My new column for National Journal attacks the Buy America language in the fiscal stimulus bills [the link expires in two weeks].
During the past few months, as the severity of the recession has become clearer, drawing parallels with the Depression of the 1930s has been a staple of economic commentary. Rightly so: This may yet turn out to be the worst economic setback for 70 years, and the Great Depression says something about how bad things can get if governments fail to respond quickly and about the need to learn from history.
Speaking of that, remember Smoot-Hawley? One can overstate its role, no doubt--it did not actually cause the Depression--but most economists, I think it fair to say, believe that the effort in the 1930s to boost domestic output by restricting imports made things worse. The collapse of world trade, and hence global output, was helped along by deliberate policies in the United States and abroad, as governments tried to keep employment high at home by shifting unemployment overseas. In the end, everybody was worse off.
I had thought this lesson had sunk in. Smoot-Hawley is a byword for economic incompetence and illiteracy. In a global slowdown, "Beggar thy neighbor" is a formula for disaster. Who dissents? The issue, I had supposed, arouses no controversy--causing far less disagreement than how to mend the banking system; less than whether a big fiscal stimulus is needed to revive demand; and less than whether tax cuts or increases in public spending are the best way to stimulate. Yet both the House and the Senate have drafted stimulus bills that include protectionist "Buy American" language. The spirit of Smoot-Hawley lives.
You can read the rest here.
"Buy American" procurement preferences are nothing new and similar (or worse) policies are pursued around the world. In "Competing Economies: America, Europe and the Pacific Rim," the Office of Technology Assessment notes that despite ranking as the top two manufacturers of electric turbine equipment in the world, GE and Westinghouse were unable to may any sales of such equipment in the EU (other than to countries with no domestic competitors). Every other country in the world routinely and without embarrassment gives preference to domestic producers -- we are the only country that would even be concerned about whether or not to do this.
Isn't this fundamentally differenct from the Smoot-Hawley tariffs, since everyone else in can still buy foreign goods without penalty? In fact, the House measure was the right way to go about protecting a very specific strategic industry. Non-government sectors can continue to buy whatever is cheaper, foreign or domestic steel. It's the vagueness of the Senate version that could lead to problems.
Buy America preferences already exist at the Federal level. The military is required to purchase equipment that is at least 51% American made. Does this grind the entire world economy to a halt? No. Its been in place for over 20 years that I know of.
Stop the fear mongering and evoking Smoot-Hawley tarrifs. "Buy American" should be in every citizens lexicon, but it isn't. When it all boils down, I am sorry Macau (or any other country), but I have to look out for my own country and keep my own neighbors employed.
Many Americans do not see it this way and that is quite unfortunate. There is no "free market" and every nation in the world has protectionist policies yet they had nothing to do with getting us in the bind we are in today.
In most cases, protectionism doesn't make sense because if other countries stopped buying your exports your revenues would suffer, hence the economy would suffer.
But isn't America a major consumer for almost the whole world?! We are buying exports from all countries but what are our exports? Of course, America's protectionism would adversely impact other countries. But what's in it for Americans? Except perhaps the potential for decreased choices, lower quality and more expensive goods? But how long can America continue to consume esp when it is losing jobs to India and China??
The maths of this would be interesting.