Opinions

Pass the stimulus bill, but drop the protectionism

In print | February 12, 2009

After ironing out a few remaining differences on Wednesday afternoon, the Senate and the House negotiated a final stimulus bill that, according to the The New York Times, “stands to become the most expansive anti-recession effort by the United States since World War II.” Members of Congress are hopeful that the House and the Senate will vote on the revised stimulus package as early as Thursday.

There is little doubt that a stimulus bill is necessary. Large-scale public works investments will both directly employ workers and help deal with America’s long-term infrastructure problems; increases in food stamps and unemployment benefits will help support the neediest Americans, who are also the most likely to spend. People have the natural tendency to curtail spending when confronted with recession, and a number of the proposed bill’s measures, from increases in Medicare Aid to generous tax cuts, are designed to put more money in consumers’ pockets and more money in the American economy.

The stimulus bill, however, has been the target of criticism from all ends of the political spectrum. Lindsay Graham, the Republican Senator from South Carolina, called the bill “an orgy of public spending” and said he did not believe enough of the stimulus money was going to generate jobs in the short-term. Many liberals, such as economist Paul Krugman, hoped for the swift passage of the bill, but felt that the stimulus ought to be significantly larger than it already is.

What matters most is that the stimulus bill appears close to being passed. It would have been a major setback for the Obama administration if the bill had been further delayed, or if it had been downsized as significantly as Republicans and an increasingly vocal Democratic minority had suggested that it should be. But as glad as we are that the stimulus package is a step closer to being enacted, there are some provisions in the original House and Senate bills that, if they made it into the final bill, should be drastically altered.

A section of the Senate’s proposed stimulus package mandated that the funds from the stimulus package could not be used “unless all of the iron, steel and manufactured goods used in the projects are produced in the United States.” The House bill included a similar protectionist measure. Both bills displayed a worrying amount of protectionism. As of the writing of this editorial, the status of such provisions in the final bill is undetermined.

Protectionism is a disavowed ideology, and one that lends itself particularly poorly to a nation (and a world) in recession. Trade acts as a natural stimulant to the economy. When it is impeded the results can be disastrous.

The most famous example of this is the Hawley-Smoot Tariff, the now notorious piece of legislation that crippled American trade prospects and sent the nation hurtling into the Great Depression. The Hawley-Smoot Tariff raised U.S. tariffs on over 20,000 different imported goods. While clearly more extreme than any of Congress’s currently proposed measures, there are a number of decidedly ominous similarities between the ways our current bill and the ways the Hawley-Smoot Tariff have been received by our trading partners.

The most troubling part of enacting protectionist measures is that foreign countries will, inevitably, retaliate in kind. After the Harley-Smoot tariff was passed, for example, European countries lodged formal protests, erected their own tariffs and worked to develop new avenues of trade. Not surprisingly, it appears that America’s sudden embrace of protectionism has prompted similar complaints by our trading partners, and similar threats of retaliation.

European Union Ambassador John Bruton expressed worry about the protectionist measures proposed by the United States, noting that Americans had promised not to resort to protectionism at an earlier meeting in November and that failure to abide by the earlier agreement could cause the world to “enter into a spiral of protectionist measures around the globe that can only hurt our economies further.” He added later, “There is always the possibility of retaliatory measures to be taken.”

Indeed, many politicians involved with the stimulus bill have come out strongly against the proposed measures.

Mitch McConnell, the Senate Minority Leader, rightly acknowledged the danger of the earlier stimulus plan’s “Buy American” clause and suggested that it would set off “trade wars.” Already, European steel manufacturers have laid out plans for suing the United States at the World Trade Organization if the protectionist clause is not dropped.

And President Obama, who had previously displayed a somewhat ambivalent attitude towards free trade, has come out strongly against the “Buy American” clause. “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,” he said in an interview on Fox News. Obama must tread very carefully if, indeed, some of the earlier “Buy American” measures have crept into the final bill.

We do not know enough about the final stimulus bill to make any concrete recommendations. But we will be clear: The stimulus bill needs to be passed as quickly a possible, and it must be passed without any protectionist measures.