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All Stimulus Roads Lead to China

BEIJING – Now that the “green shoots” of recovery have withered, the debate over fiscal stimulus is back with a vengeance. In the United States, those who argue for another stimulus package observe that it was always wishful thinking to believe that a $787 billion package could offset a $3 trillion fall in private spending. But unemployment has risen even faster and further than expected. Combine this with the continued fall in housing prices, and it is understandable that consumer spending remains depressed.

The banks, having been recapitalized only to the extent necessary to keep them afloat, still have weak balance sheets. Their consequent reluctance to lend constrains investment. Meanwhile, state governments, seeing revenues fall as a result of lower taxable incomes last year, are cutting back like mad. If there was a case for additional stimulus back in February, that case is even stronger now.

But the case against additional stimulus is also strong. The US federal deficit is an alarming 12% of GDP, and public debt as a share of national income is already projected to double, to 80% of GDP. The idea that the US can grow out of its debt burden, as did Finland and Sweden following their financial crises in the 1990’s, seems unrealistic.

Given all this, more deficit spending will only stoke fears of higher future taxes and inflation. It will encourage the reemergence of global imbalances. And it will not reassure consumers or investors.