Megan McArdle surveys the scene:

We are not even close to the bottom of the job market, much less the return to the halcyon days of low single-digits. And with the contraction of the credit markets, American consumers have lost the last safety line between them and disaster.

Of course there’s always the social safety net. And one major advantage the United States has in 2009 versus 1929 is that we have a much more substantial one than we used to. But we have a much less substantial one than do most of our peer countries in the rich world. It’s never pleasant to be laid off from your job, but in Europe such layoffs won’t generally have major implications for your ability to acquire health care for yourself and your family or for your ability to pay for your children’s schooling.

That’s nice for the unemployment, of course, but beyond that it can help maintain a certain level of confidence in the future. By reducing people’s downside risk exposure, a welfare state helps better mobilize the fact that even in a recession a large majority of the population is still gainfully employed, reducing the extent to which the employed majority starts making fear-driven financial decisions. Similarly, a large welfare state acts as an “automatic stabilizer” in fiscal policy terms. Since revenues go down during a recession but social outlays go up, a large safety net ensures that fiscal stimulus will be delivered in a timely manner without all the problems of program design and sausage-making that we’re seeing in our current congressional debate.

Let’s return to RNC Chairman Michael Steele’s efforts to destroy the economy:

Democrats in Congress want a one-trillion dollar spending bill. You’ve heard about the pork-barrel programs they want to fund… 45 million dollars for ATV trails and removal of fish passage barriers is one that caught my eye. Exactly what is a fish passage barrier and why does it cost 45 million dollars to stimulate the economy with it?

I don’t recognize the phrase off the top of my head, but common sense would indicate that you remove a fish passage barrier in order to let fish cross through someplace. A google image search revealed this:

Since the funds were for the removal of fish passage barriers, it’s not clear to me why Steele is even asking about why we would stimulate the economy with a fish passage barrier. He not only can’t bother to look up what a fish passage barrier is, but he can’t recall from one sentence to the next whether he’s mocking the idea of creating them or mocking the idea of removing them.

With everything in this debate, though, if you understand what’s happening you understand that the point isn’t that a reduction in the number of fish passage barriers will stimulate the economy. The point is that to stimulate the economy you need to identify projects that will employ people and materials. But ideally we don’t want to employ people and materials doing something totally pointless. Removing fish passage barriers will, I assume, have environmental benefits and ensure the long-term viability of fish populations. That’s good for the fish, probably good for water quality, and probably beneficial to people whose livelihoods depend on fishing or the viability of the tourism and recreation industries.

One line of argument you’re seeing with alarming frequency from the right these days is a modern-day version of the “Treasury View” from the 1930s. Here, for example, is Heritage’s Brian Riedl explaining things to National Review‘s David Freddoso:

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.

If you think about it for a bit, you’ll see that this is an argument that proves too much. Conservatives like the conclusion that having the federal government engage in deficit spending can’t improve economic performance, irrespective of the circumstances. But the same reasoning would also support the conclusion that a tax cut stimulus can’t work, which is less congenial. And it gets worse. The same logic also leads to the conclusion that monetary policy can’t boost the economy. Sure, you could lower interest rates thus encouraging firms to take advantage of cheap money to engaging in some debt-financed investment but since those companies don’t “have a vault of money to distribute in the economy” they won’t be creating new aggregate economic activity, they’re “just transferring it from one group of people to another.”

Indeed, the Riedl view makes it a little difficult to understand how economic growth can happen at all—as a result of public policy or as a result of private initiative. His model does allow for vault-based growth, in which Scrooge McDuck decides he doesn’t need so many gold coins lying around and invests the funds in something useful. The real-world economy, however, clearly doesn’t depend on vault-based growth as its primary mechanism. Riedl has set out to come up with an argument against stimulus spending that sounds like common sense, but the principle he’s invoking (roughly, the idea that “the money has to come from somewhere”) leads to sweeping and clearly incorrect conclusions far beyond the narrow point at issue.

The problem is that for Riedlism to be true, we would not only need the velocity of money to be a constant (see below) rather than a variable, but we’d also have to assume that we’re operating in circumstances of full employment. Needless to say, however, we’re not in that situation. And we wouldn’t be discussing large fiscal stimulus if we were anywhere in the neighborhood of that situation.

Mitch McConnell studies history and reaches the conclusion that we should hope for a German campaign of world conquest:

“But one of the good things about reading history is you learn a good deal. And, we know for sure that the big spending programs of the New Deal did not work. In 1940, unemployment was still 15%. And, it’s widely agreed among economists, that what got us out of the doldrums that we were in during the Depression was the beginning of World War II.”

To be precise, the historical record shows that throughout FDR’s first term, the country was on a path to recovery—albeit from a very low point. Then there was a recession-within-a-depression associated with efforts to return to McConnell-style policies of fiscal restraint. By 1940, things were much better than they had been in 1932. But still, as he says, not very good. Thus far we don’t have a very solid case against stimulus spending. And now things get worse. The conclusion McConnell wants is that “big spending programs” couldn’t help fight the Depression. But World War II was, among other things, a huge spending program. At the moment, however, we’re fortunate not to be in a position where there’s a powerful wehrmacht that needs fighting. So we can try to direct our recovery-oriented spending at useful civilian projects that will improve the country’s infrastructure or health or education rather than on tanks and bombs.

Amity Shlaes got fired from The Financial Times for being incompetent and went on to write a book about the New Deal that (a) is riddled with errors of fact and interpretation and (b) reached conclusions about economics that conservatives like. Since (b) is all that’s required in the contemporary United States to enjoy a prosperous career as a high-profile public intellectual it doesn’t surprise me in the least that she is enjoying just such a career. Nor is it surprising that a slipshod book would become congressional conservatives’ bible as they ponder Barack Obama’s economic recovery proposals.

I was, however, initially surprised to see that she’s not hanging her shingle at AEI or Heritage or Cato or the like but instead at the Council on Foreign Relations which one thinks of an outfit more likely to be guilty of being soporifically dull than batshit rightwing.

It seems, however, that Shlaes is not alone. A chap named Benn Steil is director of international economics at the Council on Foreign Relations. He also, as Brad DeLong points out, doesn’t seem to know that the velocity of money is a variable. In other words, cash and cash-like monetary instruments can circulate through the economy more or less quickly. This is a really basic error, but the terminology and the concept are going to be a bit obscure to a lot of people. It would be nice if we had institutions like the CFR around to help explain them to a broader public. Instead, we have institutions like the CFR sowing confusion.