The piece is bookended by the story of Johnny Whitmire, a guy who was unceremoniously dropped from the rolls of the middle class by the Very Serious People In Charge of Things. His wife lost her state job. They fell behind on their mortgage. He applied for the Obama administration’s mortgage modification program. His modification was canceled, Citi billed him for back payments, and his home was foreclosed on. Then he got a bill for not cutting the grass at the home his bank seized, because banks keep foreclosed homes in the names of their former owners to avoid liability issues.

So, Whitmire is angry. And he has every right to be.

Whitmire is an angry man. He is among a group of voters most skeptical of President Obama: noncollege-educated white males. He feels betrayed — not just by Obama, who won his vote in 2008, but by the institutions that were supposed to protect him: his state, which laid off his wife; his government in Washington, which couldn’t rescue homeowners who had played by the rules; his bank, which failed to walk him through the correct paperwork or warn him about a potential mortgage hike; his city, which penalized him for somebody else’s error; and even his employer, a construction company he likes even though he got laid off. “I was middle class for 10 years, but it’s done,” Whitmire says. “I’ve lost my home. I live in a trailer now because of a mortgage company and an incompetent government.”

Whitmire’s life was ruined by a few specific “institutions”: Mitch Daniels and the Indiana Republican Party, the finance industry as represented by the bank that decided to screw up his paperwork and seize his home, and the Obama administration, which failed spectacularly on mortgage modification efforts for a variety of reasons.

The piece as a whole lays blame for the sorry state of affairs in Muncie at the crumbling of institutions — church, school, government — but Whitmire is actually a victim of elites. It’s elite consensus that loan modifications have to be limited and difficult for homeowners in order to preclude “moral hazard” and save banks from having to overexert themselves. Mitch Daniels, a leading GOP presidential contender among George Will-style Republicans, slashed state payrolls, in the name of fiscal responsibility. The sorts of people who pay for National Journal subscriptions are actually responsible for this guy’s life going to hell.

Fournier and Quinton’s piece goes on to describe the decline in various Muncie institutions: the mainline Protestant church dying as a corporate-inspired Megachurch thrives outside of town, some local government scandal involving improperly cast absentee ballots and an arrogant one-term mayor. The schools are apparently awful, in part because of elite-mandated testing regimes, more Daniels budget cuts, and, of course, because many of their most motivated students have been redirected to private-run and publicly funded charter schools. (Though as usual the awfulness of the public schools is simply stated — there’s no data or anything.)

But if we want to talk about how things got so bad for formerly middle-class people like Whitmire, the culprit is basically the financialization of our entire system of capitalism and the crippling of the labor movement; the slow death of the Mainline Protestant tradition doesn’t really enter into it. Whitmire was screwed by a venal bank and betrayed by an administration that gave venal banks way too much leeway to screw people.

The National Journal advertises that their piece on “the solution” will run next, but I’m not entirely convinced they’ve nailed down “the problem.”

By 2007, America was about as unequal as it had been on the eve of the Great Depression — and sure enough, just after hitting this milestone, we plunged into the worst slump since the Depression. This probably wasn’t a coincidence, although economists are still working on trying to understand the linkages between inequality and vulnerability to economic crisis.

Here, however, we want to focus on a different question: Why has the response to the crisis been so inadequate? Before financial crisis struck, we think it’s fair to say that most economists imagined that even if such a crisis were to happen, there would be a quick and effective policy response. In 2003 Robert Lucas, the Nobel laureate and then-president of the American Economic Association, urged the profession to turn its attention away from recessions to issues of longer-term growth. Why? Because, he declared, the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”

Yet when a real depression arrived — and what we are experiencing is indeed a depression, although not as bad as the Great Depression — policy failed to rise to the occasion. Yes, the banking system was bailed out. But job-creation efforts were grossly inadequate from the start — and far from responding to the predictable failure of the initial stimulus to produce a dramatic turnaround with further action, our political system turned its back on the unemployed. Between bitterly divisive politics that blocked just about every initiative from President Obama, and a bizarre shift of focus away from unemployment to budget deficits despite record-low borrowing costs, we have ended up repeating many of the mistakes that perpetuated the Great Depression.

Nor, by the way, were economists much help. Instead of offering a clear consensus, they produced a cacophony of views, with many conservative economists, in our view, allowing their political allegiance to dominate their professional competence. Distinguished economists made arguments against effective action that were evident nonsense to anyone who had taken Econ 101 and understood it. Among those behaving badly, by the way, was none other than Robert Lucas, the same economist who had declared just a few years before that the problem of preventing depressions was solved.

So how did we end up in this state? How did America become a nation that could not rise to the biggest economic challenge in three generations, a nation in which scorched-earth politics and politicized economics created policy paralysis?

We suggest it was the inequality that did it. Soaring inequality is at the root of our polarized politics, which made us unable to act together in the face of crisis. And because rising incomes at the top have also brought rising power to the wealthiest, our nation’s intellectual life has been warped, with too many economists co-opted into defending economic doctrines that were convenient for the wealthy despite being indefensible on logical and empirical grounds.

Let’s talk first about the link between inequality and polarization.

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Our understanding of American political economy has been strongly influenced by the work of the political scientists Keith Poole, Howard Rosenthal and Nolan McCarty. Poole, Rosenthal and McCarty use congressional roll-call votes to produce a sort of “map” of political positions, in which both individual bills and individual politicians are assigned locations in an abstract issues space. The details are a bit complex, but the bottom line is that American politics is pretty much one-dimensional: Once you’ve determined where a politician lies on a left-right spectrum, you can predict his or her votes with a high degree of accuracy. You can also see how far apart the two parties’ members are on the left-right spectrum — that is, how polarized congressional politics is.

It’s not surprising that the parties have moved ever further apart since the 1970s. There used to be substantial overlap: There were moderate and even liberal Republicans, like New York’s Jacob Javits, and there were conservative Democrats. Today the parties are totally disjointed, with the most conservative Democrat to the left of the most liberal Republican, and the two parties’ centers of gravity very far apart.

What’s more surprising is the fact that the relatively nonpolarized politics of the post-war generation is a relatively recent phenomenon — before the war, and especially before the Great Depression, politics was almost as polarized as it is now. And the track of polarization closely follows the track of income inequality, with the degree of polarization closely correlated over time with the share of total income going to the top 1 percent.

Why does higher inequality seem to produce greater political polarization? Crucially, the widening gap between the parties has reflected Republicans moving right, not Democrats moving left. This pops out of the Poole-Rosenthal-McCarty numbers, but it’s also obvious from the history of various policy proposals. The Obama health care plan, to take an obvious example, was originally a Republican plan, in fact a plan devised by the Heritage Foundation. Now the GOP denounces it as socialism.

The most likely explanation of the relationship between inequality and polarization is that the increased income and wealth of a small minority has, in effect, bought the allegiance of a major political party. Republicans are encouraged and empowered to take positions far to the right of where they were a generation ago, because the financial power of the beneficiaries of their positions both provides an electoral advantage in terms of campaign funding and provides a sort of safety net for individual politicians, who can count on being supported in various ways even if they lose an election.

Whatever the precise channels of influence, the result is a political environment in which Mitch McConnell, leading Republican in the Senate, felt it was perfectly okay to declare before the 2010 midterm elections that his main goal, if the GOP won control, would be to incapacitate the president of the United States: “The single most important thing we want to achieve is for President Obama to be a one-term president.”

Needless to say, this is not an environment conducive to effective anti-depression policy, especially given the way Senate rules allow a cohesive minority to block much action. We know that the Obama administration expected to win strong bipartisan support for its stimulus plan, and that it also believed that it could go back for more if events proved this necessary. In fact, it took desperate maneuvering to get sixty votes even in the first round, and there was no question of getting more later.

In sum, extreme income inequality led to extreme political polarization, and this greatly hampered the policy response to the crisis. Even if we had entered the crisis in a state of intellectual clarity — with major political players at least grasping the nature of the crisis and the real policy options — the intensity of political conflict would have made it hard to mount an effective response.

In reality, of course, we did not enter the crisis in a state of clarity. To a remarkable extent, politicians — and, sad to say, many well-known economists — reacted to the crisis as if the Great Depression had never happened. Leading politicians gave speeches that could have come straight out of the mouth of Herbert Hoover; famous economists reinvented fallacies that one thought had been refuted in the mid-1930s. Why?

The answer, we would suggest, also runs back to inequality.

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It’s clear that the financial crisis of 2008 was made possible in part by the systematic way in which financial regulation had been dismantled over the previous three decades. In retrospect, in fact, the era from the 1970s to 2008 was marked by a series of deregulation-induced crises, including the hugely expensive savings and loan crisis; it’s remarkable that the ideology of deregulation nonetheless went from strength to strength.

It seems likely that this persistence despite repeated disaster had a lot to do with rising inequality, with the causation running in both directions. On one side, the explosive growth of the financial sector was a major source of soaring incomes at the very top of the income distribution. On the other side, the fact that the very rich were the prime beneficiaries of deregulation meant that as this group gained power — simply because of its rising wealth — the push for deregulation intensified.

These impacts of inequality on ideology did not end in 2008. In an important sense, the rightward drift of ideas, both driven by and driving rising income concentration at the top, left us incapacitated in the face of crisis.

In 2008 we suddenly found ourselves living in a Keynesian world — that is, a world that very much had the features John Maynard Keynes focused on in his 1936 magnum opus, “The General Theory of Employment, Interest and Money.” By that we mean that we found ourselves in a world in which lack of sufficient demand had become the key economic problem, and in which narrow technocratic solutions, like cuts in the Federal Reserve’s interest rate target, were not adequate to that situation. To deal effectively with the crisis, we needed more activist government policies, in the form both of temporary spending to support employment and efforts to reduce the overhang of mortgage debt.

One might think that these solutions could still be considered technocratic, and separated from the broader question of income distribution. Keynes himself described his theory as “moderately conservative in its implications,” consistent with an economy run on the principles of private enterprise. From the beginning, however, political conservatives — and especially those most concerned with defending the position of the wealthy — have fiercely opposed Keynesian ideas.

And we mean fiercely. Although Paul Samuelson’s textbook “Economics: An Introductory Analysis” is widely credited with bringing Keynesian economics to American colleges in the 1940s, it was actually the second entry; a previous book, by the Canadian economist Lorie Tarshis, was effectively blackballed by rightwing opposition, including an organized campaign that successfully induced many universities to drop it. Later, in his “God and Man at Yale,” William F. Buckley Jr. would direct much of his ire at the university for allowing the teaching of Keynesian economics.

The tradition continues through the years. In 2005 the right-wing magazine Human Events listed Keynes’s “General Theory” among the 10 most harmful books of the 19th and 20th centuries, right up there with “Mein Kampf” and “Das Kapital.”

Why such animus against a book with a “moderately conservative” message? Part of the answer seems to be that even though the government intervention called for by Keynesian economics is modest and targeted, conservatives have always seen it as the thin edge of the wedge: concede that the government can play a useful role in fighting slumps, and the next thing you know we’ll be living under socialism. The rhetorical amalgamation of Keynesianism with central planning and radical redistribution — although explicitly denied by Keynes himself, who declared that “there are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition” — is almost universal on the right.

There is also the motive suggested by Keynes’s contemporary Michał Kalecki in a classic 1943 essay:

We shall deal first with the reluctance of the “captains of industry” to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of “sound finance” is to make the level of employment dependent on the state of confidence.

This sounded a bit extreme to us the first time we read it, but it now seems all too plausible. These days you can see the “confidence” argument being deployed all the time. For example, here is how Mort Zuckerman began a 2010 op-ed in the Financial Times, aimed at dissuading President Obama from taking any kind of populist line:

The growing tension between the Obama administration and business is a cause for national concern. The president has lost the confidence of employers, whose worries over taxes and the increased costs of new regulation are holding back investment and growth. The government must appreciate that confidence is an imperative if business is to invest, take risks and put the millions of unemployed back to productive work.

There was and is, in fact, no evidence that “worries over taxes and the increased costs of new regulation” are playing any significant role in holding the economy back. Kalecki’s point, however, was that arguments like this would fall completely flat if there was widespread public acceptance of the notion that Keynesian policies could create jobs. So there is a special animus against direct government job-creation policies, above and beyond the generalized fear that Keynesian ideas might legitimize government intervention in general.

Put these motives together, and you can see why writers and institutions with close ties to the upper tail of the income distribution have been consistently hostile to Keynesian ideas. That has not changed over the 75 years since Keynes wrote the “General Theory.” What has changed, however, is the wealth and hence influence of that upper tail. These days, conservatives have moved far to the right even of Milton Friedman, who at least conceded that monetary policy could be an effective tool for stabilizing the economy. Views that were on the political fringe 40 years ago are now part of the received doctrine of one of our two major political parties.

A touchier subject is the extent to which the vested interest of the 1 percent, or better yet the 0.1 percent, has colored the discussion among academic economists. But surely that influence must have been there: if nothing else, the preferences of university donors, the availability of fellowships and lucrative consulting contracts, and so on must have encouraged the profession not just to turn away from Keynesian ideas but to forget much that had been learned in the 1930s and ’40s.

In the debate over responses to the Great Recession and its aftermath, it has been shocking to see so many highly credentialed economists making not just elementary conceptual errors but old elementary conceptual errors — the same errors Keynes took on three generations ago. For example, one thought that nobody in the modern economics profession would repeat the mistakes of the infamous “Treasury view,” under which any increase in government spending necessarily crowds out an equal amount of private spending, no matter what the economic conditions might be. Yet in 2009, exactly that fallacy was expounded by distinguished professors at the University of Chicago.

Again, our point is that the dramatic rise in the incomes of the very affluent left us ill prepared to deal with the current crisis. We arrived at a Keynesian crisis demanding a Keynesian solution — but Keynesian ideas had been driven out of the national discourse, in large part because they were politically inconvenient for the increasingly empowered 1 percent.

In summary, then, the role of rising inequality in creating the economic crisis of 2008 is debatable; it probably did play an important role, if nothing else than by encouraging the financial deregulation that set the stage for crisis. What seems very clear to us, however, is that rising inequality played a central role in causing an ineffective response once crisis hit. Inequality bred a polarized political system, in which the right went all out to block any and all efforts by a modestly liberal president to do something about job creation. And rising inequality also gave rise to what we have called a Dark Age of macroeconomics, in which hard-won insights about how depressions happen and what to do about them were driven out of the national discourse, even in academic circles.

This implies, we believe, that the issue of inequality and the problem of economic recovery are not as separate as a purely economic analysis might suggest. We’re not going to have a good macroeconomic policy again unless inequality, and its distorting effect on policy debate, can be curbed.

From “The Occupy Handbook.” Edited by Janet Byrne. On sale April 17, 2012. Excerpted with permission from Little, Brown and Co.

When you get bit by a dog, you don’t just look at the dog, you have to look at the owner who is holding the leash. To me, a lot of the regulatory changes, and a lot of what the Federal Reserve did, stand on their own as a major factor. But if you’ve read David Hume, if you’ve studied the philosophy of causation, you have to look at what motivated those changes. I have these debates with friends. One group blames everything on big government; the other group blames everything on big corporations. The sad news is that there’s really no difference between the two: Big government and big corporations work hand-in-hand. If you want to know who is the puppet and who is the puppet master, it sure looks like Wall Street has been pulling the strings of Congress for many, many, many years.

But the Federal Reserve itself should be insulated from those kinds of pressures.

They should be, except in the person of Alan Greenspan. He’s just this gnarly mass of contradictions. He’s an acolyte of Ayn Rand – believes that no intervention in free markets is the right approach – and yet he proceeded to spend his entire career, from 1987 through 2005, with his hands on the levers of Federal Reserve policy. He manipulated interest rates and money supply in order to win the love of traders. In 2001 he took rates down to unprecedented levels – below 2 percent – and kept them there for three years. Rates were at 1 percent for a full year! That had simply never occurred before in history. If you look at the late 1950s and early 1960s, rates would dip below 2 percent, but only for weeks at a time. In the “Who is to blame?” game Alan Greenspan is number one with the bullet, he’s top of the list. You can’t blame everything on him, but he’s the one who let all the gas fumes into the enclosed warehouse, knowing that a bunch of smokers were coming in to have a cigarette. Taking rates down to irresponsibly low rates is what set the stage for everything that took place over the next decade.

Are you saying that just as Ben Bernanke admitted the Federal Reserve had caused the first Great Depression, this crisis can also be blamed on our central bank?

The world isn’t black and white. We can’t just say, “The butler did it.” There were many causes, lots of poor judgements… The Federal Reserve was a significant element. But if you want to do it chronologically, you may want to go back further into the history. The bailout of Chrysler in 1980 set the stage. The rescue of Long Term Capital Management (LTCM) in 1998 encouraged a lot of moral hazard. Then there was all the radical deregulation, the undoing of some of the post-Depression rules that had operated so successfully for 75 years to prevent a major meltdown. The undoing of Glass-Steagall didn’t cause the crisis, but it made it much worse. Then there was the Commodity Futures Monetization Act (CFMA) of 2000, which completely exempted derivatives from any oversight or regulation and removed all reserve requirements. These all built to set up a situation that was extremely dangerous. So maybe the fumes were already in the warehouse and Greenspan taking rates down to 1 percent was the spark that ignited the conflagration.

So what are the take-homes? What do we do now?

It’s really simple. Go back through the past 20 years of radical deregulation and overturn all the rules that were changed. You don’t need all this Dodd-Frank legislation. Just reinstate Glass-Steagall, overturn CFMA. Just undo everything that was done in 2003, 2004, 2005 and 2006, remembering that old expression: If it ain’t broke, don’t fix it.

OK, let’s talk about some of the issues in the context of the books. Your first choice goes into the history of the Federal Reserve, and is called “Lords of Finance: The Bankers Who Broke the World” by Liaquat Ahamed.

This book won a Pulitzer – it’s a wonderful narrative covering a 50-year period from before World War I through the Weimar Republic, the Great Depression, and leading up to World War II. It tells that story through the lives of four central bankers – the head of the Federal Reserve in the U.S., of the Bank of England in the UK, of the German Bundesbank, and the French central bank. It looks at these four players, their professional actions on behalf of their countries as well as their personal relations. It tells the story of the economy, of the global crises that arose, of how people interacted, how governments interacted, what took place with monetary policy. It’s really a fascinating story.

How bad a job did the Fed do in the Great Depression, then?

Let’s put it into a broader context. The U.S. has always had a problem with the concept of a central bank. The initial central bank lasted for 20 years, and was then dissolved. Without a central bank modulating the currency, you tend to have wild swings in money supply, and in the economy you had a series of panics and depressions. So then we had the second Federal Reserve bank. Same thing – it had a 20-year lifespan, and then it died. The result is that by the time we get to the Great Depression the Federal Reserve is a relatively new institution, it’s only 15 years or so old. Its basic approach is rather modest – there’s not a lot of intervention, not a lot of pulling on the levers, there’s very much a recognition that historically, a democratic nation does not like an unelected central bank dictating economic policy. They had a hands-off approach. You really get the concept of that in “Lords of Finance,” not just within the U.S., but internationally. How it affected the post-World War I, pre-World War II period, what the central bank should have been doing – now that we have the benefit of hindsight – to moderate the effects of the downturn caused by the market crash and the Great Depression. And yes, it’s fairly obvious that had the central bank been a little looser in its credit policy, we would have had a less severe downturn. They may not have caused the Depression, but they certainly didn’t help it and they probably made it a lot worse.

The Great Depression is, of course, the period Ben Bernanke is an expert on. I got the sense from your book, “Bailout Nation,” that you don’t think he’s done such a great job, though.

My biggest problem with Bernanke is not so much him as chairman, as him as Fed governor under Greenspan. He didn’t see the problem coming and he enabled the ongoing reign of error of Alan Greenspan. When the economy is in an utter freefall, when everything is going to hell in a hand-basket, [Walter] Bagehot had the right ideas. The central bank should be the lender of last resort, it should lend on good credit at high rates. What the Federal Reserve did is that, in an attempt to save the banking system, they focused on saving the individual banks. I don’t want to get too wonky, but there are two approaches to respond to a banking crisis. There’s the Japanese way, or the Swedish way. The Swedish approach, which, by the way, is followed by the FDIC, is, “To hell with the banks, save the banking system.” If any given bank is insolvent, you fire the senior management, you wipe out the shareholders, you take the assets, you sell them to the highest bidder and whatever is left over goes to the bondholders. What you’re left with is good assets and preserved accounts. People who ran a bank poorly or invested in bad banks are suitably chastened by the market, and the system is saved.

Japan has its own keiretsu system [whereby banks are owned by companies and vice versa across the economy]. When Japan’s crisis began in 1989, if they had let Bank of Mitsubishi fail, the whole of Mitsubishi would have collapsed. So Japan’s approach was, “To hell with the banking system, save the banks, because if we don’t, everything else is going to go down.” Unfortunately, we took a page from the Japanese approach. Now it’s 30 years later, and Japan is still in a long-term recession.

Do you really believe we should have let those banks go bankrupt then?

Well, the way we let Lehman go down – just take a leap, face down, 50 storeys onto the concrete – no. That’s not the ideal way to do it. What we ended up doing with GM and Chrysler was a pre-packaged bankruptcy: You fire the senior management, wipe out the shareholders, renegotiate all the bad deals, and sell off all the bad assets. GM is having its best year in history! Had we done that with the bigger banks, we would be much healthier today. That tearing off the Band-Aid is much more painful at the time, but it would be healthier today, and more importantly, you don’t set up the [moral hazard] problems going forward. So five to 10 years from now, we don’t have some guy on a trading desk coming up with an idea and saying, “You know, if I take a little more risk, and use a little more leverage, if it works out, it’s a home run for me. But if it crashes and burns, it’s someone else’s problem!”

So how should the banks have been dealt with? You work on Wall Street, give me the specifics.

When Bear Stearns starts to wobble, a few people said, “Hey! We can’t let Bear Stearns go belly-up.” That’s where the mistakes start.

So they should have just been left to go under?

No, no. Here’s what happened. Jamie Dimon [the chief executive of JP Morgan] completely outplayed Ben Bernanke. Dimon went to Bernanke and said, “Look, we’re a counterparty with Bear Stearns, we could probably absorb them – but why should we step up? Normally we wouldn’t do this in a shotgun wedding, it would take a year to negotiate. I have a weekend to make this decision, so you have to guarantee $29bn of losses.” And the Fed did that.

If I had been the Fed chief, I would have said: “Let me explain this to you, Jamie. I know the history of JP Morgan.” (Everybody thinks Dimon is this genius who avoided the subprime situation, but that’s actually not true. They just ran into their subprime problem way earlier than everybody else, so when they had to liquidate, there was a bid there.) “I’m looking at the derivative book of Bear Stearns. It’s $8 trillion and you’re the single biggest counterparty. So if they go down, it’s your problem. So here is what I am willing to do. When you go into receivership, I’ll promise not to put you in jail! If you want to buy them, buy them. If you don’t want to buy them, we’re going to put them into a pre-packaged bankruptcy and if it ultimately causes JP Morgan to go bankrupt, well, put it this way, this is your opportunity to avoid it. So take a walk once around the park, and have a good think. As Fed chair, I have no problem testifying that I suggested you buy Bear Stearns because, if you didn’t, it really looked like they were going to blow up JP Morgan – and good luck with the shareholder lawsuits for the rest of your life.”

Instead, Dimon outplayed Bernanke. Bernanke is an academic, he was learning on the job. When the head of one of America’s biggest banks says “I’ll save your bacon, but you’ve got to do this for me…” He didn’t know better. Even at the time, a lot of people, including me, said, “This is outrageous for the Fed to give $29bn to JP Morgan to buy Bear Stearns.”

Going back to the underlying causes, the American obsession with deregulation played a big part. Your second book, “The Myth of the Rational Market” looks at the intellectual underpinnings of that worldview.

Yes, so everything was working fine. The original concept – which started under Carter but was accelerated under Reagan – was that government has gotten too unwieldy. Regulation is too costly, too time-consuming and there’s too much red tape. There is a legitimate argument that bureaucracies tend to feed on themselves, and you have to constantly hack back at some of the vines and undergrowth. But somehow, “Let’s clear out some regulations and make it easier for business,” morphed over time to become, “The market knows better than anybody else, let’s get rid of any and all oversight, any and all regulation, any and all things that get in the way of the efficient market.” So what started out as, “Let’s clear out some of the excesses,” became, “Let’s get rid of all the rules.”

In “The Myth of the Rational Market” Justin Fox explains all of the bad ideas that took root and allowed a very legitimate and worthwhile objective – getting rid of some of the really time-consuming, unjustifiable, expensive regulations that had grown over time – get so wildly imbalanced. He looks at why academics and many market theorists were so wrong about how markets actually operate. He does a wonderful job of telling the story of how the simple concept of the efficient market, the rational economic actor, got completely out of whack. You don’t have to be an economist or market theorist to appreciate the personalities, the story and some of the obvious delusions that took place and helped set the table for the collapse.

Yes, one review said, “It reads like an intellectual whodunit.”

It really does. By the way there are a bunch of other books along the same concept – “Zombie Economics” by John Quiggin, Yves Smith’s “Econned,” and Kevin Phillips’s “Bad Money.” There are a slew of these that are all about how academic economists – and especially the Chicago School and other believers in the Efficient Market Hypothesis (EMH) – got this totally wrong. There’s a simple reason for that, which is that when you build a model, you’re building a Platonic shadow of reality. It’s not reality; it’s a depiction of reality. Naturally, there’s going to be some variance and modelling errors. There’s that great George Box quote: “All theoretical models are wrong, but some are useful.” What that means is that you have to always remember, when you’re working from a model, especially a financial model making projections into the future, that you’re not dealing with a perfect reflection of everything that takes place in the real world. There are irrational things that take place that models typically don’t forecast. Human beings are not perfectly efficient, profit-maximising actors.

But real spending (adjusted to remove price changes) this year hasn’t been going anywhere. It increased just .5 percent in February after an anemic .2 percent increase in January.

The reason consumers aren’t spending more is they don’t have the money. Personal income was up just .2 percent in February – barely enough to keep up with inflation. As a result, personal saving as a percent of disposable income tumbled to 3.7 percent in February from 4.3 percent in January.

Personal saving is now at its lowest level since March 2009.

American consumers, in short, are hitting a wall. They don’t dare save much less because their jobs are still insecure. They can’t borrow much more. Their home values are still dropping, and many are underwater – owing more on their homes than the homes are worth.

The economy has been growing but almost all the gains have gone to the very top. As I’ve noted, this is the most lopsided recovery on record.

You will hear other theories about the hiring slowdown, but they don’t wash.

It’s not due to “uncertainty” about the economy. That’s a tautology – the economy’s future is always uncertain, especially when consumers don’t have the dough to keep it going.

It’s not because of fears about a European recession. Europe has been in the skids for some time now. Besides, the American economy doesn’t really depend on exports to Europe.

And it’s not about gas prices or the rise in healthcare insurance premiums. Both are up, but they’ve been trending up for many months.

It’s because consumers’ pockets are almost empty.

We’ll avoid a double-dip, but the most likely scenario in coming months is a continuation of the same – an anemic jobs recovery.

President Obama will claim the economy is improving – and, technically, it is. Growth this year will most likely average around 2 percent. The problem is, most Americans aren’t feeling it in their paychecks.

Mitt Romney will claim the economy is in terrible shape – and there will be enough evidence to justify his “cup-half-empty” rhetoric.

But when it comes to explaining what’s really wrong with the economy, Romney is the perfect foil for Obama because Romney represents the richest of the rich – a man who raked in more than $20 million last year, and paid a tax rate of just 13.9 percent (lower than much of the middle class).

He made that money by buying up “under-performing” companies – that is, companies that employed more people than they needed to, and carried less debt than was necessary to show big profits (interest on debt is deductible from company income). Romney’s firm, Bain Capital, made him and his colleagues fortunes by firing workers and loading companies up with debt.

And there’s America’s economic problem in a nutshell.

Romney and his ilk are doing wonderfully well, but the rest of the nation is still in deep trouble. Yet the U.S. economy can’t fully recover on the spending of millionaires.

The president has already announced that this election is about America’s surge toward ever-greater inequality. He’s right. And this painful recovery shows it.

It would be sadly ironic if Obama lost the election because the economy responded to widening inequality exactly as expected.

Yet the U.S. Chamber of Commerce wants us to think that corporations – preferably unregulated! – are the patriotic job creators in our economy. They want us to think it so much that in 2009, after the financial crash, they launched a $100 million campaign, which, among other things, draped their Washington, DC building with an enormous banner proclaiming “Jobs: Brought to you by the free market system.”

But the truth is that unfettered corporations are just about the worst thing for creating decent jobs. Here’s a look at why, and where the good jobs really come from.

Taming the Wild Horses

Corporations are kind of like wild horses. They can run you down. Or sweep you around in circles till you’re exhausted. And in today’s world, they’ll surely run off and take your jobs to China or someplace else if you don’t learn how to tame them.

Bad things happen when corporations are unconstrained by strong national policies that force players to think long term, behave decentlyand refrain from dumping their short-term costs on the rest of us. They tend to focus single-mindedly on maximizing profits for shareholders at the expense of all else – including jobs. Executives set their sights on a path to short-term boosts in share prices paved with layoffs, wage cuts and jobs moved overseas, while slashing research and development and investing in the skills of their employees.

The U.S. Department of Commerce found that from 2000 to 2009, U.S. transnational corporations, which employ about 20 percent of all American workers, cut their domestic employment by 2.9 million even as they boosted their overseas workforce by 2.4 million. The result was an enormous loss of jobs nationally, as well as a net loss globally.

In the 1990s, these companies added more jobs at home than abroad. What changed? 1) The rise of India and China, with 37 percent of the world’s population, as hotspots for off-shoring; and 2) the availability of tens of millions of workers in these places, many with college degrees, to do the jobs previously done by American workers.

In India, indigenous companies like TCS, Infosys and Wipro along with transnationals like IBM, HP and Accenture, employ hundreds of thousands of college-educated workers to perform IT services, in large part for American firms. In China, the electronics contract manufacturer Foxconn (headquartered in Taiwan) barely existed a decade ago, but now employs about 1.2 million workers, with Apple its single biggest customer.

And yet Big Business still trumpets itself as the American Job Creator Fairy. Apple has released a report claiming to have created half a million domestic jobs – a highly dubious number which takes credit for everything from the app industry to FedEx delivery jobs (never mind that drivers would be hauling someone else’s gadgets if Apple went out of business). It’s true that in the U.S. managers, engineers and other professionals have found good jobs at Apple. But the non-professional employees are just barely scraping by. A study of the iPod value chain in 2006 calculated that among Apple’s domestic employees, professionals earned around $85,000, not counting stock options, but the retail workers in Apple’s stores earned only $26,000. This is troubling because as Apple has grown in size, most of the employees it has hired in the U.S. work in retail. Are these jobs paths to long-term, stable careers? Quite likely they are not.

While a company like Apple whistles “God Bless America,” executives are not going to talk about the job losses induced by off-shoring, nor the horrifically abused foreign workforce that moving jobs to China has produced. And they’re not going to tell us about Apple’s preference for hiring part-time employees who can’t afford to buy health insurance. When such uninsured people have health emergencies, someone has to pay and the burden falls on the taxpayers.

Here is what Apple executives tell us instead: “We don’t have an obligation to solve America’s problems.”

The Real Deal

Corporate executives have lost the sense that they owe anything to the public. They have forgotten that the 99 percent, as taxpayers, have made huge investments in them. They fight to lower taxes as if all the money “belongs” to the companies. They fight regulations as if the public doesn’t have the right to interfere in their business.

All nonsense.

Despite the anti-government rhetoric from conservative leaders, the truth is that the government, elected by the people, plays a critical role in creating the conditions in which companies can succeed and good jobs can flourish. The government is able to invest in human capital through key services like education. What’s the point of a job if you don’t have an educated worker to fill it? The government also creates job-friendly conditions by investing in infrastructure. How can you get to work if your roads and bridges are falling apart? And it boosts job creation through investing in technology. How could Google create its amazing search engine without state investment in the creation of the Internet? When the government invests in the knowledge infrastructure, businesses can then employ and train people who can, in turn, engage in the kind of organizational learning that leads to that wondrous thing called “innovation.”

We learned this once before. After Wall Street financiers ran amok to cause the Great Depression in the 1930s, the government responded by putting in place regulations on banks and corporations, a highly progressive tax system and a robust social safety net. President Franklin D. Roosevelt created the conditions in which good jobs were possible with programs like the Civilian Conservation Corps and other New Deal initiatives. He focused on the development of highways, railways, airports and parks, investing in the future rather than focusing solely on short-term profits. The GI Bill, rather than leaving graduates with big debts, left them well educated and therefore with a chance of to provide a middle-class life for their families and to retire with dignity.

After victory in World War II, America was able to emerge as the world’s most powerful nation because it had a large middle-class and a strong industrial and technological base. The horses of Big Business were tamed, and they could be harnessed to do useful things for society. Then came the Reagan Revolution and Big Business freed itself from the regulations, unions and taxes that had curbed its worst instincts and it began to shred the nation’s economic and social safety net. The gap in income inequality grew, and jobs were eliminated and outsourced. Long-term investment in innovation and human capital slowed down, while fraud and financial speculation took off.

Today, corporate executives ask for more special treatment and freer rein in calling the shots in our economy, and they threaten to pack their bags if we don’t agree. Some politicians and policy makers respond to this blackmail by saying that we have to create a “friendly business climate” to convince them to stay. But what makes a “friendly business climate”–low wages, minimal taxes and so on — creates a very hostile climate for the 99 percent, which is ultimately bad for everyone – business included. The state of Mississippi and Rick Perry’s Texas, where city and state officials bent over backwards to lure Big Business with subsidies and other perks, are hardly bursting with good jobs.

Many researchers have concluded that tax rates are actually not terribly important to where a company locates. Further, a common rule of thumb for business headquarters location is that quality of life for key personnel is decisive. True, vastly different levels of regulation in the U.S. and China is a problem for which there are no easy answers. But there are real costs to ignoring the environment and keeping workers in a state of misery. If you want job growth, you have to have demand growth: profits and consumption go hand in hand.

That’s why the best way to unleash America’s job-creating potential is to support rights and protections for ordinary people. A climate friendly to the 99 percent is not just fair, it makes the best sense for the economy. We need to remember the complementary roles that government and business have to play in creating well-paid, stable employment opportunities and then ensuring that people can access these opportunities over the course of their careers. To get corporations working for the 99 percent on the job front, we have three major challenges:

1) Education: Young people from low-income groups (especially blacks and Hispanics) need schooling and training to move to good career jobs.

2) Incentives: Corporations must have incentives to retain educated and experienced workers instead of laying them off or off-shoring their jobs. (To do so forces valuable workers into low-skill jobs and wastes their human capital, which was expensive to acquire.)

3) Investment: Executives of financialized corporations who want the government to invest in the knowledge base have to make complementary investments in people that can keep the U.S. economy innovative and generate good jobs. That would mean changing the single-minded focus on boosting company stock prices through buybacks and other financial manipulations that serve the 1 percent but no one else.