A recent editorial in the NY Times from the US Business and Industry Council argued that the government expenditure contained in the US economic stimulus package leaked away as consumers purchased imports from foreign countries. The council's suggestions: (1) buy American and (2) impose Tariffs. Each of these policy interventions can be analyzed using the causal model presented in an earlier post. Part of the causal model is displayed above (click on the graphic to see a larger image).
Government expenditure with a "Buy American" requirement would stimulate domestic sales, increase production, create jobs and create more demand (some of which would go to imports). Tariffs (taxes) on imports would make them more expensive and reduce demand.
Beggar-my-neighbor trade policies have been tried before. The Smoot-Hawley Tariff didn't work during the Great Depression and may have made things worse. But, the Business and Industry Council argues that tariffs worked during the Nixon Administration when, in 1971, Nixon imposed tariffs on Japan, Germany and other countries that refused to let their currencies rise. The tariffs were part of the Nixon Economic Shock (to include wage and price controls) in response to inflation generated by the Vietnam War.
Neoclassical economists argue that tariffs are a bad idea because they raise the price of domestic goods and damage the world economy. We would need a causal model of the world economy to discuss the later point (maybe in a future post). However, the effect of tariffs depends on what is being taxed. If we impose tariffs on countries with substandard environmental controls (green- or eco-tariffs), we benefit our own economy and benefit world environmental systems.
What do you think are the chances that the US Congress would impose tariffs? How about the chances that the US Congress would impose eco-tariffs?
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