It’s not often you see economic idea laboratory tested, so to speak, but as Matthew Yglesias shows, that’s exactly what we have seen in comparing the West’s approach to the Great Recession as opposed to Chin’a approach. As he points out:
When the world entered a major downturn, China applied major stimulus. Really across the board stuff. …The government spent money, they did credit easing, they stimulated consumer demand (”retail sales rose 16.9 percent in 2009″), they did infrastructure, they did exchange rate policy, they did a lot. People warned that all this stimulus might create inflation, but China kept doing it anyway. Now, GDP growth is back on track and there’s actual evidence of inflation happening so they’re looking to pivot. Policymakers in the developed world—especially Europe—have, by contrast, spent much of the past twelve months doing the equivalent of worrying about a flood while standing in a burning house.
As a result, China’s ecomomy is taking off and their Central Bank is worried about inflation. Meanwhile, in the West, the central banks act like they are worried about inflation, but without the economic growth to cause inflation, I am not sure what they are worried about. It is the rest of us in the West who are worried, and it’s not about inflation.