PART 1 The Great Crash CHAPTER 1. Diagnosing America''s Economic Crisis A Crisis of Values At the root of America''s economic crisis lies a moralcrisis: the decline of civic virtue among America''s political and economicelite. A society of markets, laws, and elections is not enough if the rich andpowerful fail to behave with respect, honesty, and compassion toward the restof society and toward the world. America has developed the world''s mostcompetitive market society but has squandered its civic virtue along the way.Without restoring an ethos of social responsibility, there can be no meaningfuland sustained economic recovery. I find myself deeply surprised and unnerved to have towrite this book. During most of my forty years in economics I have assumed thatAmerica, with its great wealth, depth of learning, advanced technologies, anddemocratic institutions, would reliably find its way to social betterment. Idecided early on in my career to devote my energies to the economic challengesabroad, where I felt the economic problems were more acute and in need ofattention.

Now I am worried about my own country. The economic crisis of recentyears reflects a deep, threatening, and ongoing deterioration of our nationalpolitics and culture of power. The crisis, I will argue, developed gradually over thecourse of several decades. We are not facing a short-term business cycledownturn, but the working out of long-term social, political, and economictrends. The crisis, in many ways, is the culmination of an era-the baby boomerera-rather than of particular policies or presidents. It is also a bipartisanaffair: both Democrats and Republicans have played their part in deepening thecrisis. On many days it seems that the only difference between the Republicans andDemocrats is that Big Oil owns the Republicans while Wall Street owns theDemocrats. By understanding the deep roots of the crisis, we can move beyondillusory solutions such as the "stimulus" spending of 2009-2010, thebudget cuts of 2011, and the unaffordable tax cuts that are implemented yearafter year.

These are gimmicks that distract us from the deeper reforms neededin our society. The first two years of the Obama presidency show that oureconomic and political failings are deeper than that of a particular president.Like many Americans, I looked to Barack Obama as the hope for a breakthrough.Change was on the way, or so we hoped; yet there has been far more continuitythan change. Obama has continued down the well-trodden path of open-ended war inAfghanistan, massive military budgets, kowtowing to lobbyists, stingy foreignaid, unaffordable tax cuts, unprecedented budget deficits, and a disquietingunwillingness to address the deeper causes of America''s problems. Theadministration is packed with individuals passing through the revolving doorthat connects Wall Street and the White House. In order to find deep solutionsto America''s economic crisis, we''ll need to understand why the Americanpolitical system has proven to be so resistant to change. The American economy increasingly serves only a narrowpart of society, and America''s national politics has failed to put the countryback on track through honest, open, and transparent problem solving.

Too manyof America''s elites-among the super-rich, the CEOs, and many of my colleaguesin academia-have abandoned a commitment to social responsibility. They chasewealth and power, the rest of society be damned. We need to reconceive the idea of a good society in theearly twenty-first century and to find a creative path toward it. Mostimportant, we need to be ready to pay the price of civilization throughmultiple acts of good citizenship: bearing our fair share of taxes, educatingourselves deeply about society''s needs, acting as vigilant stewards for futuregenerations, and remembering that compassion is the glue that holds societytogether. I would suggest that a majority of the public understands thischallenge and accepts it. During my research for this book, I becamereacquainted with my fellow Americans, not only through countless discussionsbut also through hundreds of opinion surveys on, and studies of, Americanvalues. I was delighted with what I found. Americans are very different fromthe ways the elites and the media pundits want us to see ourselves.

TheAmerican people are generally broad-minded, moderate, and generous. These arenot the images of Americans we see on television or the adjectives that come tomind when we think of America''s rich and powerful elite. But America''spolitical institutions have broken down, so that the broad public no longerholds these elites to account. And alas, the breakdown of politics alsoimplicates the broad public. American society is too deeply distracted by ourmedia-drenched consumerism to maintain the habits of effective citizenship. Clinical Economics I am a macroeconomist, meaning that I study the overallfunctioning of a national economy rather than the workings of one particularsector. My operating principle is that the economy is intimately interconnectedwith a much broader drama that includes politics, social psychology, and thenatural environment. Economic issues can rarely be understood in isolation,though most economists fall into that trap.

An effective macroeconomist mustlook at the big canvas, in which culture, domestic politics, geopolitics,public opinion, and environmental and natural resource constraints all playimportant roles in economic life. My job as a macroeconomic adviser during the past quartercentury has been to help national economies function properly by diagnosingeconomic crises and then correcting breakdowns in key sectors of the economy.To do that job well, I must strive to understand in detail how the differentparts of the economy and society both fit together and interact with the worldeconomy through trade, finance, and geopolitics. Beyond that, I must alsostrive to understand the public''s beliefs, the country''s social history, andthe society''s underlying values. All of this requires a broad and eclectic set oftools. Like other economists, I pore over charts and data. In addition, I readstacks of opinion surveys as well as cultural and political histories. Icompare notes with political and business leaders and visit factories,financial firms, high-tech service centers, and local community organizations.

Sound ideas about economic reform must pass a "truth test" at manylevels, making sense at the community level as well as the national politicallevel. A macroeconomist faces the challenge of a clinical doctorwho must help a patient with serious symptoms and an unknown underlyingdisease. An effective response involves making a correct diagnosis about theunderlying problem and then designing a treatment regimen to correct it. In mybook The End of Poverty I called this process "clinical economics."My inspiration has been my wife, Sonia, a gifted medical doctor who showed methe wonders of science-based clinical medicine. I didn''t train to be a clinical economist, thoughfortunately my theoretical training, combined with my wife''s inspiration andsome very good professional luck, enabled me to forge an unusual personal pathto clinical economics. I was blessed with a first-rate education as anundergraduate and graduate student at Harvard, where I later joined the facultyin 1980. With life-changing good fortune, I became involved in practicaleconomic problem solving in Bolivia in 1985, and from then on I have built acareer at the intersection of theory and practice.

I spent much of the 1980sworking in debt-ridden Latin America to help support that region''s return todemocracy and macroeconomic stability after two decades of incompetent andviolent military rule. In the late 1980s and early 1990s I was invited to helpEastern Europe and the former Soviet Union in their transitions from communismand dictatorship to democracy and market economy. That work, in turn, broughtme invitations to the world''s two great behemoths, China and India, where Icould watch, debate, and share ideas about the world-changing market reforms ofthose two great societies. Since the mid-1990s, I have turned much of myattention to the poorest regions of the world, and especially to sub-SaharanAfrica, to try to assist them in their ongoing fight against poverty, hunger,disease, and climate change. Having worked in and diagnosed dozens of economies overmy career, I''ve come to have a good feel for the interplay of politics,economics, and a society''s values. Lasting economic solutions are found whenall of these components of social life are brought into a proper balance. In this book I will bring clinical economics to bear onAmerica''s economic crisis. By taking a holistic view of America''s economicproblems, I hope to diagnose some of the deeper maladies afflicting our societytoday and to correct the basic misdiagnosis that was made thirty years ago andthat still sticks today.

When the U.S. economy hit the skids in the 1970s, thepolitical Right, represented by Ronald Reagan, claimed that government was toblame for its growing ills. This diagnosis, although incorrect, had a plausiblering to it to enough Americans to enable the Reagan coalition to begin aprocess of dismantling effective government programs and undermining thegovernment''s capacity to help steer the economy. We are still living with thedisastrous consequences of that failed diagnosis, and we continue to ignore thereal challenges, involving globalization, technological change, andenvironmental threats. America Is Ready for Reform After a thorough diagnosis in the first half of the book,I''ll get specific on what I think we should do. Those specific recommendationswill raise several big iss.