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Economic stimulus might end up stimulating foreign economies more than the domestic economy when the US is so dependent on imports.

When Japanese car imports threatened the dominance of the American auto industry in the 80’s, Japanese auto companies quickly set up plants in the US to get over the trade barriers. In order to be qualified as domestically produced cars, they needed to embody certain domestic content. These “Buy American” provisions were a means to retain jobs in America by capturing a bigger share of the value added to the end products.

The "Buy American" movement, however, did not spread to other consumer products. As a result, 4 million manufacturing jobs were outsourced to overseas factories from 1997 to 2008 (BW 12/8/2008). In fact, the more American consumers spent, the more jobs were sent overseas. In effect, American consumption provided the virtual engine for global growth by massively importing more than it exported.

When the US housing boom collapsed in 2007 and ushered in the Great Recession, the US government had to stimulate the economy suffocated by the credit crunch. Such stimulus would come to naught if it all goes to importing goods and services from abroad. To make sure that the stimulus ends up creating domestic jobs and promoting domestic production, it has to be carefully targeted. Spending on infrastructure, health-care modernization, and green technology was thought to create the most domestic jobs.

That economic stimulus must be carefully targeted attests to the fact that much of the manufacturing technology involved is now controlled by foreign countries. Although public transit vehicles such as bullet trains must by law have 60% domestic content and be assembled in the US, the lead vendors are notably from Japan, Germany, Canada and France. Even in green energy such as wind power, the turbine technology must be imported. For example, a wind farm proposed for Texas would be 30% funded by stimulus money but powered by Chinese-made wind turbines. (NY Times 11/17/2009.) (See Farming the Wind). And China is among the lowest-cost producers of solar panels.

With such a leaky economy, the income multiplier effect of economic stimulus no longer depends just on the marginal propensity to consume in general but to consume domestic products specifically. (See Spending Multiplier).

Spending more on education, research, and health care might improve America’s long-term economic competitiveness, but the short-term stimulative effects are not as politically attractive.

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