When to Stimulate & When Not To - A neat summary from Paul Krugman (Know when to hold 'em, etc)

SOURCE: http://krugman.blogs.nytimes.com/2010/07/24/keynes-in-asia/

...

Quoting another source: David Pilling:

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.

Unlike in the west, there is little debate in Asia about how well the stimulus worked. It has been spectacular.

Part of the reason Asians felt empowered to do [much more aggressive stimulus than any Western nation] 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 (my note: please read and reread this!!); 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 (my note: Holy shit, did he really say that?); then came an unfunded war, and the rest is history.