Director of China Hearsay's Economics Department

I don’t know how many Teabaggers read his Forbes column, but Gordon Chang seems to be playing to that crowd:

Need another argument why Washington should refrain from further stimulus spending? Of course you don’t–your list should already be too long–but let me tell you what Andy Xie says anyway.

Obviously everyone already knows that stimulus spending is ridiculous, ha ha! Helping poor people and trying to inject money into the economy to boost job creation? Ludicrous. The U.S. government shouldn’t even try it. I suspect that Chang might go along with some tax cuts, but that’s speculation on my part.

OK, aside from the Herbert Hooverism, Chang does bring up an interesting argument made by Andy Xie:

Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

Sounds logical to some extent, although note that Xie’s article is not a screed against stimulus spending but concerns developing country inflation. Anyway, here’s how it works: government sends a check to that poor unemployed slob in Detroit, who goes to Wal-Mart to buy a pair of cheap tube socks that were made in China. The stimulus helps this guy get his socks, but the increased demand may translate into more manufacturing jobs at Wal-Mart’s China factories.

Agreed. Some of U.S. stimulus (or similar spending by any other industrial nation with a trade deficit) will “leak” out to China and other trading countries. That’s what happens when you have a trade deficit and do not discriminate in your stimulus spending. It’s also a good argument for multinational stimulus programs (see Mark Thoma on this issue). The question is how much of this leakage would take place. Neither Xie or Chang include any handy statistics, and Xie’s stat that half of global GDP is from the international sector doesn’t tell us enough about the effects of stimulus spending on local job creation.¹

You see, if for every dollar of stimulus spending, 50 cents leaked out to other nations, I would agree that better solutions might be needed. I suspect, however, that the real number is much lower. If the number is actually 20 cents, is that “too much” leakage? Do we scrap the program even if 80% of it is helping the domestic economy? I’m not sure where to draw the line, but Chang never brings this up; perhaps even one cent of leakage is intolerable in his eyes.

In addition to appealing to people who despise non-military government spending of any kind, Xie’s argument probably sounds good to folks who think it “unfair” that the U.S. spend money that will help China. Understood, but that would be a lot more convincing if China had not already gone through a few rounds of stimulus itself. Granted, Beijing’s money did not go directly to foreign companies (it went predominantly to State-owned enterprises), but the overall stimulus undoubtedly benefited foreign firms that sell in the Chinese market; Chang admits this in his column. It would be odd to claim that while foreigners should not benefit from U.S. government spending, this rule should not apply to Chinese spending.

I’m not refuting the claim that more U.S. stimulus money will leak to China than the other way around. For those of you that find that completely unacceptable, I understand. However, does it therefore make sense to say that American stimulus programs should therefore be scrapped, particularly now when there are some indicators that the U.S. job market is getting worse? Again, that would only make sense if an overwhelming percentage of stimulus money/jobs would go overseas or if there were better alternatives.

As to the latter, the only “alternatives” being discussed in Washington, D.C. these days are 1) no spending at all; or 2) regressive tax cuts. No spending means no help to people in distress, and no pump priming the job market, and tax cuts are a notoriously inefficient means of stimulating the economy. The rich guy who gets a tax cut is just as likely to buy a condo in Shanghai than create some jobs in Seattle. Somehow the tax cut crowd never seems to worry about those leakages.

Let’s look back at that Wal-Mart example. The guy buys his tube socks – demand has increased at that store. What’s the result when we look at the aggregate? Yes, perhaps more hiring at Chinese factories. What else? Well, maybe some additional cashiers or other service jobs at Wal-Mart and their distribution partners. These might not be great jobs, mind you, but that’s another issue.

The U.S. labor force is not based on local manufacturing; it’s based on crappy service jobs in retail, health care, fast food, etc. Stimulus money that goes to an unemployed guy will indeed go to firms like Burger King, Blue Cross, and Supercuts. That money will for the most part remain in the U.S. economy, and to the extent some of it leaks out via a Wal-Mart type supply chain, you would expect at least a little domestic hiring anyway, plus profits would remain with the Arkansas-based company (assuming that matters).

I also haven’t brought up targeted spending, like infrastructure, but even if all of the contracts to rebuild roads and bridges were snapped up by Chinese construction firms, the vast majority of those local jobs would go to American laborers, wages paid to whom would stimulate the domestic economy. There are other categories of employment that could be included here as well, such as teachers, police and fire fighters, and other local public officials. Right-wing types don’t like to admit that these are “real jobs” but they are, and their wages, when spent, go into the domestic economy just like those paid to a manufacturing worker.

So is Chang right on his facts? When he (via Andy Xie) says that U.S. stimulus money will leak to China, he is absolutely right. The question is how much. If the answer is a great deal, then someone needs to prove that. Additionally, if that is a huge problem, we might consider ways to better target spending to minimize such leakages or other solutions (Chang does not suggest alternatives). To use Xie’s column to argue for a general cessation on new government spending smacks more of ideology than economics.
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1. I couldn’t find any user friendly data either, although my time was limited this weekend. Then again, I’m not the one arguing that leaking is such a huge problem that we should forget about further stimulus spending.[↩]

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