Looking at some of the comments on yesterday’s column, I see that a fair number of readers believe that Keynes is no longer valid because any increase in domestic demand will simply “leak” abroad.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 (Silicon Valley has a way disproportionate number of software engineers, demonstrating that those engineers are producing stuff that can be exported to other locations; retail employs about the same fraction of the labor force everywhere, demonstrating that it can’t be traded). Their results look like this:

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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.

I should also mention Nakamura and Steinsson (pdf), who use regional variation to estimate the size of the fiscal multiplier; they find that for U.S. regions, it comes in at around 1.5. And the U.S. economy as a whole is much less open than any one of its regions, so the overall multiplier should be larger. Again, globalization apparently doesn’t change the basics.

In the long run, Keynes is still alive.