Chrystia Freeland

Why have the rich turned against President Barack Obama?

That has been a persistent theme of this campaign: We were reminded of it at the beginning of this week, when Mitt Romney’s team raised more money than the president’s for the second month running, and more colorfully in weekend reports of the Republican candidate’s lavish fund-raisers in the Hamptons.

If you were a Martian, or even a European, the animosity of America’s 1 percent toward the president might be rather mysterious. Although those at the bottom and in the middle are still suffering from the downturn that began in 2008, with unemployment above 8 percent, the affluent economy has bounced back quite smartly. The stock market has recovered, corporate coffers are overflowing with cash, and the luxury goods market is booming.

Even Wall Street, where hostility toward the White House is especially acid, has reason to be grateful. Bankers got the biggest government bailout of all – much more than laid-off workers or beleaguered homeowners received from this Democratic administration – and the president resisted calls from the left to nationalize the banks he rescued, as did the British.

Part of the answer is simple self-interest. As the economics writer Matthew Yglesias has argued, there is one easy and obvious explanation for the animosity of the rich toward the incumbent: He wants to raise their taxes significantly. That is certainly right. On Monday, Obama reiterated his support for letting the Bush-era tax cuts for household incomes of more than $250,000 expire, while keeping the lower rates in place for everyone else.

This is a powerful point. It can be tempting to imagine that the affluent might fret less about their tax bills than the poor, who are struggling to get by, but the elaborate tax avoidance strategies of superrich Americans suggest otherwise.

But this is about more than bank balances. Some of Obama’s most vehement critics in the private sector insist they are willing to pay higher taxes, if that’s what it takes to get the United States back on track. Their complaint, if you take them at their word, is instead with the president’s attitude toward them, toward their wealth and toward capitalism itself.

Their sense of insult is easy to mock: Do those testosterone-pumped Masters of the Universe really turn out to have the tender feelings of teenage girls? It is a mistake, though, to dismiss the outrage of the 1 percent just because it is so emotionally rendered. The truth is that Obama is telling a very different story about capitalism and its winners from the one Americans are accustomed to hearing, and it is no surprise that the rich don’t like it one bit.

Consider the two narratives on the campaign trail this week. In Colorado, Romney described those who make more than $250,000 a year with the Republican term of art — “job-creators.” And he warned that the president’s proposal to raise taxes at the top wasn’t bad just for the rich, it would hurt the whole country, too:

At the very time the American people are seeing fewer jobs created than we need, the president announces he’s going to make it harder for jobs to be created. I just don’t think this president understands how our economy works. Liberals have an entirely different view about what makes America the economic powerhouse it is.

Obama, meanwhile, insisted that “we love folks getting rich.” But his focus is different: “I do want to make sure that everybody else gets that chance as well.” One way to do that is to tax the rich. As a new television ad for the president argued this week, Obama’s plan is to “ask the wealthy to pay a little more so the middle class pays less, eliminate oil subsidies and tax breaks for companies that outsource.”

This is more than a fight about taxes. It is a fight about whether 21st-century capitalism is working for the American middle class and who should pay to fix it. The Republicans are telling Ronald Reagan’s story of trickle-down economics – the winners in the capitalist contest are “job-creators” whose prosperity helps everyone else. The wealthier they are, the wealthier all Americans will be.

The Democrats are challenging that win-win story of American capitalism. Their contention is that the U.S. economy is failing the middle class. They argue that those at the top need to contribute “a little more” to help rebuild the American middle. Even more threateningly, they point out, as in their critique of Bain Capital, that some of the business strategies that have enriched the elite have actually hollowed out the middle.

It is this last argument that most enrages the 1 percent – and it should. Obama’s most extreme critics delight in accusing him of being socialist and sometimes communist. That charge is not just overheated, it is plain wrong. But American capitalists are right to sense a challenge from the White House, which is about more than tax rates or bruised pride. The president is arguing that what works for the top of the United States isn’t working for the middle, and that is a criticism the country’s lionized elite hasn’t heard from its leader in a very long time.

Go to the Aspen Ideas Festival – or to any similar confab of affluent elites gathered to solve the problems of the world in luxurious, remote hamlets – and you can be sure that a dominant theme will be a lament for the vanishing political center.

Where, panel after panel will ask, are the wise moderates, able to seek compromise and rise above partisanship in pursuit of the public good? America’s biggest problems, and its inability to tackle them head-on, will usually be cited as the consequence of this lack of a sensible middle.

Most of the wealthy and well-positioned people in the rooms where these sorts of discussions are conducted see themselves as members of that sadly disempowered middle, so reflections along these lines are generally well received.

But the problem with this approach is its implicit assumption that politics, or at least policy, is a win-win game. Policies that serve the collective good are out there to be found, if only we publicly minded moderates were in charge.

But what if it isn’t just the political battle at the voting booth that is partisan, but the policies themselves, and their outcomes, too?

Take healthcare. The fierce battle over the U.S. healthcare overhaul is framed by both sides as an argument over which type of system would work better “for America.”

But what you think “works” depends very much on who you are. If you are uninsured, or fear you could be, expanding coverage is obviously a very good thing. But if you already have Cadillac coverage through your employer, and are confident you will keep it, then paying for more people to get on board might not seem like such a good idea.

A favorite issue for believers in the moderate middle is the budget deficit. It is held up as an example of the rabid partisanship and short-termism that threatens to destroy the U.S. economy. The usual consensus on how to avert impending doom is to put the wise moderates in charge and let them hammer out a compromise deal to both raise taxes and cut spending. That’s fair enough – and is almost certainly the eventual path the United States must take.

But what’s really striking about discussions of the budget deficit by the moderate middle is how overwhelmingly the issue itself has come to dominate the public debate about the economy, especially when those wise, nonpartisan people get together. A study last year by the National Journal found that the number of articles in five major American newspapers about the budget deficit eclipsed the number of articles about unemployment.

What’s especially remarkable about that imbalance is that while the deficit is certainly an issue the United States needs to tackle in the medium term, at the moment interest rates for 10-year bonds are near historical lows. The markets may not be wise, but they are nonpartisan, and as far as they are concerned there is no urgent fiscal crisis in the United States.

Meanwhile, unemployment remains above 8 percent and is having a dire and long-term impact on the people without jobs and on their families. That’s why Alan B. Krueger, an economist at Princeton who is the head of President Barack Obama’s Council of Economic Advisers, focused his talk at Aspen (which I moderated) on “the middle-class jobs deficit.”

“What I wanted to do in using that term is to highlight that this is a deficit, just like our fiscal deficit,” Krueger said. “We need to raise the jobs deficit to the same level as the fiscal deficit, if not above it.”

The U.S. jobs problem is even worse than the headline unemployment numbers suggest.

Heidi Ewing, a filmmaker whose documentary about Detroit was aired at Aspen and who was in the audience for Krueger’s talk, identified what is going on: “What we’ve noticed, from workers who got rehired recently, is they took a 50 percent wage cut during the bailout. So they’re coming back at $11 to $14 an hour. Do we really have to accept that this group of people is no longer the middle class we had in our minds before, but just the working poor?”

Thanks to what economists call the “polarization” of the labor market, if you are lucky enough to have a job in the United States you probably fall in either the top or the bottom of income distribution, but not in the middle.

Krueger touched on one of the most worrying consequences of this economically divided country: It will get worse over time.

Americans still imagine their country to be the land of opportunity, but the numbers tell a different story. Your parents’ income correlates more closely with your chance of finishing college than your SAT scores do – class matters more than how you do in class.

Which brings us back to the affluent moderates who congregate at conferences like the Aspen Ideas Festival. Whether they realize it or not, these sensible centrists are guided by their own self-interests, too. It just so happens that deficits are dangerous for them – they could bring higher taxes – while the jobs deficit has little impact on them or their families.

Today, the U.S. political center lives at the top. We shouldn’t be surprised by the shrieks of those who have been forced to the economic bottom and have chosen to move to the political fringes.

Liberal democracy faces a new and decisive challenge – figuring out how to deal with the “post-Communist oligarchies” of Russia and China. These regimes – authoritarian, capitalist and eagerly integrated into the global economy – are without precedent. Figuring out how to deal with them is the greatest strategic and moral question the West faces today. How we answer it will determine the shape of the 21st century, much as the struggle with communism and fascism shaped the 20th.

This is the assertion Michael Ignatieff, a Canadian intellectual and a former leader of the Liberal Party, made in a powerful lecture in the Latvian capital, Riga, at the beginning of this month. Ignatieff’s thesis came to mind during the annual St. Petersburg International Economic Forum, held last week as the gracious former imperial capital for which the forum is named glowed in the pure white light of the summer solstice.

Central to Ignatieff’s argument is his insistence that “history has no libretto.” It isn’t marching toward any particular destination, including liberal democracy, he said: “As late as Benedetto Croce, liberals still thought of their creed as being the wave of the future and thought of history as the story of liberty.”

When it comes to Russia and China today, we still hope we will all eventually sing along to this seductive libretto. “It is a cliché of optimistic Western discourse on Russia and China that they must evolve toward democratic liberty,” Ignatieff argued. Sadly, though, we’re wrong: “we should not assume there is any historical inevitability to liberal society.”

As Ignatieff explained to me in a telephone conversation this week: “The simple point is that we thought they were coming towards us. What if they are not?”

The optimistic Western cliché Ignatieff described was very much the conventional wisdom in St. Petersburg. It is what the visiting Western business titans wanted to believe, and it is what the presiding Russian government chiefs wanted them to believe.

Klaus Kleinfeld, the chief executive of Alcoa and chairman of the U.S.-Russia Business Council, said in an interview that President Vladimir V. Putin’s opening speech at the conference was “very, very good. He was basically clear that he stays on the course of reforms. He stays on the course of modernization.”

When I suggested that Putin might instead be taking Russia backward – freedom of assembly was sharply curtailed this month and several activists, including Putin’s goddaughter, were questioned by the police and had their homes searched – Kleinfeld demurred.

Referring to the reformist promises of Putin’s speech, Kleinfeld said: “We have to take that at face value.” Kleinfeld also said that Russia’s progress needed to be judged in historical context.

“How the country has emerged in the last 20 years, I think, is pretty amazing. I think most people that are easy with their criticism measure Russia against countries that had much, much more time to go into a market economy,” he said. “Some of these processes take a little time to struggle themselves through. They are on a good path.”

What is striking is what you might call the “libretto” assumption in these remarks: Russia is on the right path, just give it time.

At least when they speak English, this is a view that Putin’s people are eager to endorse. When I asked Igor I. Shuvalov, the suave and sharply dressed first deputy prime minister what he made of Putin’s speech, he, too, spun it as proof that Russia is on the path to becoming more like the West.

“I was very pleased that yesterday what he announced was completely in line with a new generation. It was everything which any citizen of the European Union, or other developed countries, wants. It’s exactly how Putin sees the future for Russia in just a few years,” Shuvalov explained.

“We are passing the way all developed countries pass,” he said.

This is a useful theory for Russian leaders – and for Chinese ones, too – and a comforting one for their Western business partners. It is useful because assurances that you are on the path toward Western-style liberal capitalism can serve as a catchall justification for whatever illiberal policy you happen to be pursuing at the moment. Think of it as the dictator’s version of St. Augustine’s prayer to be made good, but not yet.

Believing that the duo Ignatieff calls the “post-Communist oligarchies” are on the liberal capitalist path is comforting for the liberal capitalist companies that do business with them. After all, for all the kowtowing required to do business in Russia and China, the rewards are vast.

Consider the experience of BP, the oil giant based in London, which paid $7 billion in 2007 to establish a 50 percent stake in TNK-BP, its Russian joint venture. BP’s trials at the hands of both its Russian partners and the Russian state are the stuff of legend. But shareholders and the board care more about the $19 billion BP has received in dividends since making the deal. That’s quite apart from BP’s share of TNK-BP, which analysts think could be worth between $25 billion and $30 billion.

The optimistic cliché of inevitable liberal evolution is convenient and comforting. But that doesn’t make it right.

If Russia and China really are not marching inevitably toward liberal democracy, as Ignatieff argues, that is a problem not just for their repressed people but also for us.

Ignatieff says that our attitude toward Russia and China is a question of such great import because both countries “are attempting to demonstrate a novel proposition: that economic freedoms can be severed from political and civil freedom, and that freedom is divisible.”

He is right that this is the fundamental operating proposition of Russia and China, and he is right that it poses the most serious challenge that the very idea of liberal democracy faces anywhere today.

It is no surprise that this question was not on the agenda in St. Petersburg. But surely it should be much more squarely on the agenda in Western capitals – and even in Western boardrooms.

This column originally appeared in the July/August 2012 issue of The Atlantic.

We buried my grandfather last spring. He had died in his sleep in his own bed at 95, so, as funerals go, it wasn’t a grim occasion. But it was a historic one for our small rural community. My great-grandparents were early settlers, arriving in 1913 and farming the land throughout their lives. My grandfather continued that tradition, and now rests next to them on a hillside overlooking the family homestead.

If you’re a part of the roughly 99 percent of the North American population that doesn’t work on a farm, you might guess at what comes next – many a lament has been written about the passing of the good old days in rural areas, the family farm’s decline, and the inevitable loss of the homestead. But in many respects, that narrative itself is obsolete. That’s certainly true in my family’s case: The Freeland farm is still being cultivated by my father. And it is bigger and more prosperous than ever.

My dad farms 3,200 acres of his own, and rents 2,400 more – all told, a territory seven times the size of Central Park. Last year, he produced 3,900 tonnes (or metric tons) of wheat, 2,500 tonnes of canola, and 1,400 tonnes of barley. (That’s enough to produce 13 million loaves of bread, 1.2 million liters of vegetable oil, and 40,000 barrels of beer.) His revenue last year was more than $2 million, and he admits to having made “a good profit,” but won’t reveal more than that. The farm has just three workers, my dad and his two hired men, who farm with him nine months of the year. For the two or three weeks of seeding and harvest, my dad usually hires a few friends to help out, too.

My father farms in northern Alberta, but his story is typical of large-scale family farmers across North America. Urbanites may picture farmers as hip heritage-pig breeders returning to the land, or a struggling rural underclass waging a doomed battle to hang on to their patrimony as agribusiness moves in. But these stereotypes are misleading. In 2010, of all the farms in the United States with at least $1 million in revenues, 88 percent were family farms, and they accounted for 79 percent of production. Large-scale farmers today are sophisticated businesspeople who use GPS equipment to guide their combines, biotechnology to boost their yields, and futures contracts to hedge their risk. They are also pretty rich.

“It definitely is not just your father,” Jason Henderson, the vice-president and branch executive of the Omaha branch of the Federal Reserve Bank of Kansas City, told me. Henderson is essentially the Fed’s top analyst of the agricultural economy. “In the U.S. and Canada in 2010 and 2011,” he said, “farm incomes have been booming. U.S. net farming incomes rose more than 20 percent in each of those years. Farmers are flush with cash.”

Evidence of the boom is visible throughout the Farm Belt. “Tractor and combine sales have doubled, compared with 2003,” Henderson told me. “Pivot-irrigation-system sales are up. I’ve been driving across Nebraska, Wisconsin, and Iowa, and I have not seen so many shiny new grain bins, ever.”

Troy Houlder, my father’s local farm-machinery dealer, told me that in the 22 years he’s been in the business, “supply has never been this tight.” The vehicles in highest demand, he said, are midrange-horsepower tractors, which run from $70,000 to $110,000. If a farmer walked into his store in early May wanting to buy that kind of tractor, “he’s not getting one until probably November or December, even if he had a fistful of hundreds.”

Big Money has noticed these trends and is beginning to pile in. “We are seeing a tremendous uptick in allocations and interest in farmland,” says Chris Erickson of HighQuest Partners, an agricultural consultancy and investor. Erickson told me that big institutional investors – pension funds, insurance companies – have recently been making investments in farmland ranging from “the several hundred millions to the billions.” Erickson said this broad interest is new, and is driven by the fact that “the fundamentals are changing dramatically.”

Jim Rogers, who co-founded the legendary hedge fund Quantum with George Soros, told me he believes farming is “one of the most exciting professions” in the world – and that the recent boom is likely to continue for a long time. “Throughout history, we’ve had long periods when the financial sectors were in charge,” he said, “but we’ve also had long periods when the people who have produced real goods were in charge – the farmers, the miners … All of you people who got MBAs made mistakes, because the City of London and Wall Street are not going to be great places to be in the next two or three decades. It’s going to be the people who produce real goods.”

The rural renaissance isn’t just a curiosity: It’s an important new chapter in the story of America’s ability to thrive in the global economy, and in eras of disruptive technological change. As America struggles to adapt to a new wave of creative destruction that is shaking up the manufacturing and service sectors as profoundly as industrialization transformed the agrarian age, the resurgence of the family farm offers some lessons on how we might survive this wave of change, too.

At the heart of the farm boom are the very same forces that are remaking the rest of the American economy – technological revolution and global integration. When you think of technological revolution, you probably think of geeks in cool coastal spaces like the Google campus, or perhaps of math wizards on Wall Street. But one source of rural prosperity is the adoption of radical new technologies – and a consequent surge in productivity.

Henderson situates the change over the long sweep of history: “Prior to World War Two, it took 100 hours of labor to produce 100 bushels of corn. Today, it takes less than two hours.” According to Erik O’Donoghue and Robert Hoppe, two economists at the Department of Agriculture, in 2009 U.S. farm output was 170 percent above its level in 1948, having grown at a rate of 1.63 percent a year. Those figures understate the productivity revolution, because these increasing harvests have been delivered with fewer inputs, particularly less labor and less land.

Tom Vilsack, the agriculture secretary, told me that since 1980, agriculture has been “the second-most-productive aspect of our economy … I’m 61 years old, and in my lifetime, corn production has increased 400 percent, soybeans 1,000 percent, and wheat 100 percent.”

Continuous technological improvements have resulted in a system of crop farming that someone who left the countryside 20 years ago would be hard-pressed to recognize, and certainly couldn’t operate (I stopped helping my dad in the early 1990s, when I became a foreign correspondent, and I am no longer allowed to drive any of his three combines). The computer systems powering a “precision farmer’s” seed drill and combine have been programmed with the exact parameters of all his fields and are synced up with one another. That means the seed drill knows what last year’s harvest was from each inch of land, thanks to data recorded by the combine, and can seed and apply fertilizer accordingly.

The cabs of today’s combines, the most sophisticated of farm machines, look like airplane cockpits, or the control rooms on factory floors. Monitors tell the farmer how many bushels to the acre his land is yielding even as he harvests his crop, give him a read on the moisture level, and tell him how much he is leaving behind on the field. Troy Houlder’s flagship New Holland combine, the CR9090, which sells for $520,000, has a new feature called IntelliCruise, which automatically speeds up or slows down the machine depending on how heavy the crop is. (The CR9090 also features a so-called buddy seat, often occupied by a grandchild, and a small refrigerator, so its owner-operator’s lunch stays cold.)

Fancy GPS systems and space-age tractors are what most excite the farmers I know and astound their city friends. But the most profound change is something an urban civilian driving through the Farm Belt wouldn’t even notice. Ever since people first domesticated cereal crops in the Fertile Crescent 11,000 years ago, farming has followed a seemingly immutable pattern – plow your field, seed your field, harvest your field, repeat. But today, farmers can skip the plowing step.

This historic shift is known as the no-till revolution. No-till was a quirky, fringe idea in the 1970s. Today, it is practiced on one-third of U.S. cropland. It has been made more effective by the genetic engineering of seeds and the adoption of crop varieties with herbicide tolerance or a resistance to pests.

Farmers are rightly proud of their swift embrace of innovation. But the biggest reason rural bank accounts are swelling today isn’t technology (nor is it government subsidies, though those have helped, and may no longer be justified). It is, rather, the growing global middle class. “The single most important factor in all of this is the changing diet in the emerging markets,” Erickson told me. “If people there go from earning $2 a day to $3 a day, they aren’t going to buy a Mercedes, but they are going to buy a piece of chicken or a piece of pork.” That translates into surging prices for feed grains like corn, soybeans, wheat, and canola, and surging farm incomes around the world. In the early 1990s, China, for instance, was self-sufficient in soybean production; in 2010, it was the top importer of U.S. agricultural products.

This shift has made for unusual bedfellows. At a time when the mainstream U.S. political discourse has identified China as a relentless and predatory exporter – and a destroyer of American jobs – farmers are outliers. Farmers “want China to expand,” Henderson told me, “because that means a bigger or broader market” for their crops. Some of America’s biggest supporters of open borders are down home on the farm.

Agriculture, which once employed most of the population and now employs almost no one, is often held up as a grim harbinger of what awaits U.S. manufacturing (and beyond that, white-collar professions that can be partially outsourced or performed by computers). The United States today has more bus drivers than it has farmers. Technological advances have drastically shrunk the number of people required to no-till the land.

Yet today’s agricultural renaissance also shows that there is some light at the end of the tunnel – or, if you will, a good harvest at the end of the furrow. Most encouragingly, the agricultural boom shows that globalization really is a two-way street, and not just for the geniuses at Apple and Goldman Sachs. The rising global middle class wants hamburgers – which is where farmers come in – but it also wants hundreds of other middle-class comforts, and as it grows richer, it will be able to afford more of them. Helping to fill these wants is where many of the rest of us should look for opportunity. And you don’t have to work for a corporate behemoth or have a venture capitalist on your speed dial to take advantage of the changing world economy. One of the most surprising aspects of the farm story is that its heroes are self-employed entrepreneurs, albeit ones who own a lot of land.

Of course, that still leaves open the question of what to do about all those jobs being lost. One of the great, and largely forgotten, triumphs of American society and government has been how smoothly U.S. farmers and their communities negotiated the creative destruction of the early 20th century and emerged triumphant when it was over. Lawrence Katz, a Harvard professor who is probably America’s most esteemed labor economist, has, together with his partner and fellow Harvard professor, Claudia Goldin, studied how they did it. The answer, Katz told me, was heavy investment in education: “Iowa, Nebraska, the Dakotas, California – these were the leaders in the high-school movement.”

Katz said this big investment in education was a deliberate response to the rapid technological advances and productivity gains in both agriculture and manufacturing. Farmers could see that machines meant fewer hands would be needed on the land, while new jobs were being created in the cities. So they built schools to educate their children for those new roles. The strategy worked: High school made the children who stayed home better farmers and gave the rest the tools to leave. In fact, the Farm Belt’s high-school movement was so successful that farm children who moved to the big cities soon became the bosses of the native-born urbanites. “They tended to be more educated than the city slickers and move to better jobs in the city than the locals,” Katz said.

The challenge those Midwestern farm communities faced same 100 years ago was remarkably similar to the challenge much of America faces today – an economic transformation that is making the country richer and more productive, but that also means most of our children won’t be able to do the same jobs we do. A high-school education was enough for the children of farmers in the early 20th century. Children today will need college, with an emphasis on quantitative and analytical skills, if they are to thrive.

But while today’s problem would seem familiar to those early-20th-century farmers, today’s response would not. “We did a better job in that period of preparing the next generation for their new context than we are doing today,” Katz said. “These areas made the right level of investment in education. We have not even approached the equivalent today.”

The farming towns of the past saw themselves as true communities, with a collective responsibility to ready their children for the future. That sensibility has broken down. “Areas that had a larger share of older citizens actually were more supportive of education, which is the opposite of today,” Katz told me.

Today’s wealthy farmers, and their prosperous city cousins, are the beneficiaries of a long-ago communal decision to invest in the future. We could learn from their great-grandparents.

PHOTO: Chrystia’s father, Donald Freeland, and a combine on his 3,200-acre homestead. David Johnston.

Tolstoy may have been right about families – “All happy families are alike; each unhappy family is unhappy in its own way” – but the opposite of his famous first line is true when it comes to countries: The world’s disparate unhappy nations are very much alike when it comes to the causes of their unhappiness.

That’s not immediately apparent – austerity-strangled Greece, cheap-money America and military-ruled Egypt are all exhibiting quite different symptoms. But it is no accident that so many of the world’s economies are sputtering at the same time, or that so many people around the globe are angry.

One reason for the synchronized gloom, of course, is the synchronization of the global economy. But the world is suffering from more than a shared summer cold. Rather, we are all, both together and apart, trying to figure out three big questions. Our answers to them will shape the 21st century.

The first is how nation-states fit into a globalized world economy. Different countries are wrestling with different versions of this problem. Small states with their own currencies and open trade policies have just endured a version of the Asian crisis of 1998, and they have come to similar conclusions – survival requires a fortresslike national balance sheet and export-led growth. That’s why Baltic leaders, these days, sound an awful lot like Southeast Asian ones.

The rub, as Lawrence H. Summers, the former U.S. Treasury secretary, likes to point out, is that there are no Martians. Export-led growth can’t work as a policy for the whole world: Someone needs to be the net importer.

The truth of this observation is being experienced very painfully today by south Europeans, whose economies are constrained not only by inflexible labor markets – which are being reformed – but also by a currency union that has lifted north European exporters, particularly Germans, and weakened everyone else. And so the euro, which was attractive to smaller European states in part as a shelter from global economic storms like the Asian tsunami of 1998, turns out to be a perilous haven indeed.

An effective global economy will require more than a World Trade Organization and free and fair commerce between companies. What shapes trade most of all is currencies, and those are guided by national policies on exports, credit and government surpluses or deficits. If we want a global economy – and most of us seem to – we need to devise a way for the currencies of the world to work, and to work together. Call it the 21st century’s Bretton Woods moment.

The second question is even knottier. Global capitalism is the best economic system humanity has devised so far: Worldwide growth in the three decades before the financial crisis was astonishing – delivering, most strikingly, a huge rise in incomes to poor people in countries like India and China that, just a generation ago, development economists had all but given up on. Latin America has benefited, too, and even Africa, the perpetual bridesmaid, seems to be on the rise.

But 21st-century capitalism is failing at one very important task – delivering jobs and rising incomes to the middle class in rich countries. U.S. families are no better off today than they were in 1992. For ordinary Americans, it is as if the post-Cold War windfall and the technology boom never happened. Much of Europe is in the same fix, only worse, with even higher unemployment rates and a less forgiving mortgage default system. From today’s vantage point, the rise of European tigers like Iceland, Ireland and Spain feels like a mirage.

A popular meme in Western societies at the moment is to lament the mulish unwillingness of democratic majorities to support sober, centrist political leaders. Much of this refusal to follow the erstwhile wise men can surely be traced to the failure of the policies of the past few decades to deliver for the middle class.

This shortchanging has been going on for some time. If it seems new, that is because the easy money of the pre-2008 world economy hid a multitude of sins: In the United States, the middle class thought it was rich because of cheap consumer credit; in southern Europe, the middle class thought it was rich because of state jobs, state pensions and state services funded by cheap sovereign credit. Now all that credit has dried up.

As Lord Paddy Ashdown told a gathering of top Canadian civil servants in Ottawa this week: “You alienate the middle class at your peril. The middle class always leads revolutions.”

The third question is the one we speak about the least and should probably worry about the most – can rich women be persuaded to have children? Rich, here, doesn’t refer to the wives of the plutocrats, who continue to have plenty. But once a country achieves middle-income status, its middle-class women stop having many children. This demographic squeeze is another big contributor to Europe’s malaise. On current trends, it is likely to become more severe.

As countries, as middle-class individuals and as families (or as women who choose not to have them), we are struggling to find our place in a world that is in the midst of convulsive change. Lord Ashdown said that some eras are times of stability. Ours is not: “We are living in a period of history when power shifts.”

The global family of nations will be unhappy until we find a new power configuration that works. The good news – and the bad news – is that we will only be able to figure that out together. “Everything today is connected to everything else,” Lord Ashdown said. “The most important part of what you can do is what you can do with others. There is no problem anymore that is solvable alone.”

Close families and flexible labor markets don’t go together. That’s the conclusion of a fascinating paper by a quartet of transatlantic economists. Their work should be required reading for all European politicians and for the economists and pundits around the world who seek to advise them.

One truth universally acknowledged in Europe today is that the countries of the south need to overhaul their labor markets: Rigid rules on hiring and firing and on the minimum wage are blamed for the high unemployment and subpar economic growth in these states.

Economists are right to point out that inflexible labor markets exact a high economic toll. So why has there been such resistance in countries like Spain and Italy to changes that would create more jobs and stronger growth? One classic answer is the ability of vested interests – workers who do have protected jobs – to defend their own cushy deal at the expense of everyone else. Another is political dysfunction.

Alberto F. Alesina, Yann Algan, Pierre Cahuc and Paola Giuliano – the four authors of “Family Values and the Regulation of Labor” – wondered whether deeper, cultural factors might also be at play.

In their cross-country comparison, the researchers found a correlation between close family ties and a preference for more regulated labor markets. In countries with weaker family ties, there was more support for more open labor markets.

That doesn’t mean the people in countries with close family ties are acting irrationally. Instead, rigid labor markets – notwithstanding their economic costs – might actually be a better choice for societies with close family ties.

Here is how Giuliano, an assistant professor at the University of California at Los Angeles, Anderson School of Management, explained the trade-offs: “Suppose you live in a strong family tie society. You don’t want to go far away from home, so you are tied to a certain geographical location. The company that dominates a specific area knows you don’t want to leave to search for a better job, so it offers you a low wage. For that reason, people in those societies may prefer more regulated labor markets.”

The work by Giuliano and her colleagues is a timely rebuke to the one-size-fits-all school of economics.

“It could be that those regulations that economists consider effective actually work in some societies and not others,” Giuliano told me by phone from Rome. “If you make the labor market more flexible, in some countries this reform will work. But if the cultural beliefs are different, the reforms can produce unexpected results.”

This cultural lens also offers a possible explanation for the remarkable tolerance of some countries, like those of southern Europe, for high unemployment. A study by the economists Samuel Bentolila and Andrea Ichino argues that close family ties are the key to this mystery as well.

“In some sense, unemployment is less painful near the Mediterranean,” they write. That is because extended family networks cushion the blow: “The evidence supports the hypothesis that extended family networks, which appear to be stronger near the Mediterranean, provide a fundamental source of insurance against unemployment in southern Europe.” If you can count on your family to support you, being unemployed isn’t as hard; but staying close to that same family may lead you to favor the rigid labor markets that contribute to your own unemployment.

Giuliano is no flat-earther. She left her native Sicily, first to study in Milan and now to work in the United States, and she took pains to insist that, like the overwhelming majority of the economic fraternity, she believes southern Europe needs to reform its labor markets.

Her point is that those reforms will work best if economists take the time to understand the cultural conditions that prompted societies to choose highly regulated systems in the first place. “Economists should understand that when they introduce reforms, they need to take into account cultural conditions,” she said.

One reason culture matters so much is that it is remarkably persistent. For a civilian, one of the most striking findings in the paper by Giuliano and her colleagues is the correlation between family patterns in the Middle Ages and current desires for labor market regulation.

Your country’s family structure centuries ago influences how you feel about the minimum wage and severance rules. And the power of culture persists even in immigration. Giuliano and her colleagues found that the attitudes and the economic circumstances of second-generation immigrants to the United States were shaped by the nature of family relations in their countries of origin – “today as well as 70 years ago, immigrants coming from strong family ties societies tended to have lower mobility rates, lower wages and a higher level of unemployment.”

These findings are most relevant to Europe and its raging debate about labor rules. But they also make interesting reading in the United States, where the most ardent advocates of liberal labor markets are also the most vocal defenders of family values. Led most recently by the scholar Charles Murray, the American right has been lamenting the decline of those family values within the white working class. Perhaps the unregulated labor markets that conservatives also champion are partly to blame.

One question Giuliano and her colleagues don’t ask is how technology might change the trade-offs between flexible labor markets and close families. Jane Austen’s heroine Elizabeth Bennet observes that distance between family members is a function of wealth. It is also a function of technology. In the age of Skype, Facebook and cheap air travel, 300 miles today may be closer than 30 miles was a century ago. This could be yet another quandary that we assume to be the province of economists and legislators, but turns out to be solved by technologists.

Spending time with top European policymakers at the moment is scary and slightly nauseating, like the final, slow-motion moments before a car accident, when you can see precisely both how you will probably crash and what it would take, if only you could force your paralyzed muscles into action, to swerve to safety.

That’s why Christine Lagarde, the formidable French chief of the International Monetary Fund, told me this week that she wants to lock Europe’s dithering leaders in a room and leave them there until they figure things out.

“If I was able to do one thing, I would lock them in a room, take the key and let them come up with a comprehensive plan,” Lagarde said, when I asked what her fantasy scenario was for Europe. “I’m sure they can make it. I know the fundamentals are solid. The numbers on an aggregate basis are good. And, as I said, we have to take the key because they cannot escape unless and until they’ve firmed up the plan. But they can do it.”

Lagarde’s dream is frustrating and encouraging in equal measure because she is right: There is a clear, credible and widely accepted path to safety for Europe. But that car crash may still happen, because no one has the power to lock Europe’s leaders in a room, and, absent that forcing mechanism, they may not muster the will or the sense of urgency to act in time.

The sticking point is not policy. Speaking on a panel with Lagarde, Jörg Asmussen, a member of the European Central Bank’s executive board and a former official at the German Ministry of Finance, outlined what Europe needs to do.

“It’s very simple,” Asmussen said. “We need a more integrated monetary union, because the monetary area that we have now is incomplete. And we have to complement it in a way to make it more stable. One point is a fiscal union. The second one is a financial market union with three key elements: a resolution regime; second element, a deposit guarantee insurance; and third, we need a centralized supervision for the large 25 banks in Europe.”

“We need a democratically legitimized political union,” he added. “We need to start this speedily.”

That’s a plan the overwhelming majority of European leaders would agree to in principle. The problem is putting it into practice.

As Olli Rehn, the European commissioner for economic and monetary affairs, jokingly explained on the same panel: “Prime Minister Jean-Claude Juncker” of Luxembourg, the chairman of euro zone finance ministers, “put it quite well some years ago by saying that we all know what needs to be done, but we do not know how to get re-elected after that.”

Rehn’s wry comment is a reminder of the real tragedy at the heart of Europe’s troubles today: An idealistic political experiment, founded above all on the principles of democracy, peace and social inclusion, is failing because elites are unable to sell their vision to the public they were meant to serve.

Part of the problem is that the European idea, which really is a gauzy, high-concept confection, long ago devolved into a profoundly uninspiring affair of EU directives, painstakingly translated into 23 languages, and the Brussels apparatchiks, remote from the everyday life of their nations, doing the translating.

That’s where Riga, the venue for the conversation between Lagarde, Asmussen and Rehn, comes into play. The 2008 financial crisis was devastating for this country of just over 2 million. Like some of the euro zone states that today teeter on the brink, Latvia gorged itself on easy money during the credit boom of the first decade of this century. When capital abruptly flew to the world’s havens – a category that most certainly did not include the Latvian currency – Riga was pushed to the brink.

One option – which many contemporary observers thought was inevitable – was devaluation. Latvia, after all, enjoys a freedom that Greece, Ireland, Italy, Portugal and Spain do not. It controls its own currency, and printing money would have been an expedient way of both reducing its debt and instantly bolstering the country’s global competitiveness.

But Latvia chose the tougher route of internal devaluation. The country stuck with its currency peg to the euro, and instead rebuilt the confidence of the international capital markets by slashing government spending and domestic wages and prices. Over the course of the program, the Latvian government’s combination of spending cuts and tax increases amounted to 15 percent of gross domestic product.

That hurt. In the first year, unemployment jumped to more than 20 percent, and the economy shrank 18 percent. Nearly four years later, Latvia, whose overhauls were supported by funding from the IMF and the European Union, is harvesting the payoff. The economy grew 5.5 percent in 2011, the currency is stable and unemployment has subsided, to 13 percent.

“I want to congratulate Latvia for the recent successful completion of their balance of payments program which has been conducted together with the EU and the IMF and also for the successful return to the markets and the rather positive data on growth,” Rehn said. “And Latvia has shown that this kind of economic assessment is possible without currency devaluation.”

The harsh Latvian plan worked because the whole country was committed to it. And that commitment, including the painful peg to the euro, is rooted in the overarching national mission that has driven and united this small Baltic state since the collapse of the Soviet Union – to escape the legacy of communism and Russian rule and to build a modern, democratic, capitalist nation. Latvians believe they can achieve that goal by joining the European Union and eventually the euro zone.

The people on Europe’s periphery still believe in the Union’s great historical purpose. Unless the Europeans at the continent’s center regain that faith, their leaders will be unable to summon the political will to swerve out of that slow-motion car crash.

The big economic question in much of the world today is usually framed as the fight between advocates of austerity and advocates of growth. But another way to view the debate is as a contest between those who think that 21st-century government can be effective and those who don’t.

Indeed, some of America’s most outspoken capitalists have begun to fight the “Buffett Rule,” which would set a minimum tax level for millionaires, and other calls to raise taxes for those at the very top, with the argument that money is best left in the bank accounts of the superrich because they are more effective at using it than the state is.

“I’m a job creator. I’m one of the guys who can help us out. I’m a Silicon Valley guy who can invent and create,” T.J. Rodgers, chief executive of Cypress Semiconductor, told me. “If you tax me more, I will either give less to charity or I will fund venture companies less, or I will sell the stock in my own company or other companies I own, like Intel and Google. I will do one of those three things to return the money to the government.”

If that were to happen, Rodgers told me, the economy would be hurt, because he is better at investing money than government bureaucrats are.

“The money will go into cash for clunkers or another program. And somehow we’re supposed to believe that taking money from the investments, my investments, out of Silicon Valley, where they have been very, very good for the economy, and putting them into cash for clunkers, or the new scheme, whatever it is, is somehow going to make America’s economy better,” he said. “It’s just wrong. It’s going to hurt the people that they’re pandering to. It’s going to hurt the very people that think if we vote for this, then we’ll get more money. What will happen is the economy that they depend on will be less robust and they’ll be in worse shape.” “Cash for clunkers” is a term for a U.S. government program in 2009 that provided rebates to those who traded in older, fuel-guzzling cars for more efficient models.

Edward Conard, a former partner at Bain Capital, the buyout firm once led by Mitt Romney, the Republican presidential candidate, makes the same point in Unintended Consequences, a book published this month. Conard, like Rodgers, argues that society overall benefits when the rich are taxed lightly because the rich – by virtue of their wealth – have shown they are the best investors of capital.

As Conard writes: “For every dollar earned by a successful innovator or lucky risk taker, society captures forty cents of investment. Were society to pay the incremental dollar of income to a middle-class consumer, he would charge society ninety to ninety-nine cents of consumption for every penny of investment – a steep price. It’s cheaper for society to allocate income to the rich.”

There’s a lot to unpack in this line of reasoning. For one thing, it is hard to escape the obvious self-interest – it is certainly convenient to believe that low taxes for oneself not only are a personal boon but also serve the collective good. The debate is also ideological. The right has long been campaigning to reduce the power of the state and to increase the power of the individual.

But there is also a special resonance to arguments about the relative efficacy of the private sector over the state when you hear them in the 21st-century United States from a West Coast technology entrepreneur. After all, whatever your political allegiances, it is hard to disagree that in recent decades, when it comes to transforming the world, the Valley has outdone the Beltway.

One reason for that gap may be that while our private and business lives have been transformed by the technology revolution, government largely has not. To understand what hasn’t happened – and the possibilities the future might hold – I spoke to another entrepreneur at the cutting edge of the global technology revolution: Nandan Nilekani, the co-founder of an Indian outsourcing behemoth, Infosys.

Nilekani has gone on to another pioneering job, working inside the notoriously slow-moving Indian government to create a unique digital identity for each citizen. That second career has given him a different perspective on the state: He agrees with Rodgers and Conard that it needs to be reinvented, but he also argues that it is absolutely essential, not least as a foundation for private-sector entrepreneurship.

“Just as technologies are disrupting industries – retail or publishing or whatever – technologies can also disrupt the way you do government,” Nilekani told me. “The thing is that we don’t yet know how to do it well.”

“If you have grown up using a tablet or a smartphone, with nice user interfaces, and one click, you get everything, you get maps everywhere, you’re used to a certain level of responsiveness and efficiency,” Nilekani explained. Government is often not very good at delivering either, he said, which can make us more frustrated as citizens than we are as consumers.

One response to that gap is that of Rodgers and Conard, namely to give up on the state. Nilekani advocates something different. What we need to do, he argues, is reinvent government, just as the technology revolution has forced most businesses to reinvent themselves.

Nilekani thinks this transformation of the state is one of the world’s most urgent challenges because he believes that without a powerful and effective government, private entrepreneurship is impossible.

“I think innovation is something best done effectively in the private sector,” he told me. “But it’s the role of governments to create public goods which are platforms for innovation. If you look at the U.S., the Internet was a government defense program on which today you have this huge innovation ecosystem. GPS is another example.” That system “was designed for military applications. But today it’s used for maps or car navigating systems or whatever. So the ideal is to create these global public goods or these national public goods that are platforms. And then make them open so that people can innovate.”

That’s an important paradigm shift. Instead of arguing over whether to shrink the state or expand it, or whether money is better spent by the private sector or by the state, maybe we should be focusing more on reinventing the state for the 21st century.

Are your taxes too high? When Gallup asked that question in April, tax month in the United States, 46 percent said they were. An additional 47 percent said their taxes were “about right.” Just 3 percent said their taxes were too low.

This campaign season reflects that result. Mitt Romney, the Republican candidate, is offering a 20 percent tax cut for everyone. Given the mood of the conservatives in the United States today, that may not surprise you. But even President Barack Obama, who is routinely described as a socialist by his opponents, is peddling a plan under which 99 percent of Americans would pay less than they did under the last Democrat in the White House, Bill Clinton.

This bipartisan agreement that the overwhelming majority of Americans should pay lower taxes than they did in the 1990s is remarkable for many reasons. For one thing, we are constantly hearing – and it is true – that U.S. politics is more polarized than ever. But unless you are a member of the 1 percent, on this core issue there is a lot more consensus than you might think. Political strategists on both sides, it turns out, know how to read poll data.

But the really surprising thing about the no-more-tax consensus is how much of an outlier it makes the United States compared both with the rest of the world and with itself in recent history. When it comes to foreign policy or to global economic dominance, American exceptionalism may indeed be in jeopardy. But when it comes to taxes, the United States is quite different from most other Western industrialized economies.

According to the International Monetary Fund, in 2011, among the world’s 30 leading Western economies (plus Japan), only in New Zealand and in Japan was government revenue a lower share of gross domestic product than in the United States. Countries like Australia, Estonia, Ireland and Switzerland, which tend to favor low taxes and a small state, have government revenue that accounts for more of GDP than it does in the United States.

The Internal Revenue Service is also relatively restrained compared with recent U.S. history. In 1945, at the close of World War Two, federal tax receipts were 20.4 percent of GDP (expenditures, by the way, were 41.9 percent, putting the federal budget deficit at 21.5 percent, compared with 8.7 percent in 2011). In 1952, the year the Republican Dwight Eisenhower was elected president, federal government revenue was 19 percent of GDP. In 1988, the last year of Ronald Reagan’s transformational conservative presidency, the federal tax take was 18.2 percent of GDP.

Compare those figures with that of today, when a Democrat is in the White House, nearly half of Americans think their taxes are too high, and both parties are promising to keep taxes low for all, or, in the case of the Democrats, 99 percent of Americans. In 2011, government revenue was 15.4 percent of GDP, lower than it was at any time during the Eisenhower or Reagan eras. Like anorexics, who think they are grossly fat when they are very thin, the American body politic is suffering from a national version of body dysmorphia, with nearly half the country believing taxes are high, when they are comparatively and historically low.

Thomas E. Mann , the Brookings Institution scholar and co-author of an influential new book on the polarization of U.S. politics, traces American thinking about taxes to the success of conservatives, particularly of the anti-tax crusader Grover G. Norquist, in steering the national conversation.

“This is more of an elite phenomenon,” Mann said. “It’s ideological. It’s tribal now because of the Grover Norquist taxpayer pledge. It’s as if Republicans, even if they think in more pragmatic terms, are not allowed to even consider raising taxes and certainly should be pushing at all times to cut taxes further … It’s become Scripture.”

“One can’t talk rationally or on any evidence-based discussion of tax policy,” he said. “It’s assumed cutting taxes always does good.”

Mann wishes the country could have a more “rational” and “evidence-based” discussion about taxes. But perhaps the problem is the opposite. The Democrats may have lost the debate about taxes in the United States not because the country gave up on reason but because the left gave up on politics.

Conservative arguments for low taxes are sometimes couched in technocratic terms – the supply-side view that low taxes will mean higher growth for everyone – but the right has never been shy about talking about tax policy in terms of values as well. Low taxes are part of the bigger fight for personal freedom and a small state. The left, by contrast, has been more reluctant to make the case for higher taxes as the worthwhile price of better public services and a stronger social safety net.

But the IMF’s international comparison suggests that taxes really are as much the domain of the politician and the moral philosopher as they are of the economist and the accountant. Some economically successful countries that believe in a strong state levy high taxes, like Germany or Sweden. Some economically successful countries believe in a smaller state and levy lower taxes, like Australia, and, yes, the United States. Meanwhile, in economically stagnant Japan, government revenue is an even lower share of GDP than it is in the United States, while in struggling Spain it is higher, although still lower than in Canada or Germany.

Leaving the tax debate to the technocrats is tempting, but Norquist has a point. The level of taxes, and therefore the size of the state, is chiefly a political choice, and it is one the left in the United States is too scared to address head on.

Are equal rights good for the economy? Campaigns against discrimination, like the battles for women’s rights and civil rights in the 1960s and the fight for gay marriage equality today, are usually framed as struggles for justice.

We think of these issues as entirely separate from economic concerns and sometimes as even running counter to them. Equal pay legislation and rules against discrimination have often been opposed by business on the grounds they would raise costs.

But there is actually a powerful economic argument for equal rights. If you believe that talent isn’t determined by gender, race or sexual orientation, but is instead a roll of the genetic dice, then the most productive society will be the perfectly fair one. A society that is blind to gender, race and sexual orientation will choose the best person for the job – not just the best white, straight man.

That logic sounds good, and if you support equal rights for moral reasons, you will want it to be right, too. But is it? A draft paper by four U.S. economists makes the strong empirical case that it is. Fairness, they contend, has made the economy more productive. Chang-Tai Hsieh, Erik Hurst, Charles Jones and Peter Klenow argue that as much as 20 percent of the growth in productivity in the United States over the past 50 years can be attributed to expanded opportunities for women and blacks.

“Changes in things that have affected women or blacks specifically have yielded a sizable impact on overall U.S. earnings growth,” Hurst told me. “That is a big effect.”

“If we believe in a world where there was discrimination faced by women and blacks, then not having women and blacks as lawyers and doctors, for example, was costly for society, if we think they are born with the same distribution of talent as white men,” Hurst said.

Richard Florida, a professor at the Rotman School of Management at the University of Toronto and a long-standing advocate of the view that diversity is a driver of economic growth, cheered the results.

“Places that are segregated really don’t grow.”

In case you are behind in your viewing of Mad Men, the paper by Hurst et al. is a reminder of how truly supreme white men were in the United States half a century ago. In 1960, 96 percent of lawyers were white men, 94 percent of doctors were white men and 86 percent of managers were white men. The subsequent 50 years were a revolution. By 2008, white men accounted for just 61 percent of lawyers, 63 percent of doctors and 57 percent of managers.

Few women or blacks would describe the United States today as a perfectly color- or gender-neutral economy. But that huge shift over the past 50 years is a testament to the lowering of discriminatory barriers, which the economists term “a reduction in frictions.” Overall, the change was tremendously beneficial to the economy – the paper attributes as much as 20 percent of increased productivity over the past half-century to greater equality and “the resulting improved allocation of talent.”

Naturally enough, female and black workers have felt the change directly in their paychecks. According to the paper, the reduction in frictions since 1960 increased real wages for white women 39 percent; those of black women, who suffered double discrimination and therefore got a double boost, 57 percent; and those of black men 44 percent.

But while the economy as a whole benefited, there was one group that lost out. The paper calculates that the “reduced friction” for women and blacks meant that the real wages of white men were 4.3 percent lower than they would have been without the increased competition.

That result explains a political reality that we often don’t like to admit: Gains for women and blacks have come at a price for white men, and that is surely why some of them still resist the rights revolution.

“The decline in frictions had some cost for the white men,” Hurst said. “This is why majorities tend to construct barriers to minorities – you can extract rents.”

Hurst told me that he hoped to publish the research, which was still a preliminary draft, as a National Bureau of Economic Research working paper in a couple of weeks. At the end of their paper, he and his three colleagues reveal the tantalizing next direction their research will take.

The story in their draft paper on women and blacks is positive – the United States has become fairer and therefore richer. But the four economists suspect that for one category of Americans, the poor, the external barriers to professional success have actually increased.

“We suspect that similar barriers facing children from less affluent families and from regions of the country hit by adverse economic shocks have worsened in the last few decades,” the economists write. “If so, this could explain both the adverse trends in aggregate productivity and the fortunes of less-skilled Americans over the last decades.”

Hurst made sure I understood that this final point was just a hypothesis. The economists plan to run it through their model over the next few months and report on their results later this year. But if their theory pans out, their work will tell a story about America over the past 50 years that many of us intuitively will feel to be true – a country that discriminates less and less on the basis of gender, race and now sexual orientation, but where the class divide is becoming so stark as to constitute a new form of discrimination.