Thursday, August 27, 2015

Government Stimulus: Pyramids, National Parks, And Ghost Cities

By Parkland Chair Professor of Strategy Seung Ho Park, Shaomin Li, and Renze Zhang

What does constructing pyramids have in common with building national parks? If we ask the late economist John Maynard Keynes, he would probably say both contribute to the GDP. As we have all learned by now – thanks to Keynes – during an economic recession with massive unemployment, the government can hire workers to build pyramids or national parks. While neither the mummies inside the pyramids nor the protected redwoods in the parks may produce any consumable products, the workers will get paid and in turn spend their money in other sectors of the economy, therefore achieving the multiplier effect and ultimately enlarging the GDP. While this explanation implies wasteful activities, it is not the impression we wish to give readers. As a matter of fact, ever since Keynes, both liberal and conservative governments in the West have been using government stimuli during economic recessions. Even the staunch free-market advocate, the late Nobel laureate Milton Friedman, conceded in 1965 that “we are all Keynesians now”. Unfortunately, while some governments’ stimuli help bring the economy back from the verge of a collapse, others are less effective and even do more harm than good in the long run. So the key is not whether to use government stimulus, but how to use it. A comparison between the U.S. and China may shed light on this discussion, one that’s even more relevant now as the Chinese government pumped 150 billion yuan into its economy on Wednesday to compensate for the capital flight that has accompanied its recent back-to-back surprise slashes in the value of its currency. Read more on

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