He goes right to the heart of the fallacious argument of 'crowding out.'
"The current reality is that on the contrary, the expenditure of the borrowed funds (unlike the expenditure of tax revenues) will generate added disposable income, enhance the demand for the products of private industry, and make private investment more profitable. As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly, (instead of trying to counter the supposedly inflationary effect of the deficit) those with a prospect for profitable investment can be enabled to obtain financing. Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone’s wealth and ipso facto someone’s saving. “Supply creates its own demand” fails as soon as some of the income generated by the supply is saved, but investment does create its own saving, and more. Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.
http://larspsyll.wordpress.com/2013/11/21/krugman-and-mankiw-on-loanable-funds-so-wrong-so-wrong/
So in this world there's neither monetary offset-as the Fed doesn't try to counter the deficit but 'monetizes' it and there is also no 'Ricardian Equivalence.' David Glasner-though a Market Monetarist-has pointed out the absurdity of Lucas' clam that the 2009 fiscal stimulus would have been offset 1 for 1 with future tax increases. As he points out if RE has any validity it's not during a steep recession. Lucas himself had said 'in a normal economy RE applies but the economy since 2008 has hardly been normal.
http://diaryofarepublicanhater.blogspot.com/2013/10/scott-sumner-vs-david-glasner-on-fiscal.html
Wray also points out two other major fallacies-the loanable funds doctrine-that the Treasury or Fed sells bonds so that there is more funds to lend and the idea that all savings is necessarily spent. This was something Keynes railed about but Wray explains an error in it is an assumption of a an unchanged aggregate output.
So when Sumner declares 'the fiscal multiplier is roughly zero' remember he doesn't finish the sentence-this only if the Fed wrongly thinks it needs to 'offset' a deficit during a recession with an increase in interest rates. Sumner's argument is basically that as the Fed behaves perversely we should rather than direct it to stop-as we certainly could do through Congress-rather agree never to use a countercyclical fiscal policy.
"The current reality is that on the contrary, the expenditure of the borrowed funds (unlike the expenditure of tax revenues) will generate added disposable income, enhance the demand for the products of private industry, and make private investment more profitable. As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly, (instead of trying to counter the supposedly inflationary effect of the deficit) those with a prospect for profitable investment can be enabled to obtain financing. Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone’s wealth and ipso facto someone’s saving. “Supply creates its own demand” fails as soon as some of the income generated by the supply is saved, but investment does create its own saving, and more. Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.
http://larspsyll.wordpress.com/2013/11/21/krugman-and-mankiw-on-loanable-funds-so-wrong-so-wrong/
So in this world there's neither monetary offset-as the Fed doesn't try to counter the deficit but 'monetizes' it and there is also no 'Ricardian Equivalence.' David Glasner-though a Market Monetarist-has pointed out the absurdity of Lucas' clam that the 2009 fiscal stimulus would have been offset 1 for 1 with future tax increases. As he points out if RE has any validity it's not during a steep recession. Lucas himself had said 'in a normal economy RE applies but the economy since 2008 has hardly been normal.
http://diaryofarepublicanhater.blogspot.com/2013/10/scott-sumner-vs-david-glasner-on-fiscal.html
Wray also points out two other major fallacies-the loanable funds doctrine-that the Treasury or Fed sells bonds so that there is more funds to lend and the idea that all savings is necessarily spent. This was something Keynes railed about but Wray explains an error in it is an assumption of a an unchanged aggregate output.
So when Sumner declares 'the fiscal multiplier is roughly zero' remember he doesn't finish the sentence-this only if the Fed wrongly thinks it needs to 'offset' a deficit during a recession with an increase in interest rates. Sumner's argument is basically that as the Fed behaves perversely we should rather than direct it to stop-as we certainly could do through Congress-rather agree never to use a countercyclical fiscal policy.
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