Saturday, January 31, 2009

And so it begins...

Most economists, even on the left, are not going to be happy about the "Buy America" provisions within the new stimulus package.  

Proponents naturally argue that the only way to create American jobs is to ensure that the money gets spent on American goods and services. Simple enough, right?

Opponents of the provision counter with two main arguments. The first is the threat of a trade war. In the 1930s, the Hoover administration, mired in the beginning of the Great Depression, signed into law the Smoot-Hawley Act, significantly raising American tariffs. Europe, similarly dealing with the economic downturn, enacted their own tariffs. In the end, everyone got poorer. 

The second argument is that it simply won't work, for a variety of reasons having to do with the dynamics of international trade and capital mobility. As Nick Rowe explains:
"A 'buy domestic' policy will not shift demand towards domestic goods. If it did, so that imports fell and net exports increased, the current account surplus would merely cause the exchange rate to appreciate so that net exports fell to their original level. The current account must stay the same, because the capital account stays the same, because the interest rate differential stays the same, because interest rates stay the same."
Brad DeLong adds:
"If there's little excess capacity in the U.S. steel industry--so that the price of steel is high enough to induce people to look outside for suppliers--then a stimulus won't be much needed. If there's a lot of excess capacity so that a stimulus is needed, then steel customers should be able to bargain prices down to marginal cost--in which case foreign producers will have an extremely difficult time competing on price given that steel is heavy and distances are great. "Buy American" seems mostly designed to allow the steel producers to collude and push their profits up--at the expense of American taxpayers." (emphasis added)
Much has been made about the Obama administration's attempts to keep the stimulus package pork-free. But trade restrictions benefit well connected constituencies and are politically popular (usually); it's hard to think we were going to get a an $800 billion stimulus package without pork. As Russ Roberts says, you're better off hoping for a ham sandwich without pork.

1 comment:

Nick Rowe said...


And now Paul Krugman has come down on the other side. He thinks protectionism will increase the fiscal multiplier. But he is (implicitly) assuming fixed exchange rates in his model. The vast majority of US trade is with countries with which it has flexible exchange rates (Canada, Mexico, Europe, etc.)