Since I'm on a roll irritating the libertarians, I think I'm going to keep going.
David Brooks today writes that Obama is about begin in the world's biggest political engineering project with his economic stimulus package and other policy proposals. While liberals think that government can fix things, conservatives think that human society is way too complicated and anytime that government gets involved, it makes a right mess of things. Welfare=welfare queens.
While Brooks hopes that Obama is successful, he's worried that he won't be.
All in all, I can see why the markets are nervous and dropping. And it's also clear that we're on the cusp of the biggest political experiment of our lifetimes. If Obama is mostly successful, then the epistemological skepticism natural to conservatives will have been discredited. We will know that highly trained government experts are capable of quickly designing and executing top-down transformational change. If they mostly fail, then liberalism will suffer a grievous blow, and conservatives will be called upon to restore order and sanity.
It'll be interesting to see who's right.
The conservative model has already been discredited. The hands-off approach meant that government turned a blind eye as stock brokers sold crap, people bought cathedral ceilinged monstrosities, and greed raced on without some necessary speed bumps. Now, we are looking at nationalized banks. And the banks are begging for it. There are no libertarians on Wall Street.
I don't know if Obama is going to succeed or not. I have no idea how he's going to create the demand for rubber bands or plastic bags. But the death match between political models has already been fought. The decision has been made.
To put it in terms of economic models, the notion is that if Friedman wasn't right about everything, that must mean that Keynes was right about everything. But of course, the universe is not obligated to follow a neat political bifurcation. They could just as easily both be wrong.
(Or both be right--in some important ways, the disagreement between the two is exaggerated, although the disagreements between their followers often is not. The central insight of Keynes, that prices are sticky and markets don't always clear, is, in fact, the reason that monetary policy matters. But I digress.)
It can both be true that monetary policy will not keep the country from falling into a deep recession, and that massive fiscal stimulus will not get us out again. It can be true that complacent regulators will let bankers get themselves into a bunch of trouble, and that capping CEO pay or nationalizing banks will not get us out again. It can even be true that regulators have little power to keep us out of trouble when 2/3 of the world's savings is swamping our capital markets, short of very problematic measures like capital controls.
There are, clearly, central problems with "the Great Moderation", the until-recently-dominant explanation of the Great Depression, and the American banking system. That doesn't mean that Obama can fix them. It doesn't even mean he'll do a better job than John McCain would have, though we'll never know. There is a very real possibility that in two or three years, America will be in worse shape than it is now--unemployment in the double digits, GDP down by same, corporate and government budgets peeling apart at the seams. I will be curious to see whether the new armchair empiricists of the left see this as casting any doubt on their central theories, or whether they will simply argue the counterfactual.