Monday, February 2, 2009

Please Don't "Buy Ameican"

The only thing missing in turning this economic downturn into a full-blown worldwide depression is a good dose of protectionism and a massive trade war. Unfortunately it looks like it is on the way. In casual conversation, in chat groups, blogs, and in songs on country radio the “buy American” sentiment is expressed. Both grassroots liberals and conservatives are calling for requirements that money appropriated in the stimulus bill be restricted to projects that only use only American made products in their spending projects. Protectionist sentiment seems to be growing by leaps and bounds.

If the Democratic super spending bill really was a good economic stimulus bill and was devoid of all the pet projects and pork in the bill, it would still be a bad bill because of the “buy American” provisions in the bill. The last thing we need is a trade war. If we mandate “buy American” we can expect other countries to retaliate. If we stop buying Chinese goods the Chinese very well may decide to stop buying our debt.

Almost all historians agree that a major cause of the Great Depression was protectionism and the trade wars. The Depression began in 1929 with the stock market crash. The depth of the depression however did not occur until 1932. In 1930 Congress passed the Smoot Hawley Tariff Act, which raised tariffs on over 20,000 imported goods. This act was thought to be a job creation bill, the reasoning being that if we did not purchase all of those goods from foreign countries that Americans would be put to work producing those goods. As soon as the bill was passed foreign countries began boycotting American goods and passing retaliatory tariffs on imports. American farmers could no longer export their goods. We did not pull out of the depression until 1939 with the outbreak of World War II.

In addition to causing other countries to retaliate against American goods, “buy American” also creates other inefficiencies that cause job losses. Writing in an op-ed piece in the New York Times, Douglas Irwin offers an example to demonstrate why this is so:

In rebuilding the San Francisco-Oakland Bay Bridge in the 1990s, the California transit authority complied with state rules mandating the use of domestic steel unless it was at least 25 percent more expensive than imported steel. A domestic bid came in at 23 percent above the foreign bid, and so the more expensive American steel had to be used. Because of the large amount of steel used in the project, California taxpayers had to pay a whopping $400 million more for the bridge. While this is a windfall for a lucky steel company, steel production is capital intensive, and the rule makes less money available for other construction projects that can employ many more workers. (If We Buy American, No One Else Will)
I know it sounds patriotic and rational to “buy American.” It is not. The world is much more interdependent now than it was in 1930. If we start a massive trade war, it is guaranteed to push us into a full-blown Depression that may last for a very long time. I hope that the wiser heads in Congress and the Obama administration resist the growing public demand for protectionism. Please don’t get caught up in the “buy American” feeding frenzy. It is economic suicide.

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1 comment:

  1. This is a very interesting post and I was amused to see the Project Wonderful ad on your site when I read the post, "GET USA MADE".

    As is often the case, I partially agree with you on this.

    First off, the 'Buy American' seems to be more jingoism that good economic policy. In addition, when you buy something 'Made in the USA', you may not be getting what you expect. How many of the parts of what you bought were made somewhere else?

    I think this illustrates the concern economic policy. People do not make economic decisions based on what is really best, or most efficient. Instead, decisions are made based on incomplete information and emotions.

    Beyond that, however, I suspect we might disagree on trade policy. While I don't support 'Buy American' jingoism, I don't support 'Free Trade' either. Much of what I've seen labeled as Free Trade seems to be more about making it easier for large corporations to take advantage of trade policy and less about making trade truly free.

    This comes back to the lack of information that most consumers have. They will buy products from other countries without knowing if it is produced by child labor or slave labor. They will buy products without the full impact the production and distribution of the product has on the world as a whole.

    So, yes, we should try to avoid emotional buying based on country of origin, but more than that we all need to be able to get more information so that our product choices can be better and lead us back in the direction of an efficient economy.

    As always, just my two cents, adjusted, of course, for inflation.

    Aldon

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