Krugman: temporary 'protectionism' might be good:

[amborin]

"Protectionism and stimulus (wonkish)

Should we be upset about the buy-American provisions in the stimulus bill? Is there an economic case for such provisions? The answer is yes and yes. And I do think it’s important to be honest about the second yes.




The economic case against protectionism is that it distorts incentives: each country produces goods in which it has a comparative disadvantage, and consumes too little of imported goods. And under normal conditions that’s the end of the story.

But these are not normal conditions. We’re in the midst of a global slump, with governments everywhere having trouble coming up with an effective response.

And one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt. As I explained a while back, this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole. And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.

Now ask, how would this change if each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy? Then everyone would adopt a more expansionary policy — and the world would get closer to full employment than it would have otherwise. Yes, trade would be more distorted, which is a cost; but the distortion caused by a severely underemployed world economy would be reduced. And as the late James Tobin liked to say, it takes a lot of Harberger triangles to fill an Okun gap.

Let’s be clear: this isn’t an argument for beggaring thy neighbor, it’s an argument that protectionism can make the world as a whole better off. It’s a second-best argument — coordinated policy is the first-best answer. But it needs to be taken seriously.

What’s the counter-argument? Don’t say that any theory which has good things to say about protectionism must be wrong: that’s theology, not economics.

The right argument, I think, is in terms of political economy. Everything I’ve just said applies only when the world is stuck in a liquidity trap; that’s where we are now, but it won’t be the normal situation. And if we go all protectionist, that will shatter the hard-won achievements of 70 years of trade negotiations — and it might take decades to put Humpty-Dumpty back together again.

But there is a short-run case for protectionism — and that case will increase in force if we don’t have an effective economic recovery program...."

<http://krugman.blogs.nytimes.com/2009/02/10/what-happened-to-clive-crook/#comments>

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