Professor of European Political Economy at the London School of Economics, Willem Buiter, writes at the Financial Times:
I used to be optimistic about the capacity of our political leaders and central bankers to avoid the policy mistakes that could turn the current global recession into a deep and lasting global depression. Now I’m not so sure.
I used to believe that the unavoidable protectionist and mercantilist rhetoric would not be matched by protectionist and mercantilist deeds. Protectionism was one of the factors that turned a US financial crisis into a global depression in the 1930s.
The odious US House of Representatives has tagged a Buy American clause onto the Obama administration’s $819 bn (or more) fiscal stimulus bill. If this were to become law, US federal spending would, wherever possible, be restricted to goods and services produced by US companies. The main promotor of this act of global economic vandalism was the US steel industry, but other import-competing industries have lobbied also. It is quite likely that the Buy American net will be cast even more widely when the Senate gets its turn at the fiscal stimulus act.
There is little doubt that if the Buy American provisions of the Economic Stimulus Package were to become law, this would amount to an economic declaration of war on the rest of the world. The response of the assembled non-US finance ministers in Davos made this clear. Retaliation from the EU countries and the rest of the world would follow swiftly.
We can go down in history as the generation that created the Great Depression of the Noughties. Just keep on beating the protectionist drums. Keep on the footdragging that prevents effective qualitative and quantitative monetary policy easing in the Eurozone and the UK. And go ahead with unsustainable fiscal stimuli in the US, the UK and elsewhere that will spook markets, push up long-term interest rates and raise the spectre of sovereign default by countries not belonging to the group of usual suspects. Yes we can! I hope we won’t.
Our own Daniella Markheim adds:
The devastating economic effects of such protectionist measures are well-documented. The Smoot-Hawley Tariff Act of 1930, for instance, raised U.S. tariffs on more than 20,000 imported goods to record levels. Introduced as a means to reduce imports and protect American businesses and jobs, Smoot-Hawley did cut the amount of imports between 1929 and 1933 in half. At the same time, exports dramatically declined, and unemployment grew from 3.2 percent in 1929 to 8.7 percent in 1930 and peaked at 24.9 percent in 1933–the heart of the Great Depression. Large majorities of economists and historians now say that Smoot-Hawley played a significant role in worsening the Great Depression. While not the same, the expansion of the Buy American program represents a step toward the same type of destructive protectionism instituted by Smoot-Hawley.
With countries’ economic vitality linked through trade and investment, the need for all nations to protect open markets is crucial to helping the global economy recover and return to a path of growth. Therefore, given the effects of previous protectionist schemes, expanding the Buy American program as part of a stimulus package is perverse.