Obama Needs to Tell the G20 Leaders to 'Buy American'

Tue, 31 Mar 2009 20:20:09 +0000 – By Alan TonelsonResearch Fellow, U.S. Business and Industry Council Educational Foundation

President Obama heads into this week's global economic summit still preaching to a skeptical world the virtues of a coordinated international stimulus program. His plan to end the Great Recession, however, would be more credible if his own domestic strategy wasn't flopping so spectacularly. Indeed, like the literally trillions in bailouts and loan guarantees and tax rebates served up by his predecessor, the Obama recovery plan will only, at best, buy time and at worst re-bubble-ize the economy.

For years, ill-conceived trade deals have offshored huge chunks of America's wealth-creating sectors (especially manufacturing). For even longer, the foreign protectionists that will be so well represented at the summit have been coddled. The inevitable result: A U.S. economy so import-heavy that too many of the growth benefits of increased spending by government, businesses, and consumers alike will leak overseas.

That is to say, both Democrats and Republicans at home keep getting it only half right. More U.S. spending is indeed the only way out of America's economic predicament -- from whatever combination of more government outlays, more tax cuts, and thawed credit markets. But unless most of this new spending stays insidethe United States, too much of the growth it encourages will take place abroad, in the countries that supply so many of the nation's needs. Worse, Americans will be able to keep propping up their living standards only by sinking ever deeper into debt -- provided their foreign creditors permit it.

For similar reasons, the foreign powers that view sweeping new financial regulations as the world's real recession cure-all are largely off-base as well. Despite America's straining national finances, virtually all of the major powers remain dangerously dependent on growing, or staying afloat, by exporting to the United States. Without fundamental changes in lopsided world trade flows that enable America to produce its way back to health and repair its balance sheet, our unsustainable debts will eventually drag them down, too.

As a result, it's crucially important that we recognize that more U.S. or global spending alone can't foster economic growth. Spending fosters U.S. growth only when it encourages the production of more goods and services in America.

In particular, if American businesses decided to satisfy new domestic demand by increasing domestic output, and buying more from domestic suppliers, they would eventually to hire new American workers, and sometimes even increase their wages. All these new earnings opportunities would in turn create more domestic demand and help ignite a virtuous economic cycle with real legs -- because it's mainly based on streams that are reliable. Just as important, these income streams would free domestic businesses and workers from excessive dependence on credit to pay for what they consume and invest.

This virtuous circle will be much weaker than expected -- and downright inadequate -- if a critical mass of the spending purchases foreign goods and services, and thus creates too many new income-earning opportunities overseas.

U.S. growth can also be generated by exporting. Unfortunately, Washington's trade policy failures have long kept U.S. exports way below U.S. imports. Consequently, foreign trade on net has long depressed American output levels, not lifted them.

Moreover, for now, the worldwide slump and the proliferation of new foreign trade barriers have slashed the odds of boosting exports meaningfully. Indeed, they've now fallen for eight of the last ten months. Therefore, unless the rest of the world dramatically arrests this trend, and also starts selling less to the United States, any hopes for a durable U.S. recovery will require Washington to take charge and plug as many of its international economic holes as possible. Paradoxically, by restoring U.S. economic health, this kind of tough love will serve its trading partners' long-term interests, too.

These holes are enormous, as shown by the U.S. Business and Industry Council's pioneering research on import penetration in the U.S. market. Analysis of the latest available (2006) U.S. government data shows that more than 61 percent of all the consumer goods bought by Americans are imported -- which will sharply curb the growth bang per buck of tax cuts or rebates. Nearly 34 percent of the capital goods bought by companies in 2006 to build and equip factories came from abroad, too -- which similarly will undermine the growth effects of business tax breaks. And import penetration rates of 50 to 80 percent are common for many products needed to build and repair conventional roads, bridges, power grids, and water systems, as well as for the goods needed to make these systems "smart." So, thank goodness, "Buy-American" provisions for all manufactured goods were inserted into infrastructure provisions of the stimulus bill.

But, as indicated by these figures and by the continuing import tide, unless U.S. trade partners begin cooperating quickly, the stimulus' Buy American provisions should be only a beginning. They must be enforced seriously for infrastructure and for defense -- where such regulations have existed for decades. They must be extended to the rest of government procurement at all levels. And they must spread to the private sector. Moreover, where the nation can't currently "Buy American" enough, new policies are needed to meet these goals.

An economic recovery that isn't largely "Made in America" won't be a recovery at all -- for any part of the trading world. The global economic summit gives Washington an ideal opportunity for communicating this message. How much longer before President Obama understands the need to deliver it?

Alan Tonelson is a Research Fellow at the U.S. Business and Industry Council Educational Foundation in Washington, D.C.. A contributor to the Council's AmericanEconomicAlert.org website, he is also a columnist for Industrytoday.com, and the author of "The Race to the Bottom" (Westview Press, 2000).