“Buy American” provisions help on #4 [the domestic multiplier], but only if we make the implausible assumption that other countries won’t make the same provisions in their stimulus packages.
Would protectionism be OK against a country like Bhutan that can’t retaliate? I don’t think so.
Obama’s team know that the add-ons are bad policy: they create few jobs while reducing the long-term benefits to Americans from a given increase in the public debt. In health IT, rejecting possibly superior foreign technology (a proposal dropped for now) might have put the whole programme at risk. Remember that any public spending has lower import content than private: the government doesn’t buy Airbuses from Europe and flat-screen TVs from China, but domestic cement, paint, construction workers and teachers: so advocates for nothing but tax cuts are advocates for foreign jobs. But how can you argue the case in today’s environment?
Notoriously few members of the public grasp the great free-trade principle of comparative advantage: it’s as true and counter-intuitive as quantum superposition. Paul Krugman described it in 1996 as Ricardo’s difficult idea, and nothing has changed since. Virtually the entire American economics profession vainly protested in 1930 against the Smoot-Hawley tariffs. You couldn’t find today many economists against the proposition that the great worldwide economic progress since 1945 has been tied up with a relatively open trading system, though this may be due as much to dynamic effects of greater competition, emulation and economies of scale as to the benefits of static comparative advantage.
Obama’s political strength is that Americans trust his moral instincts even more than his policy prescriptions. Now is not the time to try to convince unemployed steelworkers of “Ricardo’s difficult idea”. It would be better just to agree respectfully to differ: he has formed a view on the practical merits on the basis of the most qualified advice; he knows that many Americans are unconvinced, but can still ask them to trust him. For he can make the case against protection as a moral one. The only assumption of fact needed is that the benefits of the “Buy American” provisions in the stimulus are trivial at best; he can quickly get some numbers from Romer and Summers. I suggest below an outline, without the soaring rhetoric.
1. Keeping faith
America has signed up to free trade pacts both continentally (NAFTA) and worldwide (the WTO). In fact since 1945 it has been the prime mover behind trade liberalisation. These pacts include provisions which many developing countries see as biased to the interests of US corporations, for instance on intellectual property. The United States can’t just be a fair-weather liberal; it has to be a credible partner in bad times as well as good, when it doesn’t suit us and not only when it does. The Republic’s word must always stand good.
2. The brotherhood of man *
The moral sense of believers and unbelievers alike, educated by the major religions of the world, concurs in some version of the Golden Rule: do as you would be done by. We are never entitled to treat another human being merely as a thing or instrument of our desires. The prophet Malachi for example equates those who “deprive aliens of justice” with those who “defraud labourers of their wages” or “oppress the widows and the fatherless”. Of course, no elected politician could ask his fellow-citizens to treat foreigners as deserving equal consideration, but they must have some positive weight in our deliberations.
How much? I would not venture a number, but try a thought experiment. The most mean-spirited of us might dare to say one foreigner counts for a twentieth of an American. The spontaneous generosity of very many people in response to famines and disaster suggests this is a gross underestimate. But even this arbitrary figure means that in drawing up a balance sheet of American policies, the rest of the world is roughly as important as America itself. At all events, we should try to avoid harming our fellow citizens of the world without a compelling reason like self-defence. The trivial or nonexistent benefits to Americans of protectionist measures in the stimulus, set against their certain harm to others, do not meet this simple moral test.
The economic crisis was created by the greed and folly of many all over the world, but its roots, like those of the Great Depression, lie in the USA. Wall Street has acted as the conman, Main Street as the sucker, and the rest of the world has been drawn in as the crowd of rubes. If we now have a global crisis, this is largely because of the globalisation for which America has been the coach and cheerleader. There is then a particular responsibility on America to lead the way out. My recovery package, of stimulus and reformed bailout, is designed to do precisely this. We seek every chance to strengthen the global response by intelligent coordination – and an unsparing accounting for past mistakes. But protectionist measures would negate an honest acceptance of responsibility: we Americans should not ask the bystanders who have already endured the collateral damage of our mistakes to pay for cleaning up our own mess.
* Note to speechwriter. PC problem here. “The sibhood of humanity” doesn’t quite work.
Update – same day
It’s unclear how protectionist the current bill actually is. See here, and Brad deLong here (looking good) and here (not so good). Regardless of the actual effectiveness of the measure, the unprincipled, populist grandstanding it embodies is unhealthy.
Update 2 – 6 February
Jagdish Bhagwati isn’t happy at all.