America vs China: Who does Economic Policy better?

[Feuer Frei!]

The U.S. Treasury and the U.S. Federal Reserve have got a pretty good job responding to the financial crisis. It’s always easy to do Monday morning quarterbacking, but what they were concerned about was a situation that looked very much like the Great Depression. The drop in global GDP was actually as great as during the 1930s and the Treasury and the Fed did avert that by very, very aggressive actions.
But if you pull back a little bit and ask how they handled things over the last 10 years, I would say pretty badly, especially when compared with China.
If you look at the Chinese government, the Chinese did something very important: When growth was strong, they raised interest rates. They wanted to take the froth off the economy. They tightened consumer credit because they didn't want the consumers to max out and they accumulated a budget surplus because they knew these were the good times and that this was when you save money for the bad times.
Therefore, when the crisis hit they could do three things.
1. They could lower interest rates.
2. They could ease up on consumer credit.
3. They could spend a lot of money.
All of these things helped create the situation where, dramatically, the Chinese economy barely dropped during the crisis. It had a small hiccup and then was back to boom.
In contrast, during the last 10 years in the United States, when growth was good, we lowered interest rates to further goose growth - to squeeze out the last drop of growth you could get. The U.S. eased up on consumer credit, particularly housing credit in a variety of ways –Fannie and Freddie being the most important.
And then the U.S. destroyed the federal budget. In 2000, we had a budget surplus. Then the Bush Administration did three things:
1. It cut taxes.
2. It passed prescription drugs for the elderly.
3. It undertook two wars.
The effect of those three things was to create a massive structural budget deficit so that before the crisis even hit, the U.S. had a budget deficit. When the crisis hit, the deficit went to 10-percent of GDP.
Across all branches of Government and all parties, we were unable to be disciplined about saving money in the good times in order to be prepared for the bad times.
It’s the story of a democracy where we’ve almost lost the ability to inflict any kind of short-term pain for long-term gain.
That’s very troubling for the future.




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