< previous page page_82 next page >

Page 82
the money but the total amount of money held is unchanged.
The simple Keynesian analysis implicitly assumes that borrowing the money does not have any effects on other spending. There are two extreme circumstances under which this can occur. First, suppose people are utterly indifferent to whether they hold bonds or money, so that bonds to get the $ 100 can be sold without having to offer a higher return to the buyer than such bonds were yielding before. (Of course, $ 100 is so small an amount that it would in practice have a negligible effect on the required rate of return, but the issue is one of principle whose practical effect can be seen by letting the $ 100 stand for $ 100 million or $ 100 ten-million.) In Keynesian jargon, there is a "liquidity trap" so people buy the bonds with "idle money." If this is not the case, and clearly it cannot be indefinitely, then the government can sell the bonds only by offering a higher rate of return on it. A higher rate will then have to be paid also by other borrowers. This higher rate will in general discourage private spending on the part of would-be borrowers. Here comes the second extreme circumstance under which the simple Keynesian analysis will hold: if potential borrowers are so stubborn about spending that no rise in interest rates however steep will cut down their expenditures, or, in Keynesian jargon, if the marginal efficiency schedule of investment is perfectly inelastic with respect to the interest rate.
I know of no established economist, no matter how much of a Keynesian he may regard himself as being, who would regard either of these extreme assumptions as holding currently, or as being capable of holding over any considerable range of borrowing or rise in interest rates, or as having held except under rather special circumstances in the past. Yet many an economist, let alone non-economist, whether regarding himself as Keynesian or not, accepts as valid the belief that a rise in governmental expenditures relative to tax receipts, even when financed by borrowing, is necessarily expansionist, though as we have seen, this belief implicitly requires one of these extreme circumstances to hold.
If neither assumption holds, the rise in government expenditures will be offset by a decline in private expenditures on the

 
< previous page page_82 next page >