Friedrich Hayek, Zombie: [A] 1932 letter by Friedrich Hayek and others arguing that (a) deficits somehow caused the Great Depression (b) deficit spending would drive up interest rates and make the Depression worse. Truly, nothing ever changes. The insistence that big deficits somehow caused the crisis even thought they actually didn’t appear until after the crisis was well underway — and were clearly caused by the crisis, not the other way around — prefigures the debate in Europe, in which everyone declares that fiscal irresponsibility is the core issue even though both Ireland and Spain had low debt and budget surpluses on the eve of crisis. And Hayek’s prediction that deficits would drive up interest rates despite high unemployment was, of course, totally wrong.... [T]he deficit came after the slump began, not before, and that much bigger deficits never did push rates up. You can also see the big mistake of 1937, when FDR gave in to the austerians of his era.
Still, you can make excuses for Hayek and friends: this was all new territory, and macroeconomics barely existed as a field.
What’s terrifying is... the arguments of today’s pain caucus are exactly the same as those Hayek was making in 1932, except that they’re less well expressed. And they’re sticking with their doctrine even though the economic story — deficits mainly the result of the slump, not the cause, and interest rates not rising in the face of those slump-caused deficits — is playing out the same way...