Monday, 2 February 2009

More protectionism...sigh

Looks like the UK is just as bad as the US at protectionism. Energy workers are on strike demanding that Total not be allowed to hire Italian workers at one of its plants.

Never mind that Total is a French company investing in the UK; never mind that free movement of labour is guaranteed in the EU; never mind that twice as many British people work in the rest of Europe than vice versa. Apparently we are supposed to kick out a supplier with whom Total has freely contracted.

Unfortunately this seems to be an example of rational ignorance in the political market. It requires a certain effort to educate oneself about an issue and make sufficient political fuss about it to influence anyone. The typical protectionist policy creates worthwhile benefits for a small consituency (let's say steelworkers) while the costs are spread among a far larger population. It's worth it for the steelworkers to run a campaign (or pay their unions to do so) to grab their $20,000 each; but too much trouble for the rest of the population to campaign to save the $5 it will cost them.

The tragedy is twofold:
  • The costs are higher than the benefits. When Bush imposed tariffs on imported steel in 2003, American steelworkers gained an estimated $240 million - with 5000 workers gaining on average $48,000. But the companies using steel paid $600 million for the privilege - which of course was passed onto steel consumers, at about $2 per head of US population.
  • Steel is just one example. Everyone is in some special interest group. If every single group ran the same campaign as the steelworkers, with the same economic results, everyone would gain $48,000 at the cost of $120,000. The whole population would be worse off to the tune of 150% of GDP. Astonishing!
A classic prisoner's dilemma; only altruism, adherence to universal principles or strict rules on the economic literacy of new laws will prevent this from happening. Or, just possibly, pressure groups who can make themselves a business model out of campaigning for the $2 massive.

I sincerely hope that, in this case, Peter Mandelson manages to remind Gordon Brown of their shared economic literacy before his political instincts commit him to a course he can't reverse. Is this the destiny that Mandelson was called for? Is this why he was summoned back from Europe (where he was trade commissioner of all things!) - as the Odyssean rope to tie Gordon to the mast?

If so, who will be Obama's Peter? If there was ever a time for Lawrence Summers to put his foot down...

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