The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this, often without thinking much about it. (Federal Reserve Chairman Ben Bernanke said it reflexively in a major speech in London in January: "The global economy will recover." He did not say how he knew.) The difference between conservatives and liberals is over whether policy can usefully speed things up. Conservatives say no, liberals say yes, and on this point Obama's economists lean left. Hence the priority they gave, in their first days, to the stimulus package.

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Why did the CBO reach this conclusion? On depth, CBO's model is based on the postwar experience, and such models cannot predict outcomes more serious than anything already seen. If we are facing a downturn worse than 1982, our computers won't tell us; we will be surprised. And if the slump is destined to drag on, the computers won't tell us that either. Baked into the CBO model we find a "natural rate of unemployment" of 4.8 percent; the model moves the economy back toward that value no matter what. In the real world, however, there is no reason to believe this will happen. Some alternative forecasts, freed of the mystical return to "normal," now project a GDP gap twice as large as the CBO model predicts, and with no near-term recovery at all.

I recently came up with the following metaphor.

Economists reason in terms of a "general equilibrium" which they assume is stable. Picture the economy as a ball rolling inside a bowl, oscillating around the bottom point. Economists don't even concern themselves with the approach to equilibrium, which they assume is quick enough, or else they concern themselves with the "long term". So what they do is they study how the equilibrium point changes when you change some choice parameters.

Maybe a better metaphor for the economy would be a pencil balanced on its tip, or a ball rolling on the outside of an upside-down bowl. There is an equilibrium position on top, but it is unstable and in order to keep the ball at the top or the pencil balanced on your fingertip you have to carefully but vigorously move the bowl or the finger.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith