06/06/2012 06:47 pm ET Updated Aug 06, 2012

Elitism And Its Errors

The history books are filled with the errors of the elite. Whether it's European policy makers and monarchs assuming (on both sides, mind you) that World War I would be a gloriously short march to victory unencumbered by the carnage of machine guns, chemical weapons, and mass death; or Robert MacNamara and his State Department whiz kids assuming that they could arbitrarily measure and then predict victory in South Vietnam on the basis of dubious body counts; or Andrew Mellon, captain of finance in the first third of the 20th century, confidently advising anyone who would listen that the proper response to the Great Depression was to "liquidate" everything, those who are supposed to know better have proven with regularity that they often, very often, do not. So you would think that, armed with this evidence of error, either today's elites would be suitably humble or all of us would be suitably skeptical. But they aren't... and neither, it appears, are we.

Here in the United States, Americans are entering into a presidential general election campaign. In that campaign, the opposition party, the GOP, has staked its chances on the claim that by cutting government deficits and reducing marginal income tax rates, the country's current anemic recovery can be turned into something robust enough to create jobs. Meanwhile, Republicans are also claiming that President Obama is somehow responsible for the economy, that he now "owns it," in the parlance of all those Sunday-morning talk-show pundits. Neither claim is remotely accurate. The former ignores today's economic reality, while the latter ignores the reality of the eight yesteryears when Obama was not president.

We are in what professional economists call a "liquidity trap." These occur when interest rates approach zero and growth is still anemic. At the point of this zero lower bound, there is nothing the monetarists at the Fed can do other than buy enough short-term government debt to drive down long-term rates, known to the wonks as "quantitative easing." Though the Fed, to its credit and in the face of idiotic blowback from the right wing, is doing plenty of this, as well, demand still lags as a long-term consequence of the financial implosion of 2008. Consumers, the actual buyers, just don't have the money. They are saddled with too much debt of their own, in the form of underwater mortgages for many. So corporations are holding back enormous amounts of productive capacity and naturally will not produce what their customers cannot buy.

None of these problems can be solved with more tax cuts for the rich or cuts in government spending, and every economist worth his or her salt knows as much. In fact, they have known as much for about 80 years. The only solution is government spending sufficiently targeted to restore robust consumer demand. That means infrastructure spending (road, bridges, highways, and, yes, even clean energy, and even in the face of Solyndra, which was a loser in a sector that is still a sea of success). It means getting money to the states so that they do not have to lay off teachers and police and firemen or close hospitals, all of which takes money out of the pockets of the middle class. And it may even mean an FDR-like commitment to public jobs, lest this generation of college graduates wind up permanently underemployed.

There was a time to worry about the deficit. It was when the economy was growing. Clinton did that in the '90s and solved the problem; Bush didn't from 2001 to 2008, and it has come back. Now, however, is not the time to compulse about the deficit George W. Bush left us. Now is the time to end the depression he put us in. So why won't the government do it? The answer is simple.

First, the GOP, which controls the House and can filibuster in the Senate, will not permit it. And second, too many elites -- in think tanks, at the University of Chicago, on the Sunday talk shows, and K and Wall Streets -- are pushing a false narrative on how we came to this impasse and what can be done to solve it. The false narrative starts with the notion that deregulation had nothing to do with the financial crisis of 2008, continues by blaming the government for the real-estate bubble and all those toxic mortgage backed securities, and then ends with the claims that businesses are not selling because they lack confidence (either as a result of overregulation, overtaxation, or [preferably] both) and that the bond markets will turn us into Greece if we don't end the deficit now. All these claims, however, are false.

The repeal of Glass-Steagal in the '90s allowed commercial banks to get into the securities business. Private-sector giants liked Countrywide, aided and abetted by their investment bankers, then invented those never underwritten (and thus toxic) mortgage-backed securities that Wall Street doubled down on with credit default swaps and that fueled the real-estate bubble long before Fannie or Freddie tried to catch up. The debacle that followed the inevitable burst left consumers with the debt but not the dough. Demand then imploded.

There is not a single piece of economic data to support the claim that businesses lack confidence rather than customers. Nor is there any data to support the notion that inflation is about to rear its ugly head, or that the bond market is about to revolt and send interest rates through the roof on account of the deficit. To the contrary, rates are so low that the United States is literally refinancing its debts at near 0 percent, which more or less means that paying down the debt at this point would be not just counterproductive but stupid.

But the elites march on. You cannot watch a Sunday talk show without some airhead with a title or a fancy degree ignoring these facts as he or she seriously suggests that government spending has skyrocketed under Obama (it hasn't) and must be cut by orders of magnitude (it shouldn't). A whole generation has been raised on the platitudes of right-wing ideology that make these sorts of empirically false assertions a kind of transcendent truth that cannot ever be questioned. The carnival barkers of this drivel have oodles of cash backing them, not to mention a Supreme Court that laboriously does their bidding under the guise of merely construing the First Amendment. (Memo to Scalia: money is not speech, it's property, and the Founders never envisioned a world where only the rich got to talk.)

Political pundits are aghast that President Obama now has the temerity to run on a platform that calls out the do-nothing GOP and accurately notes that their obstruction eliminated the administration's ability to win a bigger stimulus, fashion tougher financial regulation, or craft a better health care bill. Too bad, because it's all true.

Too many of the elites have gotten it wrong over the course of the last 30 years, attempting to repeal settled economic lessons learned in the hard days of the Great Depression. This election has to be about telling them they are wrong, as elections have been so often in the past.