The Threat of Protectionism

protectionism1 The Economic Times confers about the US president Obama’s rush to sought support for his new economic plan. The only solution for the so-called economic crisis these socialist Keynesians look forward is the government stimulus to increase the liquidity as Obama said
“Soon my treasury secretary, Tim Geithner, will announce a new strategy for reviving our financial system that gets credit flowing to businesses and families.”1
We have discussed why just pumping currency will not help any market any country. We also discussed why opening up and reducing governmental control from economic sector will help global economy more.
Now a different kind of threat is engulfing global markets and that is the idea of Protectionism.
As Kunal Kumar at Rediff news explains “The newly announced stimulus package by the US contains explicitly protectionist language in its call to use only US made steel in infrastructure projects.”2
Protectionism is nationalistic socialism, which tends to protect the low-income group of a nation at the expense of production, industries, economic freedom and sense of righteousness and consequentially hurts the lower-income group, increases poverty, makes societies dependent and causes unemployment.
Last year, while discussing his economic plans, Obama mentioned a “Patriotic Employer Act” it seems like the sister of Patriotic Act that almost infringed freedom of American citizen on the name of their protection.
A Patriotic employer according to Obama thus is that businessman who follows the following commands
1. Employers must not decrease their ratio of full-time workers in the United States to full-time workers outside the United States and they must maintain corporate headquarters in the United States if the company has ever been headquartered there
2. They must pay a minimum hourly wage sufficient to keep a family of three out of poverty: at least $7.80 per hour
3. They must provide a defined benefit retirement plan or a defined contribution retirement plan that fully matches at least five per cent of each worker’s contribution
4. They must pay at least sixty percent of each worker’s health care premiums
5. They must pay the difference between a worker’s regular salary and military salary and continue the health insurance for all National Guard and Reserve employees who are called for active duty
6. They must maintain neutrality in employee organising campaigns
As a gift, a tax rebate or tax credit of 1% of taxable income would be provided for every such patriot businessperson.
On a first read, it may seem like something supporting the citizens of USA, but it is not so. We all have seen how minimum wage resolutions, employers ratios, and pension plans have hurt and exploited US automakers and caused them to dwindle to the limits of bankruptcy, and any such plan is nothing but a sort of push to make every industry of US to face the fate as US automobile industry faced.
Now with governmental stimulus and bail out, US automobile industry is totally under governmental hands trying to breathe for a little more while.
We all know how and why only production can reduce poverty and unemployment.
Will any plan supporting a necessary ratio of US workers and foreign workers increase production. No, it will not only decrease outsourcing, it will decrease production too. A producer opts for taking outsourcing services because it provides more profit for him with which, he can further stimulate production. As we explained, to increase production, a producer needs real wealth rather than governmental currency notes. Thus to improve industries, production is necessary. To restrict producers from using cheaper workers and forcing them to opt for costly workers reduces his profit stimulus and thus production decreases.
Economist Murray Rothbard explained the consequences of Protectionism3 well as

“As we unravel the tangled web of protectionist argument, we should keep our eye on two essential points: (1) protectionism means force in restraint of trade; and (2) the key is what happens to the consumer. Invariably, we will find that the protectionists are out to cripple, exploit, and impose severe losses not only on foreign consumers but especially on Americans. And since each and every one of us is a consumer, this means that protectionism is out to mulct all of us for the benefit of a specially privileged, subsidized few—and an inefficient few at that: people who cannot make it in a free and unhampered market.”

Similarly, minimum wage laws although sounds supporting the lower-income-groups, yet they hurt the poor only, as an employer who could have managed providing employment for more unemployed in a limited amount of investment he can provide, is forced by such minimum wages laws to not to employ more workers. This not only increases unemployment, it further decreases production. The enforceable health-care premiums further reduces the capacity of investor to provide employment and increase production and that further increases poverty.outsourcing1
Indian media, economists and to a part government too, has always criticized any sort of protectionism on behalf of government. Our most proficient sector is service sector and we gain a lot from globalization and outsourcing. Obviously, if the Patriot Employers Act is applied, Indian workers will suffer unemployment. May be that is the reason why Kunal Kumar at Rediff news 4 has criticized the New Stimulus Plan.
Yet are we Indians not protectionists? India is well known nationalist-socialist country. The evolution of “Swadeshi” Idea of India is nothing different from American protectionism.5
Moreover, Indian nationalist-socialists encourage this faulty idea of protectionism “swadeshi” to moral policing too. That is what we saw on 26th of January when some nationalist-socialist goons of Ram Sena harassed some youth in Mangalore for dancing in pubs. Its month of February and soon we will see various groups singing songs of “Swadeshi” attacking malls, McDonald’s centres and Archie’s gift centres opposing Indian youth to enjoy the festival of love, opposing Valentine’s Day celebrations. It should be clear that any sort of protectionism not only decreases chances of employment, production and reduction of poverty, protectionism also increases tensions in different sectors of a society.
The best policy is no interference of government in economic sector or Individual’s life, let the Market be free, let the Individual be free.
We Indians should oppose not only the moral policing by government and political parties; we should oppose the protectionist “Swadesi” movement.
Do Not Give in to Evil but Proceed more boldly against it.

  1. Obama Stimulus Plan, ET News []
  2. Obama’s stimulus plan, Rediff News []
  3. Murray Rothbard, Protectionism []
  4. Obama’s stimulus plan, Rediff News []
  5. Evolution of Swadeshi Idea, The Hindu []

5 comments for “The Threat of Protectionism

  1. February 1, 2009 at 11:08 pm

    I can accept a large portion of what is written but for the point of zero interference(implying total freedom) and unrestricted production. If I am an industrialist and I think that a certain model will do well in the market and keep producing a large quantity of that model as a result of error of judgement, how is this going to help the economy?

    Destination Infinity

  2. renegade_division
    February 1, 2009 at 11:41 pm

    @Destination Infinity:

    I think that a certain model will do well in the market and keep producing a large quantity of that model as a result of error of judgment, how is this going to help the economy?

    You will go bankrupt, the stocks of your company will plummet to zero and all the investment to your company will be directed to some other more profitable industry.
    This is how Market works, the stock investors are ruthless, they can’t even see one thing out of the place, if they do, they will screw you over within minutes.

    When Satyam announced to buy Maytas Infra, the stock market investors revolted against it. They started selling the shares right and left, the stock price came down from $13 to $6, thereby forcing Satyam to cancel the plans, and it later caused the company to come out and unravel its huge mess.
    But my question is how is your argument for or against protectionism, I don’t understand. Protectionism means, creating high barriers of entry to foreign products, and creating laws to prevent the sale of competing foreign products in order to help the domestic industries.

    Second thing is why is that everything everybody do must help everybody else?
    If you think you will make profit through a business model, but its a very erroneous model then you will make huge losses. The faster you learn how to correct the model, the smaller loss you will make.

    If you are Bill Gates, you can’t really waste billions of dollars on a stupid project, because you are a billionaire that means you must have the basic requirement of not being a gambler.
    If you are anybody else with not that much amount of money, you will need stock market investors, and stock investors are highly dynamic in evaluating your company’s policies and worth of its shares.

    But if you allow govts to set up rules and regulations, what is the guarantee that the rules and regulations are always correct?
    Take for example, when govt puts a minimum wage law, without realizing what market wants, Market simply fires any employee who is less profitable than $7.95 per hour wage(the minimum wage according to the law in many places).

    Market will not hire someone who does the job of $5 per hour, but is required to be paid $7.95 per hour, rather they will hire 1 person offer him $15 per hour and have him do the work of 3 people. That means hundreds and thousands of people are left unemployed because of minimum wage laws.

    When govt screws thing up at such a massive scale, their investors don’t pull out all their investment and makes them bankrupt, like it would happen to a company, rather the voters elect the people back, because now they will make a law of “hiring at least 100 people if you have job for 100 people”.

    When you make stupid laws people try to make way around it, when you patch that way, people try to find another way around both the laws. When you have patched every single possible hole, people just start breaking the laws. They just ignore the laws.

    For example, my friends in America who are students they are hired at $8, $10, $15 per hour illegally, in a state where minimum wage law is $7.5 per hour. Now why is that? Why do businesses hire someone for a higher wage, if it can be kept out from the govt. Because if they hire someone at $7.5, they will have to pay him health insurance, and will have to jump from other govt hoops.

    Paying someone $7.5 per hour, AND providing insurance, paying employer taxes on  a person for a cashier’s job, is actually worth payin$15 to a guy without any taxes or insurance. About double the wage.

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