Brad DeLong, commenting on Greg Mankiw, writes:

Mankiw’s broader point is that since we have seen nothing like this before except for the Great Depression, we should be humble and risk averse–and hence have the government stand back and wash its hands of the situation. However, even a minor and hasty acquaintance with the Great Depression teaches that the belief that the government should stand back and wash its hands because the self-regulating market quickly returns to full-employment equilibrium is the most arrogant belief possible. And even a minor and hasty acquaintance with the Great Depression teaches that having the government stand back and wash its hands is the most risky strategy conceivable.

Quite. I really don’t think people appreciate the huge dangers posed by a weak response to 9 1/2 percent unemployment, and the highest rate of long-term unemployment ever recorded:

Right now, I’m reading Larry Ball on hysteresis in unemployment (pdf) — the tendency of high unemployment to become permanent. Ball provides compelling evidence that weak policy responses to high unemployment tend to raise the level of structural unemployment, so that inflation tends to rise at much higher unemployment rates than before. And the kind of unemployment we’re experiencing now, with many workers jobless for very long periods, is precisely the kind of unemployment likely to leave workers permanently unemployable.

And there are already indications that this is happening. Bill Dickens, one of the people has who worked on downward nominal rigidity, tells me that the Beveridge curve — the relationship between job vacancies and the unemployment rate — already seems to have shifted out dramatically. This has, in the past, been a sign of a major worsening in the NAIRU, the non-accelerating-inflation rate of unemployment.

The point is that while policy makers may think they’re being prudent and appropriately cautious in their responses to unemployment, there’s a good chance that they’re prudenting and cautiousing us into a long-term jobs catastrophe.