Peterson Institute's amateurish report a pathetic Bible for the anti-'buy American' movement

The Peterson Institute's report entitled 'Buy American: Bad for Jobs, Worse for Reputation' ( http://www.petersoninstitute.org/publications/interstitial.cfm?ResearchID=1114 )
which proclaims that Mr. Prez Obama's stimulus package should be cleansed of the pollution of 'buy american' measures, is apparently the Bible of the movement opposed to the 'buy american' measures in the stimulus package, a movement Prez Obama has apparently just recently joined. This despite the fact that during the presidential campaign less than one year ago, Prez Obama scored with voters by condemning McCain because McCain was against some 'buy American' initiative with regards to US govt procurement of motorcycles. And guess who Prez Obama's right-hand man will be in exorcising the 'buy American' legislation? None other than his opponent, Senator McCain. I guess I'm not smart enough to see how you can have a democracy when politicians in the heat of a campaign vehemently support one thing, and then three months later when in office vehemently support the opposite of what they supported during the campaign.

It seems to be the case, that President Obama in proclaiming his disdain for the 'buy american' provisions in the stimulus package, was parroting the Peterson Institute, as if the Peterson Institute is prez Obama's tag-team partner in an assault on so-called 'protectionism'. The president's statements were apparently made immediately after the Peterson Institute released its report; for days prior to the President's rejection of the 'buy American' provisions, the report's authors had been proclaiming anti-'buy American' summaries of what is in their report.

"As the (Wall St) Journal notes, a study out today from the Peterson Institute for International Economics found that the provision would cost many more jobs than it creates."
-- http://www.cbsnews.com/blogs/2009/02/04/politics/politicalhotsheet/entry4775674.shtml

"A study released Tuesday by the centrist Peterson Institute for International Economics in Washington concluded that the provision would likely cost far more jobs than it created."
-- http://online.wsj.com/article/SB123370411879745425.html?mod=googlenews_wsj

It is astonishing how amateurish this Peterson report, which has become the bible of the anti-'buy american' movement, is. It's amazing that the "Think Tank and Civil Societies Program at the University of Pennsylvania" (Jan 2009) rated the Peterson Institute as the "top think tank in the world".

The Peterson Institute report, simply throws out projections regarding how US exports could be reduced by foreign retaliation for the US enacting 'buy American' measures; and, based on this alone, it concludes that the "buy american' provision in the stimulus bill is "bad for (American) jobs".

Problem with this is that any fool could (like the Peterson report) dream up massive trade retaliations that the world could inflict on the US, and that would more than cancel out whatever advantages the US gained through 'protectionism', and on this basis conclude that the 'protectionist' measure in question is a 'bad' idea.

It is simply irrational to say that since it is possible thgat disproportionate retaliation can be taken by an involved party when it comes to so-called 'trade wars', therefore all trade-barrier increasing acts are foolish.

Of course it is possible that the world could retaliate against US economic nationalism, hitting the US much harder than the US has hit it. However to say that this means the US should not hit the world with some economic nationalism, is illogical. If the foreign nations did indeed hit the US with disproportionate retaliation, the US could take appropriate counter-measures. The fact that the US is able to take such counter-measures, would impair the tendency to hit back at the US disproportionately.

The Peterson Inst report keeps saying: "if this 'buy American' provision is enacted the world COULD retaliate by reducing US exports to the world by 1 billion, the world MIGHT retaliate by reducing US exports to the world by 10 billion, the world COULD retaliate by reducing US exports to the world by 100 billion; since the world COULD and MIGHT do these things, therefore the US should not enact economically nationalist 'buy American' provisions in the stimulus package. This line of argument is obviously foolish.

The elephant in the room is the fact that over the past 30 years the US net international investment position has declined from plus two trillion to negative one trillion; simultaneously with this, the US had been running gigantic trade deficits as a result of continual reduction of trade restrictions. Obviously, the reductions in trade barriers have economically damaged the US at the expense of the world (we ignore for now the negative effects trade liberalization has had on the world). It is lunacy to ignore this elephant in the room, and to instead focus on amateurish, childish arguments such as those presented by the Peterson Institute's authors.

Obviously, reduction of trade barriers has economically damaged the US while in the aggregate economically benefitting the world. This indicates that obviously, one could expect an increase of trade barriers to benefit the US at the expense of the world.

Obviously the Peterson Institute report is wrong to ignore the general history of the past 30 years and imply that increases in trade barriers always have equivalent effects on the US and on the world, or hurt the US more than they hurt the world, simply because a tit can be retaliated for with a tat and a tat can be retaliated for with a tit, tit for tat fashion. The fact that the world is capable of retaliating against economic nationalism, does not prove that the US is incapable of improving its position through the use of trade restrictions.

Things get to the point where the world's tit for tat fails to negate the advantages the US gains through economic nationalism. The fact remains that when trade barriers were higher, the US net international investment position, the US economic health, was far superior to what it is today. It is reasonable to believe that although the world can retaliate with tits for US tats, nevertheless the US by piling tat upon tat can climb out of its disadvantageous position.

Although relatively insignificant 'protectionist' measures taken by the US can be equivalently retaliated against by the world, nevertheless, the cumulative effect of several 'insignificant' measures together, can produce advantage for the US vis a vis the world.

The Peterson Institute's 'Bad for Jobs, Even Worse for Reputation' report attempts to estimate the amount of money foreign governments spend importing from the US as follows: (foreign govt ABC spending on goods & svcs as % of gdp) times (foreign nation ABC imports of US goods & svcs) equals (estimated $ spent by foreign govt ABC on US goods & svcs). In doing this they blythely assume, that for govt the percentage of total money spent that is spent on imports is the same as the percentage of total money spent on imports in the private sector --this despite the fact that even though data they themselves provide in their report (they state that 4% of the money the US govt spends on manufactured goods is spent on imports), indicates that governments spend a very different percent of their expenditures on imports compared to the general public. This is the best that the 'world's best think tank can do'? This is supposed to over-ride the elephant in the room which is the changes in US NIIP corresponding with trade liberalization?

Indications are that the total spending to purchase of imports ratio varies widely from nation to nation; and, the ratio of the percent of govt spending that is spent on imports compared to the percent of public spending that is spent on imports varies widely from nation to nation. The Peterson study estimates ignore such variation.

The Peterson report attempts to predict how much foreign govts spend consuming imports from the US, based on the percentage of total national spending in a given nation that is government spending. This is unworkable however, because many nations import more than they consume from all sources combined. This being the case, one cannot simply assume, that for example if govt of nation ABC spends 10% of the GDP of nation ABC, therefore the govt of ABC consumes 10% of the imports. The private sector does not consume all that it imports--the private sector uses imports to produce exports also. Therefore to say that since a nation imports 100 billion dollars of goods and services it consumes 100 billion dollars of goods and services, is inadmissible. When a nation imports 100 billion of goods and services, it consumes less than 100 billion of goods and services. Nations vary in terms of the imports consumed to imports purchased ratio.

The Peterson estimates ignore the fact that the ratio ofimported goods and services that are consumed to imported goods and services that are purchased in the private sector in a nation, will vary from the ratio of imported goods and services that are consumed to imported goods and services that are purchased for the government of the given nation. Since the activity of using imports to produce exports is predominantly concentrated in the private sector, government will consume a greater percentage of the imports that it spends money on, compared to the private sector. This factor in isolation indicates the Peterson Institute report underestimated the amount of money foreign governments spend on imports.

By way of contrast, the fact that nations consume only a portion of the imports they spend money on, indicates that the Peterson study overestimated the amount that foreign governments spend on imports; and the fact that in the US (according to my best estimates as of now) the money the US as a whole spends on imports amounts to 17% of total US consumption of goods and services whereas according to the Peterson study itself only 4% of the money the US government spends on manufactured goods is spent on imports, contradicts the Peterson study's assumption that the spending on imports compared to total spending ratio is the same for government as it is for the private sector.

Thus it is obvious that the Peterson report's estimates: are surprisingly off-the-wall (like some movie about a damaged airplane patched together with rubber bands) indicating an incredible (for the 'world's top think tank') lack of access to statistics re economies foreign and domestic; fail to take into account all kinds of complications; in contradiction of empirical evidence assume that changes in trade barriers effect all parties involved equally; and, are a very inadequate foundation to build public policy on--especially when compared to the elephant in the room which is: the decline in the US Net International Investment Position (NIIP) coinciding with gigantic US trade and budget deficits, which indicates that changes in level of trade restriction do not effect all parties equally.

To me this is all indicative of the fact that generally speaking, Harvard, Ivy League, types, on the negative side, tend to over-value reputation, ie, 'I saw an article in Time that said Harvard is the best so I'm going there', while they ignore important facts ie, 'how is Harvard governed?'. President Obama is an Ivy league Harvard man--and he seems overly impressed by some amateurish 'think tank' simply because some university group has named it the 'world's top think tank'.

This economic stimulus package is being paid for by future generations of Americans. Especially at a time like this with the US economy as sick as it is, I do not see how future generations of Americans can be expected to subsidize foreign economic prosperity. The US would never expect the world to sacrifice its future generations to insure US prosperity. The US has already almost bled itself to death financially so that foreign nations might benefit. Yet President Obama today was quoted as stating:

"I think it would be a mistake ...at a time when worldwide trade is declining, for us to start sending a message that somehow we're just looking after ourselves and not concerned with world trade (http://uk.reuters.com/article/euIpoNews/idUKN0431144920090204
)" .

Similarly (I've heard that Prez Obama wants to give grants to illegal aliens as part of the stimulus package) I fail to understand what is 'democratic', about politicians not enforcing the law and contradicting the wishes of the voters of their nation by promoting the entry of illegal aliens into their nation, and then making mutually supportive deals with such illegal aliens--to me such looks like politicians teaming up with foreigners to circumvent the will of the voters they are supposed to represent.

Relevant Links:

USDX 100 in 2000, now 71. 0.71
-- http://www.populistamerica.com/what_is_a_dollar_bill_worth

Fed broad index of dollar, down from 116 feb 2000 to 109 feb 2009 0.94
-- http://www.federalreserve.gov/releases/h10/Summary/indexb_m.txt

Fed major currencies, down 98-81 200-2009 0.83
-- http://www.federalreserve.gov/releases/h10/Summary/indexn_m.txt

Fed OITP 2000-2009 up 128-139 0.09
-- http://www.federalreserve.gov/releases/h10/Summary/indexo_m.txt

exports world total exports 13.9 trillion US exports, 1.1 trillion, 8% of total world exports.
-- http://www.nationmaster.com/graph/eco_exp-economy-exports

imports
http://www.nationmaster.com/graph/eco_imp-economy-imports

Imports per capita
http://www.nationmaster.com/graph/eco_imp_of_goo_and_ser_cur_us_percap-services-current-us-per-capita
weighted average $4884 per capita, current US dollars. Range amongst major nations: India $178, China $546, Belgium $30,000. Taking into account decline ins USDX since 2000, this would be in 2000 dollars, $3468.

expenditure per capita
http://www.nationmaster.com/red/graph/eco_hou_fin_con_exp_etc_con_2000_us_percap-constant-2000-us-per-capita
weighted average: $3350 per capita, year 2000 US dollars.

Thus, estimate of percent spent on US imports vs total spending is: 3468/3350 = 1.04 x 0.08 = 0.08 = on average, the money the world spends on imports from the US, is equal to about 8 percent of the money its households spend consuming goods and services. By way of contrast, the money the US spends on imports from the world, is equal to about 17% of the money spent by US households on goods and services (and according to the Peterson Inst, 4% of the money spent by the govt on manufactures is spent on imports).

imports as % of gdp weighted average = 46%.
http://www.nationmaster.com/graph/eco_imp_goo_and_ser-economy-imports-goods-and-services
8% Japan, 13% US, 56% Netherlands, 85% belgium

gross fixed capital formation per $GDP
http://www.nationmaster.com/red/graph/eco_gro_fix_cap_for_cur_us_pergdp-formation-current-us-per-gdp

gross fixed capital formation
http://www.nationmaster.com/graph/eco_gro_fix_cap_for_con_2000_us-capital-formation-constant-2000-us


@2009 David Virgil Hobbs

Properly Predicting Prospects of Economic Stimulus Plans

It is amazing to hear those who consider themselves to be wise economists, or who are esteemed by others to be such, discuss economic stimulus tactics. Many of them seem to rant as if a particular school of economic thought, supposedly dignified by way of deriving its name from the name of some famous economist, is always right, and other schools of economic thought which likewise are attached to the name of this or that famous economist, are always wrong, as if the prospect of an economic stimulus plan succeeding could be based upon cleverly understanding which of the famous economists of the past was the smartest.

Fact is that the extent to which a given economic stimulus can be expected to succeed, should depend on an understanding of ignored details that characterize the particular economic situation and the particular economic stimulus that is thrown at that particular economic situation. Thus it is absurd that so-called 'experts' should ignore details that distinguish one economic situation from another, and one intervention from another, and rant as if one school of thought is always right and the other school of thought is always wrong, all based not on a detailed understanding of the economic facts re the given economic situation, all based not on how the details of the given intervention interact with the given economic situation, but rather, all based on insults, assertions not backed by fact or reasoning, generalizations, theories, and the general misconception that the harder an essay is to understand, the wiser it is.

The fact is that money that is spent on economic stimulus programs is money that is diverted from the manner of spending that would occur if the economic stimulus program were not enacted. Thus the effect of the economic stimulus program has to be compared to the effects that would be produced if the economic stimulus were not enacted in the first place. This comparison is accomplished through a comprehension of troublesome yet pompously ignored details regarding the particular economic situation and the particular economic stimulus program being considered.

Money used for economic stimulus is not generated out of thin air. It is obtained through various possible methods: increase of the money supply, taxation of citizens, borrowing from citizens, borrowing from foreigners. (The creation of money is similar to a defacto flat tax upon all those who possess the currency whose quantity is being increased; when money is printed up, the value of a given unit of the money declines). Thus the question becomes, how will the economy function if the economic stimulus is enacted, compared to how it would have functioned if the economic stimulus were not enacted? One has to look at the various uses to which money could be put, and how the enactment of the economic stimulus program under consideration effects such uses.

A citizen could simply hide cash under his mattress, or hold on to material assets such as various objects that have economic value. An economic stimulus package could produce effects such as inflation, increasing the incentive to cease from simply hoarding cash and to circulate the hoarded money instead, one result being that the money chain reaction fashion produces income and sales for citizens/residents as it travels from person to person, another result being that the money could fall into the hands of someone who spends it on imports from foreign nations or who travels to a foreign nation and spends it there. Such release of money into the economy would produce some inflationary effect. The net effect of the economic stimulus program in terms of changing the economy through the effect on hoarding of cash etc., would depend upon troublesome pesky facts such as: the extent to which there is hoarding in the economy, the extent to which the citizenry spends money on imports, and the extent to which the hoarding is effected by the economic stimulus package.

If no economic stimulus package was enacted, citizens would themselves spend part of the money that would be spent funding the economic stimulus package, by buying from other citizens, or by buying from foreigners, purchasing imports. The effect of the economic stimulus package if it were to be enacted, would be related to the extent to which the economic stimulus package increased or diminished domestic citizen to citizen financial transaction and domestic citizen purchasing imports transaction. Such increase or decrease depends upon pesky details (details apparently beneath the grandiloquent dignity of some alleged 'experts') regarding the particular economic stimulus program being considered, and regarding the particular economy that the economic stimulus program is directed at. It could be that the economic stimulus package transfers spending power from those who are more inclined to spend money on imports to those who are less inclined to spend the transferred money on imports; or the opposite could hold true. It would be an oversimplification (see http://economix.blogs.nytimes.com/2008/10/24/does-the-democrats-stimulus-package-make-economic-sense/ ) to exult over how due to the economic stimulus package, the money has been transferred from someone who would have spent it on despised luxurious imports, to the noble govt who has spent the money hiring a citizen, because the citizen who receives the money might spend the money on imports or end up using the money to buy from someone who proceeds to take the money and then spend it on imports himself.

If no economic stimulus program was enacted, the money taken by the govt to use on the economic stimulus program could be used by the citizens to loan money to their fellow citizens; if an economic stimulus program was enacted, citizens could end up with money spent due to the economic stimulus program and use it to loan to their fellow citizens also anyway, even if the govt did not use the money to loan to citizens. The extent to which the economic stimulus program would effect such citizen to citizen lending depends on annoying plebeian details such as: the details of the particular stimulus program enacted; the behavioral characteristics of the individuals composing the particular economy the stimulus program is directed at; the extent to which banks keep a certain percentage of the money they loan as reserves; the differences between the individuals who would get money as it circulates through the economy if a stimulus plan is enacted compared to if a stimulus plan is not enacted. An economic 'stimulus' program could have the negative long-term effect of interfering with the positive effects produced by citizens replacing foreign creditors as sources of credit. Fact is that since those who receive loans proceed to spend or invest the borrowed money, the economic stimulus program would not have the magical effect of introducing into circulation for buying and spending, money that otherwise would have been allegedly unavailable for buying and spending had it been loaned by citizens to fellow citizens.

If no economic stimulus program was enacted, citizens could use the money that would otherwise have been used by the govt for the economic stimulus program, to invest in companies owned by their fellow citizens; they could get a percentage share of profits in exchange for such investments. The companies they invest in would spend or loan or invest the invested money thereby circulating it into the economy. Thus domestic ownership replacing foreign ownership could increase the long term strength of the economy, in a way that could be impaired if the government were to take the money and spend it on an economic 'stimulus' program. The balance between short term benefits of the economic stimulus program and long term benefits of investment would depend upon irritatingly boring details such as the individual characteristics of the particular economy and particular economic 'stimulus' program being considered.

Relevant to this is the apparently simplistic enthusiasm of persons like Palin for tax-cuts to energize small business growth which they consider to be the engine of the national economy. Citizens would still be able to get money to invest in the enterprises of their fellow citizens if an economic stimulus program using the money of citizens was enacted by the government, because they would get their hands on the money as it circulated through the economy after being spent by the government. When successful small businesses are created, they take revenues away from other businesses that already exist. This leads to a transfer of profits and employees from businesses that already exist to new businesses. What is required for the purpose of economic growth is investment that increases productivity of employees in terms of productivity per dollar paid, and also (my new cutting-edge idea) productivity per hour worked. What boosts the small business sector is increases in money flowing in the direction of the small business sector as a whole so as to increase the small business sector's total sales and employment. If the small business sector uses its profits to spend excessively on imports, such does not constitute acting as an excellent engine of national economic growth.

If no economic stimulus program was enacted, citizens could use the money that otherwise would be spent on the economic stimulus program, to loan money to foreigners, and to invest in companies that manufacture or produce services either here or abroad and make sales to foreigners. This kind of economic behavior could act as a sponge to soak up money out of the world and into the nation; this sponge-like effect could be interfered with by an economic stimulus program, despite the fact that citizens could obtain money as it flowed through the economy after the govt spent this money on an economic stimulus program and then proceed to loan money to foreigners or invest the money in companies that sell to foreigners. It is possible that circumstances are such that citizens and the nation would be better off not loaning to foreigners or investing in processes depending on sales to foreigners for profit, because what the future holds is that such investments will not pan out well. There might be a short-term boost to the economy canceled out by negative long term effects due to the government interfering to some extent in the sponge-like loans to foreigners etc.; money that otherwise would have been loaned to foreigners, could end up due to the economic stimulus program, in the hands of persons who spend excessively on imports. In the short term, the money loaned to foreigners, would circulate outside the nation, in foreign nations (one can understand this if one is able to look at the international train of events as economic forces produce economic forces in a chain reaction, as opposed to being deceived by for example where the dollar goes after the foreigner loaned the dollar trades it in for another currency, the important thing is what the foreigner does with the money he gets after he trades in the dollar*). The extent to which the positive short and long term effects of govt taking money for a stimulus program balance out the negative short and long term effects with regards to the particular subject of interference in loans to foreigners and investment in sales to foreigners, again depends upon the details regarding the particular economy and particular stimulus program being looked at.

If no economic stimulus program was enacted, citizens would be able to use the money that otherwise would have gone to the government for the economic stimulus program, to pay off debts held by foreigners. A similar situation but somewhat different would exist as citizens got their hands on money flowing through the economy due to a stimulus program. Paying off the debts to foreigners could cause short term weakness followed by long term strength. Again the short and long term positive vs negative effect of the stimulus program in this regard depends on the state of the given economy at the given time and the details of the stimulus program enacted.

I could go on with examples of how the negative and positive effects of using money for a stimulus program are effected by details regarding the state of the economy in question at the given time and the unique characteristics of the economic stimulus program that is utilized, but I spare you.

When the economy in question is not leaking money through trade deficits etc, stimulus programs are more likely to do things like increase short term prosperity, this being evenly balanced out by a decrease in long term prosperity; or, increase short term prosperity without damaging long term prosperity; or, increase both long and short term prosperity. When the economy is not leaking money stimulus can be produced by transferring money from those who indulge excessively in purchasing imports to those who purchase domestically produced goods and services. When the economy is leaking money due to a trade deficit as the USA economy is now, there is an increased likelihood of economic stimulus programs at best having no positive effect. Problem is that money can end up being transferred from those who use it to build up the national economy to those who bleed it away spending it on imports.

Academics, people in general, seem to tend to idolize the 'great men' (often deceased) of the past and like inquisitioners, persecute those who come up with new ideas in the present. Problem with this is that what was an excellent plan years ago may be a bad plan in the present given the changes the national and the world economy have gone through. The United States 25 years ago, was a nation whose exports approximately equaled its imports. Now for many years the United States has been a nation which has imported far more than it has exported.

People like to sit back in their easy chairs and come up with stunningly brilliant theories and pretend that their laconic concise brilliance has solved everything, but when it comes to predicting the effects of economic stimulus programs, what is required is boring tiring work such as data acquisition and analysis, empiricism, an understanding that the important thing is not the theories of Keynes or of his antagonist, but rather an understanding of the unique characteristics of the economy in question and of the economic stimulus program being considered.

It is simple minded to say that simply transferring money from one group of citizens to another will somehow automatically stimulate the economy into health; this kind of thinking distracts attention from interventions that would actually accomplish something. At the same time, it is simplistic to say that there is no such thing as a government sponsored transfer of income and/or wealth that succeeds in actually improving the health of the economy.

* If an American, Joe, loans a Frenchman, Francois, 10 dollars, and Francois trades the 10 dollars to Pierre for 20 Francs, after the currency trade the fact remains that the new thing in France and in the world, is still that Francois has 10 dollars of buying power that he did not have before. Then when Francois uses 2 of the dollars ( in the form of 4 of the Francs he got from Pierre) to buy a haircut from Trudeau, one can see that the chain reaction of economic forces has been from Joe to Francois to Trudeau, not from Joe to Francois to Pierre. The inability of even those Americans who consider themselves to have superior intelligence to understand such concepts has to say the least damaged the US economy.


@2008 David Virgil Hobbs