In a comment a reader asks the following: “I still propose that until the detrimental distortions of our internal protectionism is fully understood, external protectionism cannot be fully understood either. My intuition is that they are inextricable, and that their effect on GDP and employment can only be understood if both “protectionisms” are studied as an intertwined entity.

My response: I think you are right. I think it is important to recognize that protectionism, both internal and external, are in the interests of business seeking to restrict competition. That is the key similarity. Business is always looking for ways in which they can gain advantage over their competitors. While it’s often easier to blame foreign competitors and seek trade protections, firms just as often seek internal protections from domestic competitors.

I remember reading a passage by Reagan administration OMB director James Miller who was surprised by the conversations he had with businesses about impending clean air legislation. He said (paraphrasing from memory), “…when we were considering new environmental legislation, I expected industry lobbyists to be very vocal in their opposition. Instead, industry groups would say, ‘We think this environmental bill is very important and we are willing to support it, however, you see in Section 5, sub section 3b where it says xxx. It would be much better if it said yyy’ After review we realized that a change to yyy would give this firm an advantage over its competitors.”

That is the kind of internal protection that I think you are referring to, and it is undoubtedly rampant. This is the kind of protection that Chrysler and GM are seeking today. Anything the government does for them will make it easier for them to compete against Ford, Toyota, BMW and all the others. However, for these firms the protections are obvious and make the headlines. Most of the other internal protections are buried deeply in appropriations bills and other legislative acts.

The attempt by firms to seek protections from government is one of the reasons people have become suspicious of multinational firms internationally, and large and powerful firms domestically. There is a strong suspicion that these firms are using political influence to get benefits shifted in their direction. It is also suspected that these shifts account for the extremely high compensation packages paid to the top executives. I’m sure there is some truth to all these suspicions.

A problem we face today though, in today’s economic climate, is that the blame is being misdirected towards the companies who are the petitioners for protection rather than to the government who are the providers of the special protections. It is becoming easy to indict the free market as the culprit; as the catalyst for greed and the widening disparities in income. However, I think the problem lies more in government rather than with firms.

Of course firms are greedy and want to secure the best possible position for themselves in the market. Nothing anyone does is going to change that basic motivation. However, when that greed is directed towards petitioning the government for special protections, either externally or internally, then time and energy is shifted from producing products for their own customers. If instead firms knew that governments wouldn’t, or couldn’t, offer special protections, then their greed would be redirected towards producing a better product for their customers. In other words they would be forced to compete and the most effective producers, that is those who satified customers desires to the greatest extent, would win out. In this case, profits made would be profits earned in the true sense of the word.