Economic Stimulus in the U.S. and China
Written By: Jason Shafrin
“There is no such thing as shovel-ready projects.” – President Obama.
Although some experts believe that President Obama’s stimulus package (i.e., the American Recovery and Reinvestment Act of 2009) helped stave off a recession, others believe it was mostly wasteful.
What many people do not realize is that China too had its own economic stimulus package that was even larger (in relative, but not absolute size). Marginal Revolution uses China to describe some differences between how the benefits stimulus packages in theory appear in practice.
Why isn’t China post-2008 considered a great real world experiment of Keynesian stimulus?
– It was large enough (roughly 3x US stimulus as % of GDP iirc)
-The govt was starting from relatively low levels of public debt (reported anyway) so there wasn’t a crisis of confidence issue as in Europe today
-It was invested heavily into infrastructure and projects (like solar) slated to improve long run efficiency in an economy that arguably had room to increase capital stock per capita
-The political leadership directing the stimulus spending is made up of engineers, scientists, and other highly educated politicians who did not need to run for public election and thus could focus on longer run trade-offs
-The goal was to bridge a period of weak external demand rather than fundamentally alter the economy
Is this not a Keynesian’s dream scenario? My guess is that now Keynesians would say the spending was misguided and wasteful. But that’s the point! Western elites constantly praise Chinese leadership for their acumen — even today there’s an incredible amount of faith inside and outside the country that they will thread the needle — but they too were wasteful when it came to rapidly expanding government spending.
The objective of economic stimulus–quick injections of funds into the economy–is antithetical to careful choice of projects with high marginal returns to society. For instance, infrastructure development may have a large marginal returns to society, but infrastructure projects take years to build and the economic stimulus may take years or decades to come to fruition. Hence, policymakers are faced with an unenviable choice: stimulate the economy rapidly using short-term projects with a likely lower marginal return to society, or select the projects with the highest marginal return to society (not that this is feasible in practice) but where the economic stimulus may take years to occur. Or the third way: minimize government management of the economy.