The Impact of the Stimulus Bill on the Labor Market: Does It Work, or Doesn’t It?

The Impact of the Stimulus Bill on the Labor Market:

Does It Work, or Doesn’t It?

         The rallying cry of “Buy American!” can be heard pervasively across the nation, stirring nationalist sentiments as America trudges along the path of economic recovery from the worst recession since the Great Depression. One of the most sharply divided debates in public policy is the one about the stimulus bill implemented in February 2009 called The American Recovery and Reinvestment Act.

         The American Recovery and Reinvestment Act’s controversial Buy American provision stipulates that if a project is on a public work, then all the iron and steel used in the project must be produced domestically. This provision aims to preserve or create at least three million manufacturing jobs for Americans. Will this policy retain jobs for Americans and spur economic growth, or will it ultimately diminish the welfare of the nation? In the short run, protectionism indeed preserves jobs for protected industries. However, as indicated by the 19^th-century French economist Frédéric Bastiat, protection through free-trade restriction is an economic fallacy; in the long run it will slow down economic progress and represents a sheer loss to society.

         Frédéric Bastiat, in his influential commentary on economic sophisms “What is Seen and What is Not Seen,” reveals the fallacies contained in the argument for protectionism as a method of stimulating economic growth. Without limitations on trade, consumers can enjoy lower prices for the goods they consume. His essay outlines the argument of “Mr. Protectionist,” who asserts that by eliminating foreign competition, domestic firms can profit more through higher prices.  When firms charge higher prices, they help stimulate the economy by employing more workers and other resources. In turn, the incomes of resources owners will increase, and they will then consume more, thus fostering economic activity across the nation.

         Though Mr. Protectionist’s arguments are not false, they fail to account for economic consequences not immediately visible, as is the case with supporters of the stimulus plan. Bastiat reasoned that a law restraining free trade involves three key players. The first two are directly involved in the transactions as the buyer and seller. They are seen. The third could have been involved as the seller of whatever goods or services the consumer would have purchased from had it not been for the trade restriction; this third figure is not seen. At same time, this third player could have had more money to spend had it not been for the protectionist policy.

         Supporters of the stimulus plan may wonder, “How is it possible for anyone to have more spending power when jobs are being ‘outsourced?’”

         The consumers who would have paid less for building materials could have spent the money they saved elsewhere. Additionally, they could have purchased something else and gained enjoyment from the consumption of what they purchased. However, restrictions such as the Buy American provision result in consumers losing the value of whatever goods they could have purchased when free trade and competition resulted in lower prices before the protectionist policy. The double loss of the consumers offsets the gains made by the manufacturers and sellers of steel and iron.

         In applying Bastiat’s central theme to the Buy American provision of the stimulus plan, the three million jobs created or saved in the United States’ manufacturing industry are undeniable; because steel and iron cannot be obtained from abroad for public construction, they must be produced domestically, which means manufacturing jobs for Americans. This is seen.

         The not seen are the jobs that would have been created in other industries, as well as the enjoyment that would have been obtained from the consumption of the goods and services provided by non-Americans.  Frédéric Bastiat’s concept of unseen consequences does not simply exist in theory. For example, in the 1930’s the Smoot-Hawley Tariff Act imposed taxes on over 20, 000 imported goods, which distorted and limited free trade. Economists now widely believe that this tariff greatly exacerbated the severity of the Great Depression.

         To echo the sentiments of Harvard economist Dr. Nicholas Gregory Mankiw in his 2009 New York Times article, this is no time for protectionism. Both the arguments presented by Frédéric Bastiat and lessons learned from public policy history demonstrate that protectionist policies lower the overall economic well-being of the nation and serve only to impede economic growth. The Buy American provision is therefore counterproductive; it defies economic wisdom and undermines the very economy it seeks to help recover.