The "Stimulus" Trade War

Drudge highlights two articles concerning the buy American provision in the Stimulus package (The American Recovery and Reinvestment Act of 2009).  President Obama should have vetoed the bill for this provision alone.  Like most economists, I support trade.  Protectionist policies lower a country's standard of living.  During the Great Depression, the Smoot-Hawley Act began the beggar thy neighbor era in which countries responded to protectionism with protectionism.  Allan Dowd writes ("Canadians angered over "Buy American" rule," Reuters, June 6, 2009),

WHISTLER, British Columbia (Reuters) - Canadian municipal leaders threatened to retaliate against the "Buy America" movement in the United States on Saturday, warning trade restrictions will hurt both countries' economies.

The Federation of Canadian Municipalities endorsed a controversial proposal to support communities that refuse to buy products from countries that put trade restrictions on products and services from Canada.

The measure is a response to a provision in the U.S. economic stimulus package passed by Congress in February that says public works projects should use iron, steel and other goods made in the United States...

Trade Minister Stockwell Day told the group on Friday that Ottawa was actively negotiating with Washington to get the "Buy American" restrictions removed.

The measure's supporters agreed to modify it slightly by suspending implementation for 120 days, in order to give Canadian trade officials and U.S. critics of the "Buy America" rules more time to work on the issue.

Breitbart.com reports that Canada is not the only country concerned with the buy American provisions of the stimulus ("'Buy American' plan leads to ire, confusion," June 6, 2009).

The "Buy American" plan in US economic stimulus legislation is drawing increasing fire from US trading partners and also has led to confusion as government agencies try to implement the strategy.

Singapore was the latest among key US allies such as Canada and Japan to express concern over the restriction, warning that it could "beget other actions and then cause the situation to snowball in the wrong direction." ...

Without pointing at the United States, Lim [Singapore's trade minister] said it might be difficult to pin down countries that took steps that bordered on protectionism at the World Trade Organization, the global trade watchdog.

The Buy American clause originally said that infrastructure projects designed to kick-start the US economy out of a languishing recession could only use US-made manufactured materials.

But it was later watered down to show that such procurement could only take place in a manner consistent with Washington's international treaty obligations...

"The Buy American requirements are having a major impact on projects administered by state and local governments, resulting in declining trade and lost jobs for American workers," US Chamber of Commerce vice president Bruce Josten said..."Retaliation by Canadian municipalities could result in three billion dollars in lost business for US water and wastewater equipment manufacturers," he said..."We are sending exactly the wrong signal to our trading partners, and a retaliatory spiral may already be underway."

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The Batteries Tradeoff: American Jobs Vs Clean Environment

Economics involves tradeoffs.  The tradeoff is not one I believe[1], but based on goals stated by the Obama administration: clean energy and domestic job creation.  Two pieces of legislation exemplify these goals, one passed, the other pending.  The stimulus package, formally known as the American Recovery and Reinvestment Act, provides $190 billion of funds for green energy research and development, including batteries.  Pending legislation would provide funding for 100,000 U.S. made plug-in hybrid cars.  Both bills include buy American provisions.  Richard Waters, describes the current battery market (Battery makers view for US aid," Financial Times, May 17, 20090.  The emphasis added is mine.

A handful of US battery makers is scrambling for government support ahead of a deadline this week as the US struggles to win back lost ground from Asian competitors in one of the world’s next important technologies.

The race is also the first test of how the administration will use the near-$190bn in stimulus money earmarked this year to support “green” technologies, from alternative fuels to energy-efficient building materials.
Advanced batteries are seen as a strategic technology, given their importance to electric and hybrid vehicles, and their military applications.

As with the chip industry two decades ago, the US has lost the lead to manufacturers in Asia that have invested in high-volume manufacturing.

Currently, buying American batteries is more costly, implying that companies that use them in their products will be selling them at a higher priced input than they would if they could buy foreign batteries.  The supply of alternative fuel vehicles will grow more slowly and pollution, decline more slowly than otherwise.

[1]  I do not agree with the notion that forcing governments, or economic agents to buy American produces jobs.  It moves jobs from one sector to another.  I also do not believe that it is easy to isolate "green" sources of energy as the production of energy necessarily produces pollutants.  We only select the pollution type that we find less objectionable.
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Brad DeLong On The Stimulus As It Passed

To my recollection, there has never been an issue as contentious between economists as the merits of the stimulus bill. I began posting about economists supporting some type of stimulus package, followed by a spate of posts by skeptics. I thought that it was time to post on an economist supporting the stimulus bill as it passed Congress. Brad DeLong is a macroeconomist who gracefully and persuasively crafts words. He writes,

Will the Obama deficit-spending plan work? Will throwing $800 billion—$500 billion in extra government spending, and $300 billion in tax cuts—at the economy produce a world in which production and employment are higher and unemployment lower than would otherwise have been the case?

The short answer is yes. The short reason is that spending works—eras in which some group or other gets excited about future prospects and starts madly spending money are eras in which production and employment are high and unemployment is low. And the government, in this respect, is just like any other group of starry-eyed optimists whose eagerness to spend pulls the economy into a high-employment, high-pressure boom...

DeLong provides three examples of spending sprees increasing employment: the 2003-2005 housing boom supported by an easy money policy of the Fed, the 1996-1998 Internet boom, and the 1982-1986 boom led by monetary easing, increases in defense spending and tax cuts.

In a small gotcha moment, DeLong quotes Mankiw, a leading skeptic of the Obama stimulus bill, presumably supporting the Reagan fiscal stimulus, who said in 1983, "There is nothing novel about this. It is very conventional short-run stabilization policy: You can find it in all of the leading textbooks."

Many economists opposing the stimulus claim that the large debt will lower future growth. DeLong address these concerns with the typical serenity of an empirical economist waiting for data.

But there is a relevant question outstanding: Will there be some sort of a hangover after this Obama spending binge—some debt-induced, groggy morning after? And if there is a hangover how bad will it be? For the answer to that, we will have to wait and see.

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