Debate on Pros and Cons of Stimulus Policies

**Abstract**: The evaluation of stimulus policies should be conducted within a specific macroeconomic context. The same stimulus policy may yield vastly different outcomes in different macroeconomic environments. Therefore, the decision to implement policy stimulation should be contingent upon the macroeconomic environment and cannot be generalized. The true constraints of stimulus policies lie in the supply capacity of the macroeconomy, and the targets should reflect whether supply constraints are tightening, such as inflation and the balance of payments. Stimulate demand when inflation is below the target and there is a surplus in the balance of payments, and withdraw when inflation is above the target and there is a deficit. Stimulating the economy is not a "drinking poison to quench thirst" approach but a necessary strategy for stabilizing the economy under the premise of economic structural imbalance. Stimulus policies are merely technical means for the government to regulate the macroeconomy and should not be opposed to the long-term major policies that our country must adhere to. Otherwise, it would be like drawing a circle around oneself, setting self-limits, and artificially increasing the difficulty of government regulation of economic operations.

Currently, there is no significant disagreement among various parties on the assessment of China's economic situation, with a general consensus that there is a clear pressure of demand contraction and downward growth, with non-negligible risks. However, on the issue of whether China needs to use stimulus policies to support economic growth, opinions vary, with both赞成 and opposing voices. There is a lack of consensus on several issues, including the effectiveness of stimulus policies, their sustainability, and the cost-benefit situation in the short and long term. Stimulus policies face significant resistance due to the lack of consensus and are often forced out by economic pressure, akin to "squeezing toothpaste," which often lags behind changes in the situation, significantly reducing the effectiveness of the policies.

To facilitate better government regulation of macroeconomic operations and enhance the leading nature and effectiveness of policies, it is necessary to conduct an in-depth analysis of the costs and benefits of stimulus policies, thoroughly explain the doubts about policy stimulation, and thus build consensus. This article attempts to use macro thinking to deeply analyze the constraints of stimulus policies, discuss key issues such as policy effectiveness and sustainability, and clarify the pros and cons of stimulus policies.

1. Evaluating Macro Policies Requires Macro Thinking

Assessing the pros and cons of macro policies cannot be done in isolation from the policy itself but must be placed within a specific macroeconomic context. The same macro policy may have completely different effects in different macroeconomic environments. A policy that is beneficial in one context may be detrimental in another. This is because macro policies have complex feedback and transmission mechanisms when implemented in the economy, leading to a cascading effect. The feedback and transmission conditions of policies may vary greatly in different macroeconomic environments, resulting in different outcomes for the same policy. Evaluating whether a policy should be implemented without considering the macroeconomic context can lead to the error of marking the boat to seek the sword.

This principle is not complex, but it can be obscured by personal experiences from micro life, which can blind one to the broader picture. Everyone lives within the macroeconomy and has some understanding of economic operations from their own perspective. However, these micro-level understandings, even when they become "common sense" shared by many, may not fully grasp the operation of the macroeconomy. Using micro thinking derived from personal experience to understand the macroeconomy and evaluate macro policies (whether stimulative or contractionary) can easily lead to biases and misunderstandings.

Nobel laureate in Economics Paul Krugman wrote an article in 2014 titled "Successful Businessmen Don't Understand Macroeconomics," which well illustrates this issue. There is a passage in the article that says: "Nations are not companies. National economic policies, even in a small country, need to consider certain types of feedback that are often irrelevant in business life. For example, even the largest company will only sell a small fraction of its products to its own employees, yet even the smallest country, most goods and services are mainly sold domestically."

Krugman here criticizes the mistaken thinking of treating the macroeconomy as a microenterprise. Microeconomic agents (whether businesses or individuals) live in an exogenous economic environment that they cannot control and can only passively accept. Even a large enterprise's business activities can have a negligible impact on the entire macroeconomy. Therefore, when making decisions, microeconomic agents neither can nor should consider the impact of their actions on the economic environment. As a result, businesses will view their income as an exogenous variable that is not under their control and is determined by the economic environment in which the business operates. Businesses, therefore, need to live within their means, determining their expenditures based on their income. This is true for businesses, and even more so for individuals who are much smaller in scale than businesses.

Many people like to talk about policy space when discussing macro policies, believing that policies should have room for maneuver and not exhaust the "ammunition." This reflects the micro thinking of treating the macroeconomy as a business. The underlying implication is that the policy "ammunition" is given, limited in quantity, and using it reduces the amount available, so it must be used sparingly; if the "ammunition" is exhausted, the policy will be difficult to continue and may even cause problems. Although this statement sounds in line with common sense, it is a misunderstanding of the operation of the macroeconomy.

As Krugman said, "Even in the smallest country, most goods and services are mainly sold domestically." This means that for a macroeconomic entity, its expenditures are roughly equal to its income, expenditures affect income, and there is a feedback effect between expenditures and income. Therefore, when discussing the macro policies of a country, it is necessary to understand that the macro environment in which the country is situated is largely determined by the country itself and is an endogenous variable that can be regulated by the country's macro policies. As the decision-maker for macro policies, the government must understand that its expenditures are related to private income. Changes in government spending will affect the vibrancy of the private economy and, in turn, trigger changes in government revenue—for the government, its revenue is "endogenous," influenced by the government itself; this forms a stark contrast to the situation where micro businesses and individuals view income as "exogenously given" (not influenced by businesses and individuals).In the article "Insufficient Domestic Demand is a Problem of Income Distribution," written on August 29, 2023, the author argued that the insufficiency of domestic demand in our country stems from the unreasonable income distribution between the two major sectors of residents and enterprises, with the root cause being the low proportion of residents' income in the national total income, leading to a mismatch between domestic purchasing power and expenditure willingness—consumers lack purchasing power, and enterprises lack expenditure willingness. Under such circumstances, macro policies can optimize the matching of purchasing power and expenditure willingness, and effective demand can be quickly stimulated.

Therefore, "insufficient effective demand" is the theoretical basis for stimulus policies. In 1936, the founder of macroeconomics, Keynes, published the classic work "The General Theory of Employment, Interest, and Money." The third chapter of this book is titled "The Principle of Effective Demand." It includes the following passage:

"People regard [classical] economists as utopians. These individuals leave the world to cultivate their own gardens and tell people: as long as we let nature take its course, everything in the world will develop in the best way. I believe that they think this way because they have overlooked the fact that 'insufficient effective demand' can drag down the prosperity of the entire economy... If we assume that the economic operation of society is indeed as described by classical theory, then it would mean that the difficulties we face in our research do not exist."

The "Great Depression" that broke out in 1929 educated Keynes and many of his contemporaries about the potential dangers and harmfulness of "insufficient effective demand," and on this basis, they proposed a macro policy framework for demand management. Today's macroeconomics is based on Keynes' insights.

If the economy is in the optimal state as envisioned by optimists (the market is in an efficient state), then purchasing power and expenditure willingness will have the most effective combination, allowing effective demand to match supply capacity. At this time, demand-side stimulus policies are neither necessary nor effective. The reason they are unnecessary is that there is no problem of insufficient effective demand in the economy at this time; the reason they are ineffective is that effective demand is constrained by purchasing power and cannot be further expanded at this time—this point will become clearer in the subsequent analysis.

However, the real world is not always in the ideal optimal state, and situations of insufficient effective demand occur from time to time. At this time, demand-side stimulus policies, as a means of correcting market inefficiencies, have their feasibility and necessity. In the case of insufficient effective demand, the government, as a buyer in the real economy, can always create effective demand by expanding its own fiscal expenditure to compensate for the lack of private expenditure willingness; monetary policy can increase the scale of financial intermediation in the financial market, allowing more purchasing power to flow to economic entities with higher expenditure willingness, thereby more effectively combining purchasing power and expenditure willingness, and thus boosting effective demand. Such fiscal and monetary policies can stimulate demand and economic growth in the short term, making the macroeconomic situation better.

3. The real constraint of stimulus policies lies in supply capacity

For a country, the real constraint on demand-side stimulus policies is the country's supply capacity. This may contradict the intuition many people get from micro experience. If you ask where the constraint of a country's demand-side stimulus policies is, many people might say it's money—but this is only a one-sided view from a micro perspective. For a microeconomic entity (whether it's a business or a resident), when the money in hand is spent, it's spent, and of course, you can't make more purchases without money. But for a country, its own currency is created by the country itself (money is created out of thin air by the country's financial system), and if it's really not enough, it can print more. Therefore, the quantity of money is not the real constraint on stimulus policies.

The constraint of demand-side stimulus policies lies in supply capacity—when stimulus policies cause domestic demand (domestic consumption plus investment) to exceed the country's supply capacity, the stimulus policies have encountered a tight constraint and cannot continue to be used. This is because when domestic demand exceeds domestic supply capacity, it will lead to demand-pull inflation, causing prices to keep accelerating, thereby causing macroeconomic chaos.

Of course, at this time, the country can rely on imports to make up for the domestic supply shortage to avoid inflation. Although this can suppress domestic inflation, it will inevitably lead to a trade deficit, causing the country's foreign debt to keep rising. After all, other countries cannot give goods to the country for free, and trade deficits must be exchanged for the country's foreign debt. And foreign debt must be repaid with international hard currency (usually the US dollar). For other countries besides the United States, once the US dollars are used up, they are used up, and they cannot print their own. If a country lacks enough international hard currency to repay its foreign debt, it will trigger an international balance of payments crisis, causing the local currency to depreciate sharply and the domestic economy to suffer a heavy blow. The Asian financial crisis that broke out in 1997 is an international balance of payments crisis that Southeast Asian countries encountered, and its serious consequences are well known.So, as long as a country's demand exceeds its supply capacity, inflation will inevitably rise, or the balance of payments will deteriorate (trade deficit). Either of these consequences will destabilize the macroeconomy and trigger a crisis. On this path of economic instability, demand-side stimulus policies naturally cannot be used anymore.

Therefore, to determine whether macroeconomic stimulus policies have hit a bottleneck, the key is to look at inflation and trade surplus as indicators. When inflation rises and there is a trade deficit, it indicates that domestic supply is insufficient and demand is already excessive. Stimulus policies at this time will further increase inflation and external debt pressure, causing the macroeconomy to become more unstable. On the contrary, when inflation is low (or deflation) and there is a trade surplus, it indicates that domestic supply is excessive and demand is insufficient. At this time, stimulus policies are not only feasible but also very necessary.

A country's supply capacity is a constraint on demand-side stimulus policies and naturally also constrains fiscal and monetary policies as means of demand stimulation. Let's first look at fiscal policy. A more proactive fiscal policy is always manifested as an expansion of fiscal deficits - this may come from an increase in fiscal expenditure or may be due to a deliberate reduction in fiscal revenue (such as tax cuts). Fiscal deficits need to be made up by the country issuing government bonds. In other words, if a country's fiscal revenue exceeds expenditure, the government must borrow money to pay for the excess.

When a country is in a state of overcapacity and insufficient effective demand, it must mean that the domestic economy has not fully spent its total income (purchasing power), and some purchasing power has settled down. At this time, the total purchasing power of the whole society has not been fully transformed into purchasing behavior, leading to effective demand being less than (the total capacity that can generate total purchasing power). In this case, fiscal borrowing to expand deficits is essentially spending the settled purchasing power in society through fiscal means, transforming it into effective demand, which can drive the utilization of idle capacity and allow involuntary unemployed people to find jobs. Therefore, at this time, fiscal policy can alleviate the pressure of insufficient demand in the economy and improve the economic situation.

Fiscal deficits will, of course, increase government debt. However, in countries with overcapacity, there is already excessive savings formed by unreasonable income distribution (settled purchasing power that has not been transformed into purchasing behavior). At this time, the expansion of government debt is a correction to domestic excessive savings, and what is formed is also "internal debt" (creditors are domestic), and there will be no problem with the continuation of government debt. We can even say that in this case, the increase in government debt is like Zhou Yu beating Huang Gai, one is willing to fight (the government is willing to borrow more debt), and one is willing to endure (the private sector is willing to lend money to the government), and it can be sustained.

However, if a country is in a state of insufficient supply and excessive demand, for two reasons, deficit policies will be difficult to continue. First, the expansion of fiscal expenditure will more obviously drive the rise of inflation, making inflation out of control. Second, at this time, the private sector has fully transformed its purchasing power into expenditure, and there is no excessive savings settled. As a result, the government can only borrow foreign debt from foreigners. For a country, foreign debt that needs to be repaid with international hard currency is a tight constraint, and if it owes too much, the country will trigger an international balance of payments crisis. Therefore, in a state of insufficient capacity, stimulating fiscal policies will destabilize the economy and are therefore difficult to sustain.

Let's look at monetary policy next. Monetary expansion is manifested as a faster increase in the total amount of money. But first, it is important to understand that in the modern monetary system, although a country's financial system can create "nominal money" out of nothing, the "real purchasing power" of nominal money cannot be created by the financial system (including the central bank), but can only be determined by the operation of the real economy. In other words, although a country's financial system can print money, whether the printed money can buy things is not determined by the country's financial system.

In the article "The Fallacy of Excessive Money Printing Can Be Laid to Rest," published on September 15, 2021, the author discussed that the real reason for the continuous faster growth of our country's nominal money supply than the nominal GDP growth rate, and the continuous rise of the M2/GDP ratio, is our country's high savings rate - our real economy continues to have a large amount of savings accumulated in the financial system in the form of bank deposits (belonging to the monetary口径), leading to our country's nominal money supply growth will be long-term faster than the nominal GDP growth rate.

In countries with excess supply and insufficient demand, the real purchasing power corresponding to the stock of nominal money has not been fully transformed into expenditure behavior, leading to effective demand supported by money being less than the country's supply capacity. At this time, issuing more money can boost the expenditure of economic entities with limited purchasing power, thereby expanding effective demand and utilizing the idle capacity in the economy. Moreover, in this case, because the purchasing power of the stock of money has not been fully utilized, the issued money will not bring higher inflation, and loose monetary policy can be sustained.

On the contrary, in countries with insufficient supply and excessive demand, the stock of nominal money must have been fully transformed into effective demand in the economy (which is why demand is excessive). At this time, if more money is issued, the purchase behavior brought by this additional money will make the problem of supply not meeting demand in the economy more serious, thereby further increasing inflation and destabilizing the economy.It is evident that both fiscal and monetary policies can only stimulate the economy when it is in a state of supply surplus. At such times, stimulus policies can alleviate the demand bottleneck faced by economic growth, allowing for an expansion of economic output and an improvement in the economic situation. Moreover, stimulus policies at this stage do not lead to negative effects such as inflation instability or a deterioration in the balance of payments. However, when the economy suffers from insufficient capacity, demand-side stimulus policies can increase the pressure of supply not meeting demand, leading to a worsening of inflation or the balance of payments, thus outweighing the benefits.

The sustainability of stimulus policies depends on the macroeconomic environment. After understanding that the true constraints of stimulus policies lie in the country's supply capacity, we can discuss the sustainability of these policies. To determine whether stimulus policies are sustainable, we must consider two points: first, whether the beneficial effects of stimulus policies on the economy can be sustained or will quickly become ineffective (similar to how the human body may develop drug resistance when continuously medicated, rendering the medication ineffective); second, whether the costs (or sacrifices) required for stimulus policies will soon become unbearable, making the stimulus policies not worth the effort.

Both of these points depend on the macroeconomic environment in which the stimulus policies are implemented. When the economy is in a state of insufficient supply and excessive demand, the tight constraint on economic operations lies on the supply side and cannot be relaxed by demand-side stimulus policies. At this time, stimulus policies cannot improve the economy and will also bring about the costs of rising inflation and a deteriorating balance of payments, making the drawbacks outweigh the benefits, let alone sustainability.

However, when the economy is in a state of surplus supply and insufficient demand, stimulus policies can expand economic output, increase employment, and will not incur excessive costs in terms of inflation and balance of payments. It is worth noting that at this time, stimulus policies may indeed lead to an increase in government debt and a faster rate of money supply, but these consequences do not threaten the sustainability of stimulus policies.

People lacking in macroeconomic thinking may mistakenly compare countries to micro enterprises, worrying that more debt and money will eventually make stimulus policies pay a price (such as debt crises and uncontrollable inflation and asset prices). However, the laws of macroeconomic operation cannot be grasped solely based on microeconomic experience. In a macroeconomic environment of surplus supply, government debt (mainly domestic debt) and money issuance can both be sustained. In the article "The Need for a Comprehensive Correction of Perceptions on Our Country's Debt," published on June 28, 2023, the author provided a detailed analysis of the sustainability of our country's debt, which will not be repeated here.

Speaking of concerns about the sustainability of stimulus policies, the overall consideration is only one aspect. Many people also worry that this special type of stimulus policy focused on investment is difficult to sustain. Domestic demand consists of two parts: consumption and investment. Macroeconomic policies that stimulate domestic demand can only choose a focus between the two. Consumption is a function of consumers' current income and even more so a function of their expectations of future income. Even if stimulus policies can increase consumers' income in the short term, it is difficult to effectively improve consumers' expectations of future income, so consumption is not very sensitive to stimulus policies. Compared to consumption, investment is more sensitive to stimulus policies and is therefore the more common "lever" chosen by stimulus policies. Since the "subprime crisis" in 2008, our country's stimulus policies have mainly targeted investment, which is the reason for this.

After a long period of high-intensity investment, the return on investment across our society has significantly decreased, and high-return investment projects are becoming increasingly difficult to find. The combination of a high investment share of GDP and a continuous decline in the return on investment has led many people to have increasing doubts about how far this model of stimulating investment to drive growth can go.

But does a low return on investment necessarily mean that the investment-driven model cannot be sustained? For micro enterprises, this is mostly the case. This is because enterprises face exogenously given, uncontrollable funding costs. If a company's return on investment falls to a level lower than the cost of funds, the company will struggle to repay the funds borrowed for investment and may face the risk of debt default. However, this may not necessarily be the case for the macroeconomy. When the macroeconomic return on investment is very low, the requirements of savers in the economy for the return on investment (which determines the cost of funds in the economy) may be even lower.The author has previously discussed that when society is suffering from overinvestment, the most effective way to invest is actually to reduce investment and spend the income originally intended for investment. To achieve this, it is necessary to transfer income from the corporate sector, which is making investments, to the consumer sector. However, in our country, due to the poor channels for companies to distribute dividends to the consumer sector, the transfer of income from businesses to consumers is hindered. As a result, the income of the corporate sector will rigidly remain within the corporate sector and will not automatically flow to consumers and turn into consumption due to a decrease in the rate of return on investment. Under such circumstances, the corporate sector in our country is a saver that is insensitive to the rate of return on savings—because with very few dividends paid to consumers, the income of the corporate sector, apart from being turned into savings and investment, has no other way out. This is the main cause of the excess savings, overinvestment, and even oversupply in our country.

Therefore, although the return on domestic investment in our country is indeed not high, not investing will not automatically lead to income flowing to consumers and turning into consumption; it can only become the purchasing power that settles in the economy (becoming excessive savings), exacerbating the problem of insufficient effective demand. In other words, in a macro environment with insufficient demand, if someone believes that making low-return investments is a waste of national income and therefore unsustainable, they must also understand that not doing so (making low-return investments) at this time will not lead to more effective use of national income. Instead, it will cause income to settle and result in greater waste, leading the economy to eventually fall into a recession and crisis caused by insufficient demand, making the economic operation even more unsustainable. Therefore, under the current economic pattern of our country, which is caused by the income distribution structure and leads to insufficient demand, high investment is not only sustainable but also a necessary condition for the economy to remain stable.

Keynes once proposed in Chapter 10 of his book "The General Theory of Employment, Interest, and Money" to hire people to "dig holes" in the ground to create demand and stimulate the economy. Of course, "digging holes" in the ground cannot talk about any rate of return, but it is an effective policy response when the economy is in a state of insufficient demand. People who do not understand the operation of the macroeconomy may look down on Keynes's "digging holes" theory from their own micro experience. However, those with a macro perspective can see the wisdom in the "digging holes" theory that goes against (micro) intuition. By applying this wisdom, one can discover the rationality and sustainability of the current high investment in our country.

Finally, let's talk about the side effects of stimulus policies. Everything has two sides, and there are advantages and disadvantages. Especially in the current complex situation where various contradictions in our country's economy are intertwined, no macro policy can be beneficial without any drawbacks. Stimulus policies will also bring various side effects. But what's important is to look at the positive and negative effects together and comprehensively evaluate the pros and cons of stimulus policies. In practice, the side effects of stimulus policies can also be controlled by optimizing policy operations. When the economy is in a state of oversupply and insufficient demand, the benefits of stimulus policies outweigh the drawbacks. Denying stimulus policies because of some side effects is no different from abandoning food because of fear of choking.

5. Stimulus policies are not contradictory to structural reforms

Many people also believe that stimulus policies will delay or even hinder economic structural reforms, so they oppose stimulus policies. In recent years, the main focus of our country's stimulus policies has been on infrastructure investment and real estate investment, the two traditional engines of economic growth. Some people worry that allocating resources to these two areas may not only solidify our country's traditional growth model driven by investment but also occupy the resources needed for economic transformation, thus hindering the reform of our country's economic structure. However, this worry is unfounded.

The pressure mainly comes from the structural problems on the demand side of our country. And the structural problems on the demand side are areas that stimulus policies can offset.

The author has already analyzed in detail that our country has a long-term economic structure problem of insufficient consumption and insufficient domestic demand because the total resident income accounts for a low proportion of the economy. Faced with this situation, the "best policy" is to adjust the income distribution structure, increase the proportion of resident income and resident consumption in the economy, thus unblocking the blockage in our country's economic internal cycle and fundamentally resolving the problem of insufficient domestic demand.

Before the reform of the income distribution structure has made substantial progress, our country's "second-best policy" is to use stimulus policies to stimulate domestic demand. The focus of stimulus policies can only be on consumption and investment, which make up domestic demand. In investment, it can only be chosen among the three major components of infrastructure investment, real estate investment, and manufacturing investment. From the perspective of policy effects, infrastructure investment and real estate investment are the best choices for the focus of stimulus policies. This is because stimulating manufacturing investment will directly lead to capacity expansion, increasing the pressure of oversupply and insufficient demand. On the other hand, consumption is limited by resident consumption and is difficult to stimulate in the short term.

Faced with the structural problems on the demand side of our country, the "best policy" of adjusting income distribution and the "second-best policy" of stimulating investment are not contradictory. It is precisely because the "best policy" is not advancing enough that the "second-best policy" is needed to stabilize demand and economic growth. Moreover, in the current economic environment with insufficient domestic demand, stimulus policies will not "occupy" the resources needed for economic transformation but will instead "drive" private expenditure - without stimulus policies, more resources in the economy will be idle and wasted. Not taking the "best policy" and the "second-best policy," but only hoping that the unreasonable aspects of the economic demand side will automatically disappear due to slow growth, is an unrealistic wishful thinking.Faced with the structural issues on the supply side of our country, although stimulus policies cannot replace structural reforms, they can create a stable macroeconomic environment, thereby providing strong support for the transformation and upgrading of industries. The development of industrial structure mainly relies on enterprises' spontaneous investment and research and development. Without a stable macroeconomic environment, enterprises will reduce investment and cut research and development expenses due to a lack of stable confidence and good expectations. It is hard to imagine that when enterprises are struggling on the brink of bankruptcy on a large scale, the economic industrial structure can be rapidly transformed and upgraded. Therefore, when the economy grows weakly due to insufficient demand, stabilizing economic growth through stimulus policies can improve the income and confidence of various economic entities, which is conducive to the advancement of supply-side structural reforms. The idea that economic slowdown and crises can force supply-side structural reforms is more likely to lead to depression in various industries, thereby delaying or even hindering the transformation and upgrading of the supply side in our country.

Therefore, stimulus policies and structural reforms are not contradictory. Moreover, in practice, stimulus policies and structural reforms can be combined. For example, when government stimulus policies are implemented, more focus can be placed on consumption, increasing consumers' income on the one hand, and resolving supply bottlenecks that constrain consumption on the other. For instance, when stimulating infrastructure investment, more effort can be directed towards the "new infrastructure" bottlenecks that constrain China's economic development. Additionally, when stimulating real estate investment, a more price-elastic land supply system can be adopted to better match the supply of land and housing with the direction of population flow, playing the role of real estate investment in stabilizing growth and truly enhancing the people's sense of gain in housing. The belief that stimulus policies will hinder structural reforms, and even the idea that structural reforms can be automatically achieved without stimulus, is harmful to the economy.

6. Stimulating the economy is not "drinking poison to quench thirst."

After a comprehensive discussion of the logic of evaluating stimulus policies, let's now refute a popular misunderstanding about stimulus policies at present, that is, comparing stimulus policies to "poisonous wine," saying that stimulating the economy is "drinking poison to quench thirst." The subtext behind this misunderstanding is that even if stimulus policies can be effective in the short term, they will inevitably bring serious consequences in the long term. The discussion on the sustainability of stimulus policies in Section 4 of this article has actually revealed the one-sidedness of this view. Here, we are ready to analyze and refute this misunderstanding from a historical perspective.

Opposition to stimulus policies has long existed in the history of economic development. Hayek (Nobel laureate in Economics in 1974) wrote the following passage in the third lecture "The Role of the Price Mechanism in the Credit Cycle" of his 1935 book "Prices and Production (Second Edition)":

"[If demand is artificially created by] increasing the money supply, it must mean that some available resources are guided in the wrong direction, and a continuous adjustment that will inevitably come is once again obstructed. Even if idle resources are accelerated by stimulus, they will sow the seeds for new disturbances and new crises. Therefore, if all available resources are to be 'mobilized' for a long time, the only way is not to take artificial stimuli——whether in a crisis or after a crisis——but to let time complete a lasting treatment…… We may be able to avoid an economic crisis by timely expansion, but once a crisis occurs, we cannot get rid of it until it disappears on its own."

Hayek believes that stimulus policies may be able to avoid economic crises in the short term, but they will also hinder the adjustment mechanism of the market, thereby sowing the seeds for new crises. Therefore, the correct response of the government to an economic crisis is to do nothing and wait for the market to return to normal after a period of self-correction and treatment.

Undoubtedly, Hayek is the "utopian" figure in Keynes's eyes, believing that the market will spontaneously return to an effective state, and any interference with this spontaneous recovery process (such as adopting stimulus policies) will only delay the economic repair and even sow the seeds for new crises.

However, as early as 1923, Keynes wrote the following sharply contrasting passage in his book "A Tract on Monetary Reform":

"But the long term is a misleading guide to current affairs. In the long term we are all dead. In the season of storms, if economists only tell us that the sea will return to calm after the storm, then they have set their tasks too easy and too useless."Here, the "long run" that Keynes speaks of represents an idealized assumption by economists who firmly believe in the market (such as Smith, Ricardo, Hayek) about the operation of the economy — that is, the economy will return to the most efficient state in the long run under the spontaneous action of the market. The "short run" before the market returns to efficiency — regardless of how many ups and downs and sufferings it contains — is a process we cannot intervene in and must patiently wait for.

However, both in theory and in practice, the assumption that the market will spontaneously return to an efficient state has been proven false. Even in Western developed countries where Western economics originated, few people completely believe in the effectiveness of the market. The current consensus among economists is that the market may deviate from an efficient state for a considerable period of time; and when the market deviates from an efficient state, macroeconomic policy needs to take action — when there is insufficient economic demand, policy stimulation is needed; when there is excessive demand, policy regulation is needed. In this sense, most people believe that Keynes is right, and we live in the "short run" where the market deviates from an efficient state for most of the time, and we must take action, rather than using the idealized "long run" as a guide for action.

In our country, the idealized "long run" envisioned by Hayek is neither a reality nor the direction of China's market economy. The operation of our market is different from the efficient state assumed by Western economics. This is certainly because our country still has institutional and mechanical constraints that hinder the operation of the market and to some extent hinder the play of market forces. But more importantly, China's market economy itself is an organic combination of "Chinese characteristic effective market" and "active government," and there is a fundamental difference between the "Chinese characteristic effective market" and the idealized effective market assumed by Western economics.

When we praise our government for having the advantage of "concentrating forces to do big things," we must see that this advantage is based on the government's strong guidance over the market and the dependence of the market on the government that accompanies this "government guidance." If the market has already reached the optimal state as assumed by Western economics, any intervention in the market can only deviate from the optimal, and there would be no talk of an "active government." The effective market envisioned by Hayek is by no means our reality, nor is it the goal that China's market economy should pursue.

Naturally, using the market fundamentalism inherited from Hayek to oppose stimulus policies by comparing them to "poisonous wine" is not only inconsistent with China's economic reality but also does not conform to the orientation of China's market economy. In China's macroeconomic practice, stimulus policies are not only a compensation for the ineffectiveness or failure of the market but also a part of the Chinese characteristic effective market. They should be implemented according to changes in the economic situation, and should be taken when necessary, rather than being constrained by the fallacious argument of "drinking poison to quench thirst."

7. Stimulate when there is insufficient demand

From the above analysis, we can see that the evaluation of stimulus policies should be conducted in a specific macroeconomic context. The same stimulus policy may have completely different effects in different macroeconomic environments. Therefore, whether to implement policy stimulation depends on the macroeconomic environment and cannot be generalized — not stimulating when it should be stimulated is wrong, as is stimulating when it should not be stimulated.

The continuity of stimulus policies also depends on the macroeconomic environment. The real constraint of stimulus policies lies in the supply capacity of the macroeconomy. As long as the supply capacity constraint is not tightened (economic demand is insufficient, and supply capacity is abundant), stimulus policies can not only continue to produce positive effects conducive to economic growth but also continue to obtain the necessary resources for implementation, and there is no problem with continuity. Therefore, stimulus policies should target inflation and international balance of payments that reflect whether the supply capacity constraint is tightened, stimulating demand when inflation is below the target value and the international balance of payments is in surplus, and withdrawing when inflation is above the target value and the international balance of payments is in deficit.

When considering whether to adopt stimulus policies, it is essential to start from the actual situation of the economy and not be disturbed by the fallacious argument of "drinking poison to quench thirst." Discussing stimulus policies with unrealistic generalizations, and simply saying that stimulus policies are good or bad, is not conducive to the high-quality development of China's economy. In fact, expansionary stimulus policies as well as contractionary regulatory policies are merely technical means for the government to regulate the macroeconomy, each with its applicable and inapplicable economic environment. It is not appropriate to arbitrarily dismiss some means, nor to oppose or set these technical, situation-dependent means against China's long-term policies. Otherwise, it will create self-imposed limitations and artificially increase the difficulty of government regulation of economic operations.

In September 2014, against the backdrop of increasing economic downward pressure, the market had high expectations for interest rate cuts. At that time, there was a voice against interest rate cuts, viewing the market's expectation of interest rate cuts as a lack of trust in reform. On September 17, 2014, People's Daily published an article titled "People's Finance Review: Interest Rate Cuts Are Not the Opposite of Reform," refuting the erroneous view that technical decisions like interest rate cuts are opposed to major policies like reform.The article states: "The market's expectation for interest rate cuts and trust in reforms are not inherently linked. China's economic 'new normal' is itself a respect for the laws of economic development. Adopting flexible monetary policies at different stages is a widely accepted consensus, and whether to cut interest rates or reserve requirements should depend on the actual situation of the economy's operation. In the future, while not changing the overall direction of monetary policy, the possibility of targeted interest rate cuts or targeted reserve requirement reductions still exists."

The article also says: "Do not politicize the interpretation of economic policies. When the economic situation changes, policies should be adjusted in a timely and appropriate manner... Interest rate cuts and hikes are discretionary policy choices, do not 'over-emphasize'. 'Over-emphasizing' will hijack policy choices, and missing the window of opportunity will lead to regret."

Ten years have passed, and the viewpoints of this commentary on People's Daily still hold true. The direction of our country in building a socialist market economy with Chinese characteristics and moving towards high-quality development is undoubtedly certain. And as one of the tools for the government to regulate the macroeconomy, stimulus policies do not contradict the general direction of our country's economic development. What is needed is to use this tool in a timely and appropriate manner according to the changes in the economic situation. In the current situation where the pressure of demand contraction in our country's economy is relatively large, stimulus policies should be used when necessary.