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This chapter examines how countries employed activist fiscal policies in response to the sharp decline in global growth following the financial crisis of 2007. In particular, it provides an in-depth analysis of the timing, size, and composition of fiscal stimulus packages in advanced and emerging market economies as well as the issues related to their implementation. It first summarizes some of the empirical evidence on whether an expansionary fiscal policy response was appropriate. It then shows that public debts increased dramatically from 2008 to 2010, especially in advanced economies. The substantial rise in fiscal deficits and debt ratios was not caused primarily by the fiscal stimulus, but by a decline in government revenues and, to a lesser extent, government support to the financial sector. Although fiscal stimulus packages varied across countries, these differences were generally consistent with each country's economic fundamentals, including available fiscal space, the severity of the downturn in domestic economic activity, the ability and space to use monetary policy, and the degree of trade openness that dilutes the effect of fiscal stimuli on the domestic economy.

This chapter considers other fiscal stimulus programs that might be included with tax rebates in a fiscal stimulus package. The chapter begins with several fiscal stimulus programs that are recommended for inclusion. Then the chapter examines several other fiscal stimulus programs and explains why they are not recommended. Next it reviews and comments on components of the fiscal stimulus enacted in early 2009 and implemented in 2009 and 2010—the American Recovery and Reinvestment Act (ARRA). The chapter explains a common mistake made by many economists that leads them to multiplier estimates of fiscal stimulus programs that are too low. Finally, the chapter reports on and evaluates several empirical studies of fiscal stimulus programs utilized in the Great Recession.

This chapter emphasises the importance of history to modern macroeconomics and to policy makers. It uses the results of recent research literature and the points made by contributors to this volume to analyse the reasons for the economic collapse that began in 1929, the recovery which commenced in the early 1930s and the long term implications of the Great Depression on economic policy and performance. We analyse the role of deflation, the gold standard and widespread banking and financial crises in intensifying the depression and the role of monetary and fiscal stimuli in generating recovery. We also consider the key problem facing policy makers: when should the monetary and fiscal stimulus be withdrawn? We conclude with an analysis of the long term impact of the Great Depression on economic policy and performance.

Are we ready to combat the next severe recession? We can be, but we’re not. Experience shows that a huge boost in demand for goods and services can be achieved by a large fiscal stimulus—in particular, a temporary large increase in tax rebates for households. So why aren’t we ready? Because a large fiscal stimulus has always in the past required large borrowing by the Treasury. Fortunately, the assumption that a large fiscal stimulus requires an increase in government debt is false. In fact, it is astonishingly easy to implement a very large fiscal stimulus without any increase in government debt. All it takes is this: When Congress enacts fiscal stimulus, the Federal Reserve can decide to make a transfer (not loan) to the Treasury roughly equal to the fiscal stimulus so the Treasury doesn’t have to borrow. That’s it.

The depth and spread of the global financial crisis was of such magnitude that most nations plunged into action with conventional and unconventional globally coordinated measures. Remedial stimulus measures were both monetary and fiscal, by central banks and national governments, respectively, recognizing that monetary or fiscal actions alone might not suffice. To begin with, the actions were at a national level but soon converged to globally concerted and coordinated action. With traditional monetary easing of lowering interest rates knocking against the zero-bound limit, some monetary authorities even resorted to extraordinary monetary actions like quantitative easing. Stimulus measures inevitably have fiscal consequences, even monetary stimulus action because of latent quasi-fiscal implications. What emerges from this chapter is that the various ramifications of the global financial crisis ultimately and inevitably have fiscal consequences, thus underscoring the centrality of fiscal issues, which are to be addressed at a national level.

This chapter presents an overview of the state of the Indian macroeconomy (with an emphasis on the fisc) and its relationship with the global crisis so that the monetary and fiscal stimulus can be placed in the larger context of fiscal consolidation. While discussing the transmission of the global financial crisis to India, the chapter notes that given the trade linkages between euro area and India, any recession in Europe will affect Indian export growth. As far as Indian fiscal trends are concerned, it has been noted that following the enactment of the fiscal responsibility and budget management legislations (both at the central and states level), India commenced a strategy of fiscal consolidation quite effectively. Such efforts got a jolt with the advent of the great recession. Nevertheless, the hard-earned fiscal space provided India the opportunity to undertake a fiscal stimulus.

Entering into a more detailed analysis of policy responses, Stiglitz lays out four of the key aspects: monetary and fiscal policy, reducing the mortgage foreclosures, and financial sector restructuring. Keynes long ago recognized that monetary policy is typically ineffective in a downturn. He likened it to “pushing on a string.” Interest rate reductions prevented a meltdown of the financial markets but were unable to reignite the economy. The burden must therefore shift to fiscal policy. Given that the deficit soared over the past seven years, it is especially important, in the author's view, that fiscal policy aim at as big a “bang for the buck” as possible. Increasing unemployment benefits rank high in this criterion; tax cuts rank low, other than for low income individuals. Noting that the U.S. has one of the worst unemployment insurance systems among industrialized countries, strengthening it should be an important component of any American stimulus.

Solutions to free riding, whether stability or growth free riding, are thought to be found in the provision of incentives. Yet the empirical findings of this chapter suggest that domestic fiscal rules, such as debt brakes, did not impact on the fiscal policy responses to the Great Recession. Similarly, EU-level agreements (the Stability and Growth Pact (SGP) and the newly created European Economic Recovery Plan (EERP)) did not impact on fiscal policy choices. First, the majority of domestic fiscal rules were equipped with exceptionality clauses. As a result, they did not impose stern constraints on fiscal policy in hard times. Second, the EERP and SGP were meaningless for fiscal policy outcomes; member states adopted stimulus programs as they saw fit with little concern for EU-level agreements or EU-wide aims for stability and growth.

Using the International Monetary Fund's Global Integrated Monetary and Fiscal Model (GIMF), this chapter assesses the effectiveness of expansionary fiscal policy when monetary policy accommodates the shock, such as was the case in the coordinated fiscal expansion of 2008–2009. After reviewing the literature on activist monetary and fiscal policies, the chapter describes the key features of the economic model in which the policy rules are imbedded. It then introduces simple fiscal policy as a countercyclical tool to show the dynamics of policy coordination and how features such as financial accelerators affect the dynamics of policy coordination. Three scenarios are given: an expansionary fiscal policy when the monetary policy rate has not reached its lower bound, an expansionary fiscal policy when the policy rate is at its lower bound, and an expansionary fiscal policy with the market perception of unsustainable debt. The simulations show that fiscal stimulus is significantly more effective in boosting economic output when the higher real interest rates that it can generate are offset by other policy measures.

This chapter examines the impact of the 2007 financial crisis on subnational governments (SNGs) using disaggregated state level data for eight large highly decentralized countries: Australia, Brazil, Canada, China, Germany, Mexico, Spain, and the United States. It shows that the crisis adversely affected SNG finances in advanced economies, primarily through a pronounced reduction in output, which in turn generated a decline in own revenues. SNGs in emerging market economies were less affected as economic activity held up comparatively well. The chapter also considers the short-run policy response of SNGs. In general, SNGs resorted to fiscal policy countercyclicality, maintaining and in some cases increasing expenditure levels, compared to the pre-crisis period, owing to transfers from the central government in the context of national fiscal stimulus packages. At the same time, there was some limited relaxation of SNG budget rules and borrowing constraints. The crisis exacerbated long-run sustainability challenges for many SNGs. A considerable part of revenue declines was structural.

In early 2009, a majority in both houses of Congress and the president favored fiscal stimulus, but they were also worried about rising federal deficits and debt caused by the recession itself, and were therefore reluctant to propose a fiscal stimulus large enough to overcome the recession. As a consequence, the fiscal stimulus that was enacted and implemented was, according to the author’s calculations in early 2009, only a half of what was needed, and according to the author’s later calculations, a third of what was needed. This sobering experience shows that we are still not ready to combat a severe recession. So for the first time the author asked whether it would be possible to implement a large fiscal stimulus without any increase in government deficits and debt. Once the question was asked, it wasn’t long before an astonishingly simple way to do it emerged.

This book concludes by providing an update on the reform of China's rural credit cooperatives (RCCs) in the late 2000s, with particular emphasis on the costs of soft-budget constraints and bailouts by the central government. It compares the political–economic dynamics of the rural credit sector with the rise in local-government borrowing and debt as a result of the 2008–2009 fiscal stimulus program. The book situates its findings in the broader theoretical contexts of local development-oriented and predatory states, balance of power in central-local relations, and market-preserving federalism. It argues that the bailouts took place because the RCCs were “too big to fail,” thus creating “moral hazards.” Finally, it draws normative implications for China's development policies and its growth model.

The global financial crisis originated in select advanced economies with financial sectors being severely affected. The linkages between financial and fiscal situations in such significantly affected countries are the main thrust of this chapter. No doubt, several developing countries were also affected, but that was essentially through contagion. This chapter, therefore, concentrates on the relevant advanced economies and in particular, on the US and seeks to give, by way of background, a broad overview of the causes of the crisis, its global fiscal impact, responses to the crisis, and their fiscal implications (including the larger fiscal consequences on public debt). It concludes by stressing the importance of the different dimensions of imbalances, of the need for rebalancing them and, of reassessing fiscal, financial, and monetary linkages that may be necessary in distilling lessons from the crisis for the future.

This chapter examines the way in which social policy has been used during the crisis response and recovery in China. It starts by asking whether China's leadership has been able to use social policies effectively in its response: first to meet the immediate needs of individuals or localities most severely affected by crisis; and second, but more significantly, to help smooth a transition to the stated objectives of economic rebalancing through more sustainable, consumption-led growth. Through a review of policies and expenditures, and, where possible, evidence about local implementation and outcomes, the chapter identifies areas of progress as well as institutional bottlenecks to the implementation of policies, which potentially limit the role of social policies in facilitating a shift to an alternative economic development path.

Fiscal policy coordination is marred by a classic collective action problem; it pays to be egoistical. Member states have an incentive to under- or over-stimulate their economies (what this chapter terms growth and stability free riding), despite a common interest in coordinated policies. Building on Mancur Olson’s premise on collective action failure, the chapter develops three research questions that guide the empirical investigation. These relate to the group latency of EU membership, the evidence for collective action, and finally the provision of incentives to keep free riding at bay. The theme running through this chapter is that the interdependence of EU economies requires cooperative solutions to common problems.

The New Deal was not an attempt to implement a coherent economic plan and nor was it an early Keynesian attempt to stimulate recovery by introducing a vigorous fiscal stimulus. Indeed, the complexities and emphasis changes make a sweeping evaluation of economic policy during the period 1933–41 particularly difficult. This chapter asks and answers two important questions: Why did the New Deal develop in the way that it did? How much of the New Deal was borrowed from the past and how much could be viewed as genuinely innovative? In answering these questions the chapter analyses the changing relationships between the federal, state, and local governments, and the significance of regulatory policies. It also explains why some New Deal programmes were short-lived while others persisted. Finally, a contrast is drawn between the problems that faced the US in 1933 and those confronting European nations following the 2007 crisis.

International surveys recognize that Europeans enjoy the highest quality of life in the world. The United Nations Human Development Index 2015 ranks 26 of the 28 EU countries among the top 50 countries in the world. But the European Union (EU) has problems as well. It has entered a period of stagnation. Its GDP in 2015 just about reached its level of 2008—before the eurozone crisis—and it is losing market share in the global economy. In some sectors like chemicals and telecommunication technology, it is falling behind to competition from North America and East Asia and other emerging markets. Productivity growth has dwindled and is close to zero. Europe stopped catching up with the United States in the mid-1970s, but Europe’s lagging behind has grown worse in recent years.

This chapter describes why the gold standard and the euro are extreme forms of fixed exchange rates, and how these policies had their most potent effects in the worst peaceful economic periods in modern times. While the world is lucky to have avoided another catastrophe like the Great Depression in 2008–09, mainly by policy makers’ aggressive use of monetary and fiscal stimuli, the world economy is still experiencing many difficulties. As in the Great Depression, this second round of problems stems from the prevalence of fixed exchange rates. Fixed exchange rates facilitate business and communication in good times but intensify problems when times are bad.

Low corporate investment is not caused by a lack of profitable opportunities but by the bonus culture. It can therefore be cured if its perverse incentives are reversed. Official estimates for trend growth rates are very optimistic. The risk of falling living standards should be a matter of major public concern but is not. This is damaging as problems are unlikely to be solved unless widely debated. One persistent problem is that growth is largely discussed in terms of technology rather than investment. The threat that we will soon be replaced by machines attracts much more attention than the problem that this is not happening fast enough to boost productivity. It is also nonsense to claim that companies are not investing in order to reduce debt, or that demand is inadequate. The post hoc fallacy remains a barrier to sensible debate.