Protectionism: The 'Crack Cocaine' of Economics Is On The Rise

Bob Haywood does not consider the upstream side and its ability to spin off secondary employment WITHIN America.

My point is that the economic multiplier effect is lost if he initially sends American dollars out of the country.

His point is about downstream accumulation of lost jobs. He remarks, for example, about "fewer infrastructure projects done for the same dollars" since fewer dollars will be left after the presumably more expensive American goods (steel in his example) are purchased by the initial contractor.

(An aside -- American goods are going to be, in most cases, VERY competitive, so Bob Haywood's example is somewhat theoretical. Any American company that was not "competitive" in the last 10 years has already seen its jobs go offshore, or it has gone out of business. So those goods, no longer made locally, would necessarily be imported. And internal competition will not permit locally-made goods to be sold at inflated prices, as some have argued.)

So Haywood's argument would be correct if that was all there was to it.

But let's consider the American dollars sent offshore to Korean steel mills if that is where they went, to buy cheaper steel. That wealth will not get repatriated to America for some time (either in trade or lent money).

So there is zilch ability of those sent-away dollars to do any more good within America.

On the other hand, if the (presumably more expensive) American steel goods WERE actually purchased from an American steel mill, then the American employee wages paid could subsequently go to the local greasy spoon, to the local dollar store, to the local bar, to the local health care system, and so on.

Expatriated dollars would have a hard time doing that.

Again, most steel mills are, as most American businesses are, very competitive in today's world. So even without the spinoff benefits, Haywood's argument is weak. American businesses and workers are the most productive in the world. (Don't forget that this productively is what DIRECTLY has created one of the best living standards in the world.)

So even if a few dollars are initially "lost" here and there to higher prices, the net effect of spending at home is positive, and is not diluted by the mechanism that Bob Haywood cites. At least IMO, that is.

A. Viirlaid 11:36AM February 04, 2009

It is silly to refer to Protectionism as the Crack Cocaine of Economics. This just trivializes the human misery from crack cocaine and other hard drugs.

IMO the potential damage from protectionism, while real, is far less significant than most of us might think. Most of the contraction in international trade results FROM the debt-bubble IMPLOSION and resulting contraction in business activity. It has little to do with any protectionism.

The same was true in the 1930-s. We misread history when we ascribe any substantial negative effects to the Smoot-Hawley Tariff Act. International trade would have collapsed regardless.

It's like Deflation. We assume price deflation should be avoided at ALL costs, because our Central Bankers say that it causes the collapse of Aggregate Demand of goods and services.

This is backwards. It is the collapse of aggregate demand that causes price deflation, more in some sectors than others. So just as fighting price deflation will have a low payoff (if not cause outright harm), so it is with fighting against trade protectionism.

This fight also assumes that everyone will play fair. That won't happen because it is not happening today. Asian countries have quite consciously constructed export-oriented economies. They coddle their industries with invisible protection every day.

They do this via currency manipulation. When an Asian exporter converts earned U.S. money to its local funds to pay wages and buy local goods, that exporter gives some of its earned U.S. currency to its central bank which PRINTS new local money with which to buy those funds. Result? The local economy gets an artificial (but temporary) boost and that Asian central bank loads up on U.S. Treasury bonds.

Our concerns about Protectionism are rather quaint in comparison to such outright "MoneyPulation".

Protectionist concerns are irrelevant in the current economic contraction, since trade is severely collapsing even without any obvious protectionist policies. Later in any recovery, this concern might be more relevant.

I agree with Ray Fisher. Look after America first. If America can get back on her feet, she will be in far better shape to help the rest of us. If she cannot, then international trade won't save us.

And what do we think everyone else will do? Governments all over the world are looking to help their OWN business sectors. It is only logical. Japan is not going to send checks to Chrysler.

I am writing from Canada, and our politicians and economists are just as silly as anyone else on this topic. But to expect America to help us first is bizarre. Especially with money borrowed against her own uture. This is not helpful in moving us forward collectively.

If America's money helps American businesses first, then soon enough those businesses will start trading internationally.

BTW Stimulation Packages everywhere will end up having very disappointing results, so in that respect, our discussion here is futile.

A. Viirlaid 7:09PM February 03, 2009

I find it insulting that the People are accused of being seduced by "crack cocaine". Who are these wealthy ruling-class swindlers to tell us what is in our self interest? We have listened to these privileged spend-all-day-golfing good-old-boys long enough to know that we've been fooled by their free trade propaganda. And another thing, what exactly justifies the continued economic privilege of the Wall Street ruling class? At this point you can't say they've earned it. Why do hard working people like my father have to face the prospect of working until the day they die because their retirement savings disappeared while these wealthy thieves make off with the fortunes they've socked away over the last decade? They need to be locked up with their assets sold. Ask yourselves this: Are we citizens or subjects?

Hilary Smith of CA 2:08AM February 03, 2009