Issue date: 2/23/09 Section: Money/Health

Most of us are aware that a stimulus bill has been written up in recent weeks to help our country from falling into a deep recession. On Tuesday, Feb. 17, President Obama approved the bill. I certainly agree with our government representatives that a stimulus package is needed, but I'm strongly opposed to the "Buy American" clause that was included - President Obama should have vetoed the bill until this section was eliminated.

The stimulus plan totals $787 billion, which happens to be a bit smaller than originally proposed. The state of Wisconsin will receive nearly $9 billion or the equivalent of about 3.86 percent of our state's GDP. The overall stimulus package includes provisions such as tax cuts and increases in government spending on public works projects, education, health care, energy and technology. According to the Congressional Budget Office (CBO), about 74 percent of the stimulus money will be spent within the next year and a half. The goal of this spending is to create jobs, and with millions being lost in the last few months and unemployment at 7.6 percent, this quick spending is much-needed.

Like I stated though, the only setback is the bill's "Buy American" stipulation. President Obama did help "water down" this portion of the bill and ensures it will meet World Trade Organization rules, but he should have worked to eliminate it completely. It includes preference for domestic steel and iron producers for constructing buildings and other infrastructure projects while also requiring that all manufactured goods bought with the stimulus money be produced domestically too.

Why is this such a horrible idea you ask? Shouldn't we only spend taxpayer money domestically so we create more jobs for America rather than China and other major exporters?

It does seem logical, but world trade can be beneficial to all participating countries. World trade allows countries to take advantage of comparative advantage, which fosters specialization. When one country can produce a good at a relatively lower opportunity cost than another country, it's called a comparative advantage.

So each country's workforce will produce certain goods that are relatively more efficient at producing, which creates prosperity through more jobs. So the goods that a country has a relatively high productivity in will be exported, while other countries import these goods. Other countries also specialize, export these goods, and import others they aren't as efficient in producing.

All this specialization enlarges each country's consumption possibilities and ultimately results in a net gain from trade. Protectionist-like provisions such as the one included in the stimulus package, though, will reduce specialization, causing Americans to pay higher prices for goods that could otherwise be produced more cheaply.

So in context of our new "Buy American" clause, let's assume that it's 10 percent cheaper to buy steel from abroad rather than in the United States so that the foreign country has a comparative advantage in the steel market. Now, when we begin to spend the stimulus money on infrastructure (about $90 billion dollars is planned) and are forced to buy more expensive American steel, we are essentially wasting $9 billion dollars purchasing materials we could receive much cheaper. Now these are just abstract figures, but why not buy the cheaper steel of equal quality and spend the saved money on creating additional jobs or not spend it at all, for that matter?

Also, it's likely that a "Buy American" provision wouldn't even create a net increase in jobs for Americans since it's quite plausible that plenty of jobs would be lost in U.S. exporting industries once our trading partners become enraged by our actions and impose similar laws themselves. History proves that "Buy American" requirements and other protectionist measures only raise the costs of deterring a recession (ever heard of Smoot-Hawley?) and would actually diminish the effect of the stimulus package.

I'd like to note, though, that there will always be winners and losers from trade, but the benefits will outweigh the costs. Whether the "winners" compensate the losers so that everyone is better off is a whole other topic in itself. I have too little space to discuss this in detail, but it's worth stating that appropriate policies can be put in to place to correct such imbalances rather than interfering with the flow of trade, as the "Buy American" provision surely will.

Overall this sets a horrible example for the rest of the world. The one nation that has campaigned for free-trade since World War II and has protested every time another nation has enacted similar laws should not have allowed such a mistake to be made.

Rick is a senior business economics major and columnist for The Spectator. This column appears bimonthly in the Money section.

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