As many have said before him, Andy Xie argues the stimulus packages have simply pushed true economic reform into the future. Post bubble economies need time to heal – the bigger the bubble, the more time required.
When economists talk about withdrawing stimulus, they point to Japan. Japan began to reign in spending during the mid 1990s in an attempt to control budgets – this tipped the economy back into a recession.
What many fail to realize is that fiscal stimulus is to recession what methadone is to heroin. One drug simply replaces the other. Stimulus during the 1990s propped up the Japanese economy, but Japan never truly emerged from recession. Final demand remained dormant while the government built bridges to nowhere.
Japan has run up the national debt equal to 200% of GDP — the greatest Keynesian stimulus program in history — all in the name of stimulating the economy back to health. It has failed miserably. Japan’s nominal GDP is about the same as when the stimulus began. Those who advocated the policy blame Japan’s failure on either the stimulus being too small or not being sustained for long enough – that is, the dosage, not the medicine itself, was at fault.
Without true economic reform – wiping out bad debts, re-balancing supply and demand – stimulus simply provides a crutch to the economy’s structural deficiencies.
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