03/09/2010

Levels, Not Changes

Let's say you have two countries, A and B. In country A government spends 50 percent of gdp, mostly on a well-designed welfare state. When the downturn comes, there is only enough extra borrowing to make up for the lost revenue, and there is no designed "stimulus" per se. In country B, government spends 25 percent of gdp, mostly not on a well-designed welfare state. When the downturn comes, country B does an extra three, four, or even five percent of gdp "ramp-up" borrowing and spending.

Which country has a better, more active, and more AD-stabilizing fiscal policy? Well, it depends on the details and the numbers but I would encourage you to consider country A for this honor.

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