See also the comment from the Dollars and Sense blog by Larry Peterson, about 1/6th of the way down.
[Harvey]: In the United States, any attempt to find an adequate Keynesian solution has been doomed at the start by a number of economic and political barriers that are almost impossible to overcome. A Keynesian solution would require massive and prolonged deficit financing if it were to succeed. It has been correctly argued that Roosevelt’s attempt to return to a balanced budget in 1937-8 plunged the United States back into depression and that it was, therefore, World War II that saved the situation and not Roosevelt’s too timid approach to deficit financing in the New Deal. So even if the institutional reforms as well as the push towards a more egalitarian policy did lay the foundations for the Post World War II recovery, the New Deal in itself actually failed to resolve the crisis in the United States. The problem for the United States in 2008-9 is that it starts from a position of chronic indebtedness to the rest of the world (it has been borrowing at the rate of more than $2 billion a day over the last ten years or more) and this poses an economic limitation upon the size of the extra deficit that can now be incurred. (This was not a serious problem for Roosevelt who began with a roughly balanced budget).
[Delong]: [W]e can see that here we have an internationalized version of Fama's Fallacy. If we forced Harvey to actually construct on argument here, he might be able to: he might say that deficit financing means that the U.S. government borrow from somewhere, that Americans don't have the savings to finance deficit spending, and that foreigners' willingness to buy U.S. Treasury bonds is tapped out because of massive borrowing earlier in this decade. And it is at this point that we draw on neoclassical economics to save us–specifically, John Hicks (1937), “Mr. Keynes and the Classics,” the fons et origo of the neoclassical synthesis. Hicks's IS curve gives us a menu of combinations of levels of production and interest rates at which private investment spending and public deficit spending are financed out of the flow of savings. When the level of production is higher, private savings are higher–and thus the combination of private investent and deficit that can be financed is bigger. When the level of production is lower, private savings are lower–and thus the combination of private investment and deficit that can be financed is lower. Any level of deficit can be financed if the interest rate is such that the deficit plus the private investment spending equals the savings that come out of the incomes generated by the corresponding level of output. The question is thus not can government deficit spending be financed–for it can–the question is at what interest rate will financial markets finance that deficit spending.
[Harvey]: My main point about the current US stimulus package is that it is too small to do the job (I am surely not alone in saying that) and that it is poorly targeted towards tax cuts rather than real stimuli for political and ideological reasons. The distinction between white elephants and real stimuli is also important and unless coupled with a real strategy (e.g. a radical transformation in urbanization patterns and ways of life) the stimuli will merely cover deferred maintenance on infrastructures rather than point to anything new.
[DeLong]: Some guy once said that Hegel said somewhere that the World-Spirit leads all things to happen, as it were, twice–but that Hegel forgot to add that the first time it happens is tragedy, the second time farce. When Rudolf Hilferding endorsed the “Treasury View” and vetoed Wladimir Woytinsky's plans for the German Socialist Party to propose a deficit spending-based “New Deal” in 1931 that was tragedy. When David Harvey adopts the “Treasury View” and gives it as a reason that the Obama fiscal boost cannot work, that is farce.