I share the despair of many of the smarter commentators (economists and non) out there who are lamenting the failure to adopt appropriate policies to deal with the slump. How can we explain the reluctance to drop the austerity nonsense and do something for growth, the only real way to deal with our debt problems? Well, here are some inchoate thoughts on this paradox.
First, I'm pretty sure the current arrangements challenge even the softest forms of rational choice theory. Whichever way you look at it, the choice for pain in the present for no certain benefit in the future has something self-defeating and masochistic about it, particularly since the pain doesn't even net out into clear benefits for any sub-group within the economy.
Second, it confirms the power of dominant ideas, and the difficulty of getting rid of these ideas when they have been proven wrong (see Quiggin's wonderful Zombie Economics). After all, you could hardly hope for a better disconfirmation of the policy mix (basically unquestioned in elite circles before 2008), based on financial deregulation, central bank independence and privatization, than what is happening now. Yet we still hang on to these failed ideas, in a way which is starting to look like the Polynesian cargo cult - policy-makers lay out the same prescriptions that seemed to work before 2008, and patiently wait for the crisis to end.
Finally, it illuminates the crucial role in all of this of political parties as intermediaries between policy and the public response. People are clearly hugely pissed at what is going on, yet there is no real policy alternative being presented by existing political parties, hence the lack of policy change. At some point, public anger will elicit some response from elected politicians, but in the meantime they continue to preside over an economic disaster, and in some cases have managed to mobilize popular discontent in favour of policies that are certain to fail miserably (see the entire Republican party in the US).
All this suggests we need to fundamentally rethink our models of democratic politics. I'll just throw that out there, because for now I have only the vaguest idea about how we are supposed to do this.