John Taylor lays out the case  for rules vs. discretion and in the process, does a superb job of summarizing his case for why doing less or even nothing would have been better than the activist government response over the last two and a half years.
One of the interesting questions Taylor raises in the paper is why what seemed to be a consensus in favor of rules changed so quickly into a consensus in favor of massive intervention.
Here is a nice summary of where the consensus used to be:
By the late 1990s there was about as much a consensus among economists as there ever was about an issue. In an assessment of fiscal policy in 1997, Eichenbaum (1997) concluded that “there is now widespread agreement that countercyclical discretionary fiscal policy is neither desirable nor politically feasible.” In a paper in 2000, I concluded that “in the current context of the U.S. economy, it seems best to let fiscal policy have its main countercyclical impact through the automatic stabilizers….It would be appropriate in the current circumstances for discretionary fiscal policy to be saved explicitly for longer term issues, requiring less frequent changes.” And Feldstein (2002) wrote “There is now widespread agreement in the economics profession that deliberate ‘countercyclical’ discretionary policy has not contributed to economic stability and may have actually been destabilizing in the past.”
So why did things change so quickly? Taylor gives a number of possible answers including the possibility that the politics trumped the economic research that had made the case for rules rather than discretion. He also points out that there was research on the other side arguing for the benefits of discretion over rules.
There is truth in both of those arguments but I think it is useful to add some public choice as well with economists as rent seekers–if you want to be a player, you have to be willing to play. So those economists who argue for the virtues of intervention get a chance to play. Those who oppose intervention remove themselves from any chance of riding the government gravy train.
It’s a bootlegger and baptist argument–economists favored discretion and ad hoc intervention to save the economy knowing it is good for their own income and power. There’s also some groupthink involved. When everyone is touting the virtues of job creation via fiscal policy, you feel a little lonely suggesting it’s a sham. Finally, there is some risk aversion. Once you have some input into the policy process, better to do something than do nothing. Did Ben Bernanke really want to preside over the next real Great Depression while doing nothing? Better to do something, even if it’s flawed. The fact that you gain enormous power along the way would help any mortal man come to the view that doing something is better than doing nothing.