You Break America, You Buy American?

Chrysler is set to get a $4 billion loan from the US Treasury to aid its restructuring, the latest in a line of concessions to the American auto industry. I remain skeptical of the utility of these measures. At best, they will likely continue to struggle against foreign automakers with plants in other US States. At worst, there are now concerns we will set off a new wave of beggar-thy-neighbor policies, where "ghosts of Smoot and Hawley... will not announce themselves in their full protectionist garb."

Advocates of industry bailouts declaim criticism of these rescue packages as hypocrites and union-bashers, who would shovel trillions to Wall Street fraudsters whose con games with imaginary money created this mess, while scorning the real, Main Street Americans in Detroit who "make things" and are merely the victims of corporate greed and corruption. However, until financial liquidity is based on the provision of automobiles and not dollars, the same standards simply do not apply. Indeed, our government is theoretically ensuring trillions of dollars to prop up the financial sector. But that does not mean that other industries automatically deserve similar treatment.

No, the real problem with bailout hypocrisy will come when other American industries start demanding their own bailouts, handouts, and government directed favoritism. After all, Americans make more than just cars, and they have stopped buying more than just cars since this recession has hit. The process has already begun with Obama's proposed economic stimulus. The steel industry, for instance, has asked that a "buy American" clause be inserted into any stimulus legislation. Given that the most likely stimulus packages will focus heavily on infrastructure, this would amount to billions in guaranteed purchases of American steel. Theoretically the Keynesian multiplier effect would justify these costs, since the steel workers could in turn spend money and stimulate the economy further. But with the stimulus multiplier of 1.1 or lower likely and other potential pitfalls and inefficiencies to fiscal policy, it would make more sense to provide as many public goods as possible at the lowest cost. That means buying cheaper raw materials even if they come from abroad.

This is more important than just saving money by buying cheaper foreign products, though. Countries like China are desperate to provide some form of stimulus through exports, as their own citizens and governments are unlikely to provide an increase in consumption or spending significant enough to prevent serious slowdowns. In steel, for example, China may already be promoting its companies to export. Should we mix economic recovery with economic nationalism, these countries will have to respond with programs of economic nationalism of their own to compensate for being shut out abroad. Between Treasury involving itself in industry and not just finance and the potential of a "buy American" stimulus, perhaps these claims that fiscal policy might lead to global trade wars may not be so alarmist after all.