The Indian Economy Blog

February 7, 2009

Protectionism Is The Crack Cocaine Of Economics

Filed under: Basic Questions,Business,Trade — Prashant @ 7:52 pm

Are we going to see a sequel to Smoot-Hawley?

Richard Fisher, President & CEO of the Federal Reserve Bank of Dallas, tells it like it is. Commenting on C-Span about the “Buy America” provisions in the stimulus package:

Protectionism is the crack cocaine of economics. It may provide a high. It’s addictive. And it leads to economic death…We just cannot afford to go down that path. And I hope our senators, Democrats and Republicans, will be very sensible on that front (Link)

Alas, I fear we’re already started going down this slippery slope, whether it’s the “Buy American” guff or this ban on TARP recipients hiring H1-B visa holders (HT for latter link: Mohit Satyanand, via email)

10 Comments »

  1. I wonder if there is an excessive amount of pessimism about the economy and the job loss. Without a doubt the economy is in a very tenuous position but isn’t now the time to believe in our inherent ability to overcome, survive, and thrive?

    Instead of wasting too much time figuring out where blame lies (analysis of past mistakes is necessary to a degree) lets spend time developing solutions for ourselves and perhaps more help the people around us.

    Now is a time to tighten our belts and push forward believing in our inherent ability to succeed.

    http://www.weeklypoint.com/2009/02/06/are-job-losses-accelerating/

    Comment by Dan D — February 7, 2009 @ 10:17 pm

  2. Obama’s plan of economic stimulus which many terms as patriotic economic plan, is furthermore worsening.

    Anyways,I have seen many indians criticizing US protectionism, do Indians oppose Indian version of protectionism too? Or is it just hypocrisy in a new facet.

    Comment by Gargi Dixit — February 8, 2009 @ 5:35 pm

  3. Gargi

    I can’t speak for all Indians but I do know some who oppose protectionism in India — check out the posts in these two categories
    – Regulatory Reforms at http://indianeconomy.org/category/regulatory-reforms/ and
    – Trade at http://indianeconomy.org/category/trade/

    Comment by Prashant — February 8, 2009 @ 8:15 pm

  4. India was reported to be the first country to actually impose a protectionist law – as quoted in the UK press. The report said that India had banned the import of chinese toys and the reason given for that was that Indian toymakers could not compete with the chinese imports.

    SO now, we are seen in the west as a country that is willing to take away jobs and trade (outsourcing and call centres are a bugbear) but not sport enough to reciprocate!

    Comment by aanteladda — February 10, 2009 @ 3:02 am

  5. Just because I’ve highlighted the quote by Fisher about the addled-headed polices the US is pursuing currently, that doesn’t imply that India’s some paragon of free markets — as some of the commenters seem to imply.

    Let me be clear — India’s far worse than America (and many others) when it comes to protectionism.

    If you have specific comments to make about India’s egregious tariffs, please do so — with links and references. Or better still, if you think the comments merit a separate post, we’d be more than happy to post them on IEB — please email me at prashant-at-stringinfo.com

    Thanks

    Comment by Prashant — February 10, 2009 @ 6:45 pm

  6. [...] H1-B workers for job losses. This fear of H1-B workers displacing Americans is the catalyst for the Grassley – Sanders bill. Wadhwa’s column has created a firestorm of controversy — some cogent, some [...]

    Pingback by The Indian Economy Blog » Weekend Reading: 8 Feb, 2009 — February 11, 2009 @ 9:33 am

  7. Free market proponents speak about the ills of protectionism but they never explain why. They just take it as holy writ that this idea is some great evil while overlooking the current mess we Americans are in, that specifically unrestricted free trade has allowed for. Really, I have yet to see how keeping jobs in the United States so American workers might earn again and consume again can be a bad thing.

    We as Americans have a war of attrition on our hands; the more jobs that are sent overseas, the less wealth we have, the cheaper things need to be, the cheaper labor has to be, the more jobs have to be sent overseas, and so goes the endless downward spiral. Wallmart and the dollar stores saw a brief spurt in profits as the unemployed took to eating macaroni and cheese for dinner and even that has been wiped out as will be seen in the coming earnings releases.

    The downward spiral began when Americans sold out our humanitarian standards for the prospect of gross excess, adapting a Third World economic psychology and settling for extremes instead of a functional middle path of restraint and discipline. This short-term spike in Americans’ quality of life due to abundant credit and cheap overseas labor (until we lose our jobs to these very laborers and can no longer consume what they or anyone else produces) is the crack cocaine of economics. Bailing out banks to continue allowing credit to be available in this manner feeds the addiction; sending collection agency jobs to call centers in India feeds the addiction more, and clearly this latter phenomenon is the last breath of the addicted America. There’s simply nothing left to outsource.

    In this respect the “flat earth” and “global economy” ideas now seems like a brief flicker on the map, an aberration in human history where exponential population growth and communication technology took consumption to unsustainable heights. It’s all falling apart now, and quickly. I believe that protectionism hurts those who benefit from the skewed trade imbalance between the US and the Third World where cheap labor can be afforded due to egregious and inhumane worker conditions. When competing with overseas companies they are outside of the jurisdiction of the United States the rules of the game are thrown off-kilter. It was only a matter of time before our quality of life diminished to that of the Third World nations whose labor we exploited.

    People don’t mind high prices when they have equally high wages to match. It is only greed and lack of discipline that endlessly seeks more for less. The answer to America’s problems is to cut off the perpetually outstretched Third World hand, in terms of sending jobs and humanitarian aid while our own people are out of work and starving. America is three times the size of India and boasts a natural environment that has yet to be completely trashed as is found in such Third World countries. America can sustain itself, its energy needs, its food needs, its employment and productivity needs. The Ameircna landscape is now carred with overbuilding; there was a phenomenon in the early 2000s where factories were being converted into high-end loft living spaces, and now that phenomenon must be reversed.

    America can and must retain a self-contained economy within its own national boundaries. If we can ship factories overseas then we can ship them back; but re-training and re-acquiring the knowledge resources sent with those factories will be harder. Re-establishing the factory culture will be harder. American companies can easily compete within the the United States’s economic microcosm and be competitive with each other, producing equally high quality products. This is not a far-fetched thought, it was in fact the case in the 1950s when the economy was far less globalized than it is now.

    Comment by Joe Smith — February 16, 2009 @ 5:05 am

  8. To Joe Smith and B.T,

    Protectionism does not help U.S consumers either. The point about jobs lost due to offshoring to “Third-World” in terms of manufacturing and some service jobs being relocated does result in savings to the US consumer as goods get cheaper. For example, a dollar today can buy much more than what a dollar could buy in teh 1970s. When manufacturing left in the 1970s, many Americans warned that the US was finished, but the general standard of living in the U.S has increased after the 1970s.

    And the 1950s analogy is not valid as in the 1950s, US labor was the only skilled labor available. Europe was devastated after WWII and Asia was nowhere as far as industrialization goes. Therefore, US labor could get a very high premium, as labor supply was short and demand was high. It is different now, as both European and Asian countries have labor available.

    The idea of self-sustainment has been tried several times and it had failed miserably. Eminent economists like Milton Friedman have critiqued the import substitution theory. Besides, the current economic malaise is not due to outsourcing or H1-Bs, but due to US finance firms and US consumers spending like crazy and buying way more they could afford. Blaming those evil “third-world” furriners is just a pointless straw man argument.

    To BT, if the US did not feed-off the “third world” labor the US today would have a standard of living similar to that of Argentina where every consumer goods and service would be 2-3 times more expensive. It is mutually beneficial, otherwise why is it that every American stampedes into Wal-mart and target on Black Friday to get cheap stuff made by the “third-world”. And most Americans like you sing praises of “freedom” and “trade” when it suits you, and suddenly revert back to “patriotism” and “jobs” when it does not.

    To Joe, people mind high prices even if they earn a high salary. Maybe you do not mind paying $500 for a TV set, but most Americans do. It is precisely this reason as to why Americans love cheap stuff. And again, the biggest threat to job security in the US, is the budget deficit (not trade deficit) and the dropping worker-to-retiree ratio.

    Comment by AS — May 15, 2009 @ 9:08 pm

  9. AS,
    I agree with you about Americans wanting to buy goods at a cheap price – But, don’t use “every American” because we all are not that way – I don’t “stampede” to wallmart to buy up as much as I can on Black Friday (and neither does anyone in my family). I live within my means – I still had a 2001 model TV with a picture tube up until last year and had NO plans to buy a new HD flat panel TV like most of the people I know – But, a Friend of mine gave me a 4-5 yr. old Flat HD CRT – and if that breaks, I go back to my 2001 model TV, if that breaks, I may just go without a TV. (I am guessing) Most people in America buy flat panels and put them all over the house even when they really only need one TV ( I know some that do that).

    There are many causes for the situation we (The USA) are in – But, my point was that why is the indian prime minister ( and a fair amount of indian people) calling out so strongly to avoid protectionism (and I have read many a postings on indian websites to back my perception)…. Anyhow, the fact is that india needs all of the money that comes to them from the greedy outsourcing companies (and American CEO’s). I have seen posts and articles (I can post links if you’d like) by indians pointing out that they shouldn’t be so dependent on that method of growing their country – that they should develop their country through innovation and independence – I’ve seen the quote, from an indian person, that indian IT folks need to “be the poet, rather than the scribe” (something to that effect) – I believe that statement – get out there and grow your country on your own – why not give that a try and see what happens – and don’t beg for outsourcing dollars by calling to steer clear of “protectionism” as the indian prime minister stated at the G-20 summit.

    – To the site admin: Oh, an hey why is my original posting no longer on this site ? what did I say that was wrong ?
    B.T.

    Comment by bt — May 16, 2009 @ 5:36 am

  10. BT

    For what it’s worth, I’m against protectionism of all stripes.

    I didn’t read the Indian PM’s statement re “steering clear of protectionism” at the G-20 summit. If he did say that it’s ironic. India has been one of the more protectionist countries in the world over the last 60 yrs, which is one of the reasons India’s an economic laggard.

    Comment by Prashant — May 17, 2009 @ 12:38 am

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