It is now obvious that the U.S. and the world are in what is likely to be a prolonged period of economic crisis. There is a serious danger of deflation and the first global depression since the 1930's. The good news is that it appears that the people who are (or, in the case of the U.S., will soon be) in position to implement policy responses to combat the crisis will do so quite aggressively. Despite the academic disfavor into which Keynesian economics fell after the 70's stagflation, we are once again all Keynesians now. Overreacting is better than underreacting, and policy makers seem committed to engaging in aggressive policy responses. The bad news is that this might not work or, more accurately, that it might not work well enough for a very long time.
Within the crisis, however, lie many opportunities and dangers. Outside of a crisis, it is virtually impossible to get people to support large-scale changes in the way things are done. This mostly comes down to the simple mechanics of political pressure: concentrated costs and dispersed benefits. There has to be a big enough crisis to focus people's attention, to get them to ignore the voices saying that "it ain't (too) broke, so don't fix it," and to say that the time has come to change something big to which we are accustomed but that has outlived its usefulness. For example, the Panic of 1908-09 led to the creation of a central bank in the U.S. -- the Federal Reserve system -- after decades of battles over the question of federal control of the financial system. (The residual opposition to having a central bank also explains why the system was given such an obscure name and a faux-decentralized structure.)
Unfortunately, policy making during a crisis is almost guaranteed to lead to mistakes large and small. The handling of the financial bailout by Secretary of the Treasury Paulson is becoming the poster child for this phenomenon. Congress had very good reason to try to prevent the collapse of the financial system, but they had to act fast and put a great deal of trust in the good faith and competence of the executive branch. Yikes.
Even without Paulsonian fecklessness, however, every policy intervention during a crisis is going to be flawed in some very important ways. My grandfather would regularly curse FDR and the New Deal, saying that the Civilian Conservation Corps was "a bunch of guys being paid to stand around leaning on shovels." When pushed, he would explain that he knew of many CCC projects that did not accomplish what they supposed to (or that it was never clear what they were supposed to accomplish in the first place). Even policies that are later seen as great successes overall, therefore, are generally not wart-free.
This raises a raft of interesting issues to think about during the current crisis. What are the ways in which we might make systemic changes in the way we do business that we could never imagine pushing through during normal times? What dangers come with such changes? What criticisms will inevitably be leveled even against the most promising changes? Starting on Thursday (Christmas Day, for those of you who take note of such things), I will inaugurate a series of occasional posts discussing some of the ways in which we might use the current crisis and its various sub-crises to think anew about the way we organize particular industries, social policies, government programs, etc.
First up: automobiles.
-- Posted by Neil H. Buchanan