American Amnesia

1. Government is the Essential Partner in Prosperity, Not Its Rival

This book is about an uncomfortable truth: It takes government—a lot of government—for advanced societies to flourish.

Challenging a core belief. Americans cherish freedom and often view government as a limit on that freedom, portraying it as being in "ceaseless conflict" with liberty and free enterprise. This perspective suggests government merely "reshuffles the economic deck" rather than actively creating wealth. However, the reality is that government is not just a protector of liberties but an indispensable vehicle for achieving shared ends, exercising "legitimate coercion" to ensure collective well-being.

Founders understood coercion. The authors of the US Constitution, far from being free-market fundamentalists, keenly understood government's necessary role. James Madison, the "Father of the Constitution," bluntly stated, "There never was a Government without force. What is the meaning of government? An institution to make people do their duty." They gathered in Philadelphia precisely because the absence of effective public authority under the Articles of Confederation was a "mortal threat" to the fledgling nation, leading to instability and vulnerability.

American Amnesia. We suffer from a "mass historical forgetting" of this truth, believing the United States got rich "in spite of government." The modern partnership between markets and government is, in fact, "humanity’s most impressive positive-sum bargain," making both sides better off. Ignoring this history, especially when facing challenges like a strained middle class or climate change, prevents us from building a stronger, more effective government capable of rising above narrow private interests.

2. America's Prosperity Was Forged by a "Mixed Economy"

Indeed, the mixed economy may well be the greatest invention in history.

A recent invention. For thousands of years, human economic growth was mostly flat, with societies trapped in a Malthusian struggle. Life expectancy barely rose between the Neolithic era and the mid-19th century. Then, little more than a hundred years ago, something remarkable happened: countries on the frontier of economic development, led by the United States, crossed a "Great Divide" into unprecedented wealth, health, and enlightenment.

The engine of progress. This transformation was driven by the "mixed economy"—a social institution combining large-scale profit-seeking activity, active democratic governance, and a deep understanding of market dynamics. It wasn't just capitalism, which predated mass prosperity, but effective governance that made the difference. This partnership delivered miraculous breakthroughs:

• Public health measures transformed cities from "incubators of illness" to "engines of innovation."
• Massive expansion of public education boosted individual opportunity and societal economic potential.
• Investments in science, higher education, and defense spearheaded breakthroughs in medicine, transportation, and technology.
• Overarching rules tamed unstable financial markets and smoothed boom-bust cycles.

A positive-sum bargain. The mixed economy redistributed power and resources, but its impacts broadened and diffused, making "virtually everyone... massively better off." This combination of "energetic markets and effective governance, deft fingers and strong thumbs," is arguably the greatest social technology of all time, responsible for the "unmistakable reality" of economic growth for everyone in the 20th century.

3. Markets Inevitably Fail, Requiring Government's Guiding Hand

The invisible hand is all fingers. The visible hand is all thumbs. Of course, one wouldn’t want to be all thumbs. But one wouldn’t want to be all fingers, either.

Inherent market shortcomings. Even Adam Smith, the champion of the "invisible hand," identified numerous cases where rational self-interest led to "bad outcomes," such as underinvestment in education, financial instability, and unchecked monopolies. Economists have since expanded on these "market failures," demonstrating that government's "visible hand" is essential to make markets more effective.

Key areas of market failure:

• Public Goods: Markets won't provide goods like national security, infrastructure, or basic scientific research because their benefits are "nonexcludable," leading to "free riders."
• Externalities: Private transactions ignore costs (e.g., pollution) or benefits (e.g., education) to third parties, leading to suboptimal outcomes.
• Information Asymmetry & Myopia: Buyers or sellers lack crucial information, or individuals make irrational choices due to cognitive biases (e.g., underestimating risks, prioritizing immediate gratification), leading to poor decisions in areas like insurance, retirement savings, or product safety.
• Monopolies & Rent-Seeking: Markets tend toward concentration of power, allowing dominant firms to "conspire against the public" and extract "rents" (above-market returns) by limiting competition or influencing government for favorable policies.

Complexity demands governance. Modern economies are vastly more complex and interdependent, exacerbating these market failures. Increased density amplifies externalities (e.g., traffic congestion, lead pollution), while the complexity of products and services (e.g., health insurance, financial instruments) overwhelms individual decision-making. Coping with this requires a "capable, informed public sector" to set basic rules, invest in knowledge, and provide counterpressure to market forces.

4. The Postwar Era: A Golden Age of Bipartisan Consensus on the Mixed Economy

For roughly thirty years, from the early 1940s to the mid-1970s, the mixed economy of American capitalism was a model of unprecedented achievement, nurturing innovation, sustaining stability, and generating opportunity and prosperity.

A new political reality. The period from the early 1940s to the mid-1970s marked the "heyday of the mixed economy," characterized by a broad consensus among business leaders and both political parties that government had a "positive and permanent role" in the economy. This was a significant shift from earlier business hostility towards government.

Business embraced the state. Figures like Eric Johnston, head of the US Chamber of Commerce, and Marion Folsom of Eastman Kodak, recognized that "the old-style capitalism of a primitive, free-shooting period is gone forever." They saw government's expanded role as an "established and useful reality," essential for:

• Macroeconomic stability (Keynesian policies).
• Public goods (science, infrastructure).
• Social stability (unions, welfare state).
• Addressing market failures (regulation).
  This reorientation was driven by the discrediting of business during the Depression, the unifying experience of World War II, and the growing power of organized labor.

Republicans joined the consensus. Even conservative figures like Vannevar Bush (FDR's science czar) and President Dwight D. Eisenhower, while wary of "statism," embraced the mixed economy. Eisenhower famously dismissed conservatives who wanted to roll back the New Deal as "negligible and stupid," understanding that popular programs like Social Security were here to stay. His administration spearheaded massive public investments in:

• Science and technology (National Science Foundation, NASA).
• Infrastructure (interstate highway system).
• Education (GI Bill, federal aid to universities).
  This bipartisan "growthsmanship" focused on using government to generate "more" prosperity, leading to the fastest sustained productivity growth in history, shared broadly across society.

5. A New Economic Elite and Radical Ideology Undermined the Consensus

The distinctive core of hard Randianism isn’t laissez-faire (a very old fancy); it’s the division of the world into a persecuted minority that heroically generates prosperity and a freeloading majority that uses government to steal from this small, creative elite.

The rise of Randianism. Starting in the 1970s, economic turmoil and the rise of "stagflation" weakened the intellectual foundations of the mixed economy. This created an opening for radical free-market ideas, particularly "Randianism," inspired by Ayn Rand's philosophy. This ideology posits a stark dichotomy between "makers" (creative capitalists) and "takers" (everyone else, especially those relying on government).

A new economic elite. This ideological shift coincided with the "financialization" of the American economy, where finance, insurance, and real estate (FIRE) grew to dominate corporate profits. A new class of "high-rolling executives" emerged, exemplified by figures like Pete Peterson and Steve Schwarzman, who became billionaires through leveraged buyouts and private equity. This elite, increasingly detached from traditional manufacturing and focused on short-term "shareholder value," became far more critical of the mixed economy.

• The Forbes 400 list saw a dramatic increase in fortunes from the financial sector.
• Executive compensation skyrocketed, often tied to stock options and capital gains, aligning CEO interests with Wall Street.
• Deregulation of finance, starting in the 1980s, fueled this wealth accumulation.

"Pity the rich." This new elite, often "soft Randians" like Peterson, actively promoted the idea that government was parasitic on their achievements. They championed tax cuts, deregulation, and cuts to social programs, framing them as essential for "job creators" and "risk takers." This narrative, often expressed with "virulent, obsessive hatred" towards government, became a powerful force in shaping public discourse, even as it diverged sharply from the views of most Americans.

6. Business Associations Became Enablers of Anti-Government Extremism

No private organization in the history of American politics has assembled anything comparable in scope or capacity to today’s Chamber of Commerce.

From consensus to combat. The business community's political engagement transformed dramatically after the 1970s. Organizations like the Business Roundtable and the US Chamber of Commerce, once capable of bipartisan compromise, became increasingly aggressive, partisan, and focused on narrow corporate interests, often at the expense of broader economic well-being.

The Business Roundtable's decline. Initially a powerful voice for big business, the BRT's influence waned as the "CEO as public statesman" model became obsolete. Executives, driven by short-term financial pressures, prioritized protecting their own compensation and corporate governance from "outside interference." The BRT's nonpartisanship eroded under pressure from the increasingly conservative Republican Party, leading it to focus on issues like "proxy access" that directly benefited top executives.

The Chamber's transformation. Under Tom Donohue, the US Chamber of Commerce became an "eight-hundred-pound gorilla," a political machine of unprecedented scale. Donohue's strategy combined:

• Extreme partisanship: Over 90% of its spending went to Republicans, aligning closely with the GOP.
• Massive fundraising: Its budget soared to nearly $250 million annually, heavily reliant on large, often anonymous, corporate donations.
• Aggressive tactics: Extensive lobbying, campaign spending, and litigation (through the Institute for Legal Reform and National Chamber Litigation Center) to influence judges and block regulations.
  The Chamber became a "lobbyist-for-hire," often using "dark money" to advance specific industry interests, as seen in its $100 million campaign against the Affordable Care Act on behalf of health insurers.

The Koch network's rise. Charles and David Koch, committed libertarians, built a "shadow political party" with a vast network of organizations (e.g., Americans for Prosperity). They invested hundreds of millions in:

• Ideological warfare: Funding think tanks and academic programs to promote free-market ideas.
• Grassroots mobilization: Building a sophisticated ground game with thousands of field operatives.
• Donor cultivation: Hosting exclusive seminars for super-wealthy conservatives, raising hundreds of millions for political campaigns.
  This network, a modern "Liberty League," became central to the Republican Party, pushing it further right and amplifying anti-government messages.

7. The Republican Party's Rightward Shift Crippled Governance

However awkward it may be for the traditional press and nonpartisan analysts to acknowledge, one of the two major parties, the Republican Party, has become an insurgent outlier—ideologically extreme; contemptuous of the inherited social and economic policy regime; scornful of compromise; unpersuaded by conventional understanding of facts, evidence, and science; and dismissive of the legitimacy of its political opposition.

The Great Right Migration. The Republican Party has undergone a "breathtaking transformation," moving dramatically to the right since the 1970s. Once home to moderates like Eisenhower, Nixon, and Ford, the GOP now embraces positions and rhetoric previously relegated to the fringes, often adopting the "hard Randian" views of the new economic elite.

Policy extremism. This shift is evident across core governance issues:

• Healthcare: Republicans abandoned their own market-oriented proposals (like the individual mandate) to vehemently oppose the Affordable Care Act, and now advocate for benefit cuts over cost control.
• Taxes: They reject any tax increases, even in "ten-to-one" spending cut deals, and prioritize cuts for the wealthiest, despite public opinion.
• Social Programs: Rhetoric increasingly demonizes beneficiaries as "takers" and "lucky duckies," contrasting them with "job creators," reflecting a deep-seated hostility to the social safety net.

"Constitutional Hardball." The GOP has adopted aggressive tactics to obstruct and delegitimize government, a strategy dubbed "constitutional hardball." This includes:

• Routine filibusters: Transforming a rare tactic into a constant barrier, creating a "rule of sixty" in the Senate.
• Government shutdowns & debt-ceiling hostage-taking: Using procedural leverage to extract policy concessions, even at the risk of economic catastrophe.
• "New Nullification": Blocking appointments and defunding agencies to prevent the implementation of laws they oppose, effectively making government "inoperable."
  These tactics, pioneered by figures like Newt Gingrich and Mitch McConnell, exploit the fragmentation of American institutions to make obstruction easy and accountability difficult, allowing the GOP to win politically by fostering dysfunction.

8. Modern "Robber Barons" Extract Trillions in Rents from Society

Today our economy also has barons. They are harder to see and harder to identify with a single name. And yet there are huge sectors of our economy—health care, finance, energy, mining, petrochemicals, defense, key areas of telecommunications and computing, and many more—where a twenty-first-century feudalism reigns.

Tolls on progress. Like their medieval counterparts on the Rhine, modern "robber barons" in key economic sectors use their market and political power to extract "rents"—above-market returns that impose enormous costs on society. These gains have exploded in an era supposedly defined by competition and efficiency.

Key sectors of rent extraction:

• Healthcare: US health spending is double that of other rich nations, driven by exorbitant prices, not higher quality or greater "skin in the game." The medical-industrial complex spends billions lobbying to prevent price controls and maintain lucrative subsidies (e.g., Medicare Part D, private Medicare plans).
• Finance: The "financialization" of the economy has led to trillions in "output losses" from crises, while providing elusive benefits to growth. Wall Street extracts massive rents through deregulation, implicit "too big to fail" subsidies, and complex products that obscure conflicts of interest. The industry spends billions lobbying and cultivating political ties (the "Wall Street-Washington corridor").
• Energy: The fossil fuel industry profits from the "greatest market failure the world has ever seen"—climate change. It resists regulation of carbon emissions, spending heavily on lobbying and funding "merchants of doubt" to undermine climate science, even as the planet faces "cataclysmic and irreversible consequences."

Widespread rent-seeking. Beyond these major sectors, rents are extracted through:

• Occupational licensure: Overly restrictive requirements that raise prices and incomes for some professions while limiting opportunities for others.
• Broadband monopolies: High costs and poor service due to concentrated industry control and resistance to public alternatives.
• Food industry influence: Lobbying against policies to address obesity, leading to "fat profits" from unhealthy diets.
• For-profit colleges: Federal funding fuels institutions with dismal outcomes, high debt, and poor job prospects, while they lobby aggressively against oversight.
  These modern barons thrive by converting their economic power into political influence, often preventing government from fixing distorted markets or imposing necessary regulations.

9. A Crisis of Authority: Government's Capacity to Act Has Eroded

The tragic irony is that this assault is being waged in the name of a Constitution that was designed with precisely the opposite intent.

Undermining core functions. The combined effect of the new economic elite, aggressive business associations, and the rightward shift of the Republican Party is a profound "crisis of authority." Government's capacity to perform its most basic tasks—from managing finances to regulating markets and investing in the future—has been systematically eroded.

Examples of decay:

• IRS budget cuts: Led by figures like Senator Ron Johnson, Congress has drastically cut the IRS budget, leading to staff shortages, outdated technology, and a "devastating erosion of taxpayer service." This hobbles tax collection, costing hundreds of billions annually, and undermines voluntary compliance.
• Crumbling infrastructure: Despite record-low interest rates for financing, Congress relies on short-term measures, leaving roads, bridges, and transportation networks in disrepair. The Federal Highway Trust Fund is chronically underfunded due to an unraised gas tax.
• Regulatory paralysis: Agencies like the FDA are overwhelmed, with inspections plummeting despite rising foodborne illnesses. The federal workforce has shrunk dramatically relative to the population, leading to "political decay" and increased reliance on private contractors.
• "Revolving door" problem: Talented public servants, facing stagnant pay and dwindling resources, are lured into lucrative lobbying jobs, creating a "power asymmetry crisis" where government is outmatched by well-resourced private interests.

Founders' intent subverted. This assault on government capacity is waged in the name of "constitutional conservatism," yet it directly contradicts the Founders' vision. Hamilton and Madison sought a "vigorous, effective national government" with the "vital principle" of taxation to impose order and promote commerce. Today's "anti-Federalists" actively seek to "cripple governance" and make it "inoperable," using tactics like the "new nullification" to block laws and appointments they dislike.

10. Reclaiming the "Positive-Sum Society" Requires Political Renewal

If we start using government successfully again to enhance prosperity, we can fix our broken politics.

Unrealized potential. Despite the gloomy outlook, the mixed economy remains a "spectacular achievement" with immense untapped potential. Trillions in "money on the table" await collection through smart public investments and reforms. Addressing issues like crumbling infrastructure, underfunded R&D, unequal educational opportunities, and the rents extracted by modern robber barons would not only create a fairer society but also make America "enormously richer."

No magic bullet. Repairing American democracy and restoring the mixed economy requires a multi-front, long-term effort, not a single "magic bullet." The goal is to reestablish a government capable of acting on "diffuse interests"—goals shared by millions but prioritized by few—over "concentrated interests" that currently dominate.

Strategies for political renewal:

• Make the system more majoritarian: Reform the Senate filibuster to reduce obstruction and increase accountability.
• Rebuild government capacity: Invest in federal agencies, staff, and expertise to counter the influence of lobbyists and ensure effective governance.
• Empower ordinary voters: Implement national voting rights legislation (e.g., automatic registration, mail-in ballots) to increase turnout and dilute the power of concentrated money.
• Weaken the sway of big money: Enforce transparency in political spending and explore public financing systems to amplify small donors.
• Organize diffuse interests: Revitalize labor unions and leverage digital technologies to build broad-based movements that can exert consistent pressure on behalf of shared concerns.
• Amplify moderate corporate voices: Encourage business leaders to advocate for the long-term health of American capitalism, recognizing that effective governance benefits all.

Breaking American Amnesia. The current crisis stems from a "long spiral of silence" and orchestrated efforts to demonize government. To reverse this, we must challenge the "government versus the market" false dichotomy and articulate a principled defense of effective public authority. This requires leadership, activism, and a renewed belief that government can and must play a vital role in fostering broad prosperity, ensuring that "the government that governs best needs to govern quite a bit."