11/19/2008 05:12 am ET | Updated May 25, 2011

Ideology Takes a Breather, Maybe

You have to dig awfully deep to find something good to say about the economic turmoil swirling around us. These are painful times, and as is often the case, the many are paying the price for the recklessness of the few.

Yet if we play our cards right, some deeply embedded and highly destructive ideology may collapse just as hard as an overleveraged investment bank. And the fact that this possibility is occurring a mere few weeks before an historical election...well, all I'm saying is that we may be looking at a valuable silver lining to the storm clouds hovering overhead.

What is ideology anyway, and what's so bad about it? The dictionary says that ideology is simply a set of beliefs that form the basis of a system. Nothing wrong with that. Where you run into trouble is when the ideology itself blocks the system from learning, from self-correcting.

That's been the problem with our politics and economics in this country in recent years, if not for decades. Ideology under this definition has a unique characteristic: it is impervious to facts.

I've seen this through the lens of economic policy. Advocates for supply-side, trickle-down tax policy, both academic economists and top economic officials, continue to argue that large tax cuts for the wealthiest households are the most reliable way to stimulate growth. Yet the evidence belies these claims, with the Bush tax agenda as exhibit A (see also Reagan and Thatcher).

You know what does happen when you cut rich people's taxes? They get richer. In this way, Bush managed to amplify the historically extreme wealth inequality that the market itself was generating over the 2000s, as did Reagan in the 1980s. In contrast, during the 1990s, under a more progressive tax regime, economic growth was much more broadly shared (to be precise, the top continued to pull ahead in those years, but unlike the 1980s or 2000s, middle- and low-incomes grew as well).

So there it is: supply-side ideology is impervious to evidence (stop the presses!). And for a contemporary example, you need only look back to last week, when John McCain released his economic plan to help folks battered by the recession. The plan included a cut in the capital gains tax by half (from an already too low 15% to 7.5%).

As I wrote here, this type of income, such as the profits from selling appreciated assets like stocks, is so concentrated among the wealthiest families, that only 0.2%, or $4, of the gains from this cut will reach middle-income folks. Yet smack in the middle of the worst financial crisis since the Depression, this is what a presidential candidate comes up with.

Okay, you're thinking, that's politics. It's no blazing insight to point out the politicians espouse bad ideas driven by some decrepit ideology, nurtured by the lobbying machine that benefits from the spoils.

But the ideological stench goes--or maybe 'went', if we're smart--much deeper. When asked the other day for a simple explanation of what caused the financial crisis, I answered "Ideology." You may think "greed" is a better one-word explanation, but my theory is that greed is a constant. Folks, whether on Wall St. or Main St., are no greedier today than yesterday (an assertion without proof, but I'll bet it's true). What's changed is an ideologically-driven politics that allows and amplifies greed, instead of checking and constraining it.

In financial markets, this manifested itself in the belief that market forces themselves would control greedy impulses, punishing those who took positions that were unsupported by economic fundamentals. Lenders who made bad loans would be disciplined by losses; bets on derivatives would help us manage risk, not, as ultimately occurred, amplify risk beyond our wildest fears. Investors would quickly recognize those banks that borrowed too much to support their operations, and would avoid them until they got their balance sheets in order.

There were, of course, people whose visions were not blinded by ideology who warned about these excesses. Years ago, the head of one of the financial regulatory agencies tried to regulate derivatives but she was blocked (Greenspan said at the time, "Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary.") Ned Gramlich warned the Greenspan Fed in the early 2000s that the subprime market was becoming unhinged, but again, the ideologues in charge failed to act, assuming self-regulating markets would take care of it. My colleague Dean Baker recognized the housing bubble long before it popped and loudly warned about it, yet he was unheeded, dismissed as a pessimist who simply didn't understand the perfect machinations of markets. I wrote a book about the trouble this type of economics--I called it YOYO (you're on your own) economics--was causing.

So what makes me think we have a chance to change all this? What evidence suggests that the next time Dean identifies a bubble, or Krugman points out a policy mistake in action, or some regulator actually tries to do her job, someone in power might listen to them?

Well, actually, quite a lot. Jeez, it's the George W. Bush administration that's nationalizing the nation's banks! Talk about ideology on holiday. Not that you'd want to read too much into that...I suspect Bush himself doesn't really get what's going on. But there is no spring in the step of conservative ideologues these days. They've seen their model crumble, and history is quickly passing them by. They may clutch their Milton Friedman texts and rage against the most extensive government intervention in the economy of their lifetimes, but no one is listening to them.

Last week's final presidential debate was also instructive in this regard. As Joe Klein (that's Joe the journalist, not Joe the plumber) nicely deconstructs it here, McCain was "...locked in the coffin of conservative thinking and punditry. He spoke in Reagan-era shorthand. He thought that merely invoking the magic words "spread the wealth" and "class warfare" he could neutralize Obama. But those words and phrases seem anachronistic, almost vestigial now."

Amen. The old ideological blows aren't landing the way they used to, and this has presented an opening for much-needed change.

Which brings us to Obama. When it comes to ideology, I think voters are positively responding to the impression that he is not steeped in the type of ideology that ignores evidence. It's not that he's non-ideological--he's been a Democratic politician for years and a community organizer before that. But he seems to have a strong pragmatic streak. From what I can see, and as an informal advisor I've interacted with him a few times, his approach to policy is to surround himself with all the evidence from all sides, and let the experts make their cases. Then he chooses the answer he thinks will best solve the problem. But the key word is "evidence." You will not convince him with fact-free arguments about trickle down, any more than you will with "victory must be ours."

The contrast with Bush, or with McCain/Palin (especially Palin, who seems particularly unburdened by facts) is stark, of course. And it is this confluence of events--a economic cataclysm born of stubborn ideology; an historical election where reality-based pragmatism is offered as an antidote to yet another dose of the same failed agenda--that yields this potential opportunity.

The polls suggest the majority of the electorate may be on the verge of showing these ideologues the door. Not a minute too soon...really, quite a few years too late.