Leakage, and hot air

Michael Burke: One of the main objections to the government adopting measures to boost the economy is the concept, or more accurately the notion, of 'leakage'. That is, the mantra goes, we are a small open economy and if the government boosts activity it will all leak abroad via imports.

This objection would be simply ridiculous, if the outcome weren't so serious. That's because it completely misunderstands some of the most fundamental processes in this (or any other economy). Of these, the most important to note here is that the division of labour increases productivity. For all but the very largest economies this means participation in the international division of labour. When there is a high level of participation in the globl economy (international division of labour), such as there is here, imports are primarily used as inputs in production, not consumption. Furthermore, most of that producion is for re-export, whose value significantly exceeds the value of all imports.

If, say, oil is imported that is counted as a debit in the national accounts even if it is only an input into the generation of electricity or production of glassware, production of transport services, etc. In the latest data the total use of imports in this economy was €112.8bn. But the final consumption of imports was just €23.4bn. The remainder were inputs for production and re-export.

The spreadsheet can be found here.

Yet no sensible person thinks that this should be halted. On the contrary, it needs to developed as this adding of value is the basis of any country’s prosperity. In particular it is the primary source of this economy's increased prosperity over several decades.

What opponents of measures to boost the economy seem to have in mind is the personal consumption of imports. Perhaps the belief is that the masses are chewing too much chorizo, or swilling too much chardonnay. But in the same year, personal consumption of imports was just €10.6bn, just 9.4% of the total import bill. It was also just 10.7% of total personal consumption of €98.7bn. The overwheliming bulk of personal consumption is of goods and servces produced here (mainly the latter).

These ratios are lower than in many countries which did adopt measures to boost growth. They in no way undermine the case for government action to revive the economy.

Posted in: Fiscal policy • Fiscal policy

Tagged with: stimulus • leakage