Are we smarter about economics than we were 80 years ago? Yes, but …

It's widely thought that another Great Depression is impossible these days because monetary-policy makers and other policymakers simply know more, and have better tools, than their predecessors did 80 years ago. But is that wishful thinking? What, exactly, do we know now that we didn't then, and how could knowing it prevent a depression?

Of course, there is no precise, universally accepted definition of a depression, as described here. But, as this New York Times article reports, there is a strong consensus among economists that a deep, prolonged downturn of 1930s severity is virtually impossible now because of institutional changes and intellectual advances made since then.

Some changes are simply the fruit of experience—knowing what not to do. It's hard to imagine the Fed tightening under current conditions as it did in 1929 (by letting interest rates rise) and again in 1936-37 (by raising reserve requirements). It's hard to imagine Congress raising taxes (as it did under Herbert Hoover) or passing trade-restricting measures such as the infamous Smoot-Hawley tariff (even if, as Pat Buchanan, Robert Shiller, and others contend, that had little to do with the downturn).

By contrast, today virtually everyone endorses tax cuts and stimulus measures while putting balanced budgets on the back burner. That's because the notion of government as economic stimulator is far better understood and more widely accepted today than it was in 1933. The most influential expression of the idea, John Maynard Keynes' The General Theory of Employment, Interest and Money, was not published until 1936. Regardless of where one stands on Keynesianism as a rationale for deficit spending ("Keynes was no Keynesian," says economist and former presidential adviser Allan H. Meltzer, author of an authoritative history of the Federal Reserve), Keynes' influence in this regard simply was not available in 1930.

Other differences take the form of policies and institutions. The vast social safety net that has evolved since 1930 is itself a bulwark against depression. Unemployment insurance, Social Security, Medicare, and Medicaid all serve to support aggregate spending. Indeed, their outlays tend to rise in hard times, making for what economists call "built-in stabilizers." For that reason, the sheer size of federal spending (about 20 percent of GDP today) acts as a kind of damper on business cycles in a way it could not in 1932, when it was around 4 percent of the economy.

Changes in the tax regime also help. The federal government's increased reliance on income-tax revenues—as opposed to other types of taxes—means that when incomes fall, so do tax burdens, all other things being equal. "And the more progressive the income tax," wrote Milton Friedman, "the sharper the rise or fall in tax liabilities for a given rise or fall in income."