The grand Keynesian myth is that you can spend money and thereby increase demand. And it’s a myth because Congress does not have a vault of money to distribute in the economy. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. You’re not creating new demand, you’re just transferring it from one group of people to another. If Washington borrows the money from domestic lenders, then investment spending falls, dollar for dollar. If they borrow the money from foreigners, say from China, then net exports drop dollar for dollar, because the balance of payments must adjust. Therefore, again, there is no net increase in aggregate demand ... There is this notion that the redistribution of money from savers to spenders creates new spending. But that assumes that people store their savings in their mattresses. That may have been true in the 1930s, but today, people use their savings to pay down debts or invest. Or they put it into the bank, who in turn lends it to others to spend. Therefore, savings circulate through the investment side of the economy, which counts just as much in the GDP as the consumption side of the economy ... The government is going to have to raise interest rates in order to convince people to lend them the full amount they need. We’re already facing a deficit of $1.2 trillion this year, and 700 billion next year. We borrowed $700 billion for TARP, and now we’re going to borrow $800 billion for this stimulus package.
Hang on a second – Riedl notes that Keynesian insufficiency of aggregate demand may have existed in the 1930’s so that an increase in national savings does not automatically become investment demand but he argues for complete crowding-out ala the classical full employment model is the only relevant view for today’s economy. Has he been asleep for the past couple of years? Does he not know how far the employment-population ratio has declined or how low Treasury bill interest rates are? I know we should expect incredible stupidity from the National Review but this one really takes the cake!
Footnote: Thanks for Tom Bozzo for noting that Riedl is with Heritage and not Cato (I do get these two confused at time). It also seems that Tom's Angrybear colleague Sammy recognized Riedl's appropriate association even if Sammy did not realize (at first) that Riedl's argument was the discredited Treasury view.
Update: While I should thank Tom Bozzo for linking to this over at Angrybear, I am appalled by the critical comments from folks who have not been following this discussion of how Eugene Fama stumbled in his revival of the Treasury view. Apparently, my former colleagues at Angrybear do not read Brad DeLong who has even written a paper on this.