Our current economic situation invites comparisons to the Great Depression. Supposedly, the Great Depression was supposedly cured by Keynesian stimuli, not the least of which was building a metric assload of bombs and dropping them on the Germans and Japanese. But while stimulus was a necessary tool in ending the Great Depression, it was not the only tool.
The New Deal fundamentally changed the existing laissez faire capitalist system. Important steps were taken to change the social and economic relations between workers and capitalists: the minimum wage, unemployment insurance, social security, high marginal income tax rates, strong labor unions, strict financial regulation, etc. In contrast, the First Imperialist War had a considerable stimulative effect on the U.S. economy, leading to the Roaring Twenties. But without fundamental changes to capitalism, the boom lasted only a little more than a decade before collapsing in the Great Depression. If we did as Krugman et al. suggest and pumped a massive ($2 trillion or more) stimulus into the economy, we'd likely see considerable improvement that might last a decade. But about 10-15 years is as long as we could expect: without fundamental changes to the system, we should expect nothing but for history to repeat itself, and another equally catastrophic crash to occur in the mid 2020's if not sooner.
The important lesson is not just that stimulus can cure even a massive cyclical downturn (and can do wonders, I think, for even structural unemployment) but that capitalism, especially laissez faire capitalism, has structural flaws which cause massive cyclical downturns, flaws that must be corrected at the structural level. And FDR's New Deal did in fact at least begin to correct those flaws. Even the most cursory study of economic history shows that the economy in the 19th and early 20th centuries behaved substantively differently than the economy in the latter half of the 20th century. Cyclical downturns decreased in number and severity; our biggest problem in the 20th century was managing inflation, which was in our case a side effect of having money coming out of our ass: not the worst problem to have.
So the question has to be: what the fuck happened? We fixed the Great Depression, we made many important structural changes to our economic system, and here we are in another catastrophic failure of the capitalist system (which will get worse after the Republicans take the House of Representatives in November). Our first house collapsed in an earthquake, we rebuilt it better and stronger... and then it collapses when someone sneezes. What. The. Fuck!? Seriously!
What happened was that we removed the structural changes in our economic relations we added during the New Deal. Financial regulation is a joke. Labor unions where not entirely absent are owned by the capitalists. The minimum wage has been below the equilibrium wage for a decade or more (and now that it's slightly above the equilibrium wage, it's routinely and easily circumvented). The top marginal income tax rate is not really 35%, it's 15%, i.e. the long-term capital gains tax rate; ultra-wealthy make most of their real money with capital gains. (It's no surprise that hedge fund managers dominate the top earners: their "income" is taxed as long-term capital gains.) Only unemployment insurance and social security remain. Unemployment is running out (and applies to only of the fraction of the unemployed) and our "Democratic" president is at least not resisting (and may be enabling) the dismantling of social security.
Look back at the history. Social security is the foundation of the New Deal structural changes to the economy, and there's been a faction of the capitalist ruling class (and the upper levels of the professional-managerial class) that has not just disliked the idea of social security, but hated it with the burning fury of a thousand white-hot suns. But why? Come on: social security is nothing but the idea that none of our old people — people who have worked all their lives — should actually starve to death. Not only that, but social security is largely paid for by the same people it benefits: the working class and lower professional-managerial class. Why should anyone even mildly dislike, much less hate social security? Does this faction just hate old people with the same intensity that they hate blacks, women and gays? I think not: there's something deeper going on.
The fundamental issue, I think, is that the Randian faction of the capitalist ruling class has the idea that they are in charge, or ought to be in charge. They are, after all, the capitalist ruling class. The government, such as it is, should do nothing else but protect their interests, their status. They will take care of the middle and lower classes directly, thank you very much, and see to their moral and economic development as they see fit. Social security deeply subverts this idea: it says we ourselves (i.e. the working and professional classes) will take care of ourselves, and we will use the government directly to provide for our own interests, without the mediation of the capitalist ruling class. The subordinate classes vastly outnumber the ruling class; once we start using the government directly for our own purposes, however benign, it's only a matter of time before we use the government to eliminate the capitalist ruling class completely. The capitalist ruling class, surprisingly enough, is not about to let this happen.
I'm very pessimistic about the current situation. In 1932, the capitalist ruling class, having ruled unopposed for generations, was complacent and unused to serious struggle: all they did — all they needed to do — to respond to the populism, anarchism, socialism and communism of the late 19th and early 20th centuries was to throw money and police at the problems, or stage a great big war (a war won by the capitalist ruling classes in all countries, including Germany). Today, however, the Randian faction of the capitalist ruling class is disciplined and hardened by two generations of a largely successful struggle to regain power. They will not make the same strategic mistakes they made in the 1930's. They will take power: They will make substantial gains in November, and their victory will be complete or nearly so in 2012. (Even if Obama were to win re-election (I predict he won't), he will be rendered impotent or actively co-opted.)
I'm a communist, but I'm not stupid: I can see that the political organization of the Soviet and early* Chinese Communist Parties and their governments was... er... suboptimal. The problem is that the political organization of capitalist ruling class in the United States shares the worst features of the Soviet and early Chinese Communists: lack of transparency, severe barriers to entry, lack of popular accountability, and rigid and unreasoning ideological dogmatism**. And they have proven time and again they are ready, willing and able to use the most severe police powers without compunction to enforce their rule, Constitution or no. The capitalist ruling class and their government is doing and justifying everything we supposedly complained about the commies: torture, indefinite detention without trial, mass arrests and violence against peaceful*** protesters, counterfactual propaganda, wars of aggression and naked imperialism.
*Say what you will about them, but the modern Chinese "communist" party and government are forces to be reckoned with.
**Just look at any "freshwater" graduate school of economics, which not only reject socialism, but dismiss and demonize even "saltwater" capitalist economics. These guys (and yes, they're mostly men) hate Roosevelt and Krugman a thousand times more than they hate Lenin or Castro. Hating small ideological variations more than completely opposing ideologies is a sure sign of unreasoning dogmatism.
**Well, mostly peaceful, and the police responses (cough WTO) have been completely out of proportion to the relatively trivial offenses.
The capitalist ruling class has made a lot of mistakes: they're hardly omnipotent. They might well have grabbed absolute power under Bush and Cheney: I suspect that Bush flinched: his sentimentality and weakness was the only thing that prevented complete despotism. They were obviously not counting on the collapse of the housing bubble and the subsequent recession (without which McCain might have actually won in 2008). But they are growing ever stronger, toughening their will, and improving their discipline and ideological cohesion. They will not repeat their mistakes.
We're in for a long, tough slog over the next century.