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1
2
3
INTRODUCTION 4
5
6
7
TRAPPED
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9
10
11
12
13
14
15
16
Three facts are now poised to shape our economic life for a gener- co17
ation. First, thanks to global competition and rapid technological 18
change, America’s economy is about to face its most severe test in 19
nearly a century. Second, our political and business leaders are 20
doing next to nothing to prepare us to cope with what lies ahead. 21
And third, the reason for this inaction is that our entire economic 22
and political culture remains in thrall to a set of “Dead Ideas” about 23
how a modern economy should work. This book is about the 24
threat that individuals, companies, and the country face from the 25
things we think we know, and about the new (and surprising) ways of 26
thinking destined to replace these Dead Ideas so that America will 27
continue to prosper. 28
The next decade will bring a collision of forces that threaten to dis- 29
rupt U.S. society, sink the middle class, and call into question the polit- 30
ical and business arrangements on which our prosperity and stability 31
have rested for decades. These perils have little to do with the housing- 32S
related financial crisis that gripped America in the fall of 2008; in fact, 33R

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2 • THE TYRANNY OF DEAD IDEAS

1 the need to steer our way through this near-term credit crunch now
2 masks longer-term economic challenges that are far more conse-
3 quential. The stakes couldn’t be higher: if America doesn’t decisively
4 manage these tides of change, we’ll face a backlash against our eco-
5 nomic model—which, for all its flaws, has produced more better-
6 ment for more people than any other system in human history. If this
7 backlash proves contagious, and other advanced nations lose faith in
8 capitalism’s ability to improve the lives of ordinary people, the rich
9 world’s efforts to protect its citizens from economic change will
10 doom the developing world to dollar-a-day poverty.
11 The good news is that there are ways to avert this dark scenario
12 and to flourish. The trouble is we’re not doing what we need to
13 because of the Tyranny of Dead Ideas. By this I mean the tacit
14 assumptions and ingrained instincts broadly shared by business exec-
15 utives, professionals, policy makers, media observers, and other opin-
16 ion leaders regarding the way a wealthy, advanced economy like the
17 United States should work. While current thinking about the Ameri-
18 can economy is hardly monolithic, the individuals who occupy its
19 most influential positions subscribe to certain key premises:
20
21 • our children will earn more than we do
22 • free trade is “good” no matter how many people it hurts
23 • employers should play a central role in the provision of health
24 coverage
25 • taxes hurt the economy
26 • “local control” of schools is essential
27 • people tend to end up, in economic terms, where they deserve to
28
29 These axioms have percolated through the culture for decades,
30 becoming second nature to many of us. They determine which
31 paths we consider, which large questions we view as settled, which
32S possibilities we allow ourselves to imagine. And therein lies the
33R dilemma: from the halls of government to the executive suite,

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from the corner store to the factory floor, Americans are in the grip 1
of a set of ideas that are not only dubious or dead wrong—they’re 2
on a collision course with social and economic developments that 3
are now irreversible. 4
As these new realities crash against what people believe, a 5
strange intellectual chasm is revealed. It’s not just ordinary people 6
who are disoriented. The stewards of our economy themselves are 7
lost, at least to judge from the bizarre reasoning on display in 8
exalted precincts. Consider: 9
10
• CEOs routinely bemoan skyrocketing health care costs, saying 11
they give foreign companies a competitive edge because govern- 12
ments abroad pick up these bills. Yet in the next breath most exec- 13
utives insist that America’s government should not play a bigger 14
role in bearing this burden. Who else do they think is available? 15
16
• Politicians and business leaders say we should cut taxes for most 17
(some would say all) Americans to boost the economy. Yet 18
America already has $40 trillion in unfunded promises shortly 19
coming due in Social Security, Medicare, and other programs 20
serving senior citizens—and that’s before we toss in the costs of 21
rescuing America’s banking system, not to mention assorted 22
sensible blueprints to insure the uninsured, develop clean energy, 23
rebuild roads and bridges, extend preschool, and more. Has any- 24
one noticed that these numbers don’t come close to adding up? 25
26
• Everyone agrees that education is the key to improving future 27
living standards in a fiercely competitive global economy, and 28
that we need to lift all children, not just the most talented, to 29
higher standards of learning and achievement. Yet in the 2008 30
presidential campaign, not a single major-party candidate ques- 31
tioned our shockingly inequitable system of school finance, 32S
which dooms schools in poor neighborhoods in ways no other 33R

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4 • THE TYRANNY OF DEAD IDEAS

1 advanced nation tolerates. How are 10 million poor American chil-

2 dren supposed to compete?
3
4 • Top economists in both political parties perennially assure us
5 that free trade is “good for the country,” because the benefits to
6 some Americans outweigh the losses suffered by others due to
7 foreign competition. But wait: Who put economists in charge of
8 weighing the interests of one set of Americans against another?
9
10 As puzzles and contradictions like these ricochet across board-
11 rooms, union offices, town hall meetings, and kitchen tables, the
12 questions ask themselves. Why are business leaders afraid or unwill-
13 ing to say that we need government to play a bigger role in health
14 care? How can top officials and their advisers call constantly for tax
15 cuts when trillions in unpaid bills are coming due? Why do politicians
16 pledge to “leave no child behind” while overseeing public school sys-
17 tems that systematically assign the worst teachers and most run-
18 down facilities to the poor children who need great schools the most?
19 Why do free trade’s losers get only lip service even from those elected
20 representatives who say that workers are getting the shaft?
21 The best explanation is not ultimately cynicism, selfishness, or
22 indifference, nor is it really an inability to perceive and act in one’s
23 own long-term self-interest. No, the deeper ailment afflicting today’s
24 confused capitalist is intellectual inertia. In every era, people grow
25 comfortable with settled ideas about the way the world works. It
26 takes an extraordinary shock to expose the conventional wisdom as
27 obsolete, and to open people’s minds to a new vision of what is pos-
28 sible and what is necessary. Yet eventually a point is reached when
29 what was once deemed unthinkable comes to seem inevitable. The
30 climate of opinion is transformed by events. It happened in the
31 Great Depression, when mass unemployment and hardship swept
32S away long-standing taboos against government intervention in the
33R economy. It happened during the civil rights movement, when

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televised horrors outraged the nation and brought a convulsion that 1

ended legal discrimination based on race. It happened in the 1970s, 2
when recession, oil shocks, and inflation mixed with the sense that 3
welfare programs had spun out of control to bring a new consensus 4
to renew capitalism’s “animal spirits” via lower tax rates. But the 5
forces of the twenty-first-century global economy, powerful as they 6
are, haven’t yet proved strong enough to topple the unquestioned 7
ideas that continue to shape American economic life—ideas about 8
the nature of economic progress, the role of the federal government 9
and the corporation, and the best way to balance the risks capitalism 10
brings with the security people seek. For now, in short, America’s 11
economic future is at risk because of the Tyranny of Dead Ideas. 12
I’ve seen the distorting influence of these ideas from the inside. 13
As a consultant to major companies, I work with top executives 14
across corporate America, and I have heard the doubts and anxieties 15
they bring to such questions. I also know they’re too busy running 16
their businesses in the face of unprecedented global pressures to 17
have “connected the dots” on all this. As a government official, I saw 18
how ambition and fear shape political behavior and breed timid 19
thinking unequal to our challenges. As a journalist, I’ve spent years 20
moving among the voices on all sides of these debates; I’ve also seen 21
how hard it is for the media to address these questions without 22
resorting to caricatures that mask more than they explain. Together 23
these experiences have given me multiple angles of vision with 24
which to put the American economic mind “on the couch.” The 25
struggle to adapt to globalization is poised to dominate the next 26
generation of business and political life. What we need now are 27
not more out-of-touch assertions that faith in markets will see us 28
through, nor do we need well-meaning but naive “stop-the-world” 29
jeremiads. To get past these tired formulations and transform the 30
way we think, we need a burst of what might be called “economic 31
therapy,” offered by an ardent capitalist to help the American econ- 32S
omy through another of its periodic turning points. 33R

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6 • THE TYRANNY OF DEAD IDEAS

1 The basic aim when our economy reaches such a crossroads is

2 to make sure that the infamous “creative destruction” of capitalism
3 doesn’t destroy so much for so many that America’s embrace of
4 innovation and economic change is also a casualty. This isn’t a new
5 worry, of course. The quest for a better blend of growth and justice
6 has preoccupied reformers since the dawn of the industrial age. But
7 reform is never easy. “Devotees of capitalism are often unduly con-
8 servative,” wrote John Maynard Keynes in 1926, “and reject reforms
9 in its technique, which might really strengthen and preserve it, for
10 fear that they may prove to be first steps away from capitalism
11 itself.” Today, after America’s own recent experiments, there is
12 much we already know. We know that old-style “big government”
13 liberalism in America is dead, and that its traditional social demo-
14 cratic cousin in Europe seems a poor model, having produced
15 record rates of joblessness even as it breaks the bank. We also know
16 that Bill Clinton’s vaunted “Third Way” came and went without
17 reducing the insecurity that Americans feel in a global age. Yet it is
18 equally clear that the latest conservative “strategy”—cutting taxes
19 (mostly for the well off ), standing idle while health costs soar and
20 the ranks of the uninsured swell toward 50 million, mortgaging our
21 future to nations like China via massive trade deficits, and deregu-
22 lating our financial system with explosive results—has torpedoed
23 our public finances and fueled a pervasive sense of foreboding.
24 In this anxious environment, when the traditional alternatives
25 seem exhausted, we need a new way of thinking. And, as history
26 and luck would have it, we are on the cusp of the next of those
27 epochal shocks that opens our minds wide enough to discover it.
28
29
PRESENT SHOCK
30
31 The shock will be administered by four forces that are set to accel-
32S erate in the next decade. The first of these—call it White Collar
33R Anxiety—refers to the fact that jobs higher up the income scale

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(engineers, financiers, consultants, doctors, lawyers) will for the 1

first time be exposed to competition from places like China and 2
India. Alan Blinder, a professor of economics at Princeton Univer- 3
sity and a former member of the Council of Economic Advisers 4
under President Clinton, estimates that as many as 40 million 5
American jobs may be vulnerable in the coming decades, including 6
many assumed to be immune to such threats. It’s been hard 7
enough to maintain a consensus for free trade and technological 8
change as lower-paid manufacturing and service jobs have moved 9
overseas. How will business and politics be reshaped when hungry 10
foreign rivals set wage levels (and trigger “downward mobility”) for 11
better-educated and politically potent groups in ways not previ- 12
ously imaginable? 13
The second force—The Rush for the Exits—is corporate Amer- 14
ica’s desire to stop providing health care and pensions to its 15
employees. To be sure, these costs are soaring in ways that seem 16
unsustainable, especially when competing firms in other nations 17
bear fewer of them. Still, American business leaders act today as if 18
their search for an “exit strategy” on benefits is the end of the con- 19
versation. What happens to the millions of workers who are left 20
unprotected if companies simply walk away? 21
The third force is The Gray Boomer Fiscal Squeeze—meaning the 22
way the aging members of the baby boom generation will shortly 23
send government’s health and pension costs through the roof. The 24
result, at current levels of taxation, is that even “big” government 25
will be strapped, with little cash to devote to the other public pur- 26
poses we expect it to support, from border security to schools to 27
basic scientific research. Nor will the federal government be in a 28
position to broaden its safety net as corporate America withdraws its 29
own. Will it simply abandon these vital functions? If not, how will it 30
cope without raising taxes to levels that wreck economic growth? 31
The fourth force is the rise of Extreme Inequality. Even as the 32S
three forces listed above raise risks for most Americans, the very 33R

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8 • THE TYRANNY OF DEAD IDEAS

1 top of the wealth and income scale is pulling away at levels never
2 before seen. Yet it’s clear that many of the winners are reaping the
3 rewards not of the “free market,” but of clubby, manipulated
4 schemes that are as likely to reward failure as success. Bankers who
5 pocketed millions peddling subprime mortgages retire to their
6 country clubs while the rest of us are left holding the bag. CEOs
7 who preside over tumbling stock prices routinely walk away with
8 tens of millions for their trouble; hedge fund managers who barely
9 beat the S&P commonly earn such princely sums in a year. At what
10 point does the ubiquity of the undeserving rich become so corro-
11 sive in a democracy that it sparks a backlash that wrongly discred-
12 its capitalism altogether?
13 The collision of these forces will expose much of our tradi-
14 tional thinking as dangerously flawed. It will also hurtle us toward
15 a moment when fundamental questions are up for grabs in ways
16 not seen since the aftermath of World War II, when the architects
17 of a new economic order sat down to chart a course beyond
18 depression and war. Can middle-class societies be sustained in
19 wealthy nations in an era of globalization? Can democracy survive
20 the emergence of extreme inequality? How will these trends affect
21 our posture toward the hopes of the developing world? Can Amer-
22 icans build secure and happy lives amid this tumult?
23
24
SIX DEAD IDEAS
25
26 The answers to these questions will depend on how quickly we
27 escape the pernicious influence of six Dead Ideas:
28
29 • The Kids Will Earn More Than We Do. Broadly rising
30 incomes have been considered an American birthright. This pat-
31 tern of generational advance is now at risk for as much as half
32S the population.
33R

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• Free Trade Is “Good” (No Matter How Many People Get Hurt). 1
Though millions of people may be hurt by foreign competition, 2
we’re told, the overall gains from free trade so outweigh any down- 3
side that it is folly to question its ultimate advantages. 4
• Your Company Should Take Care of You. Business (not gov- 5
ernment) must fund and manage much of our health and pen- 6
sion benefits, this idea holds, or else we risk becoming socialist. 7
• Taxes Hurt the Economy (and They’re Always Too High). 8
The truth is that taxes are going up no matter who is in power in 9
the next decade, and the economy will be fine. We won’t turn 10
into France or Sweden. 11
• Schools Are a Local Matter. Americans need more skills to 12
maintain our living standards as developing economies rise up to 13
compete with us. America also spends more on schools than 14
nearly every other wealthy nation—with worse results. Yet our 15
unique model of “local control” and funding of schools remains 16
sacrosanct. 17
• Money Follows Merit. The most cherished illusion of today’s 18
educated class is that market capitalism is a meritocracy—that is, 19
a system in which people basically end up, in economic terms, 20
where they deserve to. 21
22
As we’ll see, the persistence of these Dead Ideas generally 23
involves a failure to adapt to new circumstances, a recurring feature of 24
human thought and behavior. In that sense, these outworn con- 25
cepts are part of a broader phenomenon that afflicts every organi- 26
zation and each of us as individuals. The question at the heart of 27
this book—“Are old ways of thinking preventing America from 28
adapting to the challenges now posed by globalization?”—is thus 29
surprisingly kin to such questions as “Why didn’t newspapers real- 30
ize more quickly that the Internet posed a fundamental threat to 31
their business?” and even to questions like “Why doesn’t John see 32S
33R

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10 • THE TYRANNY OF DEAD IDEAS

1 that Emily’s new job means that he needs to help more with the
2 kids?” In each instance, intellectual and emotional inertia traps
3 people in antiquated ways of thinking even though circumstances
4 radically change. You can’t develop a strategy for a country or a
5 company (let alone for yourself ) if you’re blinded by preconcep-
6 tions that no longer reflect the real world.
7 When the day of reckoning comes for a Dead Idea, things can
8 change very quickly—and also very painfully. In the fall of 2008, for
9 example, we witnessed the dramatic implosion of the idea that
10 “Financial Markets Can Regulate Themselves.” Within a matter of
11 weeks, as markets tumbled and seemingly impregnable financial
12 institutions collapsed, old ideas and convictions had to be tossed
13 aside and massive new government interventions put in place by an
14 ideologically conservative administration that only days before had
15 deified free markets. If this Dead Idea had been uncovered and
16 exploded earlier, a great deal of turmoil and suffering could have
17 been avoided. In much the same way, other Dead Ideas are waiting
18 now to ensnare us if we fail to open our minds and to act. What’s
19 more, while the fallout from today’s financial crisis is serious, it will
20 also be temporary; the system will almost certainly be restored to
21 health within a few years. In the longer term, the consequences of
22 failing to bury the Dead Ideas at the core of this book are far greater.
23 Our aim in the pages ahead, therefore, is to unearth premises so
24 deeply ingrained in American economic life that they’ve essentially
25 become invisible. They’re just “the way things are.” We’re going to
26 dig these ideas up, brush off the dirt, turn them over in the light, and
27 assess why they no longer make sense. Moreover, it’s perfectly safe
28 to try this at home. Breaking free of Dead Ideas entails three steps:
29
30 FIRST: IDENTIFY THE DEAD IDEAS THAT MATTER.At any given time there
31 are dozens of Dead Ideas in our public life, and hundreds if not
32S thousands across our business and personal lives. Truth is, most of
33R us probably couldn’t get through the day without a few Dead Ideas.

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In my professional life, for example, I cling to the idea that “Ratio- 1

nal Analysis Can Lead to Constructive Change”—which, if you’ve 2
read any history, may never have been that “alive” an idea in the 3
first place. But only a handful of Dead Ideas are big enough to pose 4
fundamental threats; fewer still have the power to shape the fate of 5
a society. Until the middle of the nineteenth century, for example, 6
millions of Americans believed that “An Economy Based on White 7
Human Beings Owning Black Human Beings Is Moral and Sustain- 8
able.” This idea seems grotesque and preposterous to us now, but it 9
determined the contours of countless lives. Similarly, before 1920 it 10
was perfectly reasonable in the United States to think that “Democ- 11
racy Does Not Require Extending the Vote to Women.” Before 12
1913, when the Federal Reserve was established, sophisticated 13
businesspeople believed that “Economic Stability Can Be Main- 14
tained Without a Central Monetary Authority.” Today, on the inter- 15
national scene, many Western societies believe that “The United 16
Nations Security Council Should Have the Same Permanent Mem- 17
bers It Had in 1945,” even though Britain and France are arguably 18
less consequential in global affairs than rising powers like India. 19
The list goes on. 20
Since there are so many potential Dead Ideas to choose from, 21
the key in any effort to improve the prospects of a country or a com- 22
pany is to focus on the ones that are truly strategic. We need to step 23
back from the rush of events to identify the premises that are cen- 24
tral to an entity’s fate. For a company it may be assumptions about 25
key customers or competitors or technologies. (“Japan Will Never 26
Be Able to Compete with American Car Manufacturers” was an 27
idea that needed puncturing in 1980, for example.) For an individual 28
it may involve a tough-minded assessment of personal strengths 29
and weaknesses. For the United States as it strives to adapt success- 30
fully to the twenty-first-century global economy, the six Dead Ideas 31
in this book have the combination of high stakes and “sacred cow” 32S
status that give them the power to derail America’s future success. 33R

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1 SECOND: UNDERSTAND EACH DEAD IDEA’S “STORY.” We can’t move past

2 a Dead Idea without first understanding the source of its power.
3 Where did it come from? Why did it once seem to make sense?
4 What has changed that now makes it useless or wrong or harmful?
5 Who has a stake in its persistence nonetheless? We’ll examine these
6 and related questions through a mini-biography of each Dead Idea
7 in part one of the book. The mere act of reviewing the history and
8 trajectory of an idea, and dissecting the assumptions and circum-
9 stances that gave rise to it, almost immediately opens our minds to
10 alternative ways of thinking that make more sense.
11
12 THIRD: REACH FOR NEW (AND PARADOXICAL) WAYS OF THINKING. The final
13 step, based on a clear-eyed assessment of current trends, is to iden-
14 tify the new ways of thinking that are not only needed to thrive
15 but almost certain to come to pass because they better reflect new
16 realities. As we’ll see in part two of the book, these “Destined
17 Ideas” often seem taboo or paradoxical, because conventional wis-
18 dom has become so disconnected from the facts that ideas that
19 should be obvious (or soon will be) appear counterintuitive or star-
20 tling or otherwise “off.” Don’t be fooled: the fact that they appear
21 this way only speaks to how skewed our vision has become. It’s
22 helpful to frame these Destined Ideas as paradoxes, because doing
23 so forces us to reconcile apparent contradictions that exist only
24 because our thinking today is faulty. As we’ll see when we get to
25 such Destined Ideas as “Only Government Can Save Business,”
26 “Only Business Can Save Liberalism,” and “Only Higher Taxes Can
27 Save the Economy,” the mental exercise of embracing paradoxes
28 has the power to stretch our minds as well.
29
30
31 Identify the Dead Ideas that matter; understand each one’s story;
32S and reach for new and paradoxical ways of thinking. This process
33R is so straightforward, it’s difficult to understand why we keep

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getting trapped in Dead Ideas. But we shouldn’t be too hard on 1

ourselves. The perils of orthodoxy at moments of sudden or perva- 2
sive change have been with us forever. The blind spots bred by 3
complacency or arrogance or certitude or habit fill the obituaries of 4
civilizations that didn’t make it, businesses that didn’t make it, even 5
marriages that didn’t make it. It’s human nature. And it’s the things 6
we think we know (but don’t) that are the chief obstacles to success 7
in nearly every endeavor. In the end, however, the true measure of 8
a person, an organization, or a society isn’t the Dead Ideas we fall 9
prey to. It’s whether we can summon the perspective and imagina- 10
tion to recognize the Dead Ideas in our midst, and bury them 11
before real damage—or more damage—is done. 12
13
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19
20
21
22
23
24
25
26
27
28
29
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31
32S
33R

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