Economists all over the Western world are divided: should we keep stimulating our economies or shouldn't we do so. The fans of the continuing of the easy money claim that when we stop our economies might yet fall into a crisis. They like to point to Roosevelt's effort to end stimulation in 1937 after which the crisis promptly came back. But their adversaries like to point out that the fate of Greece might also happen to the US or the UK. Some day there might be no more money to borrow and then they would face a really big crisis.
I believe it depends on the situation. Some general rules are:
- it is crucial to keep the country from becoming too endebted. So when a country is running trade deficits and has a negative balance of payments - like the US now - it should devalue its currency. Living above your means doesn't work.
- you cannot trust on export alone. China and Japan now are very similar to the US in the 1930s. They are dependent on export for growth. But you can only export so much before the rest of world runs out of money. If that happens your growth model runs into a wall.
- when there is unemployment government may inject extra money in the economy. This is basically a matter of distribution within a country. When the producers have too much money and the consumers too little the goal is to give the consumers more money. In the short term a stimulus is the best way to achieve that.
I think there are three possible situations:
- producers and consumers are rather in balance. In that case a stimulus will get the economy running again. The cost of the stimulus will soon be made up by additional tax receipts and less unemployment benefits.
- there is too much money with the consumers and too little with the producers. This is the 1970s scenario. A stimulus only leads to stagflation. The solution is to direct more money to the producers - as Thatcher and Reagan did with tax cuts.
- there is much too much money with the producers and too little with the consumers. This is the case with export dependent countries like China and Japan and the US in the 1930s. In this case a stimulus has only a temporarily and weak effect. Economists like to say that the government should just stimulate more, but there are both practical and political limits to how much a government can spend. Japan has now spent so much that its government debt is now above 200% of GDP. That is a major distortion. What is needed are more structural reforms that bring more money to the consumers. In the US it was the war economy of the 1940s that finally brought that restructuring. To accomplish a more consumption oriented economy in peace time one might consider the following measures: policies that favor the poor over the rich (the rich tend to save more), policies that aim for full employment (that leads to upwards pressure on the wages of the poor and so to less inequality) and discouraging saving for the old day (it is much better when people build a house that will serve as their old age reserve; a property bubble however will destroy this way out).
My conclusion is that we in the West need to undo what Reagan and Thatcher did. Not because what they did was wrong, but because what they did has gone too far and we need to bring the balance back towards the consumers.
I am rather pessimistic about China despite its foreign currence reserves. Its policies for fighting the crisis have resulted in bubbles. It looks like China is going the way of Japan after the Plaza Accord. The Plaza Acord forced Japan to revalue its currency. China is not yet facing such pressure but it is clear to everyone that China no longer can keep growing by increasing its exports. Its reaction to that is a very similar real estate bubble like Japan created. The one thing ibn favor of China is that its government seems prepared to make unpopular steps to puncture bubbles.