New Rules, New Politics
How a revolution in economics has led to a new kind of politics.
June 26, 2019
Jun 26, 2019
23 Min read time
How a revolution in economics has led to a new kind of politics.
A reasonable Democrat from just a few years ago—way back in 2015, say—would be forgiven for not recognizing the basic ideas at the center of the party’s political debate today. It is a bold new agenda: doubling the top tax rate to 70 percent; achieving 100 percent renewable energy in the foreseeable future; eschewing balanced budget norms and embracing federal deficits; and breaking up the tech giants. Such proposals, which are designed to change how key societal institutions are structured, usually die of their own fantastic ambitions well before they reach the halls of power. But 2019 represents a sharp break from business as usual. Indeed, these are the official platforms of U.S. senators and governors running to become president of the United States.
Our national understandings of how the economy works and how politics work are changing because our understanding of the world itself has changed.
What, exactly, is going on? The most straightforward answer is that a new economics is being born—one that is being argued everywhere from academic journals to the 2020 campaign trail and is moving with surprising alacrity to mainstream consciousness. Interestingly, no single figure on the left—no John Maynard Keynes, no Milton Friedman—has fully sketched out this new paradigm. Conversely, and perhaps most importantly, Donald Trump is not the driving force behind it. The president may be the most dominant figure in U.S. politics, but he is a side show in the Democratic party’s embrace of a new and more progressive economics.
Trump, of course, is to be credited with demonstrating that whatever Americans thought of as “normal politics” is no longer. And his presence in the Oval Office has generated anxiety and urgency amongst his many critics. But at a much more profound level, our national understandings of how the economy works and how politics work are changing because our understanding of the world itself has changed. In an era where many worry, rightly, about fact-free public life, the transformation in today’s thinking is being driven by data. Americans are learning not only how deeply economic, social, and racial inequality have baked themselves into the workings of the private sector, but also the extent to which our political institutions are captured by private interests.
Economist Heather Boushey recently hearkened back to Thomas Kuhn to explain how the current moment feels as if we are on the cusp of a true scientific revolution in the way we understand economics. The old paradigm is unable to answer basic questions (“if the economy is doing so well, why is it that 40 percent of Americans can’t afford a $400 emergency expense?”), and researchers today are moving fast to ask new ones. The transmission belts between academia and the real world are thus moving ever faster. Younger scholars are making entire superstar careers for themselves by looking anew at these dysfunctions, while more experienced scholars are changing their minds. Social movements—such as Occupy Wall Street, Black Lives Matter, and Sunrise—have been essential not just as translators and bridge builders for academics, but also as provocateurs and idea generators in their own right. While Trump paints a caricature of socialism descending upon Democrats, the reality is that the Party’s evolution is tracking the trajectory of mainstream research at our nation’s most prominent universities, as well as some of the most popular social movements of the past decade.
The outlines of the new economic paradigm are clearer by the day. Most fundamentally, the old paradigm assumed power away, while the new paradigm makes power central. Corporate power—where it hoards and corrodes—must be tamed, while public power must be cultivated as a force for public good. For forty years the dominant political ideology on both sides of the aisle was the opposite, centered around low taxes and small government. We are now seeing the effects of that ideology and re-learning—as has often been the case in U.S. history—that a strong federal government is essential to maintaining public power. Even Republicans are now calling on their party to “stop living in the 1980s” and that “government has a role to play.” Today’s basic economic realization that a strong government is essential to both prosperity and democracy is growing in U.S. political culture.
“Free enterprise” capitalism has been synonymous with our politics and society for so long that it is hard for most of us to remember anything else. Ronald Reagan and Margaret Thatcher ushered in not just an economics but a cultural and moral belief system: private solutions were most effective, most efficient, and therefore always preferable. Conversely, government was inefficient and less competent—bureaucratic at best, dangerous and freedom-destroying at worst. By the time Bill Clinton declared, in his 1996 state of the union address, that the “era of big government is over,” the neoliberal variant of capitalism was everywhere, on both sides of the aisle in U.S. politics. At the turn of the millennium, doing good by doing well became the new American dream, and new technologies that were profitable economically while also being socially beneficial (i.e., “connecting” people) were seen as all upside, no downside.
An empirical revolution in economics helped change the framework.
In retrospect, it is clear how important the 2008 financial crisis was in beginning to unravel these narratives. Neoliberalism has always had its detractors, but for years, most of the naysayers were academics on the fringe—trenchant anti-imperialists who could complain only from the outside. Mainstream criticism was muted. Yes, rising economic inequality has plagued Americans since the 1980s, but throughout the 1990s and 2000s political worries about inequality were at most sotto voce. As such, in the wake of the 2008 crisis, austerity still dominated the political debate.
The economy had lost almost 3 million jobs in 2008, was projected to shed more in 2009, and millions of families would lose their homes to foreclosure—but neoliberal constraints built an intellectual box, wherein all had to be saved without spending too much public money. The story is well-known, but worth recounting: the incoming Obama economic team projected that the stimulus should be $1.8 trillion, but the president never saw that number because his advisors feared “sticker shock” on the part of the U.S. public. The final package approved by Congress was $787 million. The tone set by the person in charge matters, and as such Barack Obama’s 2009 inaugural address is telling. The president blamed the economic crash on the “greed and irresponsibility on the part of some,” but mostly on “our collective failure to make hard choices and prepare our nation for a new age. . . . [T]hose of us who manage the public’s dollars will be held to account, to spend wisely, reform bad habits, and do our business in the light of day.”
The Obama team took flak at the time, including from prominent Nobel Laureates such as Joe Stiglitz and Paul Krugman. But Stiglitz and Krugman, though famed, were outsiders. Today, the contra-austerity, contra-neoliberal movement is much closer to the political mainstream. And it was an empirical revolution in economics that helped change the frame.
Two decades ago, empirical work in economics began to suggest that twentieth century economic theory was wrong. That theory rested on two pillars. First, as economies develop, the worst inequalities will compete themselves away. Rising tides will lift all boats, so focus on the tides. Second, more equality will come at the expense of growth and efficiency. This is known as the “big trade-off.” Taken together, these contentions said that market forces themselves would drive wage increases and prosperity. Any government intervention—or other intervention, such as the power of union workers to bargain collectively—would endanger the market, lowering employment.
The new evidence called into question the basics of what we had thought was the American creed—especially our faith in U.S. opportunity and meritocracy.
But in 1997, Alan Krueger and David Card showed, in contrast to all received economic theory, that minimum wage increases do not lead to lower unemployment. Their data looked at 410 fast food restaurants: half in New Jersey, which raised the minimum wage from $4.25 to $5.05, and half in Pennsylvania, which did not raise the wage. Since then, many economists, using new experimental designs, new data sets, and following the advent of massive computing power, have followed suit, and shown compelling results.
Throughout the ’90s and ’00s, empirical economists worked to understand the real-world effects of economic differences. Critics derided the “Freakanomics effect,” lamenting that students in premier economics departments no longer studied “intractable problems—poverty, inequality, unemployment,” but instead “fac[ed] off in what sometimes felt like an academic parlor game.” But many of the new empiricists did tackle economics’ biggest challenges. Larry Katz, Jeffrey Kling, and Jeffrey Liebman studied the 1990s-era federal “Moving to Opportunity” program, sparking a vigorous debate about whether low-income families with children who move to lower-poverty neighborhoods have better life outcomes (the study showed significant improvements in participants’ mental health). In 2001, Daron Acemoglu, Simon Johnson, and James Robinson studied both the division of Korea in the 1950s and European colonization of the globe beginning in the fifteenth century to argue that “economic institutions encouraging economic growth emerge when political institutions allocate power to groups with interests in broad-based property rights enforcement, when they create effective constraints on power-holder, and when there are relatively few rents to be captured.”
Some sub-fields—most notably industrial organization, which studies anti-trust, or the effect of corporate mergers on prices—lagged. But the data-driven research continued, both within and outside of economics. One now-famous set of studies was carried out by Elizabeth Warren and her co-authors Teresa Sullivan and Jay Westbrook. By looking at thousands of records from multiple states, as well as multiple studies of consumer bankruptcy, Warren and her colleagues found, to their surprise, that U.S. families were in grave economic distress. They had anticipated discovering that profligate spenders ended up in bankruptcy, but, as Warren said in 2007, “I did the research, and the data just took me to a totally different place.”
The economic revolution reached a tipping point around 2014. Using data from throughout the OECD, Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva showed that higher tax rates on the wealthy don’t stifle growth, but in fact are associated with more equality. The most public impact came from Piketty’s 2014 blockbuster, Capital in the 21st Century, which revolutionized the use of tax records to suggest that the capitalist system would destroy itself without systemic checks on its own march to power. Piketty’s proposal was a 2 percent global wealth tax, combined with an 80 percent top income tax. Polite society scoffed, while marveling at the elegance of Piketty’s argument and his worldwide book sales. Perhaps he was on to something.
By 2015 Jason Furman and Peter Orszag, Obama administration economists from the earliest days, were worrying that “superfirms” and corporate concentration across sectors were driving inequality. In 2016 Raj Chetty led a team in investigating new empirics. As part of the long-running debate over the Moving to Opportunity experiment, Chetty and colleagues showed that the structure of a young child’s neighborhood, in fact, does have a deep effect on college attendance rates, incomes, and overall economic mobility.
In 2017, a team of younger labor economists—José Azar, Ioana Marinescu, and Marshall Steinbaum—looked at data from job websites, an entirely new resource, and demonstrated that the market power of large firms wasn’t just bad for prices (which had become the common standard for whether a monopoly was a problem), but that it also suppressed wages. Most recently, J. W. Mason, a young macro-economist, has looked afresh at all of the official unemployment statistics since 1980 and argued that it is far more likely for the economy to have slack—idle resources—than not, suggesting that we can afford more public spending without risking inflation.
The new economics has such momentum that academics who were roundly dismissed just a few years ago are now going straight to politics, either as advisors to presidential candidates or as candidates themselves.
Taken all together, this new economics reveals a fundamental shift. Not only is inequality rising, but, in comparison to inequality just a few decades ago, it has changed in character. Modern inequality is not driven by labor disparities (the old common knowledge was that poor skills led to low pay) but by owners of ever-concentrated capital. The evidence over the past twenty years has pointed increasingly to a sclerosis born of elites’ chokehold on power: the problem is at the very, very top—a capital income problem, focused on the one-tenth of the 1 percent.
For a very long time, our basic understanding of increasing inequality did not make economic sense. Suddenly, it did. The problem was not just economic, and it wasn’t just identified by economists. Political inequality, meaning the causal mechanisms linking elite influence and money to politics, became a focus of political science. Nick Carnes measured the effect of wealthier politicians, and the absence of working-class lawmakers, on outcomes. Martin Gilens argued that elites, and often only elites, influence economic policy. In large majorities, the American people support higher taxes on the wealthy, actions to fight climate change, greater regulation of monopoly companies, and higher wages. But, according to Gilens and co-author Ben Page, ordinary voters have no say in these issues, because the structure of our politics is such that the wealthy—and those they fund on their behalf—have tangible political influence, while "the estimated influence of the public is statistically indistinguishable from zero.”
These were not small-bore findings. The new evidence called into question the basics of what we had thought was the American creed—especially our faith in U.S. opportunity and meritocracy. What if the success of large companies isn’t the hard-earned result of business smarts, but instead the result of markets structured to capture and hold on to power and profits? What if tax cuts for the wealthy lead not to productive investment, but to hoarding? What if hard work does not catapult the most talented to well-deserved success, no matter how hard they try?
The new economics will no doubt see pushback from some mainstream academic circles—markets-first thinking enjoys the influence of the habitual, which is not to be overlooked. But by asking new questions of old data, by moving beyond mere puzzle solving to asking about basic rules governing the system, by going back to first principles and fundamentals in the search for answers, and by intellectual experimentation, economists today are drawing a new map. And they are finding overwhelming support in political and social movements.
This is crucial. Paradigm shifting, no matter how powerful the evidence, doesn’t happen on its own. Social pressure and social movements play an important role. Occupy Wall Street elevated inequality to the national debate and gave it a catchphrase—“We Are the 99%”—and the #FightFor15 organizers won nationwide victories by regularly citing and publicizing Card and Kreuger to challenge the pervasive “raising wages kills jobs” argument. Indeed, the new economics has such momentum now that academics are going straight to politics. Emmanuel Saez and Gabe Zucman, whose wealth tax arguments, like Piketty’s, were roundly dismissed just a few years ago, are today directly advising presidential candidates. And Elizabeth Warren’s path is even more direct. An academic turned candidate, her appeal is based at least in part on a career’s worth of accumulated knowledge.
The new worldview makes one thing clear: the problem is power and where it resides. In the labor market, employers set the terms. In the product market, monopolistic firms keep driving profit mark-ups and making unilateral decisions about the products they provide (or don’t). And in the capital markets, the financial institutions that govern your ability to buy a home or go to college are still—a decade after the crisis—too big and too powerful to fail.
If today’s problem is that power is increasingly and dangerously concentrated, then the only solution is to build countervailing power.
For more than a generation, the economics profession dismissed politics as analytically soft; power, after all, cannot be studied rigorously. Karl Polanyi’s 1944 classic The Great Transformation—which showed the inextricable intertwining of politics and economics—was celebrated by historians and sociologists but dismissed by economists. In contrast, Friedrich Hayek’s 1944 warnings in The Road to Serfdom, that government economic planning would lead to tyranny, became the underpinning of market economics in introductory economics classes nationwide. In 1958, John Kenneth Galbraith put it bluntly: “For the businessman and the political philosopher . . . the appeal of the competitive system was its solution to the problem of power.”
But power cannot be solved. It cannot be assumed away. Indeed, it can only be dealt with head-on. If today’s problem is that power is increasingly and dangerously concentrated, then the only solution is to build countervailing power. Rather than ignoring, or operating separately from, democracy, the new economics requires a government that is committed to the public good, not corporate interests, and that is accountable to the will of the people.
This is not about throwing out markets. We need markets to do what they do well. But markets are functions of the rules that structure them, and the current broken process of rule-making allows for, and even encourages, corruption. Improving economic performance requires breaking the revolving door practice whereby private sector lobbyists, often former public servants, hold sway. The Trump administration did not cause this corruption, but it is the most egregious example of exploiting it. We now have government agencies that are run by lobbyists and financial executives. We have turned our government over to markets, and our markets over to corporations.
Our problems are too big, too deep, and too acute to entrust to companies. We need an economic transformation to meet existential threats. Climate change is the most urgent, overwhelming example, but the ubiquitous surveillance and extraction of the digital economy is up there as well. Markets alone will not help society mobilize in the face of economic change at this scale. Instead, we must reimagine the role of government so that it can do what only it can do: structure the market to perform as it should while also providing some goods and services directly to complement the market and spur competition.
When put this plainly, the fundamental tenets of the new economics sound basic. In many ways, they are. In part, this is because the new economics did not come out of ideological radicalism. It arose, as emerging paradigms do, out of failures of the old way of thinking. It is also because—cable TV and presidential Twitter hyperventilating notwithstanding—we have been here before.
The popular notion that Roosevelt saved capitalism has much to recommend it. But let’s remember exactly how he did it: through direct government intervention.
As we consider how to reimagine our economy, it is worth remembering that debates about how to structure markets—or whether markets should be structured at all—go back to our nation’s founding. They predate even Alexander Hamilton and Thomas Jefferson. Questions of large federal institutions in a dynamic and changing economy and questions of inclusion as we structure labor markets are age-old.
The last time our country had this full-blown debate was in the 1930s. Then, too, we faced near-failure in the midst of an epochal economic transition. As Bill Leuchtenberg wrote in Franklin D Roosevelt and the New Deal (1963):
As the depression deepened, amorphous resentment finally took form in one overwhelming question: Who was to blame? The answer came readily enough. Throughout the 1920s, publicists had trumpeted one never-ending refrain: that the prosperity of the decade had been produced by the genius of businessmen. If businessmen had caused prosperity, who but they must be responsible for the depression?
Usually the story we tell of Franklin D. Roosevelt and economic recovery is reduced to a one-liner: “he saved capitalism from itself.” If we get a second beat, it’s “and World War II mobilization sealed the deal.” The truth is more complicated, and instructively so for us today: Roosevelt was able to take decisive action even as his advisors debated questions about how and when to utilize the countervailing power of the federal government.
Roosevelt, of course, took office at the depths of the Great Depression—and in the midst of a fierce argument about how the government, built in many ways for an agrarian nation, should respond to growing industry, and in particular the shift from the steam age to the age of electricity. The Depression was the crisis point in a longer-term economic transition. As Roosevelt took the oath of office in 1933, more than 12 million workers had lost their jobs. Business investment had cratered by 90 percent.
What the new president should do, or would do, was not at all clear. For at least a generation, both populists and progressives had argued that in order to stem corporate domination, a new and more robust form of governmental power was required. But how democratic that power ought to be was the essential question of the day. During the long period between his election and inauguration (which, according to the tradition of the time, was held in March), Roosevelt had to sort through the many differing beliefs about the right path forward. He had run for office, after all, on a message of optimism but without a definitive policy platform.
Perhaps the “New Nationalism,” which counseled federal intervention and federal spending, was correct. Or maybe the answer was the “New Freedom,” which focused on trust-busting and encouraging small business. Roosevelt’s brain trust agreed generally on some kind of business-government cooperation, but what that meant in practice was unclear. How much national planning should there be? How much regulation? How much reliance on business vs. the “naked power of the state”? Should rural farmers or urban workers be the political priority? Should they worry excessively about too much “loose money” and deficit spending, or not?
The Roosevelt administration was able to navigate these debates because they had a guiding principle. Central to the FDR agenda was power, specifically a balance of economic and political power. Roosevelt and his advisors agreed on the importance of asserting the force of the federal government for the public good. In his first two terms, this guiding principle resulted in billions spent to prevent home and farm foreclosures, the federal regulation of Wall Street finance, the revitalization of the Anti-Trust Division at the Department of Justice, and crusades against monopolies ranging from aluminum to oil. The Works Progress Administration and the Public Works Administration flexed government power to build roads, bridges, dams, even airports —thus delivering jobs. And the National Labor Relations Act bolstered labor’s power by codifying the right of workers to bargain collectively and prohibiting the blacklisting of labor organizers; within a decade, 13 million Americans belonged to unions.
By the 1940s, during his third and fourth terms, Roosevelt oversaw a wartime mobilization, creating 17 million new jobs, doubling industrial productivity, and creating entire industries based on government spending and government demand. The popular notion that Roosevelt saved capitalism has much to recommend it. But let’s remember exactly how he did it: through direct government intervention.
The point here is not to write an FDR hagiography. Roosevelt, as chronicled by Ira Katznelson, made some terrible political compromises. Most notable, and still harmful, was his concession to white supremacist southerners, who functionally cut black Americans and women out of Social Security, gains from minimum wage laws, and later the GI bill. The point today is to highlight how central the shared mindset about government structure and power was among Roosevelt’s brain trust. These people came from different policy networks: some legal, some economic, some state, some federal, some progressive, some populist. But, ultimately, they agreed on one thing: the need for government action and the need for countervailing power against corporate domination.
As we consider today’s new economics—and the debates that will surely emerge within it—it is worth remembering how beneficial Roosevelt’s guiding principle was. Better outcomes for U.S. workers and families have to be baked into the structure of the economy itself. Institutions, both government and worker, have to be muscular enough to always contest for power.
How far are we, right now, from Roosevelt’s America? A powerful, unapologetic government feels far in the distance, but today, it often feels as if we are living through neoliberalism’s demise. Should we be optimistic?
The current open window in U.S. political belief is unprecedented in our lifetimes. Notably, business titans today, alarmed at the evidence, have joined the left and the intellectuals in deciding that capitalism needs reforming. Whether out of civic duty or fear of the pitchforks, they are producing a jittery criticism of free enterprise—complete with charts and graphs—from Davos to Beverly Hills to Wall Street. Ordinary voters also want more government economic action. And it’s not just Democrats, who are unified in their desire for more aggressive government-driven economic policies. One in five of Republicans and significant numbers of independents agree.
We know today what Roosevelt knew then: any new worldview threatens entrenched power.
All of this might provide an opportunity for the nascent, pro-public worldview to take root and flourish. The new economics, after all, has empirics, morality, and basic honesty on its side. But whether truth-telling will be enough is still unknown.
While the new economics has nothing to do with Trump, Trumpism has grafted itself on to Republican party politics. The alliance is using old, but proven tactics to cling to the status quo. By evoking specters of race and class war, they are proving themselves willing vehicles for a kind of zombie neoliberalism. Last fall, even before the Democratic mid-term victories (which propelled a number economically progressive candidates to power), the White House Council of Economic Advisors issued a report on the dangers of socialism, suggesting that Maoism and collective farming are actual threats in contemporary U.S. politics. This is not really an argument so much as a political epithet. The socialism smear is, in the words of the National Republican Congressional Committee, “a good narrative to get us back to the majority.”
Nor is it just the socialism accusation. Trumpism has proven itself adept at mashing up many long-lived American political subcultures: in addition to red-baiting, Trumpism draws on anti-intellectualism, conspiracism, isolationism, and anti-immigrant, race-baiting. This is a toxic and, so far, durable mix. Combating fear-mongering in an age where paranoia runs deep and has endless megaphones can feel impossible. The communications eco-system now regularly connects social media to outlets, such as Breitbart News, that were once fringe but are now standard.
Increasingly, however, candidates, progressive activists, and people of common decency are calling this out for exactly what it is. And it is worth remembering that Roosevelt faced similar vitriol. Roosevelt turned the tables on his accusers, famously telling a packed crowd at Madison Square Garden at the height of the bitter 1936 re-election campaign: “business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, and war profiteering” are “old enemies of the peace. . . . We know now that government by organized money is just as dangerous as government by organized mob. . . .They are unanimous in their hate for me—and I welcome their hatred.”
We know today what Roosevelt knew then: any new worldview threatens entrenched power.
And the paradigm shift at the heart of the new economics has focused our attention on the profound imbalances of today’s entrenched power. That some leading, mainstream politicians see this for what it is gives some reason to hope.
But, as important as this election cycle will be, battling and winning against accretive and extractive power requires even more. It requires the analytical power to see what is going on; the organizing power to elevate, push, demand; and the institutional power to make ideas real. Some rousing victories will seem sudden, as will some devastating losses. This will take time. In the process though, it is crucial to both remember and assert that this contest is not radical. Instead it is a reaction to the world as it is—a world that is demanding our attention.
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June 26, 2019
23 Min read time