The world’s advanced economies remain divided over whether to strengthenbudget balances in the short term or to use fiscal policy to promote recovery.Those worried about the short-run contractionary effects on the economy callthe first option “austerity”; those concerned about long-term sustainabilityand moral hazard call it “discipline.”

Either way, the debate is akin to asking whether it is better for a driverto turn left or right; depending on where the car is, either choice might beappropriate. Likewise, when an economy is booming, the government shouldrun a budget surplus; when it is in recession, the government should run adeficit.

To be sure, Keynesian macroeconomic policy lost its luster mainly because politicians often failed to time countercyclical fiscal policy – “fine tuning”– properly. Sometimes fiscal stimulus would kick inafter the recession was already over. But that is no reason to follow adestabilizing pro-cyclical fiscal policy, which piles spending increasesand tax cuts on top of booms, and cuts spending and raises taxes in response todownturns.

Pro-cyclical fiscal policy worsens the dangers of overheating, inflation, and asset bubbles duringbooms, and exacerbates output and employmentlosses during recessions, thereby magnifying the swingsof the business cycle. Yet many politicians in the United States, the United Kingdom, and the eurozoneseem to live by it. They argue againstfiscal discipline when the economy is strong, only to become deficit hawks when the economy is weak.

Consider the positions taken over the last three decades by some Americanpoliticians.

In his 1980 campaign and again in 1981, a period of recessions, PresidentRonald Reagan urged immediate action to reduce the national debt.

In 1988, however, as the economy approached the peak of the businesscycle, candidate George H.W. Bush was unconcernedabout budget deficits, even though the national debt was rapidly approachingthree times the level that it had been underReagan. “Read my lips: no new taxes,” Bushfamously declared.

Predictably, Bush and the US Congress finally summonedthe political will to raise taxes and rein inspending growth at preciselythe wrong moment – in 1990, just as the US was entering a recession.Although the timing of the legislation was poor, the action was courageous: pay-as-you-go (PAYGO) budgeting rules and otherreforms deflected government finances backonto a path that eliminated the budget deficit by the end of the decade.

But, three years later – at the start of the most robust recovery inAmerican history – all Republican congressmen voted against President BillClinton’s 1993 legislation to maintain Bush’s spending caps, PAYGO, and taxincreases. Even after seven years of strong growth, at the peak of thebusiness cycle in 2000, with unemployment at record lows, George W. Bush basedhis 2000 campaign on a platform of large tax cuts.

After recovery from the 2001 recession had gotten underway,and the inherited budget surpluses had nonetheless turned to record deficits,the Bush administration pushed through a secondround of tax cuts in 2003, and maintained a rate of spending growth thatwas triple the rate under Clinton. As Vice President Richard Cheney put it,“Reagan proved that deficits don’t matter.”

These policies were maintained for another five years, as another $4trillion was added to the national debt. Predictably,when the worstrecession since the Great Depression hit in 2007-2009, politicians werereluctant to launch an adequate fiscal response, owing to the huge deficits anddebts that the government had already been running.

Republicans suddenly re-discovered the evil of budget deficits. Theyopposed Obama’sinitial fiscal stimulus in February 2009, and succeeded in blocking furtherefforts when its effects petered out two years later. In my view, thegovernment spending cutbacks of the last two years are the most importantreason why the economic recovery that began in June 2009 subsequently stalled in 2011.

Here, then, are three generations of politicians who favored fiscalexpansion during booms (1982-1989, 1992-2000, 2002-2007) and austerity duringrecessions (1980, 1981, 1990, 2008-09). A similar unfortunate cycle – largefiscal deficits when the economy is already expanding, followed by fiscalcontraction in response to a recession – has also been visible in the UK and theeurozone in recent years.

Turning left every time the road goes right, and vice versa, isworse than switching policies randomly.

But the pattern is understandable: when the economy is booming, there isno political support for painful spending cuts or tax increases. There is ahole in the roof, but the sun is shining. Then, when the thunderstorms roll in, sinnerssuddenly get religion and proclaim the necessity of reforming – just when it ismost difficult to fix the problem.

Historically, it used to be developingcountries whose dysfunctionalpolitical systems produced pro-cyclical fiscal policies. Almost all of themshowed a positive correlationbetween government spending and the business cycle from 1960 to 1999.

But things have changed. About a third of emerging-market countries’governments – including authorities in China,Chile,Malaysia, South Korea, Botswana,and Indonesia– managed to reversethe historical correlation. They took advantage of the 2003-2007 boom tostrengthen their budget positions, saving up for a rainy day. They were thus ina good position to use fiscal stimulus when the global recession hit them in2008-2009.

In fact, a majority of the governments that have pursued countercyclicalfiscal policies since 2000 are in emerging-market or developing countries. Theyfiguredout how to achieve countercyclical fiscal policy during precisely the decadewhen so many politicians in “advanced countries” forgot.