Thursday, February 05, 2009

Buy American Will Destroy Jobs, Not Create Them

This Buy American momentum is bad economics, and by threatening to destabilize trade and capital flows, it risks turning a global recession into a 1930s-style depression.

Suppose that we did not allow free trade between the 50 American states. Citizens like me in New Jersey would be far worse off if we could not buy pineapples from Hawaii, wine and vegetables from California, wheat from Kansas, and oil from Texas and Louisiana while we sell pharmaceuticals to the rest of the country. The specialization that trade makes possible allows all of us to live better.

The situation is the same with respect to world trade. Both we and the Chinese are better off if we can import inexpensive clothing from China and sell them large-scale computers and data storage equipment.

Since the U.S. is the biggest exporter in the world, retaliation could cost America more jobs than the provision would create. It could also destabilize the global capital flows on which the U.S. depends to fund its deficits. Moreover, the provision could delay some shovel-ready infrastructure projects, since sufficient American-made materials may not be immediately available. The U.S. does not manufacture enough steel to meet domestic demand.

In 1930, just as the world economy was sinking as it is today, the U.S. Congress passed the Smoot-Hawley Tariff Act, which essentially shut off imports into the U.S. Our trading partners retaliated, and world trade plummeted. Most economic historians now conclude that the tariff contributed importantly to the severity of the world-wide Great Depression.

Buy American provisions and other forms of protectionism will destroy jobs, not create them. They are an irresponsible and self-defeating response to a downturn in world economic activity.

~Burton Malkiel in today's WSJ

From a recent CD post:

"Buy American" provisions under consideration in Congress as part of a huge economic stimulus bill could create only 1,000 new steel industry jobs and might cost as many as 65,000 across a number of sectors, according to a new study from the Peterson Institute for International Economics.


At 2/05/2009 9:20 AM, Anonymous Anonymous said...

Keep in mind how far we've come on trade. The democrats are not arguing in favor of trade barriers, just a restriction on government contracts. While the government represents a large share of total spending it is mostly wages for government employees or transfer payments. As such, while it will on-net destroy jobs, this Buy American proviso should have a tiny impact upon total trade.

At 2/05/2009 9:30 AM, Anonymous Anonymous said...

Lone shark,

I agree this will have a relatively low net loss of jobs for the reasons you explained. The bigger worry though is whether this is an excuse politically for the protectionist leaning european and Japanese governments to retaliate with their own measures, starting a full blown trade war. Will China now allow contracts for its own stimulus to go to companies like Catapiller?

At 2/05/2009 9:54 AM, Blogger lineup32 said...

Trade war media talk is multi-national company PR working overtime. The US needs to create manufacturing beyond home construction and auto and protect it.

At 2/05/2009 10:21 AM, Blogger QT said...

The largest bi-lateral trade relationship in the world is between the U.S. and Canada. 80% of Canada's exports are to the U.S. Canada is currently already seeing mounting losses in manufacturing jobs and rising unemployment (projected to rise to 8.6% according to last night's newscast).

Protectionism over softwood lumber hurt both countries. Higher material costs for homeowners & builders and devastating losses for Canadian producers. The problem with protecting one group is that the repercussions are felt by a far greater number of people.

What is the effect of diverting all domestic steel to infrastructure? How does this distort distribution/price and affect other steel dependent industries like the auto sector?

It is often difficult to gauge the potential effect of public policy. Have we really seen the full cost-benefit analysis of "Buy America"? The last thing that should be driving public policy is special interest groups looking for ways to extend monopolies of supply or game the rules in their favor.

Spider sense is definitely tingling on this one.

At 2/06/2009 4:26 PM, Blogger VangelV said...

"Trade war media talk is multi-national company PR working overtime. The US needs to create manufacturing beyond home construction and auto and protect it."

The US does not create jobs. American entrepreneurs do. Starting a trade war will not get them to invest in the US. For that to happen what is needed are fewer regulatory burdens and lower taxes but that is not what Obama wants to see.

At 2/06/2009 11:04 PM, Blogger OBloodyHell said...

The Nation That Lost Its Jobs, But Got Them Back

At 2/07/2009 10:18 PM, Blogger VangelV said...

Thanks for the link. Leave it to the Austrian economists to provide the proper perspective.

At 2/08/2009 11:28 PM, Anonymous Anonymous said...

This worry over the problems with the steel industry or any other industry with government contracts for a rebuilding of America's infrastructure will all be a moot point if we don't start producing more of our own food. We won't have to worry about our plasma TV trade deficit if we don't have our own energy and food resources independent of the "global economy". Buying American, will create more jobs for the industries that are already producing in this country. This is not isolationism, it is economic stimulation as it was meant to be.

At 9/13/2009 9:30 AM, Blogger Steve Selengut said...

How To Create More Jobs America - Survey Results

My recent survey produced a variety of ideas, but most of them had these common elements: replace the Internal Revenue Code with a simpler model, encourage businesses to increase employment, and insist upon tort reform everywhere.

It also brought two disturbing realities into focus: We are painfully apathetic (less than 1% of the people I contacted took the time to respond) and, although we have great problem-solving ideas, few to none of our ideas are included in any of the reforms being considered by Congress.

For those who participated, thank you again. I hope that you will appreciate how I've synthesized your thoughts and suggestions into the commentary. I also hope that you will find the time to address some of these issues more aggressively with blogs, networks, and elected officials.

Major changes are being proposed in six inter-related areas. All the dots cannot be connected in one article. Government revenue is cut in this article and the next without a hint about a replacement plan. I'll get to that later, and painlessly for all of us.

So how do we create more jobs?

What Congress, a long line of Presidents, and much of the population have lost sight of is the fact that even the dirtier businesses are job providers. They must be pampered, not pummeled; supervised and reined in but not tethered and broken.

Business income taxes are 100% inflationary; costs associated with employees (yes, even the minimum wage, which some suggest is the cause of our illegal alien problems) result in fewer employees hired. Period. Capitalism is not broken--- its success formula has been compromised.

Repealing the corporate income tax, and prohibiting any and all levies, fees, charges, and taxes on any form of business could instantly produce millions of job openings, lower prices, and create new business opportunities throughout the economy.

Repealing business income taxes would instantly make export products more competitive in world markets, as businesses reduce prices while maintaining profit margins. Greater profits should translate into growth in economic activity.

Finally, the elimination of these taxes would make all businesses run more effectively because there would be no need to spend money (or create losing transactions) just to cut the tax bill.

For the rest of the article, just Google: "How To Create More Jobs America".

Steve Selengut
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"


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