Right-Wing Establishment Embraces Discredited 1930s-Vintage Economic Doctrines



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.