The sound of one-handed economists clapping

(This column, about the risks of rising protectionism in the US and around the world, was published in DNA edition dated February 18, 2009.)

Venky Vembu

Former US President Harry Truman once famously said that he yearned for the services of a one-handed economist because the economists that he knew were forever going, “On the one hand… on the other hand.”

When President Barack Obama signs – with his left hand – the $787 billion economic stimulus bill that recently breezed through Congress, he must likewise be yearning for some unanimity of economic opinion that this humungous recovery plan will work.

Such a consensus, however, has proved elusive; more disturbingly for Obama, the few “one-handed economists” with a forceful opinion are actually betting that all the feverish dollar-printing that underlies the expansionary stimulus package will, in fact, prove ruinous for the US economy. More extreme prognostications about a Soviet Union-style implosion of the US economy and polity are gradually gaining traction in the mainstream media.  

For all its earnestness in addressing the deep-rooted problems that beset the economy, the Obama administration’s stimulus plan has at least one provision that will, if anything, deepen them, and trigger a creeping isolationism around the world.

This is the ‘Buy American’ provision under which infrastructure projects that are being planned will be required to source domestic materials. And although the final version of that clause was watered down as a concession to US trading partners, there’s enough mercantilist mischief left over in it to lay the intellectual foundation for building protectionist walls in the US and around the world.

More disturbingly, from an Indian point of view, the stimulus plan also incorporates a provision that would restrict US banks’ ability to hire workers on H1-B temporary work visas if the banks received bailout funding from the government.

An earlier version of the bill went even further by altogether prohibiting such banks from hiring workers on the H1-B visa. Another legislative provision that seeks to prohibit recipients of bailout funds from outsourcing call-centre work to foreign companies is still pending before the US Senate; given the mood of the moment, its chances of passage seem reasonably certain.

America is not alone in this. Similar isolationist tendencies are manifesting themselves in countries across Asia and other parts of the world as well. China, which had allowed its currency to appreciate until the global recession hit home, is now considering devaluing it to regain its export competitiveness.

In Taiwan, authorities responded to rising unemployment figures by revoking 30,000 work visas for foreigners and offering a subsidy to businesses to compensate for the wage differential between local and foreign workers. And Malaysia, which too has a large immigrant labour population, has outright stopped issuing visas for immigrant workers.

Over in Europe, the ‘jobs-for-locals’ campaign has taken on even more bizarre manifestations, with the Czech Republic offering a free air ticket and a fistful of cash to foreign workers who volunteer to return home after losing their jobs.

These protectionist provisions are a knee-jerk political response to the deepening recession and soaring unemployment figures in the US and around the world. But while they appear to offer a political palliative when local populations are hurting, the experience of previous economic downturns establishes their complete ineffectiveness.

In trying to “export” economic misery, they only render host economies less competitive and lead to retaliatory policy responses by other countries, which serve to worsen the downward spiral.

Zen scholars given to abstruse philosophical musings ponder over such questions as “What is the sound of one hand clapping?” The answer is many-layered, but at its core is a message about the interconnectedness of all things. It’s a learning that policymakers in the US and around the world might profit from.

Today’s global economic meltdown requires coordinated policy efforts in countries around the world, not unilateral, reactionary, beggar-thy-neighbour policies that run the risk of prolonging the collective misery. And that’s a view that economists, be they one-handed or two-, forcefully agree on.

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About Venky

Journalist, blogger, amused observer of worldly goings-on... More about me here.
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