Procyclical Fiscal Policy Is Practiced In The Developed World

Countercylclical fiscal policy is based on the idea that government should run deficits when spending by households and business is not sufficient to support full-employment.  The developed world today seems to favor procyclical fiscal policy.  Politicians, and many economists, in developed countries prefer to raise taxes and cut government spending during economic downturns.  They also prefer to cut taxes and increase government spending during economic booms.  The recent economic history of the US is full of such examples.  For example, Ronald Reagan wanted to balance the budget during a recession, and he cut taxes, and increased government spending, during a boom. George W. Bush based his campaign on cutting taxes during the dot.com boom.  Today most developed countries favor government spending cuts and tax increases during our worst post war recession.

Procyclical fiscal policy was quite common in developing countries which typically had dysfunctional governments.  Today they seem to have learned an economic lesson.  Many of them cut spending. and raised taxes during the boom years, and now they are in a strong position to use countercyclical fiscal policy during a downturn.  They are doing exactly what J.M. Keynes recommended.

The dysfunctional governments in the developed world are much like investors during booms and busts.  During booms investors tend to ignore risk and make bad investments.  When the boom ends they tend to become risk averse and restrict credit just when it is needed.