Krugman: Globalization, the stimulus and trade.
Looking at some of the comments on yesterday’s column, I see that a fair number of readers believe that Keynes is no longer valid because any increase (like the stimulus)in domestic demand will simply “leak” abroad. This is a widespread view, but it’s wrong. Globalization has been impressive, but it has not proceeded far enough to make Keynesian analysis irrelevant.
Actually, you should realize this point immediately just by thinking about the Great Recession itself. If domestic spending all goes on stuff made in China, the one-two punch of plunging home construction and falling consumer spending should have done all its damage abroad, not here in America. Obviously that didn’t happen.
But we can also look at the issue directly. The fact is that despite rising trade, a large majority of workers in America still produce goods and services that can’t be traded. My favorite estimates here come from Jensen and Kletzer (pdf), who use geographical variation across the United States to estimate which industries and occupations are tradable. ... Their results look like this:
Add to this the point that even tradable industries are strongly affected by domestic demand, and you find that globalization has not, in fact, changed the rules all that much.
http://krugman.blogs.nytimes.com/2013/08/10/globalization-and-keynesianism/