A Brief History of the "Buy American" Provision of The Stimulus

I have written several posts (here, here, here) about the buy American provision of the stimulus bill (The American Recovery and Reinvestment Act of 2009) that continues to rankle our trading partners.  This post presents a brief history of the provision.  The original bill required that all public projects use iron, steel, and manufactured goods produced in the United States.  Representatives of foreign governments, including Canadian prime minister, Stephan Harper, became concerned about the sections protectionist nature.  As the debate over the stimulus raged in Congress, President Obama was preparing to meet with Harper in Canada.  Roger Runningen and Hans Nichols write for Bloomberg in  "Obama Will Review Buy American Provision in Stimulus (Update1)," (January 30, 2009) that,

The administration “will review that particular provision,” Gibbs [President Obama's press sectretary] said today at his regular briefing. The president’s advisers understand “all of the concerns that have been heard, not only in this room, but in newspapers produced both up north and down south.”

He refused to say whether the administration supported or opposed keeping that part of the legislation intact. Nor did he say what the president would do if the provision remains once the bill clears the House and the Senate.

The issue may cloud Obama’s trip to Canada on Feb. 19, his first journey outside U.S. borders as president. Officials in Canada, the top U.S. trade partner, are criticizing a part of legislation that passed the U.S. House of Representatives Jan. 28 that requires the use of U.S.-made iron and steel in infrastructure projects.

On February 4, 2009, Sheldon Alberts of Canada.com reports in "U.S. Senate votes to soften 'Buy American' clause," that

American lawmakers on Wednesday voted to soften the controversial "Buy American" provisions in the proposed U.S. economic stimulus package over fears they could spark a trade war.

The change gives Canada, among other major trading partners, some comfort it would be exempted from a strict requirement in the $819-billion bill, which passed the House last week, that only U.S.-produced steel and iron be used in projects launched with funds from the economic stimulus.

The amendment, approved by the Senate, requires the Buy American provisions be "applied in a manner consistent with U.S. obligations under international agreements."

Senate Democrats had earlier in the evening voted down an amendment, proposed by Senator John McCain, that would totally strip the Buy American provisions.

The "Buy American" section  as passed by the Congress and signed by President Obama reads,

Sec. 1605. Use of American Iron, Steel, and Manufactured Goods. (a) None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.

(b) Subsection (a) shall not apply in any case or category of cases in which the head of the Federal department or agency involved finds that--

(1) applying subsection (a) would be inconsistent with the public interest;

(2) iron, steel, and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality; or

(3) inclusion of iron, steel, and manufactured goods produced in the United States will increase the cost of the overall project by more than 25 percent.

(c) If the head of a Federal department or agency determines that it is necessary to waive the application of subsection (a) based on a finding under subsection (b), the head of the department or agency shall publish in the Federal Register a detailed written justification as to why the provision is being waived.

(d) This section shall be applied in a manner consistent with United States obligations under international agreements.

While meeting with the Canadian prime minister, President Obama promised U.S. compliance with international trade obligations and related his hope that trade would continue to expand ("PM, Obama talk trade, Afghanistan, pledge 'clean energy dialogue'," CBCnews.ca, February 19, 2009.

On the controversial "Buy American" provision included in the U.S. stimulus package, Obama said he made clear that those measures will be consistent with Washington's obligations under the World Trade Organization and the North American Free Trade Act.

"I provided Prime Minister Harper an assurance that I want to grow trade, not contract it," Obama said.

Harper said those agreements do allow domestic purchasing preferences, but pointed out they are not allowed without limits.

"We have agreed in the G-20 countries to stimulate the global economy, not just benefit ourselves. If we choose to benefit ourselves at the expense of others, we will deepen the global economic crisis," Harper said.

Apparently, there is a lot of wiggle room in international agreements that allows nation to restrict trade when spending on government funded projects.  The provision is being applied and our trading partners are considering retaliation.  President Obama's supporters promised an empirical president.  Protectionism is a knee jerk reaction, that is not based on empirical evidence. 
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No Citizen Gets Ahead

Under the banner, "No Child Left Behind," President Bush attempted to improve educational standards, particularly for underachievers.  President Obama has unfurled a new banner, "No Citizen Gets Ahead," in his attempt to improve the welfare of the poor.  He plans to raise the top income tax rate to 40%, cut deductions--even charitable deductions, remove the cap on social security taxes, and now foist the cost of health care for the poor onto the rich.  Laura Litvan and Ryan Donmoyer of Bloomberg write ("Democrats Weigh Health Mandate as Obama Urges Taxing Wealthy," June 7, 2009),

President Barack Obama wants Congress to consider taxing the wealthy instead of workers to pay for a health-care overhaul, as House Democrats discuss a plan to require health insurance for most Americans...

The president is trying to avoid broad-based levies such as a Senate proposal to tax some employer-provided health benefits Axelrod said. Instead he is urging lawmakers to reconsider limiting all tax deductions for Americans in the highest tax brackets.

“He made a very strong case for the proposal that he put on the table, which was to cap deductions for high-income Americans, and he urged them to go back and look at that,” Axelrod said on the CNN’s “State of the Union.” Goolsbee, appearing on “Fox News Sunday,” said Obama is “mindful” about how “ordinary Americans are able to foot the bills” and never proposed taxing employee benefits.

Apparently, some of his top campaign donors (the wealthy) misread candidate Obama's populist rhetoric for demagoguery, which is OK (Leonard Doyle, "Barack Obama's rich supporters fear his tax plans show he's a class warrior," Telegraph.co.uk, May 9, 2009).

Wealthy Wall Street financiers and other business figures provided crucial support for Mr Obama during the election, backing him over the Republican candidate John McCain as the right leader to rescue the collapsing US economy.

But it is now dawning on many among them that Mr Obama was serious about his campaign trail promises to bring root and branch reform to corporate America - and that they were more than just election rhetoric.

A top Obama fundraiser and hedge fund manager said: "I'm appalled at the anti-Wall Street rhetoric. It was OK on the campaign but now it's the real world. I'm surprised that Obama is turning out to be so left-wing. He's a real class warrior."

Chris Edwards of the Cato Institute, a free enterprise think tank, said Democrats in Congress were unnerved by the president's latest plan to raise $210 billion over 10 years from multinational corporations.

Although I disagree with many of the administration's policies, taken individually, they are well within America's historical bounds of policy debates.  I understand the reasoning behind raising the top income tax rate to 40%.  It was that high under Clinton.  I understand the distorting effects of tax deductions.  I understand the need to increasing revenues for Social Security, and the desire to help the poor gain better access to medical care.  I don't understand the economic reasoning behind the administration's attempt to raise taxes on U.S. based multinationals.  But taken as a whole, they are a radical departure from past policy debates that constitute an assault on the freedom of all Americans who are economically successful.  President Kennedy said, "Ask not what your country can do for you--ask what you can do for your country."  The Obama administration has bent those words to, "Ask asks not what we can do for our country, but what the wealthy can do for us."  Milton Friedman's opening words in "Capitalism and Freedom" are as prescient now as they were in 1962 when they were penned. 

In a much quoted passage in his inaugural address, President Kennedy said, “Ask not what your country can do for you—ask what you can do for your country.” It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not on its content. Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic “what your country can do for you” implies that government is the patron, the citizen the ward, a view that is at odds with the free man’s belief in his own responsibility for his own destiny. The organismic, “what you can do for your country” implies that government is the master or the deity, the citizen, the servant or the votary. To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, and instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served. He recognizes no national goal except as it is the consensus of the purposes for which the citizens severally strive.

The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather “What can I and my compatriots do through government” to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect? Freedom is a rare and delicate plant. Our minds tell us, and history confirms that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.

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Globalization Causing Reliance on Markets?

David Gauthier-Villars and Marcus Walker, writing for the Wall Street Journal in, "Across Europe, Left-Leaning Parties See Clout Faltering," June 8, 2009), exam recent election and polling results in Europe and find evidence that the economic crisis is benefiting the right, not the left as in the U.S.  They offer two reasons for the right's success.  First, the right has moved left.  I will call this the Schwarzenegger effect, and in America's right of center debate pits pragmatic politicians like Schwarzenegger, Powell, McCain and Bush against ideological purists like Limbaugh and Cheney.  Gauthier-Villars and Walker observe that

One reason is that as Europe tipped into recession, the right moved left -- appropriating some of the left's long-standing economic policies, including nationalizations and bailouts.

French conservative President Nicolas Sarkozy, for example, helped recapitalize French banks, earmarked six billion euros for the auto sector and lashed out at "rascal bosses" with huge pay packages.

In Germany, Chancellor Angela Merkel has planted her conservative camp firmly in the political center. Ms. Merkel has largely given up her former program of market-oriented reforms, and has gradually approved various kinds of state intervention to protect workers during the current recession, from bailing out carmaker Opel to subsidizing payrolls at companies whose export orders have collapsed.

Second, globalization has weakened national policy tools.  Some economists have argued that globalization of trade and financial markets would force governments into an international competition for efficiency and erode fiscal and monetary policy options.  Perhaps as an acknowledgement of greater interdependence, G20 members attempted to hammer out an international response to the financial crisis in the meetings in April.  Market oriented economists believe that reductions in policy options would be beneficial because the problems these policies introduce, cronyism, crowding out, inefficient spending, and inflation often outweigh their benefits.  The worldwide bailouts of banks and other firms suggest that many of the inefficiencies that market oriented economists hoped to eliminate remain even under a more competitive system.  Gauthier-Villars and Walker claim that the tipping point toward greater reliance on markets came with the signing of creation of the World Trade Organization in 1994.  If the authors are correct, the Clinton administration, and members of Congress that supported the GATT deserve kudos. 

In the past, there was a clear fault line between Europe's left-wing and right-wing parties. The left called for more social welfare programs and public spending. The right wanted the state not to interfere in market forces.

Globalization helped change that. With nations and companies vying on a global scale, it has become difficult for a country to separate the effects of public spending and budget deficits from its labor costs and capacity to compete in export markets. The key moment came as far back as 1994, some political analysts say, when the World Trade Organization was created and much of the world began shifting to a more free-market economy.

"The WTO marked the triumph of the market economy," says Dominique Reynié, head of Paris-based Foundation for Political Innovation. "Since then, the left has been unable to propose another route."

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The "Stimulus" Trade War

Drudge highlights two articles concerning the buy American provision in the Stimulus package (The American Recovery and Reinvestment Act of 2009).  President Obama should have vetoed the bill for this provision alone.  Like most economists, I support trade.  Protectionist policies lower a country's standard of living.  During the Great Depression, the Smoot-Hawley Act began the beggar thy neighbor era in which countries responded to protectionism with protectionism.  Allan Dowd writes ("Canadians angered over "Buy American" rule," Reuters, June 6, 2009),

WHISTLER, British Columbia (Reuters) - Canadian municipal leaders threatened to retaliate against the "Buy America" movement in the United States on Saturday, warning trade restrictions will hurt both countries' economies.

The Federation of Canadian Municipalities endorsed a controversial proposal to support communities that refuse to buy products from countries that put trade restrictions on products and services from Canada.

The measure is a response to a provision in the U.S. economic stimulus package passed by Congress in February that says public works projects should use iron, steel and other goods made in the United States...

Trade Minister Stockwell Day told the group on Friday that Ottawa was actively negotiating with Washington to get the "Buy American" restrictions removed.

The measure's supporters agreed to modify it slightly by suspending implementation for 120 days, in order to give Canadian trade officials and U.S. critics of the "Buy America" rules more time to work on the issue.

Breitbart.com reports that Canada is not the only country concerned with the buy American provisions of the stimulus ("'Buy American' plan leads to ire, confusion," June 6, 2009).

The "Buy American" plan in US economic stimulus legislation is drawing increasing fire from US trading partners and also has led to confusion as government agencies try to implement the strategy.

Singapore was the latest among key US allies such as Canada and Japan to express concern over the restriction, warning that it could "beget other actions and then cause the situation to snowball in the wrong direction." ...

Without pointing at the United States, Lim [Singapore's trade minister] said it might be difficult to pin down countries that took steps that bordered on protectionism at the World Trade Organization, the global trade watchdog.

The Buy American clause originally said that infrastructure projects designed to kick-start the US economy out of a languishing recession could only use US-made manufactured materials.

But it was later watered down to show that such procurement could only take place in a manner consistent with Washington's international treaty obligations...

"The Buy American requirements are having a major impact on projects administered by state and local governments, resulting in declining trade and lost jobs for American workers," US Chamber of Commerce vice president Bruce Josten said..."Retaliation by Canadian municipalities could result in three billion dollars in lost business for US water and wastewater equipment manufacturers," he said..."We are sending exactly the wrong signal to our trading partners, and a retaliatory spiral may already be underway."

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Glaeser on the Minimum Wage

In a previous post, I cited surveys of economists on the minimum wage.  The majority don't like it.  Edward Glaeser ("Coercive Regulation and the Balance of Freedom," Cato Unbound, May 11, 2007) the Fred and Eleanor Glimp Professor of Economics at Harvard University, responds to Daniel Klein, a professor of economics at George Mason University, ("Economics and the Distinction between Voluntary and Coercive Action, Cato Unbound, May 7, 2007).  Klein takes a doctrinaire approach; he doesn't like minimum wage laws because the are coercive.  Glaeser takes a more practical approach; they don't work well and that there are better alternatives for helping the working poor.

Daniel Klein has written an elegant essay arguing that minimum wage laws are coercive. He is obviously right. These laws threaten employers with state-sponsored violence if they have a contractual relationship with wages that are too low. To me, the most striking fact in the essay was that more than fifty percent of a survey of economists said that these laws are not coercive in any significant sense. That’s just silly...

The case against the minimum wage or other related restrictions on contracting does not, in my view, come from clear anti-coercion axioms or even maxims, but from other more technical reasons that have been emphasized for decades. If we want the state to redistribute income, we have sensible means for doing that like Friedman’s negative income tax or the Earned Income Tax Credit. These tax-based approaches are also coercive, but they can increase the choice set of the poor with less of a reduction in the freedom of others. Obviously, these tax-based solutions don’t restrict the set of available contracts and that is a great plus. The fact that American minimum wages are too low to create large-scale unemployment shouldn’t blind us to the fact that, across the Atlantic, far more aggressive minimum wages are accompanied by vast numbers of unemployed youths. The minimum wage is also bad redistribution policy because it imposes the costs of redistribution on the employers of the poor, and on their customers who will have to pay higher prices to make up for higher wages. If we want to redistribute income to the poor, then it is appropriate that everyone with resources pay, not just employers in sectors that employ the less fortunate.

A final reason to reject further increases in the minimum wage is that it gets the government into the business of setting prices, and this requires competence that seems far beyond the limits to government. The case for laissez-faire comes ultimately not from unbounded faith in the power of the market, but rather in a realistic appraisal of the limitations of government. Price-setting is a difficult task that is prone to enormous abuse. The historical track record of price and rent controls is pretty terrible. It seems like this track record should make us further recoil from further governmental incursions into setting prices.

By reminding us about the coercive nature of the minimum wage and other similar regulations, Daniel Klein also reminds us that the centuries of sagacious concerns about the abuse of government power also apply in this case. Perhaps we should use redistributive taxes that reduce the freedom of the wealthy to increase the freedom of the poor, but it is hard to think that the minimum wage is a good tool for redistribution.

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Competition for Google?

Many economists view competition as ubiquitous.  It is everywhere and threatens the position of dominant firms if they fail to innovate.  I don't know which products will be market winners but consumers will certainly win.  Ned Potter describes Wolfram's computational engine in "The Answer Machine? Wolfram Alpha Debuts," (ABC News, June 1, 2009).

Wolfram Alpha. It sounds like a code name from World War II, or perhaps a term a wildlife biologist would know.

Instead, it's the name of an audacious, if quirky, Web site led by the scientist Stephen Wolfram -- not a search engine, and not meant to be the "Google killer" that it was sometimes described as being, but a "computational knowledge engine." It is a Web site that will answer your questions -- at least some of them -- even if nobody has ever asked them before.

"What we're trying to do is much more ambitious," said Wolfram, 49, the lead developer of the technology behind the project, on which he says he has worked 25 years. "We're trying to take the question you ask, and automatically produce for you the answer, not giving you a collection of links, and saying, 'Go read this Web site, go read that Web site.'"

Gordon Crovitz "Google Gets Some Competition," describes Microsoft's Bing search engine (Wall Street Journal, June 4, 2009).

Microsoft says Bing, which goes live on Wednesday, will distinguish itself from Google and Yahoo by focusing on delivering answers, not just search results showing potentially relevant links. Microsoft says it's built a "decision engine, designed to empower people to gain insight and knowledge from the Web, moving more quickly to important decisions."

The goal is to understand what you're trying to know and to come up with answers, categorizing results in more useful ways. Bing has a separate approach, for example, to searches for factual research versus, say, searches for the best price for a new camera.

Finally, John Timmer describes Google's latest product enhancement, Google Squared in "Google squares the Web, hilarity ensues," (ars technica, June 4, 2009).

Yesterday, Google Labs took the wraps off its Google Squared service, which takes a spreadsheet-like approach to finding information on the Web. It's tempting to speculate that this is a bit of a response to Wolfram Alpha, the online computation engine that went live last month. But, although a spreadsheet implies calculation, Google's squared simply uses a cell-based presentation to organize data—the approach to the actual data is actually radically different from Wolfram's. We took the service for a bit of a spin and found it interesting and potentially useful, but only for those willing to put in a fair bit of effort.

The idea behind Squared, which Google announced back in May, is that users often want the results of what's essentially a multidimensional search. So, for example, if I wanted a collection of demographic information on several major US cities, I might need to perform multiple searches, one for each city. Google squared allows you to extend a single search into a second dimension—it's possible to create a square where each city has a row, and each column contains the specific demographic information you're interested in.

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Four Week Moving Average of Unemployment Rises

Shobhana Chandra of Bloomberg analyzes this week's unemployment numbers in "U.S. Initial Jobless Claims Fall 4,000 to 621,000 (Update1)."

June 4 (Bloomberg) -- Fewer Americans filed claims for unemployment benefits last week, signaling the most acute phase of job losses may be over even as hiring has yet to pick up.

Initial jobless claims fell by 4,000 to 621,000 in the week ended May 30, in line with forecasts, from a revised 625,000 the prior week, the Labor Department said today in Washington. The number of people collecting unemployment insurance fell for the first time in almost five months, breaking a string of 17 consecutive records...

The four-week moving average of initial claims, a less volatile measure, climbed to 631,250 from 627,250.

Research by Robert J. Gordon finds that recessions often bottom out shortly after the four-week moving average peaks.  The average may have peaked on March 28, 2009 at 659,500.  Only time will tell if the small climb of 4,000 in the average represents a new upward trend in the average, a stabilizing of the average, or a small bump in the downward trend.

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