Protect My Stimulus!

In trying to learn more about the stimulus package, I’ve continued to find Paul Krugman an absolutely invaluable resource.  Although I have no formal economics training beyond junior high school (and having read Freakonomics), I find the posts he labels ‘wonkish’ to be the most interesting and insightful.

He made a great point a few days ago that, absent any smart international coordination, there are strong reasons to put protectionist elements in a governmental stimulus package.

The short version of his argument is that, due to the interconnected nature of multinational corporations, a stimulus package put out in the U.S. will almost certainly have significant leakage, and some of the benefits will drip to other countries.  This will reduce the stimulus’ effectiveness in the U.S., while providing assistance to other countries’ economies at our (or, perhaps, our great-great-grandchildren’s) expense.

So, in the absence of any other information, it’s smart policy for the U.S. to try to restrict the effects of the stimulus to internal corporations.  One version of this is the ‘Buy American’ provisions that are in the stimulus bill right now.  They make some economic sense.  In fact, he argues that, lacking the international cooperation which simply doesn’t exist in the world as is, the short-term economically ideal policy is to go protectionist.

However, he ends up arguing against the policy in the end, because of where it leads us.  Inevitably, if the U.S. enacts protectionist policies, the rest of the world will have no choice but to respond in kind, erecting similar trade barriers in their stimulus packages.  And then, whenever we have recovered from the current economic woes, we have many decades’ worth of work to do, trying to tear those barriers back down.  The long-run loss, in Krugman’s opinion, is of more concern than the short-term gain we could get from protectionist policies.

I’m glad to know that my inherent suspicion of blind ‘Buy American!’ policies has some econopolitical justification, although I was also interested to learn about the economic arguments against my beliefs as well…

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