Diary

Recipe For A Depression

While we are still struggling to get out of the most severe recession in nearly a quarter of a century, the Obama Administration is determined to make matters worse:

The prospect of a trade war between the US and Europe is looming after “Buy American” provisions were added to President Barack Obama’s $820 billion (£573 billion) stimulus package.

The EU trade commissioner vowed to fight back after the bill passed in the House of Representatives late on Wednesday included a ban on most purchases of foreign steel and iron used in infrastructure projects.

The Senate’s version of the legislation, which will be debated early next week, goes even further, requiring that any projects related to the stimulus use only American-made equipment and goods.

The inclusion of protectionist measures has quickly raised hackles in Europe.

A spokesman for Catherine Ashton, the EU trade commissioner, said: “We are looking at the situation. The one thing we can be absolutely certain about, is if a bill is passed which prohibits the sale or purchase of European goods on American territory, that is something we will not stand idly by and ignore.”

Despite the parlous state of the US economy, some major American firms, including General Electric, are also opposed to the Buy American stipulations, fearing reprisals from overseas and further damage to the global economy.

Bill Lane, government affairs director for Caterpillar, which has just laid off nearly a fifth of its 112,000 work force and is the tenth largest US investor in Britain, warned it was a dangerous step.

He said: “We are the first to recognise that if the US embraces Buy American then the whole notion of buying national will mestastasize and limit our ability to take part in overseas projects.

“We are students of history. A major reason a very deep recession turned into the Great Depression was the fact that countries turned inward.”

To say that this policy is lunatic would be to understate matters. And to their credit, the very people and constituencies in the business community whose favor the Obama Administration seeks to curry, are calling shenanigans on the Administration for its self-destructive desire to engage in a trade war. But since it appears that it is not enough for the Administration to hear from foreign governments about how its policies would destroy any chance whatsoever of a near term recovery, let’s give Willem Buiter his well-deserved moment in the spotlight:

There is little doubt that if the Buy American provisions of the Economic Stimulus Package were to become law, this would amount to an economic declaration of war on the rest of the world.  The response of the assembled non-US finance ministers in Davos made this clear.  Retaliation from the EU countries and the rest of the world would follow swiftly.  Because this disastrous US Congressional actions follows so closely on Treasury Secretary Geithner’s declaration that China is manipulating its currency, it is essential that the Obama administration draw a clear line in the sand.  If anything like the Buy American clause inserted by the House survives in the bill president Obama gets on his desk, he must veto it.  The questionable value of the fiscal stimulus is overwhelmed by the unquestionable domestic and global harm caused by the Buy American clause.  If president Obama fails to veto a protectionism-laced bill, it will be clear that we have a wuss in the White House.  If such is the case, God help us all.

There is a lot more where that came from. But you get the point. The question, of course, is whether the same can be said for the Obama Administration.