Buy American, Hire American

President Trump continues to repeat his populist slogan “Buy American, hire American,” reflecting the way he and Steve Bannon appear to understand what is needed to make America Great Again. Thus, with apologies, I endeavor again to explain why this catchphrase is fundamentally wrong and would actually make America weak. “Trade and Globalization” “Save trade”

If buying an American made product or service (100% American, 90%, 51%?) or hiring an American worker is my best option, I would not need to be compelled to do so by the government. If it is not my best option, being compelled to do so forces me to accept an inferior option. It would make me worse off. The Trump family understands this as their hotels import and purchase foreign made products (from China, Philippines and India, to name a few) and Ivanka sells clothing made in China.

It is obvious that being forced to buy and hire American would make many of us worse off (not to mention diminish our freedom of choice), but are there compensating benefits or gains for others in the American economy that would justify making us worse off? “Teeing up Trump tariffs”

Buy American

If I must buy an American made Corvette rather than a German Porsche, does the American economy benefit? To simplify, leave aside the fact that a substantial part of the components making up a Corvette are imported from various countries. The fact that I had to be forced to buy the American car rather than the German one, i.e. that it was an inferior deal, means that the American workers who make it were reallocated from the production of export products at which the United States had a comparative advantage. Trading less as a result of buying American mean allocating American workers to producing things (Corvette) that they are not as productive at making. They would be moved from producing Boeing aircraft to sell to Germany (to pay for our imports of Porsches) to producing Corvettes. So in addition to my being made worse off as a result of having to buy American, the American economy as a whole would be worse off as a result of a less productive work force and thus lower overall income (lower GDP). This is Econ 101.

In addition, as noted by the Financial Times, “Attempts to restrict procurement to domestic companies tend to backfire. They induce retaliation from trading partners, harming US businesses trying to sell abroad. They raise input costs, ensuring less infrastructure is built and fewer construction workers are hired for each dollar of public spending.” “The Pitfalls of having to buy and hire American”

Hire American

The meaning and impact of a requirement to hire Americans is a bit more complex. If the terms to American companies of employing the workers needed, whether they are citizens, permanent residents, or temporary or permanent immigrants from abroad, are not competitive with importing the product or service, American companies will in effect hire foreigners abroad (i.e. they will import the goods and services produced abroad). Thus it is a bit unclear what “hire American” means. “The long, rough ride ahead for ‘Made in America'”

Presumably, “hire American” refers to our immigration policies. Indeed our immigration laws need fixing. This includes providing a solution to the status of the 10 or 11 million people living here illegally, and adjusting immigration quotas to better match the needs of American firms for workers without undercutting the status of existing American workers. “Illegal-aliens”

The decline in American manufacturing jobs is largely the result of automation, not foreign trade. Manufacturing employment has fallen almost everywhere in the world as manufacturing output has increased. Automation enables the work force to produce more and thus enjoy a higher living standard. It need not cause unemployment.

The wonderful film “Hidden Figures” tells the true story of the large number of human “computers” employed by NASA (the National Air and Space Administration) who cranked out the numbers needed to put Americans in space and bring them home again. The stars of the film are three black women whose mathematical skills were indispensible to NASA. At the end of the day and in time for the first American to orbit the earth in 1961, new IBM’s mainframe computers proved essential to crunch the critical data fast enough. Overnight the human computers were no longer needed. But rather than becoming unemployed, most of them retrained to program and run the IBM computers with an unbelievable boost in productivity. While other things also affected NASA’s workload, the employment data are interesting. In 1960 NASA had 13,500 in house employees, which increased to 41,100 by 1965 and gradually drifted down to 18,618 in 2010. The numbers for contract workers on the same dates were 33,200 in 1960, 369,900 in 1965 and zero in 2010.

The President’s appeal to Buy American and Hire American, in addition to restricting our freedom of choice, flies in the face of what made America Great in the first place. As proclaimed by the Financial Times: “The principle should remain to keep the US economy as open as possible to the inflow of good products and good workers from abroad. Slamming down the drawbridge is only likely to impoverish the residents of the citadel.”

 

About wcoats

Dr. Warren L. Coats specializes in advising central banks on monetary policy, and in the development of their capacity to formulate and implement monetary policy. He is retired from the International Monetary Fund, where, as Assistant Director of the Monetary and Financial Systems Department, he led missions to over twenty countries. Before then, he served as Visiting Economist to the Board of Governors of the Federal Reserve System, and to the World Bank, and was Assistant Prof of Economics at the Univ. of Virginia from 1970-75. Most recently he was Senior Monetary Policy Advisor to the Central Bank of Iraq; an IMF consultant to the central banks of Afghanistan, Kenya and Zimbabwe; and a Deloitte/USAID advisor to the Government of South Sudan. He is currently a member of the Editorial Board of the Cayman Financial Review and until the end of 2013 was a member of the IMF program team for Afghanistan. His most recent book is entitled "One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina."
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One Response to Buy American, Hire American

  1. Joe Cobb says:

    “Protectionism” is a variant of social policy, akin to the idea of a Universal Basic Income. The important difference is that a Protectionist action (e.g. Canadian lumber) operates on a more “micro” scale.

    The argument for free trade is entirely a “macro” argument, because resources will be more efficiently allocated and consumer- and intermediate-product prices are minimized by competition. All of that true claim is a generalization, but one in which I have full confidence. It has also been mathematically demonstrated, but it is still not a “micro” analysis.

    Softwood lumber is harvested and milled in Canada. The jobs are mostly in the mills. When I was on Joint Economic Committee staff for the Senator from Idaho, we tasked the GAO to investigate why our sawmill owners and big cutters on national forest land believed the Canadians were “subsidizing.”

    The GAO found the long-term leasing policy of the Crown lands allowed long-term planning and rational road networks in the Canadian northwest. By contrast, the Forest Service required “plantinum plated” forest roads, built by the cutters who wanted the contracts; the roads had to serve also “recreation use” after the cutting was done. Clear cutting was also not generally allowed, although more efficient. In Canada the long-term planning of the big companies with Crown land leases allowed much lower operating costs.

    But politics is politics, and all politics is local. The United States Dept.Commerce ITA accused the Canadians of “dumping” and used the witches’ brew of formulae to enact the special tariffs just jacked up by Commerce Secretary Wilbur Ross. It is an administrative procedure, and will be appealed to the ITC. Meanwhile, the new tariff will be collected.

    But like the Universal Guaranteed Income, this special “antidumping” tariff provides a specific UGI to the small towns of Idaho and Montana. Perhaps a sawmill will reopen. Perhaps the profitability of cutting on national forest land will increase. As the “political rent” trickles down to the communities, the political leaders will be congratulated. There is nothing “impersonal” about this social policy, political to its essence. It is classically “micro.”

    But this is just social policy of income redistribution (just not “universal – and impersonal”). Indeed, news reports citing housing prices being boosted is fatuous. Housing prices are set by general demand for housing, and land prices, in specific geographic locations. Building costs represent entirely a factor of costs that are negotiated among lower level suppliers, as the higher lumber costs are passed back and forward. But the final demand price of housing is not affected. Land use restrictions are clearly a culprit in housing prices.

    Only Marxists believe in “the ingredients cost” theory of pricing. Higher US lumber prices will have no effect on housing demand.

    Excellent discussion, Warren.

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