Knowing and Making

Paul Mason points out that world trade (more precisely exports from the developed world) is down by 40% on an annualised basis. We can imagine rational reasons for people to trade less with each other - for example an increased desire for saving reduces the resources available to devote to the slightly risky activity of exchanging with distant parties. But what appears at first sight not to be rational is the distinction between local and foreign trade. Trade within the UK, for example, is certainly not down by 40%. Of course the idea of "trade" within a country is not a very well-defined concept - one could perhaps look at interstate trade in the US, but I assume that such data is not collected comprehensively. But if we generalise to the idea of economic exchange in general, then GDP is essentially the measure we are looking for. And GDP, of course, has not fallen by 40% or anywhere close. So why has international trade fallen so much more? There are several proximate reas...

H.R. 1, the stimulus bill passed by the House of Representatives which you can read at this excellent site , actually contains the following text: SEC. 1110. USE OF AMERICAN IRON AND STEEL.  (a) IN GENERAL. None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron and steel used in the project is produced in the United States.  (b) EXCEPTIONS. Subsection (a) shall not apply in any case in which the head of the Federal department or agency involved finds that (1) applying subsection (a) would be inconsistent with  the public interest;  Therefore, a willing administration official would be able to exempt all purchases of iron and steel from the Buy American clause by stating either that the public interest is served by buying the cheapest or commercially most attractive materials available; or that protectionism in general is not in th...

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 tr...

I wrote this item at the beginning of January when the steel industry first started pleading for a "Buy American" clause (thanks to Greg Mankiw for the alert). As you'll see, I predicted that Paul Krugman might make an argument for a form of protectionism. I felt slightly guilty about ascribing an opinion to someone in advance. Today he has posted his actual view on the topic - have a look and see how close I was.

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 th...