Big Steel, Bad Gridlock
Washingtonians headed south this month, beware. The long, hot season of traffic congestion around Colonial Williamsburg and Busch Gardens is in full swing. This year's tie-up has an interesting twist. A new Busch Gardens exit, including a bridge over Interstate 64, was supposed to open this summer but the project is a full year behind schedule. The exit will benefit tourists and residents by redirecting traffic from clogged roads. The Virginia Department of Transportation explains that its contractor faces a severe shortage of U.S.-made steel for the project.</br></br>Federal "Buy American" laws forbid interstate highway projects with federal financing from using imported steel, even if there is no domestic steel available. The restrictions apply equally to the raw material (rolled beam) or the fabricated product (finished girders). A Northern Virginia contractor with whom I spoke said his supplier could use imported rolled beam for the contractor's private projects, but for federal roads projects such as the Interstate 95 exchange at Springfield, the domestic raw material costing 15 to 30 percent more was required. By expensively micromanaging his projects, his firm has steel. Others are scrambling. Guess who ultimately pays the extra cost.</br></br>Buy American policies are nothing new, and they have a patriotic plausibility to most people. Who could be against saving American jobs? In many circumstances they are also innocuous. On the other hand, if they squeeze out imports as intended, they maintain higher prices to American steel users or cause them production delays waiting for backlogged orders to clear. This may save some jobs in favored industries like steel, but at a cost of sales and jobs in American industries that use steel. The benefits this policy provides to the protected steel workers and shareholders come directly out of the pockets of other Americans. This is income redistribution of the worst sort--from average folks to a group that earns substantially more than the manufacturing mean wage. In times of high unemployment, Buy American provisions conceivably can raise domestic demand, thus cushioning a cyclical downturn. But these discriminatory policies are hopelessly inefficient compared with Alan Greenspan's well-oiled monetary policy machine. By the way, has anyone checked the unemployment rate lately?</br></br>What many people do not realize is that the most intense competition American firms face is not with foreign firms but with other American firms in markets for talented labor and scarce capital. Any policy that favors one set of American industries disfavors others. The most important possible exception to this is for policies that are designed to enhance innovation in ways that spill over to other American firms. Buy American policies are not directed toward research and development, and the steel industry is not at the cutting edge of technical progress.</br></br>Highway construction contractors happily use Komatsu earth-moving equipment and a host of other imported products. So why is USX favored and Caterpillar not? The answer, of course, is lobbying power. A large industry spread across a number of important states often gets its way. Alas for the steel industry, its influence isn't what it used to be. The industry employs more than 400,000 fewer workers than it did in 1960. Small, modern mini-mills now provide almost half of domestic output. They have production costs substantially lower than the remaining large-scale integrated mills for which steel protectionism was designed.