Lincoln, McClellan, And Stimulus: There’s now a lot of talk about the fact that U.S. corporations are sitting on a lot of cash, but not spending it. I don’t find that particularly puzzling: with huge excess capacity, why invest in building even more capacity. But almost everyone seems to agree that if we could somehow get businesses to spend some of that cash, it would create jobs.
Which then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs? (Brad DeLong has tried to make this argument repeatedly).
Which brings me to Lincoln and McClellan. General McClellan had raised a powerful army, but seemed disinclined to actually seek battle. So Lincoln sent him a letter: “My dear McClellan: If you don’t want to use the Army I should like to borrow it for a while.” (Yes, there are various versions of the quote).
So shouldn’t that be our response to all that idle corporate cash? We don’t literally have to borrow from the corporations; they’re parking their funds in the money market, and the feds would borrow from that market. But the end result would be to put some of that idle cash to work — and, ultimately, to give the corporations a reason to start investing, too, so that the deficit spending would crowd investment in, not out.
I have never seen a coherent objection to this line of argument.
Well, there isn't one. After all, simply rename the United States government something like: "United States Joint-Stock Corporation" and then if it borrows and spends, or even spends more rapidly, employment goes up. The argument for the ineffectiveness of fiscal policy in all of its forms requires a rigid (or, at least, a completely interest-inelastic) velocity of money and money multiplier. And that means that increases in private desires to spend also have no effect save to raise interest rates--the full Say's Law.
John Stuart Mill in 1829 understood that that was what believers in Say's Law (and, if he had thought about it, in the ineffectiveness of fiscal policy) were assuming--as did Say in 1829 (although not in 1803). R.G. Hawtrey in 1925 understood that that was what he was assuming in advancing the "Treasury View" as a fact about economies (rather than as a convenient doctrine for Chancellor of the Exchequer Churchill to assert). But Lucas... Fama... Prescott with his blaming everything on That Communist Hoover... and the rest--I can see no conclusion other than that they simply refuse to think issues through.