The main goal of any economic stimulus is to create more infrastructure, more jobs and increase wealth but where the theory falls short is where these jobs are going and who is truly benefiting from it, according to independent economist Andy Xie.
Multinational companies which span the globe are able to take full advantage of cost differences between companies and these stimulus measures may end up stimulating someone else’s economy.
‘You have the Krugmans of the world saying “Lets stimulate! Austerity is wrong!”', said Xie. 'The theory of stimulus is you give people money to spend, they spend, companies hire more people, and they have more money to spend, and this kicks into a virtuous cycle.’
In practise, however, it doesn’t always behave the way theory dictates, as Xie illustrated with the example of Nike.
‘If you give money to Americans to buy an extra pair of Nike shoes, will it stimulate the economy? The shoes are made in China, the logistics are arranged in China, the shipping company, and even the ship is Chinese too. The only American who works is the guy who drives the truck. A lot of economists do not understand this.’
As more pressure is put on central bankers to deliver the GDP growth so desperately needed by the world’s developed economies, the resulting landscape has favoured speculators over investors, said Xie, who noted investors who focus on fundamentals have done poorly in the last few years, while speculators have done very well.
But at least one developed economy is taking positive measures to adjust to the new reality, and be more economically flexible, said Xie.
‘Germany is a good example. German wages are not higher than in other countries, the German living standard is not that high, but its economy is working because it’s restructured to fit in this world. Housing is cheap, education is cheap, healthcare is cheap.'
Assets such as housing, education, and healthcare are domestically focused, and are not easily globalised, unlike manufacturing and services.
Making such ‘non-tradable’ assets efficient, said Xie, allows Germans to compete globally, and effectively. Conversely, printing money has an almost contrary effect.
‘When you print money, what inflates first? It’s the things that do not trade; education, housing, and healthcare. In the short-term, you get the benefits, you get a wealth effect.'
'Housing prices go up, people feel better and spend more money,’ says Xie, who notes the long-term effects will erode the competitiveness of money-printing economies.'