Paul Krugman has an analogy to explain why fixing the economy is both very simple and impossible. There was a woman whose car had a dead battery. It wasn't a complicated repair, just a matter of replacing the battery. Her husband, apparently being the traditional sort who thinks men make the decisions about cars and money, refused to believe the battery was the problem and insisted she get by without a car. His wife does have a serious problem ... but her problem isn't the car.
That link is the audio of a speech, and the analogy is about eight and half minutes in.
If you can read while listening, read this book excerpt from Joseph Stiglitz. He's writing about our longer-term problems with inequality, but the cause is the the same: conservative propaganda that's been quite effective at giving false impressions about growing inequality and its effects. Some samples:
It is clear that many, if not most, Americans possess a limited understanding of the nature of the inequality in our society: They believe that there is less inequality than there is, they underestimate its adverse economic effects, they underestimate the ability of government to do anything about it, and they overestimate the costs of taking action. They even fail to understand what the government is doing - many who value highly government programs like Medicare don't realize that they are in the public sector.
Are there any congressmen who haven't been told by a constituent "Keep the government out of my Medicare!"? What shows how little many people pay attention is that today's Medicare recipient was at least 18 when it passed.
Perceptions have always shaped reality, and understanding how beliefs evolve has been a central focus of intellectual history. Much as those in power might like to shape beliefs, and much as they do shape beliefs, they do not have full control: ideas have a life of their own, and changes in the world-in our economy and technology-impact ideas (just as ideas have an enormous effect in shaping our economy). What is different today is that the 1 percent now has more knowledge about how to shape preferences and beliefs in ways that enable the wealthy to better advance their cause, and more tools and more resources to do so.
In the most recent crisis what followed from deregulation was far from efficient, but even here a battle of interpretation rages. Members of the Right tried to blame the seeming market failures on government; in their mind the government effort to push people with low incomes into homeownership was the source of the problem. Widespread as this belief has become in conservative circles, virtually all serious attempts to evaluate the evidence have concluded that there is little merit in this view. But the little merit that it had was enough to convince those who believed that markets could do no evil and governments could do no good that their views were valid, another example of "confirmatory bias."
Anyone else had circular discussion with conservatives who insist the whole financial crisis was caused by Fannie and Freddie giving mortgages to irresponsible people because the government forced them to? Ask all you want about derivatives. You won't get an answer.
The intellectual battle is often fought over particular policies, such as whether taxes should be raised on capital gains. But behind these disputes lies this bigger battle over perceptions and over big ideas-like the role of the market, the state, and civil society. This is not just a philosophical debate but a battle over shaping perceptions about the competencies of these different institutions. Those who don't want the state to stop the rent seeking from which they benefit so much, and don't want it to engage in redistribution or to increase economic opportunity and mobility, emphasize the state's failings. (Remarkably, this is true even when they are in office and could and should do something to correct any problem of which they are aware.) They emphasize that the state interferes with the workings of the markets. At the same time that they exaggerate the failures of government, they exaggerate the strengths of markets. Most importantly for our purposes, they strive to make sure that these perceptions become part of the common perspective, that money spent by private individuals (presumably, even on gambling) is better spent than money entrusted to the government, and that any government attempts to correct market failures-such as the proclivity of firms to pollute excessively-cause more harm than good.
This big battle is crucial for understanding the evolution of inequality in America. The success of the Right in this battle during the past thirty years has shaped our government. We haven't achieved the minimalist state that libertarians advocate. What we've achieved is a state too constrained to provide the public goods-investments in infrastructure, technology, and education-that would make for a vibrant economy and too weak to engage in the redistribution that is needed to create a fair society. But we have a state that is still large enough and distorted enough that it can provide a bounty of gifts to the wealthy. The advocates of a small state in the financial sector were happy that the government had the money to rescue them in 2008-and bailouts have in fact been part of capitalism for centuries.