Buy American?

Brad DeLong:

If there's little excess capacity in the U.S. steel industry--so that the price of steel is high enough to induce people to look outside for suppliers--then a stimulus won't be much needed. If there's a lot of excess capacity so that a stimulus is needed, then steel customers should be able to bargain prices down to marginal cost--in which case foreign producers will have an extremely difficult time competing on price given that steel is heavy and distances are great. "Buy American" seems mostly designed to allow the steel producers to collude and push their profits up--at the expense of American taxpayers.

And Brad is right. Lawmakers (and even many economists) seem to be missing the underlying points. What is the purpose of a fiscal stimulus? The Keynesian answer is to fill the excess capacity gap. In the long run we know that idling factories and an unemployed workforce are far more detrimental to long term growth than a short-term deficit boost.

What we need now is to avoid inducing ourselves into a protectionist mantra. Instead, we need carefully crafted policy intended to help the economy regain its footing. I fear, however, that the protectionists will win, the economy will be marginally stimulated, and a handful of politically connected groups will profit exorbitantly from it.