May
30, 2002, 8:45 a.m.
Steeling Votes?
Protectionism
may not be a politically sound activity.
he
Senate and House are up for grabs. A one seat net gain in the Senate and
retention of the House will put the Republicans in the driver's seat.
No change in the Senate and five House seats could deliver both Houses
to the Democrats. In either of these two scenarios, the winner will be
able to implement much of their agenda without a single vote from the
minority party.
That is what Bill
Clinton did early in his administration. It is also how Bush got his tax
cut through (the Republicans had control of the House and Senate for part
of last year). Given the nature of the prize, it is not surprising to
see both parties doing everything they can to win the favor of the various
constituents and special-interest groups in swing states and districts.
There is plenty of pork to go around, and so they're spreading it. And
they believe the votes will follow.
Unfortunately, the
new spending measures are not good economics, and they may not even be
as good politically as many are making them out to be.
Question: How is
the current Bush policy different from the Democratic agenda? And if it
is not different, why should conservative Americans go out of their
way to vote for Bush again? Bush's original instincts were right: good
economics makes good politics. But it is a mistake if he has sacrificed
his principles in favor of political expediency.
COMING
BACK TO BITE YOU
The rationale behind industry-specific protectionist measures (such as
the Bush tariffs on steel) is that the benefits of government actions
are concentrated on a few groups while the costs are fairly diffuse. In
other words, large benefits accrue to a few and many pay a small portion
of the costs. According to the political calculus, the protectionist measure
on steel will help Republicans in Pennsylvania.
The economic argument
in favor of protectionism is that it provides breathing room for the steel
industry while that industry retools and becomes competitive. This is
an appealing argument. However, the historical facts in the case of steel
and other industries show that protection has not worked.
In a static world,
protectionism becomes a simple income-redistribution scheme where money
is handed to one industry at the expense of everyone else. Unfortunately
the world is not static and the distortions generated by the protectionist
measures on steel will elicit substitution effects. For instance, what
if the steel entered the country through exempt nations, the net effect
being the addition of some trans-shipping costs and a different pattern
of trade. In this case, when all is said and done, the price of the steel
is a little higher, the domestic producers have not benefited at all,
and all we managed to do is make the U. S. consumer worse off.
Even if the you could effectively restrict the direct import of foreign
steel, domestically there could be other unintended effects. Assume that
the domestic price of steel rises because the restriction is effective.
The higher price of steel will then induce a substitution effect away
form the use of steel, as the tariff will have increased the cost of domestic
products that are intensive in the use of steel. It follows from there
that domestic producers who compete with similar imported products that
are steel-intensive will be at a disadvantage.
And there's the vicious
cycle. Steel restrictions are circumvented as cheaper finished products
made from steel are imported. Then there's the next substitution effect
where employment in the steel-intensive industries declines because of
increased foreign competition. And this all will lead to another political
decision: Does the politician worry now about the workers in the steel-intensive
industries or those in the steel-making industries?
When you look at
it this way, the case for protectionism is not as strong as the advocates
make it out to be. President Bush may have made a mistake that he's really
going to regret — particularly when our savvy investor class sees
what havoc a little protectionism can wreak.
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Senate and House are up for grabs. A one seat net gain in the Senate and
retention of the House will put the Republicans in the driver's seat.
No change in the Senate and five House seats could deliver both Houses
to the Democrats. In either of these two scenarios, the winner will be
able to implement much of their agenda without a single vote from the
minority party. 
