Does Brian Riedl of National Review Finally Get It?
I think he does. I think he finally understands why expansionary fiscal policy can be effective. And so National Review, for the first time in the memory of living man, publishes an explanation of why expansionary fiscal policy is likely to be effective right now.
Riedl writes:
Answering DeLong, Yglesias, and Collender - Brian Riedl: Income... results from productive activity. When productivity increases (thus increasing employment and eventually wages), income increases and demand increases, all in tandem...
Game, set, and match.
When--in conditions in which there are masses of unemployed--the government spends money to hire people who were previously among the involuntarily unemployed, their productivity increases. It goes from zero to whatever the value of what the government hires them to do is. This increases income and demand, all in tandem.
Well done, Brian! I knew you would get it! Quite a change from the days when Whittaker Chambers used to rave about how John Maynard Keynes (and Knut Wicksell, and John Hicks, and Dwight D. Eisenhower) were as red as Karl Marx.
It is important to note that effective expansionary fiscal policy requires two things:
Lots of people need to be involuntarily unemployed--to have a productivity of zero--so that when the government hires people to do things, a substantial chunk of the people it hires do have their productivity go up by a lot. Otherwise--if there aren't a lot of involuntarily unemployed people--you are going to boost the flow of nominal spending but not production (or employment).
The bonds that the government sells to finance its hiring program need to have only a small effect on interest rates--if they have a large effect on interest rates, then private businesses that were hiring people to expand their productive capacity will lay them off, their productivity will drop to zero, and we won't have gotten anywhere.
That lots of people are involuntarily unemployed--would welcome a steady job at the prevailing wage but cannot right now find one--seems to be something that not even the cretins of National Review are denying right now.d
That the passage of the ARRA has not led to a substantial increase in interest rates crowding-out private investment spending--well, look at the Treasury yield curve right now:
