Wednesday, February 4, 2009

Surprise! The Stimulus Bill Includes Protectionism

By Phil Fraietta

It should come to no surprise to most people that when it comes to economics, Democrats, have no clue. It was first reported late Thursday afternoon that the version of the stimulus bill passed by the House includes a “Buy American” proposition. The proposition requires all iron and steel used in the bill’s infrastructure projects to be purchased by American companies. And, it is now expected that when the Senate produces its own version of the bill, the “Buy American” proposition will expand beyond just iron and steel to include all materials used.

Trade is a topic of heated debate amongst politicians, but amongst economists there is no debate—protectionism fails. But of course Democrats are not concerned nor educated when it comes to economics so this should come as no surprise.

The central idea behind protectionism is that by requiring all materials to be purchased from United States companies, these companies will employ more people to meet their increased demand; thus creating jobs. While this may be true, the protectionists fail to see the wider scope of the argument.

First, there is no evidence that protectionist policies create jobs on a macro level. Of course, requiring all steel to be purchased by domestic companies will create jobs in the steel industry, but what about the jobs lost in the import industry, and other industries dependant on free trade?

This brings me to my second point. If we impose strict anti-trade laws on neighboring nations, why would they not be enticed to do the same? Chances are they would be enticed to do the same and they most likely would. This can have disastrous effects on domestic companies. Take a company like General Electric, which receives nearly half of its revenue from overseas. If foreign nations were to increase their import restrictions, GE would suffer huge losses causing them to cut back on costs, most likely by cutting labor. When you take into account the fact that we live in a global economy, this same process is likely to be repeated by thousands of companies, meaning thousands of lost jobs.

Finally, we have yet to consider the effects of protectionist policies on the price of goods. As anybody who has taken an Econ 101 class would know, when supply is limited prices rise. By limiting the supply of products such as steel and iron, we can expect prices to rise in the near future, which will have catastrophic consequences. When dealing with government purchases, prices with contractors are set ahead of time in contractual form. But the prices offered by the contractor will of course be based on steel prices at the time the contract is signed. Once the price of steel rises, however, the costs increase for the contractor. Because the price was agreed upon in a contract, the contractor could not ask for more money from the government to cover the increased costs, and would be forced to cut costs. As stated earlier, when businesses cut costs they normally do so by cutting labor costs. This means fewer jobs.

For those who doubt that protectionist policy can really affect prices that much, take this example. The Bush Administration was faced with the problem of low steel demand in 2001 and again in 2003. Both times the Administration implemented tariffs to try and protect US steel factories from closing. This of course led to foreign steel makers finding other markets, namely China. Once the steel market recovered, and US steel demand rose again, in 2004, steel prices rose a staggering 48% that year according to the Labor Department.

We are currently in the midst of the worse recession this country has seen since the early 1980’s. Protectionism is a policy that is not advocated by any school of economic thought, yet the Democrats have decided to implement it in this stimulus bill. Not only should trade never be limited, doing so in the midst of a recession is plain stupidity. Unfortunately, economics is not an area in which Democrats are caring or educated. The American economy will recover from this recession, but with the Democrats in control it may take a little longer than we thought.

1 comment:

DSKohn said...

True, if we are careful we must avoid a repeat of Smoot Hawley. A trade war now would have consequences of a nature we could not possibly recover from without having to pay to fight World War III. Though I do support people of their own volition attempting to buy American products....remember Lee Iacocca and Ronald Reagan.