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Reproduced with permission from a private e-mail from Mahesh Johari

Some quick commentary only today.  The stimulus bill that just passed the House contains a “Buy American” clause, which forces materials purchased using funds from the stimulus package to come from American manufacturers.

Intuitively, this sounds both logical and appealing.  If we’re spending our taxpayer dollars, obviously we want those dollars to be spread throughout our economy.  It makes no sense to pass an economic stimulus package that sends our money to China.  So why not mandate that?

Unfortunately it’s not that simple.  The “Buy American” clause has great political appeal but will do nothing but defer job losses and prolong the overall process of adjustment that we are experiencing.

Here’s why: Let’s imagine (for example) a steel manufacturer in the U.S.  The manufacturer is unable to compete globally because their cost structure is too high.  They are facing the prospect of downsizing, of shuttering excess capacity, of laying off workers.  But wait! Here comes the stimulus package to save the day!

Now this uncompetitive sloth of a firm has a new lifeline.  They can sell their overpriced product to the stimulus package.  They can delay downsizing, cost cuts, and layoffs.  So as long as the stimulus package is around, they can keep being inefficient.  Meanwhile their international competitors are becoming ever more efficient, adjusting themselves to true market conditions.  The competitors are getting better.

When the stimulus package expires, the firm will be right back where it began: uncompetitive and burdened with an unsustainable cost structure.  Then what?  Of course the layoffs will come, the downsizing, etc.  Everything that should have happened will happen, just a year or two later.  The part of the stimulus used to overpay for those American materials will essentially have been used for zero long term benefit.  The overall economic adjustment process will be prolonged.

This type of waste why we have to be very careful when it comes to government spending.  Government spending packages tend to waste a lot of money.  Resources that are wasted produce no long term economic benefit.

So what should we do?  We don’t want companies to willy-nilly send our stimulus dollars to China.  Well, at least not when they can get the same stuff in the United States.

As long as we are creating websites and transparency, let’s go all the way!    We could require any purchases of commodity materials from international vendors to be subject to a domestic competitive bid first.  For example, if Caterpillar feels their most economical source for steel is based in Australia, let’s require them to accept competitive bids from American firms BEFORE they are allowed to place the order to the Australian firm.  If we keep the process open and transparent, it will bring the best American firms out to compete at peak efficiency – a very desirable outcome.

We have to be very careful here.  Subsidizing inefficiency is not the path to prosperity.

Related Blog/News Posts (add by Russ not email author, just for further reading):

CNN on Limbaugh and Obama Package

Perfect Storm?

Retailers on the Ropes

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Economic Help?

I can’t say I’m surprised by media and governments narrow-minded approach to re-energizing the economy.

Normally, I wouldn’t post on this subject, except that I think media plays a big part in reinforcing attitudes the public carries about our economic situation.

We never seem to get beyond the basic economic indicators to explain the situation in government nor the media.  It’s pretty inaccurate to report only on and issue policies on employment numbers, consumer sentiment, consumer product spending and sub prime housing.  Worse, if you are basing any of your personnel micro economic decisions on those metrics, you’re doing yourself a disservice.

let’s consider:

  • the largest expense in a person’s budget is HOUSING (whether renting or mortgage paying)
  • the second largest expense in a family budget and elderly budget is HEALTH CARE
  • the third largest expense in working family budgets is CHILD CARE (it becomes education for college people and post graduates)

Food, transportation, entertainment, and connectivity are all distant runner ups.  Thus most of our analysis and policy deals with our least costly expenses.  Really, think about it.

So now the economic stimulus package is going to give us $1600 back.  As if that makes EVEN A DENT in any of our major expenses.  Spare us the paper work and IRS work of issuing credits.  Fix Health Care costs via transparency or single payer or vouchers or tougher enforcement of fair practices.  Allow the importing of pharmaceuticals to reduce costs of medicine. Raise minimum wages and provide better laws for maternity/paternity leave to reduce dependence on child care. Don’t reduce school budgets for afterschool programs and more teachers as all it does it put pressure on the family to make up the difference. Stop nailing people on property taxes (which forces landlords to jack up rents and homeowners to not save) – yes we can replace those taxes with other taxes that don’t have such trickle down consequences.

and so on.

I don’t have the answers, no one does.  Neither the media nor policy makers are asking the right questions, so there’s no chance to find good solutions.

Bloggers, News outlets, papers, magazines – report on the big economic factors in our lives, not the mice nuts.  The price of consumer gas is a mice nut. the unemployment rate is a mice nut.  Consumer sentiment and spending is a super mice nut.

Actually, there’s no point in moralizing.  I’m trying more to deliver analysis.  Media, government, the public, academic instuitions, corps all reinforce each other.  if we want the behavior of the economic “system” to change, we have to change the reinforcers.  Our economy is in trouble because non of us have enough money to spend? or we’re just spending it on things that don’t give back? (health care! over priced housing! replacement child care! expensive secondary education)

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