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Is China the Perfect Keynesian Test Case?

One of Tyler Cowen’s readers poses an important question: isn’t China’s response to the financial crisis exactly what Keynesians would have wanted the United States to do? In fact, in some ways China might have a better case for Keynesian stimulus than either the US or Europe.  To wit:

  • 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

And yet, as we’ve been detailing on this blog, things aren’t going so well. Infrastructure and energy projects are turning out to be costly boondoggles, and China’s growth is slowing despite the best efforts of its highly educated, unelected technocratic elites. Does even China need a bigger stimulus? Are there fundamental differences between China and the US that would make our economy more responsive? Did China get it wrong?

Mr. Krugman, over to you. Why can’t Keynes fix China? It’s a serious question, not a barb.

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