Buy American: A counter to anti-deficit bias

It is fashionable in intellectual circles to treat "Buy American" provisions in government spending packages as silly relics that appeal to ill-educated people. These provisions require the government to purchase goods and services from US based companies whether or not they are the lowest cost providers.

This is one reason that both the Trans-Pacific Partnership and United States-European Union trade agreement are likely to include language sharply restricting home country preferences in government procurement. Unfortunately, this is yet another case where the folks in intellectual circles don't have a clue what they are talking about.

It is easy to make the case for ending home country preferences. It is the same argument for free trade more generally. If governments purchased goods and services from the lowest bidder, regardless of which country they are located in, they would save money which could then be used for spending in other areas.

The problem of overpaying can be especially serious with government procurement. In many situations public officials award contracts to friends or political associates, often paying far more than the going rate on the market. For example, it has been claimed that buy American provisions added more than $400m to the cost of rebuilding the Bay Bridge between San Francisco and Oakland. In such cases, there could be large savings from contracting with a foreign firm.

However this is only part of the story. When President Obama took office in 2009 he immediately crafted a stimulus package to restart the economy, which at that point was in a free fall. He tried to get as large a package as possible through Congress. All of his top economic advisors believed that the $800bn stimulus package eventually approved ($700bn after excluding technical changes to the tax code that would have occurred in any case) by Congress was much smaller than the economy needed at the time.

Many independent economists, including those at the International Monetary Fund, have concurred in this assessment. In other words, the economy would have been better served in 2009 with a stimulus that was far larger than the one President Obama was able to get through Congress.

However even this package presented a huge political struggle. There were almost no votes to spare in either the House or Senate.

One component of the package that won the support of many businesses and unions was a "Buy American" provision that required that contracts go to firms based in the United States unless this would raise the cost of a project by more than 25 percent. The support of these groups was crucial in persuading several members of Congress to vote for the package.

Without the support won by adding a "Buy American" provision it is likely that the 2009 Obama stimulus package would not have passed. Whatever stimulus package eventually got through Congress would almost certainly have been smaller, meaning that it would have provided less of a boost to growth and employment.

This is not just a US problem. The stimulus packages almost everywhere were too small and short-lived to bring economies back to full employment. This has been the case in Germany, the United Kingdom and nearly every wealth country, with governments unwilling to spend the money needed to boost the economy back to full employment following the 2008 collapse.

This recent history indicates a clear bias against deficit spending even when it is needed to counteract the effects of an economic downturn. This is a factor that trade negotiators should keep in mind if their goal is to foster economic growth and employment. The United States was able to have a more effective stimulus than would have otherwise been the case because President Obama was able to include a Buy American provision in the stimulus package. This was likely the case in other countries as well, where stimulus spending may have included stipulations that favored domestic business and jobs.

It may be true that the world economy would have been better off if every country passed stimulus packages identical to the 2009 packages and the packages did not include any home country preferences, but that almost certainly would not have happened. Without the home country preferences many of the stimulus packages would have been smaller, providing less of a boost to the world economy. For this reason we should be thankful that we did not have trade agreements in place in 2009 that would have prohibited the "Buy American" provision that was needed for passage of the stimulus. 

This is a fact that should be kept in mind in negotiating the Trans-Pacific Partnership and US-EU trade agreements. We must recognize that most governments seem to have a bias against running large budget deficits, even when large deficits are needed to boost their economies back to full employment. In this context, the political value of including home country preferences in stimulus packages is likely to dwarf whatever losses might be incurred by paying higher prices for goods and services.

In fact, virtually all countries are likely to come out ahead in this story. Whatever business US trading partners may have lost because the "Buy American" provisions in the stimulus were dwarfed by increased exports to the US as a result of the growth created by the stimulus.

It would be nice to think that we won't be in a situation again where we need another large stimulus package, but does anyone really believe this? If we want these trade deals to be a boost rather than an impediment to growth, they will have to leave some room for home country preferences for government expenditures.