International Law

Fiscal Stimulus and China Bashing

By Stan

I was just listening to the Bill Moyers program on iTunes (this is a U.S. newstalk show with a very left-leaning point of view). The discussion was on the economy and the challenges of the recovery. What got my attention was talk of the fiscal stimulus and the need to spur consumption.

Specifically, the guest (a self-identified socialist — not that there is anything wrong with that) contrasted the present time with the Great Depression of the 1930s. The complaint was that when money was spent in the 30s on job programs, construction, etc., virtually all the money stayed in the U.S. economy (i.e. spending of those dollars cycled through the domest economy and did not “leak” offshore).

Today, the guest complains, the same sort of spending is given to people who go and spend it at Walmart, purchases that benefit the Chinese or Korean economies just as much as they do that of the U.S.

I think the biggest sin here is oversimplification, or focusing narrowly on one aspect of a larger issue, and ignoring the broader context, in order to provide evidence for your argument. I guess it works if no one challenges the statement.

A couple of very basic points at the outset. First, if you buy a plain, unbranded T-shirt at Walmart that was made in China for $10, ten dollars does not go to the Chinese economy. There are a whole lot of folks that are taking a piece of that revenue, including Walmart and intermediary distributors, not to mention transportation and other logistics enterprises. When we finally get down to the factory in China, not much is left for them to pocket.

Second, if you buy a branded item, let’s say a Nike shoe, even more profits are flowing to U.S. companies. Indeed, for some products, you will find that for the entire manufacturing and sales cycle, all the players (including the factory in China) are American companies.

Third, let’s not forget what happens to those dollars that end up over here. As an aggregate, when they are converted into RMB, the government ends up with a whole lot of excess dollars. Thus far, despite what you read in the press these days, the Chinese government has invested those excess dollars into safe investments such as U.S. Treasury bills. This investment has allowed the U.S. government to borrow all of that money it is currently using for fiscal stimulus at reasonable interest rates.

So. I don’t think it is particularly useful for American protectionists to claim that a purchase at Walmart is somehow a bad thing because it significantly benefits the Chinese economy. Not only is it misleading, but it also ignores the deeper, interrelated structure of the American and Chinese economies.

This is a very attractive emotional argument. Why should we spend money on foreigners when we are having so much trouble at home? Let’s make sure that our money benefits Americans first.

Sure. And this is coming from a person who not only dislikes globalization, but wants to reverse it (i.e. is a proponent of “deglobalization”). As a free trader, I’m skeptical that deglobalization is even possible, and I’m quite certain that it would be a bad idea if it were. Didn’t the world deglobalize in the 1930s? I don’t think that worked out all that well.

© Stan for China Hearsay, 2009. | Permalink | No comment | Add to del.icio.us

Full post as published by China Hearsay on May 05, 2009 (boomark / email).