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should we buy American?

Wednesday 15 April, 2009

This article by Wailin Wong made the front page of the Chicago Tribune  Buying American: Helpful or hurtful for the struggling U.S. economy? It raises questions many are asking themselves.  My questions are:  Should we buy American made, American created, or American owned?  “American what” is undefined.

The economic theory of comparative advantage states that each country should specialize in production of the goods in which it has the relative comparative resource advantage in land (natural resources), labor, or capital.  Then we all benefit from this resource specialization by trading labor-intensive goods for capital-intensive goods, etc.  This optimizes the quality of the product as well as the prices we pay for them.  As a card-carrying economist, I still subscribe to this theory.  It’s for this reason that watering down the “Buy American” provisions in the stimulus package was appropriate.  It would only lead to higher prices paid by consumers for domestically-produced & ultimately imported goods.  There are a lot of assumptions here (laborers are treated fairly, the environment is protected, etc.), so as long as you can buy with a clear conscience, this all holds true.

If we were to “Buy American,” US workers no doubt would benefit from the additional work, but consumers would pay the price of higher prices to support higher American wages.  Investors probably would not endorse American companies paying higher wages than they must, so it’s safe to assume investment in American companies would go down.  That leads to less ability to innovate & improve productivity, so prices continue to go up without a commensurate increase in value, thus, we pay more for less, which is not good for our economy.

There’s also a difference between product companies & service companies.  Buying products these days, you don’t know where they’re created or made, so “Buying American” is a murky proposition.  However, even though this is changing, but most services are usually still being produced & consumed locally, so you’re more reasonably sure you’re helping the economy by hiring your local lawyer, accountant, or even dry cleaner.  Some tech services are being outsourced offshore, so this is changing, but I’m not sure of the scope of this yet.

For the record, I have to ding Ms. Wong for quoting clueless retail customers whose comments on international economics are woefully uninformed.  Expressing their disdain that American companies export is ludicrous.

Buy the best products you can for the prices you want to pay.  That rewards those producers for providing you the most value.  If those aren’t American producers, they shouldn’t be rewarded for not providing value.  That provides the incentive for them to change their equation so that they do provide more value to get your business, which is as it should be. Alternatively, I propose we educate ourselves better to create a better workforce so that we can “Hire American” so we can buy from wherever we want.

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