For those who have followed congressional debate on the fiscal stimulus plan, it has helped to have a strong sense of irony. Without it, the gap between the overreaching rhetoric from both sides of the aisle and the true, foreseeable economic outcomes of the provisions advocated would foster much frustration.
Take all the huffing and puffing by Democrats on the need to include a “Buy American” clause to ensure only U.S. residents benefit from outlays to construct roads, bridges and other infrastructure.
The principal product people have in mind is steel. The argument is that if we ban government purchases of reinforcing rods from Lithuania or India or bridge beams from Japan or Brazil, any increased government spending on such construction steel will directly increase demand for U.S. steel producers and employ U.S. workers.
There is a fundamental error here in ignoring the fact that most types of construction steel are “fungible goods.” Domestically produced steel is indistinguishable from imported steel, and it is internationally traded.
You can require specific lots of steel bought for government construction projects to come from U.S. mills. Contractors can comply honestly and fully. But while such government purchases of U.S. steel may increase, private-sector purchases will decrease by nearly the same amount.
Here’s why: Both U.S. and imported steel are widely available in this country. Increased government purchases of U.S.-made steel will raise its price marginally, making imported steel cheaper and thus more attractive to buyers who don’t have a “Buy American” mandate. This is not due to ill will on the part of private-sector contractors, just the natural — and largely unalterable — outcome of the workings of a market in an internationally traded fungible good.
Any net increase in demand for steel from stimulus spending is an increase in overall global demand. Global prices and steel consumption will increase at least a bit, but most of the effect will spill outside of U.S. borders, and the net benefit for U.S. mills or steelworkers will be small.
The Senate bill’s reductions in transfers to state governments represent another irony. If there is any category within the stimulus bill that meets former Treasury Secretary Larry Summers’ standard of “timely, targeted and temporary,” this is it.
Outlays would occur quickly, compared to most categories left in the bill. There is no need for any new bureaucracy, as mechanisms for disbursing money already are in place at the state level. It would offset state and local spending cuts that will occur in the absence of such transfers.
Given the fiscal pressures on nearly all states, virtually none of this federal money would go to create new, ongoing programs. Moreover, it could be made clear such transfers would be temporary, in response to an historic economic crisis, and not something states could depend on over the long run.
The agreement announced by lawmakers Wednesday appears to restore much of this transfer money, but the fact it was in question is itself worrisome. The “Buy American” provisions are important symbolically and may have the effect of angering trading partners who, in response, may institute more substantive restrictions on U.S. exports. But such provisions will do next to nothing to boost net demand or employment in the U.S. steel industry. The Senate’s cuts in emergency transfers to states are a case of separating the wheat from the chaff and then throwing away the wheat.
It’s enough to make you either laugh or cry. I’d try to stay with laughing, but the ongoing crisis is bad enough that I am tempted to cry.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.