Buy American

Buy American is un-American. Much if not most of what we already buy is American, meaning made in America. Though it would be rather challenging to identify products (leaving aside services) that are 100 percent made in American, i.e. that do not have at least some components produced abroad, 85% of U.S. GDP is domestically produced. So why is the slogan “buy American” un-American?

Buy American has several understandings. There are laws, such as the Buy American Act of 1933, that require the U.S. government to give preference to American goods and services over others in its purchases. To the extent such laws have any effect, they require the purchase of goods and services that would not otherwise be chosen–that would not otherwise meet the test of the best value for the taxpayers’ dollars. This law aims to protect American jobs. This, of course, is a misunderstanding of the reality. Buy American, when it changes behavior at all, protects some undeserving jobs at the expense of other jobs that are worth keeping.  It protects jobs producing goods and services that would not otherwise be profitable. In short, it keeps American workers employed in activities that are less productive than would otherwise be the case. In the long run, it does not increase employment but rather reallocates workers to less productive tasks. In short, buy American lowers our standard of living. Thus, we can be thankful that it only requires 51% domestic content to qualify as “American.”

So why does our current government adopt such policies? For the same reason we have slapped a tariff on Canadian steel. It is not to make the American economy more productive or to keep it fully employed (which it already was when President Trump imposed such a tariff for “national security” reasons (I kid you not).  Rather, like other “protectionist” measures, it is to protect the jobs of particular, favored industries or workers, or what you might call political corruption.  Such favored industries are not competitive without such protection or why bother.

Beyond the legal requirement for government to Buy American, the plea to the general public is voluntary.  But why should we purchase products that we otherwise would not have (because they were more expensive or inferior)?  As with government buying American, the effect is to draw workers into activities at which they are less productive than they would have been otherwise. So “Buy American” is un-American because, if taken seriously, it would lower our standard of living and is contrary to the free market and entrepreneurial spirit that has made America the prosperous society that it is.

About wcoats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My most recent book is One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.
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5 Responses to Buy American

  1. Kevin Belcher says:

    Warren – I have followed your work, and have read your paper “Implementing a Real SDR Currency Board”. In the paper, you outline how the ‘Real SDR’ would be a Dollar replacing world reserve currency. We are now 6 years since you had written the paper, do you think we are any closer to your ‘Real SDR’ (backed by a basket of commodities)? Thank you.

    • wcoats says:

      Kevin, I think that the desire to replace the dollar has strengthened (U.S. abuse of dollar dominance for its own, unshared political ends is increasingly resented and concern with growing U.S. debt is slowly building). However, nothing has been down to build the foundation needed for a shift to the SDR (SDR invoicing, and private SDR financial assets, etc.).

      • Kevin Belcher says:

        Thank you for your input. What if China has other plans? After the ’08 Financial Crisis, China called for a new Reserve Currency as the SDR. Gov. Zhou Xiaochuan said the SDR basket of currencies should be expanded (which the Yuan later was) and should be shifted from “pure speculation” (fiat) to “one backed by real assets”. It’s the “real assets” part that reminds me of your ‘Real SDR’ backed by a Commodity Basket.

        Do China and the BRICS have more sway this time around?

  2. wcoats says:

    Kevin, China’s earlier interest in the SDR (current or real) as expressed by former Gov. Xiaochuan seems to have waned. When China established the Asian Infrastructure Investment Bank, it strangely chose the USD as its unit of account. Go figure.

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