Feelings and Facts: How to Respond to Economic Crisis?

There is considerable sentiment coursing through the national consciousness that goes something like this:

"We got into this economic mess through a binge of overspending, so now is the time to cut back."

This is an understandable reaction. Like the drunk who wants to put his life in order, to cure a crisis brought about by overspending, stop overspending and become a teetotaler, fiscally speaking that is. As emotionally satisfying as this sounds, it is also terribly misguided.

There is a good word for this economic theory. It is called Hooverism. David Leonhardt has a good article on our current fixation on this utterly discredited economic theory. The Republicans in Congress are pushing aggressively for a return to Hooverville, despite the fact that a slew of recent non-partisan economists have given various estimates about how these policies will increase unemployment and decrease growth.

What is the source of this current fixation on Hooverian economics? There are three underlying  reasons.

• Psychologically, is is a common sense response to crisis brought on by overspending. Nonetheless, the vast majority of professional economists believe that when weakness in demand in the private sector  leads to unemployment and reduced growth, the best response is increased government spending. Unfortunately, although the 2009 stimulus achieved pretty much what it was designed to achieve, it has become an article of faith that it failed. President Obama's spectacular ineptitude explaining and promoting his own policies is the primary culprit here.
• Ideologically, the Republican party is commented to small government as a matter of principle. This point cannot be overemphasized. Jonathan Chait wrote a widely-discussed article about this a several years ago. Republican commitment to small government is a core principle in a way totally unlike Democratic commitment to activist government. Republicans will oppose activist government intervention in the economy as an a priori principle, even when the policy succeeds. An excellent contemporary example of this is TARP and the GM bailout. By any objective measure, these policies were a huge success. TARP will almost certainly turn a profit and the GM bailout saved hundreds of thousands of jobs at a time of dire crisis, revitalized a core of the American manufacturing sector, and will almost certainly end up costing the government nothing. Yet, it is still an article of faith among tea-partiers and other conservatives that these were bad policies.
• Politically, the GOP has no incentive to favor policies that would improve the economy as long as there is a Democrat in the White House. I know that this sounds hopelessly cynical, but it is nonetheless I think an accurate assessment of the current political climate.

The U.K. offers a clear test case of these two responses to economic crisis. The U.K. has initiated severe budget cuts and tax increases in an effort to reduce the national deficit. How their economy responds will provide conclusive evidence regarding how best to respond to an economic downturn.