Today David Brooks writes about psychology, economics, and to what extent we can formulate detailed policies that produced desired macroeconomic results. I think Brooks was talking more about fiscal policy, taxing and spending, as opposed to monetary policy, but his thesis about psychological factors mattering could also apply to the latter.
I think he feels that some of modern macroeconomics, in particular the part that thinks that government spending actually increases national income rather than perfectly crowding out private activities, leads the left-brain wing of the left to advocate such policies. But Brooks feels that the net result can be different because of psychology; people presumably fear higher debt and future taxes, or the uncertainty about them, and reduce or put off their current spending.
Brooks probably has a point about policymakers' poor understanding of this or their poor communication to voters about it, or some mixture of both of those. But like everything in an opinion column, it cuts all kinds of corners, and it caricatures modern and historical macroeconomics.
Keynes, whose writing provide the backbone behind the idea that public spending might be a good idea when the economy is down, was actually really big on such "animal spirits" being important for the macroeconomy. There are also plenty of neoclassical economists who feel that expectations are important, consumers are smart, and that many won't get fooled by spending or tax cuts. But a middle-of-the-road view held by many economists is that fiscal policy is a good idea to try in such hard times, if for no other reason than to offset the effects of budget cuts at the state and local level. The stimulus package seems not to have worked extremely well --- but it probably did work to some extent, especially when combined with the rescue of the financial sector, a great success --- so it would be worth trying something different, like more tax cuts rather than spending. Temporarily extending the Bush tax cuts seems like an attractive option.
The debate over monetary policy now is a little mystifying to me. The Fed is trying to increase the availability of credit any way it can, in order to get investment but especially consumption back on track, but banks and other financial institutions aren't really cooperating. They're hoarding credit, inflation is very low, and there are few signs it is on the rise. Arguably the bigger danger is deflation, which would raise the real costs of borrowing and reduce it even further.
