(What’s Left of) Our Economy: A Buy American Road to a Stronger Recovery

Tags

Atlanta Federal Reserve Bank, Buy American, Christopher S. Murphy, Department of Transportation, domestic content, Economic Policy Institute, manufacturing, railroads, recovery, Robert Scott, Trade, Trade Deficits, University of Massachusetts, {What's Left of) Our Economy

As 2015 draws to a close, the bad news about an already dreary American economy seems to be getting worse. For example, the Atlanta Federal Reserve Bank’s system for forecasting economic growth – which has been very reliable lately – currently expects the nation’s output to expand after inflation at an annual rate of only 1.30 percent. So it’s great to be able to report that some in the policy community have been touting practical ways to strengthen the recovery – and good job creation – that don’t depend on creating ever more national debt. Their proposal: require the public sector to buy more U.S.-made goods, and especially manufactures.

Some Buy American rules are permitted by World Trade Organization rules (ditto for similar measures by other countries); therefore Washington and state and local governments are able to make sure that some of what they purchase with Americans’ tax dollars is produced in the United States, and therefore generates growth and employment at home. But as shown by new studies from the University of Massachusetts and the Economic Policy Institute, much more can and should be done.

The UMass report, published earlier this month, makes clear the enormous potential of that further growth. It found that the American public sector is the biggest single customer of goods and services in the world, with its appetite reaching $1.10 trillion in 2013. Moreover, manufactured goods represent $400 billion of that total. Since the American manufacturing sector turned out $2.2 trillion worth of products in 2013 according to the UMass researchers, government is already a huge player.

Although its findings apply to all Buy America programs, the UMass study zeroes in on those that have been in place for buses and rail cars since 1982 – precisely to revive two once-thriving industries that seemed in terminal decline. Indeed, to this day, none of the world’s major rail equipment producers are based in the United States. The study is especially valuable for its detailed examination of the Department of Transportation’s domestic content standards, which regulate how much of the makeup of a manufactured product (i.e., the share of its parts, components, and materials) needs to originate in the United States in order to be legally considered American-made.

The authors conclude that big reasons for the continued troubles of the rolling stock industry have been domestic content provisions that:

> remain too low (largely because the content of sub-components isn’t adequately taken into account, and because the rules don’t cover design and administrative activities);

>are continually compromised by too many waivers;

>and are poorly monitored and enforced.

In addition, the study makes a critical point about the inadequacy of the current “lowest price” standards that enable foreign producers to win many rail and bus contracts for the share of content they can compete for under Buy American rules. These criteria, they rightly note, greatly understate the longer-term benefits to the U.S. economy – and therefore to taxpayers – of nurturing more manufacturing production and employment at home.

As a result, even though the rules require that 60 percent of all federally purchased rail car components be made in the United States, and 100 percent of the final assembly performed domestically, the actual overall mandated U.S. content of these systems is only 40 percent. The UMass researchers estimate that even raising the effective domestic content level for rail car procurement from the current 40 percent to 60 percent would increase by nearly 29 percent the numbers of American jobs created by such spending. And of course, each dollar of that re-channeled spending would stay in the United States and add to economic growth, rather than leaking abroad.

A broader look at the effects of better Buy America policies has been taken by Robert Scott of the Economic Policy Institute. In a late November post, Scott examined the impact of legislation proposed by Connecticut Democratic Senator Christopher S. Murphy that would close major loopholes in existing federal policies and raise the required U.S. content level from 50 percent to 60 percent.

His findings: Simply closing the biggest loophole would boost domestic manufacturing output by $8.5 billion annually (based on recent federal procurement rates) and therefore generate $13.5 billion in new overall growth each year (because increases in manufacturing output have a “multiplier effect” on the rest of the economy). On the employment front, the bill could generate up to 100,000 new manufacturing jobs. And the higher level of domestic content could add to the $160 billion worth of manufactures currently purchased annually by Washington under current Buy America rules, as well as to the jobs they create.

Compared to the size of the American manufacturing sector and the larger economy, these numbers are small. But as big as they are, total federal purchases were only 6. 5 percent of U.S. gross domestic product in 2013. As I have repeatedly written, trade policy overhaul that simply keeps the deficit from rising higher would have much bigger payoffs. How much longer before the president, the Congress, and most of the current crop of presidential candidates get the message?