Monday, February 22, 2010

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.


  1. Keynesians reject crowding out when resources are not fully employed. Don't they kind of have a point? How can there be crowding out when unemployment (of capital and labour) is so high?

    The options are (a) be unemployed or (b) work for the govt; not (a) work for private sector or (b) work for the govt.

  2. If you don't think there is a shortage of capital, i.e., savings, how do you explain this:

  3. Playing Keynesian advocate I could respond with: sure, the private sector has stopped lending money. This is where the govt can step in and lend out money instead. There is no crowding out.

    Furthermore, I notice you didn't address my point about unemployed labour. No crowding out there either.

  4. I get it the private sector is not lending so the government is going to borrow the money the private sector is not lending and lend it to the private sector.

    As far as unemployment, take away unemployment insurance and those people will find jobs real fast.Larry Summers even says so.

  5. "At this point, Federal Reserve policy will become effective again." lol
    When exactly was FED policy ever effective? When it created the bubble? Or when it created the bust?

    Regarding Anonymous I can only say Hallelujah!! We have found the annointed one who can identify exactly when "resources are not fully employed." He can apparently do this even when those "resources" are not his own. He must be truly omniscient.

    I am sure those who have had their resources stolen by the govt., whether by "borrowing" or to fund "job creation" are truly thankful. Oh what would we do without you O' Anonymous One?

    Oh yeah - we'd have a free and prosperous economy!