Friday, October 23, 2009

Stimulus Spending in Comparative Perspective

. Friday, October 23, 2009

The NY Times ran a series of articles on how stimulus funds have been spent in the U.S., E.U., India, and China. Let's have a look:

In the U.S., for all the talk of "rebuilding America's infrastructure" the need to fund "shovel-ready projects" has meant that stimulus funds have gone to some dubious projects, like a sports complex at a community complex in suburban Chicago. Actual new spending on infrastructure has been slow. And if the point was increase employment, it hasn't done that very well either: more money should have gone to state and local governments, and expanded education and job re-training. It's not that stimulus has done no good; it's just that the government hasn't gotten much short-term bang for its buck, nor has it led to long-term reform or structural improvement.

The record in the E.U. is even more spotty. The Stability and Growth Pact prevents local governments from engaging in much fiscal stimulus directly, and the broader E.U. has done very little. Some think that the E.U.'s "automatic stabilizers" are sufficient, while others are not interested in using E.U. funds to prop up individual countries (e.g. Spain). Additionally, many member states had high debts before the crisis, which has limited their abilities to fight it. In short, the crisis has shown -- once again -- that E.U. member states do have to sacrifice some sovereignty to join the union. But this may not be a terrible thing: Ireland's recent passing of the Lisbon Treaty shows that many in Europe have confidence in the union than has not been shaken by the crisis.

India responded to the crisis with aid for rural workers and tax cuts, but they may have overshot: growth is back to 6%/year, but inflation is now a worry. And the rapid response by the government was somewhat unfocused, leaving many questioning why more money wasn't spent on improving India's infrastructure and expanding opportunities for the poor. The recent decline in the dollar has also adversely affected exporters.

China's response to the crisis was swift and large: huge fiscal stimulus, a loosening of monetary policy, and injections of liquidity into the banking system. A good bit of the stimulus is going to infrastructure projects, but China had so many "shovel-ready" projects in the pipeline that some wondered whether this stimulus spending represented new spending or just planned expenditures under a new name. But China has not used the crisis to build up domestic institutions (like a social safety net and access to credit for private small businesses) that would increase domestic consumption and begin reversing the global imbalances that contributed to the crisis in the first place. Perhaps that transition is too much to ask of a short-term stimulus package, but they could have started programs to that end.

In short, a mixed record. And despite all the talk of reform, very few concrete actions have been taken to address the major issues in global or domestic economies. I suppose those will have to wait for the next crisis.


Stimulus Spending in Comparative Perspective




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