For weeks I’ve been saying that the hopeful thing about the current economic mess is how quickly a consensus has developed across the spectrum that government must spend BIG to boost demand to get us through this. After all, between 1929 and 1933 little policy action was taken, and what was done (contracting the money supply) made matters worse. Today is different. Yes, you can say the relevant officials dithered for a year or so when they should have been acting. But since then they’ve been throwing lots of spaghetti against the wall, and under Obama there’s tons more spaghetti to come. What’s more, Republicans are for it – even Reagnaut Marty Feldstein knows this is the moment for Keynes on steroids. In the 1930s, by contrast, the state of economic thinking was so confused that FDR actually raised taxes and cut spending in 1937 when we were still in trouble, ushering in a deep new recession.
Yet the fact that FDR & Co. could in 1937 commit what seems in retrospect so obvious a blunder suddenly makes me nervous. What toxic ways of economic thinking are we now in thrall to that our grandchildren will look back on with horror, just as we look back amazed at FDR’s 1937 missteps? What I’m talking about here is the economic equivalent of Rumsfeld’s "unknown unknowns." In 1937, FDR and the "smartest" advisors from that era sat in the Oval Office and made very reasonable-sounding arguments about the need for fiscal tightening, and it proved disastrous. What seemingly sound arguments by "experts" are now propelling us toward some similar fate because of things we don’t yet understand? If you’re looking for cause to be even gloomier, it’s a scary thought.