Following precedents from the New Deal and other federal public works programs, the provision would require materials used in infrastructure projects to be produced in the United States. Materials like steel and concrete would be especially large inputs, as would more advanced finished products. The objective, naturally, is to lift domestic output -- steel production is currently wilting at 43% of capacity, while without roughly 90% capacity, steel companies waste huge amounts of money keeping their furnaces and production lines running.
However, multinationals including General Electric, Caterpillar and aerospace companies are protesting that the measure amounts to protectionism and that foreign governments will in response make export of their products more difficult.
At first glance, GE & co. have no right to whine -- if the purpose of the stimulus is to create American jobs, it should actually attempt to do so; and if Washington is going to spend $1 trillion of taxpayer dollars, taxpayers have every right to demand they materially benefit from it. Few would disagree that taxpayers' interests, not those of GE (while also a taxpayer, its tax receipts pale in contrast to 200 million working Americans'), should take precedence.
On the other hand, the massive current-account deficits that have built up in the US (translation: we import way more than we export) will require a huge pick-up in exports down the road. To that end, the United States is right to pursue free-trade agreements with trading partners, and any sniff of American protectionism could well result in much more direct protectionism from other nations itching to bring up their own tariffs or spite American firms.
But if you look a little bit closer, that logic appears less solid.
A spokesman for Caterpillar provided the following rationale to the Post: "Any student of history will tell you that one of the most significant mistakes of the 1930s is when the US embraced protectionism. It had a cascading effect that ground world trade almost to a halt, and turned a one-year recession into the Great Depression."
That's all technically true, but that protectionism came in the form of tariffs during the Hoover days, not the New Deal's "Buy American" provision. Stipulating that taxpayer-funded public works programs put taxpayers to work is a fairly routine practice in all local and federal public works projects. The most recent example I visited is the new Capitol Visitors' Center in Washington, D.C. As is standard practice, it used American-made materials. It may have come in in over budget and late, but that was the fault of security concerns, not materials suppliers, and nobody thinks it amounted to protectionism. Similarly, for security but also economic reasons, one of the largest areas of federal spending -- defense -- relies overwhelmingly on domestic production. That seems to sit fine with other countries.
Moreover, GE, Caterpillar and (presumably) Boeing may now be crying about stimulus provisions stipulating US-made products are used in road construction, but a potential reason for that is that they themselves will be at a disadvantage in procuring those contracts. GE and Boeing have spent years trying to move production from the US to China, seeing no reason at the time to invest in their historic home countries. But as the Economist notes, that lack of investment in US production, R&D and other capital projects was a major factor in the global financial collapse:"After the dotcom bust, American firms turned cautious and investment spending was weak. That ruled out a natural home for foreign capital [in the US]. Faced with strong external demand for AAA-rated assets, the financial system got creative. Marginal home loans were packaged into supposedly safe securities. That supply of credit lifted house prices and spurred a boom in residential construction, which filled the gap in demand left by sluggish business investment."In other words, if US companies had invested in American cap-ex, China's $2 trillion tidal wave of investment into bonds could've been put to more productive use than puffing up house prices and encouraging subprime mortgages and excessive consumerism. That China dumped money on consumers is as much the fault of US businesses that stopped investing in production as it is of the Chinese central government. And as the dollar remains a primary safehaven currency, capital inflows will only continue. Why allow GE, Boeing & co. to continue slicing investment in the US when inflows are looking for more productive investment than the credit-card debt derivatives they were able to find in the Outsourcing Age?
Perhaps, then, the "Buy American" provision is a cheeky way to show companies that while Washington doesn't demand they base production here to gain access to the domestic market (as China does) or grant WTO-violating subsidies in return for direct investment in facilities (ditto), there actually is a material benefit to investing in US-based facilities and employees in times like this.
In a word, the rush to move production to low-cost labor markets can hardly be said at this point to have been a smashing success in the United States. Any economist can tell you we spend too much and make too little. This crisis, and the stimulus, offer a decisive first step toward changing that.
Stepping back, crises are often the only times a people tends to reflect on the fundamentals of its economy, political system and society. So it is now in an America that had grown haughty and lazy in recent years. Even the Clinton-era lead negotiator who established Permanent Normalized Trade Relations with China now wonders whether that deal has actually helped the United States. At the time, it was thought PNTR would see a dramatic increase in both Chinese imports and US exports. Because of Chinese protectionism, exporter-subsidies, yuan policy and investment to keep the dollar weak, only half of that equation came true.
WWCD: Is Beijing's public spending likely to source from the US with its own workers losing jobs? Perhaps GE and Boeing should do some reflecting of their own now: Rather than encourage the US government to plunge the polity into long-term debt buying Chinese construction materials and finished goods, is it not worth asking whether China, long hostile to imported goods (and now even more so), will actually grant access to its own public works program? Do not doubt that with Chinese factories closing, unemployment soaring and the yuan getting depreciated, any access GE gets to Chinese spending will be the direct result of agreement to build its goods in Chinese factories. China already doesn't allow US-made goods from DVDs to steel to banks to enter its market; Caterpillar or GE would only be able to tap the Chinese kitty if they do so with Chinese-made goods.
At the end of the day, it is frighteningly possible that Jeff Immelt's lobbying could be as disastrous as PNTR, resulting in a federally funded mass purchase of Chinese steel and electricity network equipment while GE nonetheless is shut out of China's public works program. To quote our Cold Warrior friend John McCain, "That's not change we can believe in."
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Stimulus bill moves us closer to nationalized health care and rationing
ReplyDeleteThe House of Representatives approved an $819 billion economic stimulus package Wednesday. The party line vote was a blow to Barack Obama's alleged desire for bipartisanship. All the Republicans and 11 democrats voted against the bill. One thing in the bill that went mostly unnoticed was a new bureaucracy called the Federal Coordinating Council for Comparative Effectiveness Research.