The fallacy of the 'Buy America' stimulus package

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The New York Times reports that the 'Buy America' clause in the economic stimulus package that President Obama signed into law may not be as absolute as some would like to think. The clause includes language stipulating that products need not be made in America if "the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities." That could offer some latitude for interpretation.

But the larger philosophical question is whether "Buy America" is really a good thing to aspire to, putting aside how warm and fuzzy it might make us feel.

University of Massachusetts professor Robert Pollin told the Times that, "We are behind other countries in solar and wind turbine technology, and Buy America is an incentive for American companies to catch up. It is not just trade protection but a form of industrial policy."

But couldn't a cynical person argue that the Buy America provision does exactly the opposite of providing American companies with an incentive to catch up by eliminating the need to provide better, more efficient, and more affordable products than foreign competitors? Doesn't the elimination of competition -- which I think most people would say is one outcome of Buy America -- tend to breed mediocrity in many cases? Isn't that the whole reason why most economists are so skeptical of protectionism?

I emailed Professor Pollin and asked him to elaborate a little bit on how Buy America increases incentives for American companies to catch up. He responded, "To a significant degree, I am in agreement with your 'cynical' view, though I don't take it to be cynical. On the other hand, the green sector is going to be perhaps the single most important growth node for our economy over the next generation. We cannot afford to not have manufacturing capacity in that sector, any more than we can afford to outsource, say, Pentagon spending."

He added that whether these new industrial policies will encourage industrial development or shelter mediocrity depends on how they are implemented.

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