A Born-Again Keynesian Wants Crowding Out

An EPJ reader emails:

If just to prove how inept the Keynsians are on the crowding out problem, I offer born again Keyensian, Bruce Bartlett: (Note: they want crowding out!?)

We will know that the government is spending enough to matter when interest rates start to rise. Although we think of saving as coming in financial form, in reality, saving represents things--labor and raw materials that are used to produce products and services people want.

Once the federal government increases its purchases of goods and services, it preempts resources that private businesses would otherwise use in production. As they compete with each other for those resources, their prices will rise and interest rates will rise.

How much of a Keynesian has Bartlett become? He writes in the same article somewhat approvingly of this mad Keynesian scheme: RW

For what it's worth, Keynes didn't know what to do in this situation, either. He suggested building pyramids and burying bank notes in deep mine shafts that had been filled in. As people tried to dig up the money, they would be forced to employ labor and purchase equipment that would raise spending and thereby growth.

At this point, Federal Reserve policy will become effective again. As prices and interest rates rise, the liquidity trap disappears and money begins circulating more rapidly; i.e., velocity increases. This is what ends an economic crisis. Unfortunately, it was not until World War II that the federal government spent enough on real resources--because they were needed for the war effort--to make Keynes' theory work in practice.