I disagree with both Fama and Arnold's critique of Fama. Fama's strangely trying to use an accounting identity to make inferences about causation. No can do. But Arnold seems to say that fiscal policy matters as long as there are unemployed resources:
Basically, Fama says that national savings equals national
investment. So, if the government deficit goes up and private saving is
unchanged, then investment must go down. Therefore, the argument runs,
a government deficit crowds out private investment and does not raise
That story holds for an economy that is always at full employment.
However, if the economy were always at full employment, then hardly
anyone would have heard of a fellow named John Maynard Keynes, and we
would not be talking about the issue of an economic stimulus.
That's wrong too. Even in a word of unemployed resources, fiscal policy is impotent if money demand elasticity is zero. In intermediate Keynesian terms, if the LM curve is vertical, fiscal policy has no effect even if the AS curve is horizontal.
Who cares? Well, I've previously argued that this "special case" is probably close to the truth. The Keynesian view that money demand has appreciable interest elasticity is almost as fanciful as the Real Business Cycle view that labor supply has appreciable interest elasticity. Maybe I'm wrong about this; Mankiw says so (though here's my reply). But in any case, this abstruse issue of the interest elasticity of money demand is what economists should be debating - not the silly question of "whether unemployed are possible."