Stimulus? It’ll all go to China. Or not

This new post at VoxEU on the sudden plunge in world trade in 2008-2009 is very interesting. For one thing, it gives us some detail about how the crisis was transmitted around the world, and how this transmission happened between typically supply-side factors (wages are too high, the wrong goods are produced, everyone is suddenly a “zero marginal product worker”) and demand-side ones. It seems that the unprecedently large chunk of world trade that consists of intermediate goods in supply chains played an important part. On this occasion, “The World, On Time” was the last thing anyone wanted.

Another interesting and important point which isn’t explicitly made is that fiscal stimulus didn’t actually “leak” as so many people feared. Countries that carried out substantial stimulus didn’t see their balance of payments get sharply worse. This is because public spending often goes into nontradable goods, and the rest is often spent on home production.

In so far as you want “rebalancing”, then, it doesn’t make sense to think that austerity leads to it.

This entry was posted in A Fistful Of Euros, Economics by Alex Harrowell. Bookmark the permalink.

About Alex Harrowell

Alex Harrowell is a research analyst for a really large consulting firm on AI and semiconductors. His age is immaterial, especially as he can't be bothered to update this bio regularly. He's from Yorkshire, now an economic migrant in London. His specialist subjects are military history, Germany, the telecommunications industry, and networks of all kinds. He would like to point out that it's nothing personal. Writes the Yorkshire Ranter.