Aug 18, 2020 05:18 PM

Opinion: High Taxpayer Cost of ‘Saving’ U.S. Jobs Through ‘Made in America’

Gary Hufbauer is a nonresident senior fellow at the Peterson Institute for International Economics. Euijin Jung is a research fellow at the PIIE. This is an edited version of the original article first published on PIIE’s website.

President Donald Trump and presumptive Democratic presidential nominee Joe Biden differ on many issues, but government procurement is not one of them. “Buy American, Hire American” was Trump’s campaign slogan in 2016, while “Made in America” and “Buy American” together appear 29 times in Biden’s 2020 policy document. Trump promised to crack down on federal agencies that grant excessive waivers to skirt Buy American rules, and Biden committed to closing loopholes that allow foreign content to creep into American-made goods. Both leaders harbor special affection for manufactures, particularly for iron and steel melted and poured on American soil, and for the merchant marine to carry goods between U.S. ports. The claim of generating well-paid jobs is central to the argument for spending taxpayer dollars solely on American goods.

When presidential candidates agree, the policy must be a political winner. Nevertheless, “Buy American” or “Made in America” as a slogan for excluding imports is an economic loser. We calculate that the annual taxpayer cost for each U.S. job arguably “saved” by Made in America probably exceeds $250,000. We put “saved” in quotation marks because buy national requirements essentially shuffle jobs from other sectors of the economy to the procurement sector. And the shuffling takes a toll on economic efficiency, which shows up in elevated price tags on everything from computers to bridges. On balance, buy national requirements create no new jobs, but they do save jobs in domestic firms that supply government needs, often at a high cost to taxpayers.

The spirit of Made in America can be traced to the Buy American Act of 1933, a Depression-era measure that buttressed the infamous Smoot-Hawley tariff. Over time, federal and state governments recognized the high cost of exclusive reliance on U.S. firms, often sole suppliers free from competitive pressure. To reduce taxpayer gouging, safety valve features such as waivers were introduced. The World Trade Organization and the North American Free Trade Agreement also provided for limited reciprocal opening of national government procurement. Biden’s campaign document seemingly promises to eliminate safety valve features and for good measure to inspect the origin of U.S. goods to exclude indirect foreign content. If elected, Biden, like Trump, may well allow pragmatic considerations to dilute his campaign promises. But some supporters will insist on strict adherence to Made in America. For that reason alone, it is worth calculating the taxpayer cost per job “saved.”

The Trump administration would see foreign procurement barriers as ample justification for Buy American. Before jumping on this bandwagon, a Biden administration should consider the taxpayer cost per job “saved” by an even stricter Made in America regime.

Government procurement is skewed toward manufacturing and construction, rather than activities like health, education, and entertainment. On average in the U.S. economy $1 billion of manufacturing production requires 2,138 direct jobs. The comparable figure for $1 billion of construction is 4,504 jobs.

Based on these figures, we assume that $1 billion of U.S. government procurement requires 2,635 direct jobs. To be conservative in calculating taxpayer costs, we assume that an equal number of indirect jobs are supported in other sectors, giving a total of 5,270 direct and indirect jobs per $1 billion of government procurement. So, the extra $68 billion of domestic procurement supported 358,360 U.S. jobs. Our CPE model indicates that the price tag on domestic production for procurement increased by 5.6% on account of Buy American requirements at the federal, state, and local levels.

This is a lowball estimate because of optimistic demand and supply parameters built into the CPE model. However, a markup of 5.6% on $1,674 billion of the observed level of U.S. domestic procurement in 2017 translates into a taxpayer cost of $94 billion. Arithmetic leads to the startling conclusion that the annual taxpayer cost was over $250,000 for each job “saved” in the domestic procurement industry. While this figure is high, other studies have shown that the consumer cost per job “saved” in the steel industry exceeds $900,000.

Such analysis demonstrates that protection in whatever form — outright tariffs, nontariff barriers, Buy American — extracts a considerable price from taxpayers or consumers for each job preserved in the sheltered activity. Of course, very little of the money finds its way to workers. Instead, the extra cost is largely lost to inefficient production and higher profits collected by firms.

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