Are European nations free-riders when it comes to fiscal policy?

I don't think so.  I think the truth — hard for some people to digest — is simply that these smart Social Democrats, rightly or wrongly, don't much believe in massive fiscal stimulus.  They're used to the idea that their economies have big structural problems that government spending cannot eliminate.

If fiscal policy can work for a large country such as the United States, it should work for the Netherlands (or Portugal) as well, even if it would work with less potency.

The benefits from the first round of spending would be captured almost completely within the Netherlands.  If unemployed resources can be well targeted, and without messing up incentives too badly, (big "ifs" in my view), that provides an almost automatic case for extra Dutch government spending.

It is a good question whether the Dutch already have too much government spending.  I will say yes but I don't much hear this from fiscal policy advocates.  Maybe they think the current Dutch balance is "just right" but again that means at the margin fiscal policy, targeted at unemployed resources, won't wreck the overall balance.

What about the second round of expenditures from the fiscal policy?  Well, if a big chunk of those newly employed workers increase their spending on food, shelter, and local transportation, lots of the second round is captured in the Netherlands as well.  Even buying a T-shirt from China will likely benefit a Dutch retailer to some extent.

You will hear the common tale that "everyone not crazy thinks fiscal policy is a good idea, but some countries are too selfish, or too cowardly, to do it."

That story is an easy out, but the truth is that not everyone is so enamored of massive fiscal policy stimulus.  If they were, they would be doing it.  But they're not.

Hong Kong, by the way, is preparing a relatively aggressive stimulus package.

Here is a relevant blog post on Germany.


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