They Learned Their Lessons Well

Krugman directs us to this David Pilling column on Asia's Keynesian response to the crisis.

However much Asians trumpet the value of parsimony, their governments have been as bold as any in opening the fiscal sluices. One reason is the bitter memory of the 1997 Asian financial crisis when the International Monetary Fund imposed fiscal austerity on several Asian countries. Those measures are now almost universally seen as a blunder that unnecessarily exacerbated economic misery.

Asian governments have taken the lesson to heart. According to Fitch Ratings, fiscal stimulus packages as a percentage of gross domestic product amounted to 6.9 per cent for Vietnam, 7.7 per cent for Thailand, 8 per cent for Singapore, 13.5 per cent for China, and a whopping 14.6 per cent for Japan. Taiwan, with a relatively modest stimulus of 3.8 per cent, gave $100 spending vouchers to each of its 23m inhabitants, including convicts. The Singaporean government subsidised businesses that retained staff. In China, the mother of all stimulus packages funnelled $585bn of spending into the economy, and even more through directing state-controlled banks to increase credit.

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.

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Japan looks like a cautionary tale for the west. But those peering into the Japanese mirror will see the reflection they want to find. Keynesians will argue that Japan’s fiscal stimulus was not wrong in principle, but badly implemented and undermined by half-hearted policy. For the fiscal hawks, Japan is proof that everlasting stimulus does not work. Japan’s nominal output has hardly budged in two decades, but its gross debt pile now towers at nearly 200 per cent of GDP. Twenty years after its bubble collapsed, Japan has still not crawled from the rubble. Western governments pondering what to do next must worry that this could be their fate.

Krugman adds:

There are several interesting things about this table; one is the fact that in the face of the crisis, Germany’s actions were very different from its rhetoric; it was pretty Keynesian in the crunch. I have no idea what was going on in Russia. But the main point here is that 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.