Bad, just plain bad ..... (updated)

Just when you thought the idea of a stimulus package couldn't get any worse, the following report comes from the Washington Post:

The stimulus bill passed by the House last night contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package.

A Senate version, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods

[....]

U.S. industrial giants including Caterpillar, General Electric and the domestic aerospace industry are emerging as strong opponents. The measures, they argue, could violate trade deals the United States has signed in recent years, including an agreement on expanding access to government procurements reached through the World Trade Organization.

But most damaging, critics say, would be the "protectionist message" attached to imposing such barriers on foreign companies. Nations including China and many in Europe are preparing to spend billions of dollars of taxpayer money on stimulus projects. American companies are angling for a piece of those pies, and retaliatory measures against U.S. companies, executives argue, could significantly complicate those efforts. This week, a European Commission spokesman threatened countermeasures if the Buy American provisions are approved.

Just what the world needs now, a trade war :-( Apart from anything else, such measures will increase the cost of projects undertaken as part of the stimulus package. Also note that such protectionist measures don't affect the total number of jobs in the economy much. All they do is shift those jobs around. Some industries, iron and steel in the above example, gain jobs but other industries lose them, exporters for example. As trade economist Douglas Irwin puts it:

Since trade both creates and destroys jobs, a frequently asked question is whether trade has any effect on overall employment. Unfortunately, attempts to quantify the overall employment effect of trade are exercises in futility. This is because the impact of trade on the total number of jobs in an economy is best approximated as zero.

What such protectionist measures do do is make the country as a whole poorer.

We have to hope, along with Greg Mankiw, that "President Obama and his economists strongly oppose these first shots in a new trade war of protectionism." The Washington Post report says:

The administration has not addressed the issue publicly, and sources close to the issue said it appears that a response is still being formulated.

(HT: Greg Mankiw)

Update: The Inquiring Mind blog comments here and here and includes links to articles from the Times which look at the issue here and here.