Saturday, January 31, 2009

A Worm Market in Unintended Consequences

'Buy American' provision in stimulus bill makes no economic sense

"Americans want to see American taxpayer funds supporting a stimulus package that will generate American jobs using high-quality, American-made products," he added.

It doesn't get much more protectionist than that. Now I might be wrong on this, but didn't we move much of our manufacturing to China? Do we no longer wish to buy inexpensive socks?

I say that somewhat tongue-in-cheek. I've already hoarded plenty of socks. I consider them to be savings that no longer earn interest but at least have the potential to keep up with long-term inflation. Some would argue that socks are cheap and plentiful. That makes them a lousy investment. Others would argue that it is better to buy socks when they are cheap and plentiful than it is to buy them when they are expensive and hard to find. I tend to be in that latter group. Go figure.

Here's another thought. When are we going to start pumping out more high-quality, American-made oil? We'll probably want some in reserve once we've shut down global trade with protectionist policies.


You don't have to be a Nobel Prize-winning economist to see how this will play out.

I would argue that your odds of seeing it may actually be higher if you are not Nobel Prize-winning economist (as seen here).

Canada increasingly hopeful of U.S. climbdown from protectionism: Day

Day compared the provisions in the stimulus bill to the U.S. Smoot-Hawley Act of 1930, a tariff law which many economists believe fuelled the Great Depression.

That bill set record-high tariffs on more than 20,000 goods imported to the U.S. Over 1,000 American economists warned against it in a petition, but then-president Herbert Hoover signed the bill.

Countries retaliated swiftly, with Canada slapping tariffs on 16 American products that accounted for about one-third of imports from the U.S., and America's global imports and exports both plunged more than 60 per cent.


You'd think that would turn me deflationary long-term, wouldn't you? It doesn't. It makes me more stagflationary. We are not the world's manufacturer like we were heading into the Great Depression though. In sharp contrast, we now import far more goods than we export.

Our government helped get us into this crisis. We are now counting on our government to get us out of it. Here's a brief history of how well they did during the last crisis. There was a dotcom bubble collapsing. The government stepped in with cheap credit to solve all our problems. This left us with a bigger and more dangerous credit bubble.

The government is aware of the problems with this credit bubble though. They tried throwing even more credit at it in hopes that they could replace this credit bubble with another similar bubble (credit bubble #2). That hasn't worked out very well so far. Our government is always thinking though. They've come up with an additional solution. They wish to shut down global trade.

The more the government does the more unintended consequences appear. We've had a bull market in unintended consequences for the past few years. The government is really stepping up to the plate now though. Therefore, I predict a worm market in unintended consequences heading forward. A bull market just wouldn't do it justice.

From Dune (1984)...


Paul: Stilgar, do we have wormsign?
Stilgar: Usul, we have wormsign the likes of which even God has never seen.

9 comments:

Anonymous said...

Stag,

Public works projects receiving federal funds have been subjected to strict "buy America" clauses for decades. Exceptions are/have been extremely rare.

The article you reference implies that the "buy America" clause is something new brought about by the stimulus. That is totally wrong.

Really bad journalism - something else that is not new.

I really question the obsession with Smoot-Hawley. I think it was a minor factor in the great depression. IIRC, imports/exports were only ~ 5% of U.S. GDP in the late 1920s & early 1930s. Not significant enough to cause that much economic misery in my mind.

Imo, the main causes of the GD were high debt levels (excessive credit), excessive leverage, severe income inequality, and lack of bank deposit insurance.

It's not comforting that debt, leverage and income distributions are arguable worse today than in 1929. The "buy America" issue is a sideshow.

Tough times ahead.

Stagflationary Mark said...

mab,

It's not comforting that debt, leverage and income distributions are arguable worse today than in 1929. The "buy America" issue is a sideshow.

It is only natural for people to feel protectionist when danger appears though. Further, there's a heck of a lot of danger out there right now.

http://www.eastasiaforum.org/2008/11/29/1970s-deja-vu-creeping-protectionism-is-on-the-rise/

A related side show is Geithner blaming China for currency maniuplation.

Memo to Obama and Geithner: This is no time for a trade war
http://www.nydailynews.com/opinions/2009/02/01/2009-02-01_memo_to_obama_and_geithner_this_is_no_ti.html

There can be little doubt that China has been manipulating its currency for competitive advantage.

Thud! Thud! Thud!

That's just the sound of my head hitting my desk again. Unless I was mistaken, ALL countries try to manipulate their currencies for competitive advantage.

For example, we're trying to manipulate our currency straight into the toilet (in order to dig out from our massive debts).

China is not known as a country that responds well to external threats.

Thud! Thud! Thud!

Perhaps they should use America as an example? A handful of terrorists killed themselves flying planes into our buildings with the intent that they could someday bankrupt our country. Now we're spending trillions on two wars.

Anonymous said...

Stag,

Perhaps they should use America as an example?

Absolutely. The whole world should aspire to be like us. Use it or lose it. What's yours is mine. Everyone should have a casa de caca they can't afford.

Now we're spending trillions on two wars.

Don't short change the U.S. eCONomy. We also have the war on terror, the war on drugs, the war on prudence, the war on the middle class and the war on savers. And it is becoming clear we are at war against falling prices.

I'm not much of a patriot when it comes to a lot of these wars. Please don't tell anyone. I'm already paranoid about BerNaNke's helicopter. I certainly don't need to start worrying about black helicopters too.

And then there is the forgotten war on regulation and red tape. That one has been a roaring success. A total massacre, as in chainsaw massacre (woohoo! We're #1. Go team!):

http://www.propublica.org/article/banks-favorite-toothless-regulator-1125

A couple weeks ago, I tanked up @ $1.44/gal. This weekend, gas was $1.69/gal. I also just got a property tax increase ~ 6% yoy. Oh, and the teachers are picketing for wage and benefit increases in my town, although they are not on strike yet. I'd welcome a mild deflation, but it is definitely a war. I expect high levels of collateral damage.

Stagflationary Mark said...

mab,

From your link...

The reason, a former Countrywide exec tells the Post, was that the OTS would be "more lenient."

That's the first thing they teach you in Harsh Sentencing Avoidance School for the Recently Convicted. Pray for a lenient judge.

Canada prefers broad solution to Buy American issue
http://www.reuters.com/article/politicsNews/idUSTRE50U1XY20090202

TORONTO (Reuters) - Canada is willing to explore all options to resolve concerns about "Buy American" requirements in U.S. economic stimulus legislation, but an exception solely for Canadian trade is not Ottawa's preference, the trade minister said on Sunday.

Since Canada has shown a willingness to explore all options and would prefer to not be made an exception, I propose that Canada applies for US citizenship! That would certainly solve the problem.

Web of protection that only does harm
http://www.guardian.co.uk/business/2009/jan/31/barack-obama-international-trade-protectionism

But protectionism usually has humble beginnings and the law of unintended consequences applies.

I'm a huge believer in the law of unintended consequences. One trigger was the "free" lunch we were offered back in 2004. Using hindsight, I'd say that it ended up costing us about twice as much as a normal lunch.

We're now back in the free lunch line again. We didn't quite get our fill.

Chinese Food Hunger
http://chinesefood.about.com/library/weekly/aa110199.htm

In any event, Chinese Food Hunger refers solely to the feeling of being hungry a short time after consuming a Chinese meal.

We consumed! George Bush told us to consume (Made in China). And this is the thanks we get?

Anonymous said...

Stag,

I'm a huge believer in the law of unintended consequences.

Isn't it amazing how all the unintended consequences are negative? Seriously. You'd think with so many "experts" we'd have a few unintended "positive" consequences. Maybe we should rename it the law of unintended negative CONsequences

I read the Guardian article from your post. I also read the 3rd post by "American Gypsie" in the comments section of the article. He touches on some interesting points.

In Newtonian physics, for every action there is an equal and opposite reaction. That is not the case in economics or international trade. Especially with floating currencies. Unequal and lobsided seems more like the norm.

Free trade is more theoretical that factual. It only seems to exist for short periods when it is perceived to be convenient. The concepts of "Sovereign nation" and "free trade" seems at odds to me.

I'm unsure about a lot of things regarding economics. More now than ever. But I am sure that "buy American" is the norm on public works projects when federal funding is involved. It has been that way for decades if not longer. I have a hard time accepting the conclusions or opinions of "experts" when they clearly have no idea what the facts are.

Stagflationary Mark said...

mab,

Isn't it amazing how all the unintended consequences are negative? Seriously. You'd think with so many "experts" we'd have a few unintended "positive" consequences. Maybe we should rename it the law of unintended negative CONsequences

Most positive unintended consequences are magically transformed into positive intended consequences, especially around election time, lol.

But I am sure that "buy American" is the norm on public works projects when federal funding is involved. It has been that way for decades if not longer.

Here's the problem as I see it though. There's nothing normal about the size of Stimulus Package #2.

The world embraced Stimulus Package #1. We were encouraged to buy more crap we really didn't need. Much of that crap was made overseas. (I was not a big fan of Stimulus Package #1.)

The world isn't embracing Stimulus Package #2. Of course, the world will embrace the concepts though, as it applies to their own countries. To me, that's laying the foundation of a trade war. (I'm not a big fan of Stimulus Package #2.)

Free trade is more theoretical that factual.

Yeah, there's ALWAYS a trade war going on. The difference, in my opinion, is that things tend to escalate when it turns from covert into overt, much like a normal war would.

I have stated that I'm not a big fan of the stimulus packages. I have no solutions to our problems. I'm therefore not really a big fan of anything we do in the way of solutions.

That would seem to make me a pessimist, but the data as seen through the rear view mirror shows me to be an optimist. Make sense of that!

Anonymous said...

The difference, in my opinion, is that things tend to escalate when it turns from covert into overt, much like a normal war would

Agreed. Perceptions on all sides have changed too. The tension is increasing.

I have stated that I'm not a big fan of the stimulus packages. I have no solutions to our problems. I'm therefore not really a big fan of anything we do in the way of solutions.

My proposed solution is to let the bad lenders eat the bad loans. Clearly the bad lenders have too much clout for that to be allowed to happen.

In many ways we are in a depression. The wealth destruction has been astounding and it's getting worse.

flin said...
This comment has been removed by a blog administrator.
Stagflationary Mark said...

Spam deleted.