Tuesday, February 03, 2009

Obama Backs Down, but Should he Have even if Others Scream Protectionism?

Obama Will Review Buy American Provision in Stimulus
Jan. 30 (Bloomberg) -- President Barack Obama’s administration will examine a "buy American" requirement in economic stimulus legislation that has raised concern among U.S. trading partners, White House press secretary Robert Gibbs said.

The administration "will review that particular provision," Gibbs said today at his regular briefing. The president's advisers understand "all of the concerns that have been heard, not only in this room, but in newspapers produced both up north and down south."
Strangely, this incident of having "buy American" seems to have created a hysteria of the thoughts that this is protectionism. And followed down the usual split between those that support free trade no matter all and those that can not see any protectionism measures under any circumstances as bad. The story continues:
President Obama to water down 'Buy American' plan after EU trade war threat
Last night Mr Obama gave a strong signal that he would remove the most provocative passages from the Bill.
"I agree that we can't send a protectionist message," he said in an interview with Fox TV. "I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we're just looking after ourselves and not concerned with world trade."
On the one hand, I am glad that Obama is paying attention to our trading partners. It seems to show that he is willing to consider the needs of other countries. Although besides the other trading partners {other rich countries}, I would doubt if the Bottom Billion will have much sway in Washington now.

On the other hand, I have no problem with any segment of society wishes to emphasize domestic productions including individuals like Sawdust and myself. I and I am sure a lot of Americans consider location as one of many aspects in making purchases. It does not mean that we solely buy US products but that if other things are equal we would choose US products first. And this seems that I would also include in this group any level of government decision making.

On the other hand if it is strictly prohibited by international treaty then that is not something to tamper with.

It seems obvious that consumers should be the deciders in what they purchase. Thus "The Government" when it makes purchases should be free within the confines of a representative democracy should be able to decide who it decides to purchase from and so be it if it is Johnny Lunchbox.

Thus my point was {and maybe not expressed well enough} was that if we have an open bidding process, the government can decide to give preferential bias towards US firms and that would be ok with me. Just as some government jobs give preference to Veterans. When I applied to become a rural mail carrier, Veterans were given either 5 or 10 additional percentage points to their raw scores. Is it fair? Probably not.

So other than taxes {marginally adjusted}, I do not ask others to subsidize Johnny. Just there could be externalities that are not captured by a simple open bidding process and thus the socially optimal solution would not be found.

I do see that you are willing to tax certain transactions to capture some of those externalities {taxes} which might be considered slightly similar to what my contentions are. We might even agree with certain Libertarian Paternalism {Soft paternalism}.
US-EU trade war looms as Barack Obama bill urges 'Buy American'

I remember that Bush also got into trouble with a similar provision, but why should US taxpayers promote other nation's export sectors? US taxpayers are going to pay this back not importers. So as I talked about above, if we want it to stimulate the economy then emphasis on domestic productions would provide more bang for the buck.

This is completely different than the laws enacted during the Great Depression where everything for every segment of the economy was affected.

As far as the Europeans, they understand the leakages of Fiscal Policies and Keynesian multipliers. In their case, the leakages is even greater for each individual country because of no trade restrictions between member states. You may remember when the EU nations were all enacting Fiscal Stimulus and Germany was reluctant to "chip in". I am sure there was some major arm twisting to make sure they enacted a similar fiscal stimulus package. And a couple of articles on their latest stimuli:
FACTBOX-Europe's fiscal stimulus plans to tackle crisis

Fiscal update: Stimulus plans around the world
A stimulus in one state has so many leakages that is nearly impossible to have any effect on the economy of that state. Something one of my first Economics Teachers talked about (her being a woman's studies professor and all).

The difference is that if we feel that we need a fiscal stimulus {and that honestly is still a question to some people} then it should be given the highest "bang for the buck". Much like Krugman and other Economists are saying. I am not sure why, with your knowledge, you can see and identify the basics of Keynesian economics.

I have thought a lot about mobility of labor, and I agree with the basic tenets of the analysis that free mobility of workers is desirable within the confines of a Liberal Democracy to decide who enters. But whatever is decided will need to be under a "gradualist" approach to your utopia. Also just because capital and labor is mobile between states and localities, does not mean that the Federal Government may not have a role in distributing wealth or creating incentives to bring about more socially optimal solutions, and again through soft paternalism.

Anyway, under this one situation, I think the Europeans and the critics are wrong. And the readers should know by now, I do not want any trade restrictions aside from those that a Liberal Democracy decides including punishing "bad countries". The Bottom Billion should have ZERO trade restrictions for imports to the USA.

If the consumer in this situation is the Government? Then the ultimate consumer is the Taxpayer as we seem to agree on. Thus through our representative bodies, "we" should decide how to spend our money.

But are we willing to subsidize the paycheck of steelworkers in China, Japan...???
OK, so let us look at the multiplier effect as we talked about earlier. Let us say we have a project and it requires a bid with a competent US firm bidding 1 million and a comparable foreign firm bidding 900 thousand. Under your analysis we should hire the foreign contractor. Right, V???

So what are the effects on the economy and the Federal Budget?
The economic effects on the Foreign purchase will not give provide any multiplier effect on the economy as the content we will assume is 100% foreign and the transportation revenue I will count as insignificant.

Now what are the effects from a "Buy America-First"?
First let me assume 80% content on the steel and 100% of that will be reflected in higher wages or retained earnings in our economy of the 80%. Thus we have a first round effect on the economy of $800,000 and with a 18% overall revenue from the economy we could see that the Fed could generate tax revenues of $154 thousand. Also if we look at the Keynesian multiplier of 1/(1-MPC) then this $800K would translate into 5 times this amount into the economy at $4 million. This is with the assumption of leakages are savings at around .1 and imports of around .1, we could change these numbers but we still get a significant multiplier effect. Thus the $4million in increased economic activity could translate to $720,000 of increased tax revenues.

Who is subsidizing whom?

Foreign contract: $900k
Domestic: $1 million-$720K

As far as the rules of the WTO, do you have some proof of the exact wording of such clauses. Does this limit the Pentagon from purchasing domestic products? And what about US States that have the same practice including state businesses? Do they violate WTO?

I seriously doubt that they would retaliate since they probably practiced the same thing with their fiscal stimuli and secondly they know the Keynesian multiplier effect as much as anyone so just jumping on the band wagon to prevent anything looking like protectionism. They just like us are not sure about the empty suit...

UNDERSTANDING THE WTO: THE AGREEMENTS Non-tariff barriers: red tape, etc
"Rules of origin" are the criteria used to define where a product was made. They are an essential part of trade rules because a number of policies discriminate between exporting countries: quotas, preferential tariffs, anti-dumping actions, countervailing duty (charged to counter export subsidies), and more. Rules of origin are also used to compile trade statistics, and for "made in ..." labels that are attached to products. This is complicated by globalization and the way a product can be processed in several countries before it is ready for the market.

The Rules of Origin Agreement requires WTO members to ensure that their rules of origin are transparent; that they do not have restricting, distorting or disruptive effects on international trade; that they are administered in a consistent, uniform, impartial and reasonable manner; and that they are based on a positive standard (in other words, they should state what does confer origin rather than what does not).
Still do not see any way that the USA is breaking this rule, anymore than any other country is as noted above.

Links:
AGREEMENT ON GOVERNMENT PROCUREMENT

FACTBOX-Europe's fiscal stimulus plans to tackle crisis

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