Very, very interesting stuff here about the limitations of modern macroeconomics for making sense of the current situation. Ricardo Caballero of MIT has written a paper (thanks to Amol Agrawal for the flag) which essentially argues that modern macro is incapable of grasping what is going on, and that contact needs to be made with reality.
Fresh from taking part in a public debate on the UK spending cuts at LSE, I read this with interest, and wished I'd read it before Friday. I argued that the high degree of uncertainty facing us meant that political actors grasp hold of models in order to make sense of the world, and it is these models which drive their behaviour as much as the likely real consequences of doing so (sounds like a hermaneutic circle...). I didn't push the first part of the argument too much, given the high-powered economics brains I was up against, but at least there are some people in the economics profession itself making these points (most notably, with qualifications, Krugman).
What worries me about economics is that, if pushed, most sensible scholars will retreat to the position that the models are crude appromixations of reality, yet often the impressive mathematical precision of the models lends them an authority and apparent reliability that leads people to place way too much faith in their predictions.
As a humble political scientist, there is nothing I can do about this, except insist on the point that policy emerges from a political process, and that models are part of that process, rather than an adequate explanation for it. People hanker after prediction, and a non-predictive science offers little comfort. But still, there has got to be some point in reminding ourselves that we don't really know what the effects of policy are going to be, and that the resulting caution must be all the stronger when policy will predictably harm people.