Will the "Buy American" clause in the stimulus bill create or destroy jobs?

Xin Lu — Mon, 16 Feb 2009 22:06:06 +0000

Tomorrow on February 17th President Obama plans to sign the $787 billion stimulus bill recently passed by Congress. One controversial portion of the bill is a clause for the public works and infrastructure projects to "buy American". The logic behind this is that if the money in the stimulus is spent to buy American products then Americans will have more jobs. However, this policy of protectionism is sparking many fears of a global trade war. Will this clause create or destroy jobs?

Many commentators are afraid that the "buy American" clause will repeat a global trade war that occured during the Great Depression. On June 17th, 1930, President Hoover passed the Smoot-Hawley Tariff Act which dramatically raised import taxes on over 20,000 imported goods. In retaliation, America's trade partners stopped buying American goods or raised tariffs on American products. This led to more job loss in America and world trade declined by 66% between 1929 and 1934.

Before the Smoot-Hawley Tariff Act was passed, Hoover's administration received many protests from foreign governments, and a similar barrage of protests is being reported around the world right now. China claimed that the "Buy American" clause is "poison". Japan, Canada, and Australia have also expressed their concerns to the Obama administration. The language of the "Buy American" clause is now softened so that Canada, Japan, the European Union, and several other countries may be exempt from the law. However, this leaves out giant trade partners such as Brazil, Russia, China, and India. These countries contain over a third of the world's population, and if they stopped or reduced their purchase of American goods out of retaliation then the American economy will undoubtedly suffer.

On the other hand, some people believe that America has been buying too much from foreign countries. It is true that there is a trade deficit of nearly $40 billion a month as of December 2008. So the logic is that if the stimulus spent as much as possible on American products then it would narrow the trade deficit and keep more jobs in America. However, considering that the public works portion of the stimulus bill is only about $73 billion, I doubt it would make a dent in the trade deficit. Instead, it is fueling a lot of anger in many trade partners for little gain.

So will this "buy American" clause create or destroy jobs? Only time will tell and I sincerely hope that another global trade war does not happen because that would hurt everyone. So far, China has promised to avoid a similar "buy China" clause in its own stimulus efforts, and I think Americans should be thankful for that.

For further reading about free trade and protectionism you can check out these books:

Wealth of Nations by Adam Smith

The Choice: A Fable of Free Trade and Protectionism Updated Edition

Economic Sophisms

Do you exercise pocketbook patriotism by buying products made in your own country? Do you think this clause will help or hurt Americans? Feel free to leave your thoughts about this issue in the comments!

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Patriotism and Personal Finance - A Brief Walk Through American History

Xin Lu — Fri, 04 Jul 2008 08:00:02 +0000

To all the Americans out there, happy Independence Day! I think this a great day to reflect upon how personal finance and patriotism is so intertwined in America. So I dug up a few tidbits from American history and summarized them here.

Before 1776

"No taxation without representation" is an iconic slogan that points to one of the main reasons why the American colonists sought independence from Britain more than 200 years ago. Simply put, the Americans were angry that their personal incomes was being taken without their consent. The first direct British tax on American colonists was spelt out in the Stamp Act of 1765, a law that required every newspaper, pamphlet, and other legal documents to have a British stamp upon it. Since the stamp costs money, it sparked outrage amongst the Americans because they had no need for this stamp and they did not want to pay for it. The Stamp Act was repealed in 1766, but the later Townshend Acts imposed more taxes on many other goods, including tea. These new taxes led to more unrest amongst the colonists and British troops being sent to America. Eventually, the anger over the taxes led to the Boston Tea Party, and in response to this unrest the British Empire passed the Intolerable Acts which spurred the growth of the American Revolution and eventually led to the Revolutionary War. With this history, it can be argued that the American Revolution was all about the freedom of personal finances. The Americans wanted the freedom to spend their own money how they wanted, and do business without being unjustly taxed.

The Great Depression

The Social Security Administration was formed in the midst of The Great Depression by Franklin D. Roosevelt. In a famous speech now known as "The Four Freedoms" speech , he said this, "I have called for personal sacrifice, and I am assured of the willingness of almost all Americans to respond to that call. A part of the sacrifice means the payment of more money in taxes. No person should try, or be allowed to get rich out of the program, and the principle of tax payments in accordance with ability to pay should be constantly before our eyes to guide our legislation... If the Congress maintains these principles the voters, putting patriotism ahead pocketbooks, will give you their applause." The basic message was that if people did not want to participate in the Social Security program they would be unpatriotic. Roosevelt also outlawed the ownership of gold by private citizens except in jewelry, and basically allowed banks to print as many bank notes as they want without having to redeem it for gold.

World War II

During World War II, the general message was for Americans to be frugal with their money and support the war effort. A Disney propaganda cartoon called "The Spirit of '43" showed the good side as a thrifty and hardworking Donald Duck who paid his taxes, and the film explained that if you did not pay your taxes a good soldier out there would die. The propaganda message was that if you spent your money you would be helping the Axis powers and if you saved your money for taxes you would be helping your country. Many war bonds posters were also made to encourage people to invest in the war effort. In the present day, many of these colorful posters have become collectibles.

Now

After World War II, consumerism somehow became synonymous with patriotism in America. Americans are systematically encouraged to spend their money. In the fifties and throughout the era of the Cold War Americans were told to spend in order to be as different from communists as possible. After the Cold War, consumerism is already a big part of America's GDP. After the September 11 attacks in New York, the country slid into a recession and many companies created ads that linked spending money to helping America. Additionally, the Federal Reserve made it cheap to borrow money to encourage spending. Recently, homeownership was also touted as a way to fight terrorism and keep our country secure. This year, nearly every tax paying American is receiving a "stimulus check" that they are expected to spend to give a boost to the economy. President Bush said in a speech in February that "the purpose is to encourage our consumers. The purpose is to give them money …Consumerism is a significant part of our GDP growth, and we want to sustain the American consumer, encourage the American consumer…". The dominant message out there is that if you want to help your country, you must take out your pocketbooks and spend like there is no tomorrow.

I realize that this is a extremely abbreviated collection of American history, but I think it is interesting how the idea of patriotism affects the personal financial decisions of Americans. There is also a stark contrast to how taxes is viewed in the different eras of American history. At first it was a sign of oppression, but eventually it became a symbol of power, freedom, and patriotism. I feel that the current state of promoting rampant consumerism as patriotism is a bit irrational, but I guess propaganda always appeal to the emotion and not reason.

I know that some Americans also show patriotism by only purchasing items made in America, or refuse to travel abroad. Do you show your patriotism with your pocketbook? If so, how do you go about it?

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: