No Con Economics

In the January 31, 2021 issue of the Financial Times (FT), columnist Rana Foroohar titles her opinion piece “Joe Biden’s ‘Buy American’ isn’t bad, it’s necessary.”

In this posting, I argue that the premise that “Buy American” will improve the standard of living of middle-income Americans – not to mention low income families – lacks validity.  And the promise that increased federal procurement of goods from domestic producers rather than foreign ones will provide better medical care, education, and housing can’t be easily met because the budgetary implications of “Buy American” would yield less funding to meet these desirable domestic targets.

“Buy American” has existed in some continuous form since the Buy American Act in 1933, signed by Herbert Hoover on his last day in office.  For details on the present program see the U.S. government’s General Services Administration website .  Examples of foreign procurement include the purchase of goods (such as certain types of protective personal equipment) not available at an acceptable price in the U.S. or embedded in supply chains (such as pharmaceuticals) that stretch across one or more foreign countries.  As noted in rows 3 and 4 of the below table, U.S. government procurement of foreign imports accounted for $135.9 billion in 2017 out of total U.S. government procurements of $1,809.4 billion (less than 8%).

Foroohar claims that “purely economic arguments ignore the political challenges facing the Biden administration.”  She doesn’t challenge claims such as those made by the Financial Times editorial board or by Peterson Institute economists Huffbauer and Jung that “Buy American” policies will be expensive in terms of costs per job saved nor how such policies would address the valid public policy concerns she raises: consolidation of corporate market power or the provision of better education, healthcare, or housing for those whose income has failed to keep up with the increased costs of these items.

The substance of Foroohar’s argument seems to be following:

“Over the next 18 months, before the US midterms, Mr. Biden has to convince Americans that his administration exists to serve them broadly, not just the 10% of households who own more than 80% of the stock market.  If he can’t and the Democrats then lose control of Congress, his ability to achieve much of the rest of his agenda, which includes re-engagement with the rest of the world will vanish.”

Does a claim that the Biden administration would substitute domestic procurement in federal contracts for imported procurement convince Americans that they will have a better standard of living?  Foroohar presents no evidence that such would take place.  Thus, is her argument that the perception that “Buy American” would improve the well-being of Americans sufficient to overcome the prominent U.S. skepticism regarding the benefits of trade or existent deficiencies in economic efficiency and fairness? Perhaps, but she doesn’t provide evidence of how such perceptions would meet these alleged political challenges faced by the Democratic party in 2022; therefore, the premise is misleading at best and counterproductive at worst.

The aforementioned FT editorial on January 28, 2021 points out that, under mandated increased domestic procurement, the prices of protected products – some consumer goods and some essential components in manufacturing – would rise and that “a good portion” of the gains “will go to shareholders and managers.”  Given Foroohar’s appropriate concern about consolidated market power in the corporate sector, “Buy American” is likely to increase rather than reduce such increased market and pricing power. 

The Peterson Institute paper by Hufbauer and Jung characterizes governmental procurement actions in six economies (see the table below.)  Based on generous estimates of the magnitude of the various income, employment, and price effects, the authors conclude that U.S. domestic production would replace $68 billion (roughly half) of the imported goods.   Though such “buy domestic” policies are common across the countries examined, these foregone imports constitute a larger portion of overall imports for Japan and the U.S. than for the other listed countries (see row 1 divided by row 2 in the below table.)  Furthermore, they note that increased domestic procurement in the U.S. would largely be directed towards manufacturing and construction, not toward health, education, or leisure time activity, sectors that have suffered in the current pandemic generated recession.  They estimate the resulting federal expenditure increase generated by the program to be $94 billion (and 358,360 jobs), which converts to over $250,000 per “saved” job, and prices to increase by 5.6% (row 7).   In January 2021, roughly 150 million people were employed in the U.S.; so, this program would be a very expensive way to affect a small portion of the domestic labor market.

If the reduced procurement of imports to reach a “largely free trade” equivalent amount, the equivalent tariff needed to reach that level (row 8) would be lower than the other countries shown except for Japan; nevertheless, it would still generate significant burdens on the American public.  In my view, it is a false promise to believe that “Buy American” will improve efficiency, generate more domestic income and tax revenue or generate the funds needed for priorities such as reducing existent infrastructure and social service gaps.

The FT editorial concludes that such “Protection from competitive pressure is also likely to slow innovation and hence productivity growth among U.S. producers – the opposite of what strong and sustained wage growth requires.  This is, rather, a way of creating a group of fat rentier companies.”

In summary, “Buy American” procurement policies may be intended to be largely symbolic; however, such raised barriers to trade would fail to improve domestic economic well-being for most Americans. It also would encourage other countries to enact similar counter-measures.  Presumably, this signal would be opposite to what the Biden administration wants to indicate.  Rather than “We’re back”; it symbolizes “We continue to put America (but not Americans) first.”  How can the U.S. get other countries to enact and support more constructive labor and environmental standards if we hide further behind “Buy American” policies? As it has in the past, the rhetoric of “Buy American” will fail to deliver the promised benefits; so the administration should not act as if it is central to delivering political success in 2022.