Keynes In Asia: In early 2009, the IMF estimated the size of stimulus programs.... [I]n the face of the crisis, Germany’s actions were very different from its rhetoric; it was pretty Keynesian in the crunch.... Korea and China both engaged in much more aggressive stimulus than any Western nation — and it has worked out well.
Part of the reason Asians felt empowered to do this was the fact that during the good years they did what you’re supposed to do. Keynesian economics is often caricatured as a policy of deficit spending always; but as I’ve tried to explain, deficit spending is what you should do only when the economy is depressed and interest rates are at or near the zero lower bound. When times are good, you should be paying debt down. Pilling:
The scale of Asia’s stimulus may have matched, even surpassed, the west. But the context has been entirely different. Asian governments had plumped-up their fiscal cushions after the 1997 crisis, building a formidable pool of reserves. Such “prudence” meant, rather bizarrely, that poor countries such as China were foregoing spending and investment in order to facilitate rich foreigner’ binge-buying. But it also meant that, when the crunch came, they had the wherewithal to spend.
So that was the fiscal sin of the Bush years: deficits continued even when times were good; there was no effort to prepare for future shocks.
And don’t say “what can you expect from politicians”. The ratio of federal debt to GDP (pdf) fell from 49 percent in fiscal 1993 to 33 percent in fiscal 2001; it could have continued on that downward path. But candidate George W. Bush declared that if the government is running a surplus, it means that it’s collecting too much in taxes; Alan Greenspan told Congress that we had to cut taxes to avoid paying off our debt too fast; then came an unfunded war, and the rest is history.
Despite all that, we actually did have enough room to take strong fiscal action. But we didn’t. And we’ll spend at least the next decade paying the price for the combination of irresponsibility when times were good and irresolution when they were bad.