Economic stimulus and globalization
With few global trade barriers, fiscal stimulus measures paid for by taxpayers may boost another country's economy.
The following is not a full transcript; for full story, listen to audio.
Governments have pumped almost unimaginable sums into stimulus measures to prop up their economies. The money's been spent in lots of different ways -- from public works programs to tax cuts and cash incentives for buying new cars.
President Obama's stimulus plan is costing American tax payers about a trillion dollars. China is spending $600 billion, while Britain's crisis spending has doubled public borrowing in relation to the size of its economy. Numerous other countries have done the same.
In a world with few trade barriers, measures paid for by taxpayers in one country may actually be boosting the economy somewhere else. Does globalization mean a costly economic stimulus in one country will actually benefit other nations instead?
James Feyrer, professor of economics at Dartmouth College, recently conducted research on world savings and investments. On the BBC's "Business Daily," he said large government deficits can "crowd out" global private investment.
"When the United States for example, increases taxes by a dollar, that gives an extra dollar's worth of savings because that's a dollar that the United States is not borrowing," said Feyrer. "So about half of that extra savings ends up staying in the United States and turning into investment in the United States. And about half of that dollar turns into extra savings in the rest of the world ... so all the rest of the countries in the world have access to that dollar to borrow, to produce investment goods in other countries. And what we found was that the dollar really went to all the rest of the countries in the world in proportional to how big their economies are."
The results of his research showed that the effects of the fiscal stimulus spending in the US expands way beyond America's borders, and that stimulus in other countries also affects the US.
While much of his findings were obvious and consistent with the tenets of globalization, Feyrer said he was surprised by how "broad-based" the effects were:
"Small countries, big countries, developed countries, lower-developed countries all appear to have similar effects ... it isn't just that when the US does something, the rest of the OECD or the EU feels its effects; it turns out when the US does something, all of the countries of the world appear to partake of the changes in world financial markets that come from that.
"And similarly, when countries like China, over the last decade, increased their savings by enormous amounts, that actually allows everyone in the rest of the world to invest more ... so it's not really just about the US, it's really about any time a big country changes how much savings their putting into world capital markets."
BBC "Business Daily" is a regular feature from the BBC World Service.
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