Reader Pedro Pereira points out an important issue with stimulus spending in the current US economy. What happens if most of the income generated by the stimulus is spent at Walmart and other big box, import intensive, retailers?

However, my suspicion is that, nowadays, workers hired by stimulus package programs will tend to spend their money at stores such as Wal-Mart. Relatively little of the money spent at Wal-Mart goes to its employees, unable to organize as they are, even less goes to Chinese factory workers, and virtually none goes to American factory workers. These are the people who would multiply the effect of the stimulus by spending the money.

And it is indeed the case that a stimulus dollar will be less effective as derived spending from that dollar goes to stores like WalMart rather than domestic spending. The multiplier story goes like this:

1. The Government gives Wonks Anonymous $100 for a fine blog post increasing net government spending and Wonks Anonymous income. Assuming that we are in a liquidity trap type situation no private spending is crowded out by this spending and national income rises by $100.
   
2. Wonks Anonymous spends some part his $100. Say $80 because he is pathologically thrifty. Because he is a foodie, he spends it all at the local - ecologically correct - farmers market. Now the total impact on national income of the $100 spent is $180. $100 first round spending and $80 second round spending. Note that the $20 that Wonks Anonymous saves is a "leakage" and reduces the size of the total impact.
   
3. Suppose that the fine farmer who sold Wonks Anonymous $80 of organic locally grown produce is also thrifty. He saves $16 and spends $64. Suppose that he spends the remainder on cheap Chinese crap at WalMart. Assume further that 1/2 of the value of the crap is domestic value added - transport costs, marketing and design services, retail labor and shareholders profits. The rest goes to profits for fine StalinoCapitalist firms and wages of oppressed workers. The second round has added only $32 to domestic income. The rest has leaked through purchases of imports. If the farmer had followed the civic minded example of Wonks Anonymous the total impact on domestic demand would have been $244 Instead it is $212.
   
4. If Walmart shareholders and the StalinoCapitalists of China have a higher propensity to save and if they manage to take most of the income from the $64 then the leakage continues apace and the overall impact of the spending - the multiplier - is smaller.

Economists take this into account when they compute the amount of government spending that is need to stimulate the economy and try to convince the government to calibrate fiscal policy accordingly. When Professor Krugman complains about the small size of the stimulus package he is taking the WalMart factor into account.

It is probably dangerous and unproductive to try to change current trade patterns and economic institutions. Trade wars and all of that you know. Still voluntary actions to buy from local producers wouldn't hurt and might just help build stronger communities.

Remember folks, Wonks Anonymous may not have a Nobel prize like some other bloggers but he does answer your email.