Doing the Same Thing Over and Over Again and Expecting Different Results

Insanity: Doing the same thing over and over again and expecting different results.

-Albert Einstein

In what is supposed to be well-understood history, policymakers in the late 1930's made an epic mistake. Before the world exited the Great Depression, they launched the Great Austerity, trying to balance budgets in the midst of a downturn. David Leonhardt in The New York Times yesterday writes about this mistake, and its parallels to the present day:

The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome.

In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.

On Tuesday, pessimism seemed the better bet. Stocks fell around the world, over worries about economic growth.

...

The policy mistakes of the 1930s stemmed mostly from ignorance. John Maynard Keynes was still a practicing economist in those days, and his central insight about depressions — that governments need to spend when the private sector isn’t — was not widely understood. In the 1932 presidential campaign, Franklin D. Roosevelt vowed to outdo Herbert Hoover by balancing the budget. Much of Europe was also tightening at the time.

If anything, the initial stages of our own recent crisis were more severe than the Great Depression. Global trade, industrial production and stocks all dropped more in 2008-9 than in 1929-30, as a study by Barry Eichengreen and Kevin H. O’Rourke found.

Short version...we're supposed to know better than this. Indeed, here's what the President had to say yesterday about repeating economic mistakes yesterday:

Now, let’s be fair though.  The other party’s opposition is also rooted in some sincere beliefs about how they think the economy works.  They think that our economy will do better if we just let the banks or the oil companies or the insurance industry make their own rules.  They still believe that, even after the Wall Street crash, even after the BP oil well blew, that we should just keep a hands-off attitude.  They think we should keep doing what we did for most of the last decade leading up to the recession. 

So their prescription for every challenge is pretty much the same -- and I don’t think I’m exaggerating here -- basically cut taxes for the wealthy, cut rules for corporations, and cut working folks loose to fend for themselves.  Basically their attitude is, you’re on your own.

Now, here’s the problem.  And again, I don’t question that a lot of them sincerely subscribe to this view.  Here’s the problem:  We’ve already tried these ideas.  Remember, we tried them for eight years.  We tried them for a good part of the last decade.  We know where they led us. 

We do know where these ideas led us. We know what happened in 1937, when the Great Depression had a second dip; we know what happened over the last decade, as Americans saw their household incomes decline and wages stagnate; and we know what's happening right now - growth and job creation are weak. We can live in a fantasy land that makes economic policy of off perverse theology about deficits, or we can live in reality, in which it would be absolutely insane to repeat the mistakes of the past and shift to austerity while the global economy remains fragile.