Tuesday, January 17, 2012

For The Defense

Paul Krugman has a recent piece on his blog which makes the case for the efficacy of fiscal policy, even in the age of globalization.  He has an indisputable point, and, I suppose, a useful one.  But on the whole, I feel compelled to point out that it should not be necessary to have to make such a data rich and graphic argument to carry this debate. 

Think of it this way: Prior to the age of economic globalization, a nation's economy was akin to a sound, leak free bucket.  Globalization can be thought of for purposes of this example as punching several holes in the bottom, such that a certain quantity of investment and productive effort with which we fill the bucket, now runs out from below.  Nevertheless, the bucket still fills to some level and holds there as long as the input stream remains steady.  If we increase the fill stream and are careful not to make more holes in the bottom, a somewhat larger amount will leak out because of higher head pressure from above, but this same head pressure results from a higher fill level as well.

Anyone who fails to understand the basic physics and math at work here, simply is not being very thoughtful or else adopting a defeatist attitude.  We can do much better than accepting either of those two possibilities.

Here is the Krugman post:

Not So Global

Barry Ritholtz sends us to a San Francisco Fed paper from last summer that makes a point on which many people seem confused: despite globalization and all that, the bulk of a consumer dollar spent in America falls on American-produced goods and services.
The reason this matters — or at least one reason it matters — is for discussion of austerity, stimulus, and all that. I often get comments along the lines of “Well, maybe stimulus worked back in the old days, but now it just means spending more on stuff from China”. In reality, that’s nowhere near true.
Why? For one thing, most consumer spending is on services, few of which are really tradable. For another, even if the thing you buy in WalMart says “Made in China”, the price includes a lot of US value-added in the form of transportation and retailing costs.
Here’s the paper’s estimates of the share of personal consumption expenditure (PCE) spent on imports in general and imports from China:
So we’re still a country where about 85 cents of your consumer dollar is spent at home, one way or another. And this means, among other things, that the rules of macroeconomics haven’t changed nearly as much as people imagine.


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