Yet some of our top university professors, winners of Nobel prizes, and central bankers who are the subjects of adoring books, still preach the hyper-efficiency of self-correcting markets. They demonize the actions of policy makers who try to intervene to help offset demand contractions (as in the Recovery Act), impose regulatory structure on key markets (financial regulatory reform), strengthen social insurance (health care reform), invest in public goods (infrastructure spending), or pursue industrial policies to better position our national economy (President Obama's clean energy agenda).

The intellectual actions of these extreme free marketeers do not take place in a vacuum. They interact with a political structure comprised of lobbies and pseudo think-tanks to promote policies that, while wrapped in the cloak of promoting free markets, ultimately serve to redistribute growth to the top of the wealth scale. "Efficient market hypotheses" and "rational expectations"--the idea that absent government interference, market participants will make optimally efficient decisions--leads directly to supply-side tax cuts, deregulation of financial markets, the formation of financial bubbles, the acceptance of income stagnation, and disinvestment in public goods. And these measures, in turn, have delivered levels of income and wealth inequality not seen since the late 1920s, along with policy handcuffs that today have us arguing about how to reduce, rather than strengthen, regulations.

THE MARKETPLACE OF BAD IDEAS



These are strong accusations. Why should you believe me? Why shouldn't you believe the hyper-rationalists?

Because the predictions that fall out of the model I'm describing have largely all come to pass. Deregulation coupled with lack of attention to the existent regulatory regime has led to the shampoo economy: bubble, bust, repeat. This last bubble--in housing--has been particularly devastating. It is directly responsible for literally trillions of dollars in output lost forever, for lives lastingly disrupted through millions of foreclosures, for lifetime earnings trajectories that will likely be permanently altered downward, for hundreds of millions of lost hours of work.

We are stuck in an intractable "growth" recession--GDP is rising, but far too slowly to bring down the elevated jobless rate (real GDP grew 0.7% in the first half of this year). And while the President and his estimable economics team are fighting for jobs programs that could actually help right now, the opposition is arguing for immediate spending cuts, more deregulation, and even deeper permanent tax cuts for the wealthy. And while their arguments may well be motivated by pure politics--"if the President proposes it, we're against it"--their rationale appeals to "free market" economics.