Historically, sometimes the right economic policy in dire economic situations is not because it would be the right thing to do economically, but because we have no other choice because of some non-economic reason, e.g., the Nazis after the Great Depression.
Arguably, we are living in an even more politically hard-headed time. Churchill famously said, “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.” Today’s variation of that perhaps, is “we do the right thing when finally confronted with a choice that transcends politics.”
Paul Krugman’s post on his blog today is straight-up brilliant on how economic theory can be simple but the politics can be hard. Here’s the excerpt:
Here’s how I interpret what we see in the historical data: financial crises leave an overhang of private-sector problems, principally excessive debt on the part of some subset of economic agents — households, in the case of the United States. Because these agents are either forced or strongly induced to slash spending, the “natural” rate of interest, the interest rate consistent with full employment, falls sharply — and in the case of a severe crisis, falls well below zero.
What this means in turn is that conventional monetary policy, which normally bears most of the burden of economic stabilization, is no longer up to the job.
Now, there are other policy options. You could use discretionary fiscal policy, a k a stimulus, to boost demand; you could use unconventional monetary policy to depress interest rate spreads and/or raise expected inflation, helping get past the zero lower bound problem. Historically, however, countries tend not to do these things, or not to do them on a sufficient scale. Why? Politics. Intellectual confusion. Inertia. Misplaced fears.
Basically, it takes much more clarity and unity to pursue either discretionary fiscal expansion or unconventional monetary policy than it does to cut the Fed funds rate, and few countries manage to display that kind of clarity and unity. And that, in turn, is why it took a war to end the Great Depression; there’s nothing special about military spending from an economic point of view, but as a political matter Hitler managed to override the usual objections to stimulus.