Monday, 5 January 2009

The "Buy American" clause

Greg Mankiw is not in favour of a "Buy American" clause in the expected US fiscal stimulus package.

I don't like protectionist rules myself, and normally you wouldn't find many economists arguing for them. But I have a feeling now that we might see support among some economists for variations of this "Buy American" rule. For example, a condition that spending can go only to countries that have also passed a major fiscal stimulus package.

This might just come from people feeling peeved at Germany. It might come from instinctive protectionists finding a respectable way to get their point across. It might come from strong Keynesians who are worried about the damage to the fiscal multiplier from propensity-to-import.

It may be unfair to him, but I predict that Paul Krugman may be a flagbearer for this argument. He has just won a Nobel Prize for his New Trade Theory work, which argued (among other things) that some protectionist policies might be justified if they encourage local network effects which stimulate increasing returns to scale. It's easy to extrapolate from there to the generalised "network effect" of the Keynesian multiplier.

Krugman also strikes me as one who would support a fairly interventionist fiscal policy - highly targeted government spending, aimed at maximising the multiplier, as opposed to a hands-off tax reduction. This is another variant of that targeting.

My own feelings? My general position, though still Neo-Keynesian, is closer to moderates such as Mark Thoma than to Krugman. I believe that:
  1. This is a world problem. Therefore we shouldn't try to solve it locally. There is lots of theory and some clear empirical data behind this.
  2. US gross exports are strong (even though there's still a trade deficit) and will be boosted anyway if other economies successfully emerge from recession.
  3. Well over 50% of the world is likely to engage in fiscal stimulus (the EU, possibly apart from Germany and Italy, is mostly committed to it; China has announced an even bigger package than the US, though it is unclear whether they can follow through; Japan is still running deficits) so any potential leakage of multiplier into the non-stimulating countries may be outweighed by the loss of efficiency from protection.
And I am tempted to say that there are some principles more important even than getting out of this recession quickly. International trade and equal treatment probably qualifies as one.

Update: Paul Krugman has posted his opinion on this. My prediction wasn't exactly right, but have a read and see what you think.

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