it; the “classical” part harks back to some of the early pristine models that were used to prove that the best possible outcomes will prevail for everyone if rational people seek to maximize their own profits, assuming the government generally stays out of the picture.

YOYO POLICIES: MYTHS AND FALSE ASSUMPTIONS

That last part, of course, is relevant to our story. As economic policy has shifted from WITT to YOYO, the perception of government has changed. Under the old policy regime, government was viewed as an ally of the people; in the framework of YOYO economics, it's perceived as a big, stumbling behemoth that can only muck up the neoclassical system, jam the “price signals,” and generally stink up the place. Still, even the neo-(e)cons believe there is a role for government. For the die-hards, that role may be reduced to defending the coasts and delivering the mail (and they're not too sure about the mail), but as discussed in chapter 4, there's been no shortage of economic policy ideas from the Bush administration (and no shortage of money, albeit deficit-financed, to pay for them).

To reiterate, the two main roles for government in today’s economics are (1) to deregulate in the Coolidge/Reagan “get the government off our backs” sense and (2) to get the incentives right at the individual level. Both of these lead away from WITT, but number 2 is much more subtle than number 1 and thus deserves some explanation. (And as you'll see, numbers 1 and 2 are intimately related.)

Suppose you're the U.S. government operating in the “old school” mode. You worry so much about your citizens losing income from layoffs that you implement a program providing unemployment insurance (taxpayer-financed weekly payments made for a set period or until the worker finds a job). Nice job, Lefty. You've just mucked up some bum's incentive to get a job. Suppose you guarantee a pension. You've blown the individual's incentive to save. What if you tax stock dividend payments or capital gains? You've crimped the incentive to invest. Want to provide universal health care coverage? You'll take away the incentive to conserve (see the “moral hazard” discussion in chapter 1). How about welfare benefits? No. They're a disincentive to work and an incentive to have kids out of wedlock. Do you think it's a good idea to regulate the job market with minimum wages, overtime, and the like? By placing mandates on employers, you're quashing the entrepreneurial spirit.

Sorry, Old School. Your best move is to get with the new thinking and leave well enough alone, even if all doesn't seem so well.

Except that every one of those objections is largely spurious. In my own research, for example, I have found that minimum wages have nothing like the effects their opponents say they do (job losses, firms going out of business, locusts, famine). Solid evidence supports the claim that moderate increases in the minimum wage have their intended effect: they raise the earnings of low-wage workers without hurting their employment prospects. (Other, much more accomplished economists than I have found the same thing.) 3

Welfare benefits have been found to have very small effects on work and family structure, which is what common sense would dictate. 4 Most people don’t base big decisions, like becoming a single mother, on a monthly check averaging a few hundred bucks (which is by no means to say that people think such things through carefully or rationally, just that the welfare benefit isn't a big motivator). Before 1996, when the welfare reform act was passed, welfare recipients worked outside the home less than they would have if they hadn't been on welfare, but just a bit. What blocked them from the job market had much less to do with the stingy welfare benefits and much more to do with the scarcity of decent job opportunities and the lack of government support for those seeking work, like subsidized child and health care. Employment among the poor surged in the mid-1990s because the economy was strong and because welfare reform led to significantly more, not less, government investment in helping poor single mothers find and keep jobs.

And so on. Unemployment insurance may extend the jobless spell a bit, but the effect is tiny and it gives job seekers the opportunity to find better jobs than they otherwise would. 5 The savings disincentive associated with Social Security has never been found to amount to much. As best we can tell, people appear to save pretty much what they would anyway.

So the notion that WITT policies have “unintended consequences” that undermine them is quite bogus. Yet, the YOYOs are incredibly successful with their arguments. Evidence be damned, they'll warn anyone who'll listen that the do-gooders do more harm than good. In virtually every policy debate I've had on these issues, some YOYO will argue that if we raise the minimum wage, we'll get massive layoffs, or that if we try to insulate the unemployed from the hardships associated with a job loss, the next thing you know we'll be looking at a European- style welfare state with French- like levels of laziness and unemployment (Mon Dieu, they've got twenty-five days of mandatory vacation!).

More than once, I've argued with lobbyists for the restaurant industry who claim they're representing the interests of low-wage workers because a minimum wage would price the unwitting victims out of the labor market. From 2001 to 2003, while we were hemorrhaging jobs on a monthly basis, YOYO economists argued that extending unemployment benefits would lead to longer jobless spells-this, during the longest jobless recovery in our history. I recently debated a member of the Wall Street Journal's editorial staff who argued that reducing taxes on the estates of multimillionaires would generate the right incentives for dealing with the aftermath of Hurricane Katrina. 6 You couldn't make this stuff up.

Most members of the media understandably work hard to report both sides of an argument. One could wish they had the time, energy, and incentive to check the empirical findings, like some of those cited above. 7 But as it is, much news coverage of such economic debates quickly devolves to "he said, she said" reports. An important part of the WITT agenda is to be much more effective in setting the record straight with regard to what the evidence shows. The WITTs' lack of success in making their case is a real problem, and one I take up in chapter 4.

       The Benefits of WITT, the Costs of YOYO

    To be successful, WITTs need to make two points a lot more frequently and clearly. First, policies that pool risk, actively seek full employment, and mandate against undesirable market outcomes don't just generate costs. They also generate benefits and lead us to make critically important investments in ourselves and our society that wouldn't be made under YOYO policies. Second, hyper-individualist policies have some pretty serious unintended consequences of their own.

One tactic of YOYO politics is to disallow discussion of the benefits of WITT policies and to focus on, and hugely inflate, the costs. The alleged inefficiencies associated with Social Security, unemployment insurance, minimum wages, the tax system, welfare, public education, workplace standards, unions, you name it, dominatethe economics literature as well as much of the public policy debate. The benefits of these programs get short shrift.

It wasn't until Social Security was under siege that we began to see articles noting that two-thirds of seniors get at least half their income from the program. The introduction of Social Security cut elderly poverty rates in half. And, as Jacob Hacker stresses (and as common sense would suggest), pooling risks can be highly efficient, both in terms of administration and in reduced costs to the individual when risks are spread over more people.8 The Social Security system sends out checks each month to 40 million people, with administrative costs that amount to a tiny fraction (less than 1 percent) of the total expenditures. Compare this with the much greater costs and challenges of administering millions of individual accounts. The inefficiencies in our health care system are legendary, and they are typically and unfavorably cited in comparisons with the systems of other advanced economies. For example, Canada spends less than a third of what we do on health care administration per capita, yet it insures everyone. In the United States 46 million people are uninsured.

Pooling risks over large populations, and thus distributing the costs of retirement, disability, and illness as broadly as possible, seems intuitively sensible. There are soon to be 300 million of us in this country. Some of us are will be fine; others will get sick. Some will prosper; others will founder. Some of us will get fired; others will be secure in our jobs. Through risk pooling, we distribute these possibilities over hundreds of millions of cases, and life is no longer a lottery where you're on your own to sink or swim. In fact, ifs more like a huge group pooling their resources to buy a lottery ticket. True, each person sacrifices the minuscule chance of winning the whole jackpot, but each increases the chance of winning something.

Admittedly, countries with universal health care do more rationing than we do. They spend a smaller share of the resources on the last years of life, and they spend less on the riches clients, who can buy whatever health care they desire. So some people would be worse off than they are currently. But with an equitable distribution of resources, the vast majority would do better. 9

We simply do not hear enough about when these initiatives go right. There's an ongoing argument about a whether the press suffers from a liberal or a conservative bias, an argument to which I have nothing to add except this: there does seem to be a strange reluctance to point out the upside of governmental market interventions.

When did you last see an article celebrating the benefits to low wage workers of an increase in the minimum wage, or the costs to them of its long-term deterioration? Welfare reform, which was widely hailed as a success of incentive-based economics, was nothing of the sort. For many poor women, it was surprisingly successful, but not because we finally got the incentives right; it was successful because we pooled the risks faced by poor mothers moving into the workplace. We spent more money per welfare case, providing numerous work supports like health care, transportation, and child-care subsidies, plus a significantly expanded tax credit (the Earned Income Tax Credit, which can add upwards Of $4,000 to the annual income of a poor family). Even more importantly, fiscal and monetary policy helped move the job market toward full employment for the first time in decades, ensuring ample employment opportunities for low-wage workers.

YOYO economists are so busy wagging the unintended consequences finger at others that they too often get a free ride on the problems caused by their own approach. Thus, the second point that WITT proponents need to make is that anti-interventionist economics has its own unintended consequences. The Reagan administration's supply-side economists weren't planning for an explosion in government debt, higher poverty rates, and sharply increasing inequality when they pushed tax cuts. But that's what happened.

George W. Bush's economic advisers weren't planning on the sharpest reversal from surplus to deficit in the history of government accounts, but that reversal was partially due to their tax cuts (the nonpartisan Congressional Budget Office found the cuts to be the largest single factor explaining the shift). And again, as in the many of the Reagan years, poverty is up and the typical household's real income is down, not to mention the structural budget deficits. Poverty has gone up every year from 2000 through 2004 (the most recent data point as of this writing), adding 5.4 million people, including 1.4 million children, to the rolls of the poor. The typical (median) household income, adjusted for inflation, has been flat or failing for the past five years, the worst period on record.

Tax cuts for the wealthy reliably do only two things: one, they redistribute income upward, and two, they lead rich people to move assets around to take advantage of the timing of the cuts. All the supply-side nonsense about investments, job growth, and higher revenue generation is just that: no evidence exists that would be even mildly convincing to an objective person. 10 I'm hard-pressed to think of a more damaging notion than the free-lunch, "tax cuts pay for themselves" silliness that to this day is spouted by those whose real agenda is redistributing wealth upward and blocking the WITT agenda by defunding government programs, or “starving the beast,” in YOYO- speak.

For the record, as long as we're talking about unintended consequences, the beastie is not starving. Its food source depleted, it lives off debt. The tax cutters didn't count on the Bush administration being one of the biggest spenders to come down the pike in decades. Not that I take any solace in this: the resulting deficits only put off the inevitable - tax increases or spending cuts - until the grown-ups get home. I tackle this interesting conundrum how is it that this group of YOYOs has increased the size of government? -in chapter 4.

Whatever the intention, the consequences are the same: policies inspired by YOYO are failing to address our major challenges and are thus failing to truly provide individuals whit the platform they need to realize their potential.

"Dangerous for Good or Evil"

It may seem over the top to assert that the shift from one way of thinking about the economy to another way could be as monumentally important as I'm suggesting. Yet, it was Keynes himself who famously recognized that such ideas

“are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.... Sooner or later, it is ideas, not vested interests, which are dangerous for good or evil." 11

WITT's political hands are tied by the ideas of many of today's economists and the policy makers they influence. These influential people insist that employment rates and other market conditions are not to be trifled with by some soft-hearted Keynesian dreamer who thinks they can be improved. Moreover, their approach to economic policy provides excessive individualism with a solid foothold. Hyper-individualism is YOYO's foundation, and it blocks the path to a WITT society.

As long as we cannot challenge outcomes like rising poverty amid plenty, middle-income losses, the legions of the uninsured, the vast inequalities shown in figure 1.1, the impact of globalization, the growing insecurities engendered by the risk shifts, the WITT path is blocked. Under the yoke of YOYO economics, you’re on your own to triumph or fail. Any intervention would undermine the system.

What's amazing is how pervasive the YOYO way of thinking has become. These days, the difference between a Republican and a Democrat on the economy is that the former believes you should accept market conditions and leave it at that, while the other believes you accept market conditions, but then perhaps repair some of the damage with a sprinkling of redistribution. So, for example, while the Democrats might work to strengthen unemployment insurance, and the Republicans work against it, neither is willing to take the steps to ensure full employment. While Democrats come up with ideas to compensate workers displaced by globalization, they, like their Republican counterparts, hesitate to challenge the doctrine of “free trade” by insisting on enforceable labor and environmental rights, or ensuring that U.S. workers are compensated for the risks inherent in such competition.

As someone whose job is to argue about these issues in the media and in trade journals, take it from me: to argue for interventions that will shape market outcomes and determine at least part of our economic fate is to invoke the wrath of YOYOs. Whether it's recommending steps to ensure full employment, pursue energy independence, suggesting we raise the minimum wage, or promoting a universal approach to health coverage, every case calls forth some variation of the same response: to take any of these steps will cuff the invisible hand and distort the pristine economic system that assures the best possible outcomes for everyone.

Economics, once an elegant and sensible set of ideas and principles devoted to shaping economic outcomes to the betterment of society, has been reduced to a restrictive set of ideology-inspired rules devoted to an explanation of why we cannot take the necessary steps to meet the challenges we face.

     Education and Job Training: The Exception That Proves the Rule

     One social good, however, is exempt from all this free market ideology, and it is worth deconstructing the one policy area where even YOYOs love to tread: education and training. Whether it's joblessness, stagnating real incomes, globalization, or the offshoring of American jobs, the go-to solution suggested by policy makers caught

in the sway of this thinking is “improving the education and skills of our workforce.” This sounds fine, of course, and no one could be against it. But when it stands alone as the only serious solution offeried, beware: YOYO is afoot.

While more education is always better, "improving education" as the solution to all of what ails us has become a code for avoiding the steps we need to take to directly address the problem. In far too many cases, it blames the victim, singling out the individual's lack of skill as the reason things haven't worked out for him or her. It removes the responsibility from policy makers and, more pointedly, from the inequities embedded in our market outcomes, as well as in our education system itself, and places it squarely on the ever more risk-burdened individual.

This point cuts to the nub of where we've gone off course. In an economy with staggering new challenges, the current politics and economics place too much of the burden on the individual.

Given the lack of earnings growth over the last few years, for example, many working parents are just making ends meet. Depending on where they live and their family size, they need anywhere from $40,000 to $60,000 to pay for housing, child care, health care, and soon. Child care alone, for a family of four with both parents working, can easily cost $15,000 a year in an expensive coastal City. 12 And these costs are rising quickly. Yet, in recent years the typical (median) household income has declined in real terms, and real hourly wages, the building block of working families' living standards, have been posting historically large losses. 13

Yet the YOYO agenda would have this working parent manage a private investment account, an unemployment account, and a Health Savings Account while she upgrades her skills enough to compete against workers abroad possessing similar skills but earning third-world wages. We're not quite throwing her to the sharks.

We’ll give her a tax break and a voucher for training of health care. But it's up to her to navigate these waters.

There's got to be a better way, one more in sync with the realities faced by most families in the United States today.

But we won't find it in the hyper-individualism of YOYO. The individual stays in the WITT equation, but the new agenda must tap a shared responsibility to create a context for individuals to flourish. Especially now, with the complexities of a modern global economy, the WITT sensibility is as necessary a starting point as it was in the Great Depression.

That may sound peculiar, given that our economy is percolating along just fine. But that's the irony. YOYO-inspired policies have led societies to an incredible juncture where their economies appear to be doing well until you take a closer look at the people in them.

A mantra among economists is that the main determinant of living standards is the rate of productivity growth (that's economic output per hour worked). The assumption is that if we're X percent more productive, we can have X percent more output without working more hours. And between 1947 and 1973, the typical family's income did grow in lockstep with productivity growth: they both doubled. Since then, the typical family's income has grown at about one-third the rate of productivity. With the acceleration of productivity growth since 2ooo, the gap between that supposedly key determinant of living standards and the incomes of most families has never been wider.

The implications of this split are as staggering as they are underappreciated. Had the median household income continued to grow with productivity, it would now be in the $60,000 range instead of the $40,000 range. As hourly wages fell for many middle income workers, particularly men, the only way families could get ahead was by working more hours. In fact, families have added over three months of full-time work over the last twenty-five years (that is, they're working that many more hours per year now than they were in the late 1970s). Had wages continued to rise with productivity, they-we-could have avoided that tradeoff and thus had a much better chance of balancing work and family life. The grip of the middle-class squeeze would be far looser in such a world. The angst engendered by trying to pay for housing, health care, and college would fade as the incomes of all families, not just those at the top of the scale, rise with the rest of the economy.

And what about “jobless recoveries”? There's no better phenomenon to illustrate an economy that's leaving many of its constituents behind than an economic recovery without jobs. In both of the last two recoveries, those of the early 1990s and the early 2000S, the economy expanded, but the job market continued to contract. In the most recent case, the recovery began in late 2001, but we kept losing jobs for a year and a half, by far the longest such period on record. Though the job market finally began to expand in mid-2003, the growth was tepid and the labor market remained slack for years. A slack labor market plays a key role in this scenario, because it puts little pressure on employers to bid up the compensation of the workforce, and in this regard, it sets the stage for the gap between productivity and wages to expand (which is why full employment is such a critical plank of the WITT agenda).

Now, here's a fascinating microcosm of the way YOYO creeps onto the scene. In mid-2005, which saw solid economic growth but stagnant wages and incomes for many, all the national polls began to reflect considerable dissatisfaction with the economy. The president and his economic team were forced to take notice and had a highly publicized summer meeting at his Crawford, Texas, ranch. When Treasury Secretary John Snow was asked to comment on the discrepancy between how the economy was growing overall and how people were faring, he declared that it “points you in the direction of greater emphasis on education.” His undersecretary, Randal K. Quarles, amplified the point: “If the country as a whole is going to undergo economic growth, the population has to be able to take advantage of opportunities.” 14

In other words, it's not our fault, it's your fault. The opportunities are there, but you're not skilled enough to take advantage of them. Never mind that the evidence pointed in exactly the other direction. By mid-2005 the only groups to see fairly strong and consistent job growth were those with the lower levels of education. The employment rate, or the share of a given population at work - a proxy for the extent of a group's job opportunities -was up for high school dropouts and down for college graduates. (The reason had much to do with the boom in construction and health services, and the bust in information technology.)

But such facts were not admitted to challenge the hyper-individualistic YOYO analysis, which by definition ignores the possibility of a structural imbalance in the way economic growth is distributed. As is so often the case, the only solution - “Get more education” -handed the problem back to the victim.

Let me repeat what I said before, so as to insulate this argument from specious attacks: more education and more skills are always better, and individuals should always pursue them, both to realize their own potential and to become better informed and more productive citizens. And yes, government has a responsibility to ensure the quality of public schools, as well as to provide access to all who desire a higher education. (Universal access to college for those who can cut it, regardless of their resources, is a policy plank of the WITT agenda.) 15

But when an economy is failing to produce enough jobs for those at all levels of education, including college graduates, and when it's failing to distribute the fruits of its growth to those in part responsible for the growth- the workers as opposed to the investors - more significant intervention is necessary.

What form should that intervention take? Read on.

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SOURCE: Jared Berstein, “All Togerther Now: Common Sense for a Fair Economy”, p. 37-59, 2006

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