Buy American?

Congress is debating the scope of a buy-American clause in the proposed stimulus package, which would require recipients of stimulus funds to give preferential treatment to U.S.-produced goods. The exact language of such a clause could be tricky: cars, for example are composite products produced by a variety of nations.

A reader asks:

Would a "buy-American" clause benefit middle class Americans?

Under normal circumstances, conventional wisdom says that international trade (and avoiding a "buy domestic" mentality) increases the size of the economic pie for all participating nations. The effect of trade on income distribution is not well understood, however. Recent research by Nobel Laureate Paul Krugman suggests that trade hurts the American "lower class," which is often euphemistically assumed to be part of the "middle class." Krugman's research won a lot of press, but even he admits that the research is inconclusive. I argue that the distributional effects of trade should be ignored, since income inequality can be largely corrected by adjusting the progressivity of the tax code.

Of course, the current economy is not operating "under normal circumstances." Would a temporary buy-America" clause act as a stimulus? I don't have a good answer. A first impression is that it seems obvious that buying American will stimulate American business. But not all American businesses agree. In particular, any business that exports much of it's product is worried that a buy-American clause would anger other nations who export to the U.S., and these other nations may retaliate with tariffs on U.S. exports, which would hurt U.S. exporters.

I support the stimulus proposal of Harvard economist Greg Mankiw.