When policymakers are overly cautious, it can backfire:
The Timidity Trap, by Paul Krugman, Commentary, NY Times: There don’t seem to be any major economic crises underway right this moment, and policy makers in many places are patting themselves on the back. ...
Unfortunately, that ... just goes to show how accustomed we’ve grown to terrible economic conditions. We’re doing worse than anyone could have imagined a few years ago, yet people seem increasingly to be accepting this miserable situation as the new normal.
How did this happen? ... I’d argue that an important source of failure was what I’ve taken to calling the timidity trap — the consistent tendency of policy makers who have the right ideas in principle to go for half-measures in practice, and the way this timidity ends up backfiring, politically and even economically.
In other words, Yeats had it right: the best lack all conviction, while the worst are full of passionate intensity.
About the worst: If you’ve been following economic debates these past few years, you know that both America and Europe have powerful pain caucuses — influential groups fiercely opposed to any policy that might put the unemployed back to work. There are some important differences between the U.S. and European pain caucuses, but both now have truly impressive track records of being always wrong, never in doubt. ...
So what has been the response of the good guys?
For there are good guys out there... But these good guys never seem willing to go all-in on their beliefs.
The classic example is the Obama stimulus, which was obviously underpowered... Some of us warned right from the beginning that the plan would be inadequate — and that because it was being oversold, the persistence of high unemployment would end up discrediting the whole idea of stimulus in the public mind. And so it proved.
What’s not as well known is that the Fed has, in its own way, done the same thing. From the start, monetary officials ruled out the kinds of monetary policies most likely to work — in particular, anything that might signal a willingness to tolerate somewhat higher inflation, at least temporarily. As a result, the policies ... have fallen short of hopes, and ended up leaving the impression that nothing much can be done. ...
You might ask why the good guys have been so timid, the bad guys so self-confident. I suspect that the answer has a lot to do with class interests. But that will have to be a subject for another column.