Wed, 12 May 2021

Does US Economic Stimulus Boost the Global Economy

Voice of America
16 Apr 2021, 07:05 GMT+10

The United States has poured trillions of dollars into its economy during the pandemic, and if President Joe Biden has his way, it will continue doing so for the next several years.

While most of the attention to the stimulus and recovery payments in the U.S. has focused on the domestic economic impact, economists have their eye on another side effect: the "spillover" benefits to the rest of the world.

"The government is sending out checks to everybody," said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics. "Households and state and local governments are buying all kinds of supplies for education and health care - we haven't had a government budget deficit this big since World War II."

Even though it is currently impossible to say what percentage of the stimulus money coming from the federal government will be spent rather than saved, the "massive" amount of money involved guarantees large economic impacts, Gagnon said.

A 'phenomenal experiment'

Gagnon explained that in an economic boom, the percentage of spending directed overseas - in normal times between 15% and 20% - increases sharply. "So that means that maybe as much as 30% of all this extra spending could spill over onto other countries."

The level of spending by the U.S. right now amounts to a "phenomenal experiment," Gagnon said.

"Overall, it's good for the world," he said. "In fact, it's so good that it might end up being a political issue in the U.S. because our trade deficit is going to get much larger, and people will say, 'Why is the federal government borrowing all this money to support jobs in China and in Germany?' "

US as 'locomotive'

Falk Brauning, a senior economist and policy adviser in the Federal Reserve Bank of Boston Research Department, said that there is a "strong consensus" among economists that the spillover effects from increased U.S. spending are very significant for other countries.

"The U.S. is really on track for a very strong recovery after last year," he said, adding that the U.S., as the world's largest economy, can serve as a "locomotive" that pulls other economies along behind it.

"The booming U.S. economy will help other countries to recover faster and more strongly," Brauning said. "So we expect strong, positive spillover effects on direct trade partners to the United States. In fact, we see part of that already materializing."

Germany, he pointed out, is already reporting strong export growth to the U.S. based on increased demand.

Some benefit more than others

The bulk of the benefit from increased U.S. spending abroad will likely accrue to other large economies in Europe and Asia, experts said. And countries such as Mexico and the nations of Central America, which all have economies closely tied to the United States, will likely see substantial increases in their exports.

Countries that rely on tourism for most of their income, however, probably won't see much benefit from increased U.S. spending until the travel industry recovers more fully.

And the economic boom in the U.S., while good news for much of the world, could also have some downsides.

Inflation and rising interest rates

Desmond Lachman, a resident fellow at the American Enterprise Institute in Washington, said that he expects the large volume of extra spending in the U.S. to overheat the economy within the next year, and that will have follow-on effects that may hurt other countries.

"The negative side is that if the United States economy overheats ... then what that does is it produces high interest rates in the United States," he said.

When that happens, investors who had taken their money overseas in search of higher returns will start seeing new opportunities in the U.S. and will bring that money back. Lachman pointed out that precisely the same thing happened in 2013, when the Federal Reserve began raising interest rates after the Great Recession.

"This is serious, because a lot of these countries are just totally dependent on money coming from the United States to keep them afloat," Lachman said. "They're running big budget deficits, and they're really in very bad shape."

Lachman said that he is looking particularly at countries such as Brazil, South Africa and Turkey, which would be hit particularly hard if U.S. capital begins to flow away from them.

The problems will be compounded for countries that have borrowed money that they are required to pay back in U.S. dollars. As U.S. interest rates rise and the dollar strengthens, making those debt payments will become more of a financial drain on debtor nations.

A cautious approach

Brauning, the Federal Reserve Bank of Boston economist, said the Federal Reserve is well aware of the potentially damaging effects of disrupted international capital flows, and it will be cautious about how it approaches changes to monetary policy.

"I think the key to avoiding these disruptive effects is that interest rates increase gradually and not abruptly," he said. Economic research, he said, "has found that as long as there's a gradual and kind of predictable path of the interest rate, then these disruptive effects - especially for emerging markets - resulting from capital outflows are much less severe."

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