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Tuesday, 03 February 2009 17:22

Investor's Business Daily
February 2, 2009 Economy: In barring foreign steel from infrastructure projects and forcing payment of "prevailing wages," the stimulus bill merges the Davis-Bacon and Smoot-Hawley acts in a way that could be a recipe for depression.

IBD editorial (www.investors.com)
February 2, 2009

Protectionism, one of the contributing factors to the Great Depression, has reared its ugly head again with a provision in the recently passed House stimulus package — H.R. 1, the American Recovery and Reinvestment Act of 2009.

In an amendment inserted by Rep. Peter Visclosky, D-Ind., and approved by the House Appropriations Committee, none of the stimulus-funded infrastructure projects can proceed "unless all of the iron and steel used in the project is produced in the United States."

This provision was naturally supported by steel companies such as U.S. Steel and Nucor and just as naturally opposed by steel users and exporters like GE and Caterpillar.

Caterpillar, heavily dependent on exports of its earth-moving and construction equipment, recently announced huge job cuts. The Peoria, Ill., company got more than 60% of is revenue outside the U.S. in 2007.

"You would be creating an ample basis for countries to close their markets to U.S. products," said Karen Bhatia, GE's senior consultant for international law in Washington. GE, the world's largest maker of jet engines and locomotives, gets half of its sales from outside the U.S.

While designed to protect American steel makers, such efforts have historically come at the expense of American steel users, their customers and their employees.

After President Bush imposed steel tariffs in 2002 to protect steelworker jobs, the Consuming Industries Trade Action Coalition, a business group, published a study showing that as a result of the tariffs, 200,000 jobs were lost among steel users while there were only 187,000 total people then employed in the entire steel industry.

"Any student of history will tell you one of the most significant mistakes of the 1930s is when the U.S. embraced protectionism," says Bill Lane, government affairs director for Caterpillar in Washington. "It had a cascading effect that ground world trade almost to a halt and turned a one-year recession into the Great Depression."

This is a declaration of war on free trade. The Smoot-Hawley tariff act turned a severe but recoverable recession into a general depression. Our trading partners responded then to American penalties, as they will again, with their own penalties. The rest, as they say, is history.

Also not helpful to the recovery is the Depression-era Davis-Bacon Act, which is applied throughout H.R. 1. This incarnation goes beyond the scope of the original law and includes federal-government-backed bonds for new renewable energy, energy conservation, qualified zone academy and school construction projects.

The original law, passed in 1931, required federal construction contractors to pay what is determined to be the "prevailing wage" in a given area. It was designed to protect unions against lower-priced nonunion and minority competition.

Very often this is simply the union wage. A 2008 study by Suffolk University and the Beacon Hill Institute found that Department of Labor prevailing wage estimates were 22% higher than actual wages paid in various cities.
This application ensures that stimulus dollars will not go as far as they otherwise could and will result in fewer people getting jobs while raising the cost of everything we build.

According to the Heritage Foundation, including Davis-Bacon provisions will drive up construction costs on the $188 billion worth of construction projects in H.R. 1 by some $17 billion.

These provisions will make the U.S. less competitive, fail to stimulate the economy and likely trigger a trade war. If this recession is prolonged and deepens into something worse, be sure to look for the union label.