The Unbearable Stupidity of Populist Protectionism.

First the House version of the stimulus bill included a "buy American" provision. Then the Senate voted to limit bailout-supported firms' ability to hire H1B workers. At this rate, I may soon be deported from the country to make room for a US citizen to take my job.

For those of you that don't know, H1B is a work visa program for skilled foreign workers. It is the visa I - and any of your foreign friends in the US (unless they are students, illegal or have a Greencard) - live and work on in the US.

Apart from the obvious personal discomfort that seeing something like that creates – not that I am working at a bailed-out bank, but it is a troubling trend for anyone on an H1B visa - there are two big mistakes in a step limiting H1B visas or immigration to protect the US economy.

The first problem is well outlined and discussed in today’s column by Friedman. Given that intellectual capital is the greatest competitive advantage of the US, putting protective measures on it’s inflow is counter-productive. There is something terribly non-sensical about collecting some of the brightest minds from around the globe, bringing them to US universities, and then not allowing them to participate in the US labor market. On previous occasions I took that a step further and argued that immigration is necessary not just to sustain America’s competitive advantage but also to bring it back to fiscal soundness, given the rapidly deteriorating demographic profile of the country.

The second problem I have with the logic of labor protectionism is that I think it’s a symptom of a broader flaw in thinking about recession and unemployment and specifically about the obsession about unemployment common in the public debate about the economy. Surely, increasing unemployment is not a good thing. And understandably, it is the most poignant way to describe a recession. It is personal, it is sad, it has troubling consequences. I think it is for those reasons that when it comes to debates like the one right now about the stimulus package the language used is more often about jobs than it is about output or production. However, as the economy is concerned, unemployment is a symptom or a proxy of a recession, not the equivalent of a recession. Higher unemployment is a result of a contraction in economic activity. And yes, it feeds on itself, but it is primarily caused by shrinking demand.

Bringing this back to my point about foreign workers: I think this obsession about jobs (as opposed to output) leads to the understandable yet mistaken belief that employing more Americans is good given the swelling ranks of the unemployed. Or, to use the words of Charles Grassley, the Senate Finance Committee ranking member:

"With the unemployment rate at 7.6 percent, there is no need for companies to hire foreign guest workers through the H1-B program when there are plenty of qualified Americans looking for jobs."

And yet, hiring Americans in place of foreigners still does not create a job. As economic activity goes, the nationality or immigration status of the worker makes no difference. If I were to be fired today and some US citizen were to replace me, it would do nothing to unemployment or the economy. Even though an unemployed American was hired, no job was created, nothing was added to the economy. And as secondary economic effects go, my income is as likely to be spent – and generate economic activity – as anyone else’s. So nothing has changed there either.

That's why the whole idea of labor protectionism doesn’t make sense to me: it doesn’t matter who gets the job. What matters is that a job is created – which can only happen when the economy expands. Of course, the only reason why the idea makes sense is political: Americans vote for American senators, so if it otherwise doesn’t make a difference who gets a job, they would prefer to favor their constituents. This, however, should not be confused with being beneficial for the economy.

Or, viewed as irrelevant to its long term prospects.