Wednesday, February 04, 2009

Conversation with Douglas Irwin about Buy American

I corresponded by email with Professor Douglas Irwin of Dartmouth about the Buy American provision in the stimulus bill. Professor Irwin wrote an article in the New York Times opposing it.

He believes that with the domestic steel industry having tremendous excess capacity (they may have laid off the workers, but they could still ramp up production rapidly if they wanted), they are likely to be able and willing to offer a good enough price to get the majority of the the steel purchases. To the extent that the US is worried about China, for example, flooding the market with state-subsidized steel, there are anti-dumping provisions in the World Trade Organization that permit duties to be imposed against only the dumped products. See the dumping (pricing policy) article on Wikipedia for a summary on dumping.

I should also remind readers that the US has extensive subsidies for its agricultural industry.

Additionally, Irwin reminds us that the aim of the stimulus package is to create as many jobs as possible. The aim is not necessarily to pay for a lot of capital inputs (e.g. steel). That being the case, you would want to be able to minimize the price paid for the capital inputs. If the Buy American provision does force the US to spend more on steel (it may not - depends on what price US Steel is able and willing to supply steel at), then states and municipalities would hire fewer workers.

By the way, I understand the US steel industry was the party that lobbied for the Buy American provision.

Lastly, some may be worried about the trade deficit. It cannot go on forever. However, Irwin feels the better way to deal with that is to encourage a higher savings rate. The US savings rate is near zero. China's is near 40%. He feels that the US tax code penalizes savings and promotes spending. I'm not sure I agree with the first bit, but that was his answer.

Separately from my conversation with Irwin, manufacturers these days may have operations all over the globe. There are numerous Asian and European firms that own factories in the US and hire American workers.

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