Closing loopholes in Buy American Act could create up to 100,000 U.S. jobs
By closing loopholes in the Buy American Act, the 21st Century Buy American Act will increase demand for U.S. manufactured goods and create at least 60,000 to 100,000 U.S. jobs. The Buy American Act requires “substantially all” direct purchases by the federal government (of more than $3,000) “be attributable to American-made components.” However, there are a number of exclusions or loopholes in the Buy American Act. The single largest is an exception for “goods that are to be used outside of the country,” and the 21st Century Buy American Act includes provisions to close it. In addition, current regulations interpreting the Buy American Act state that “at least 50 percent of the cost must be attributable to American content,” which can reduce net demand for American made content.
Between 2010 and 2015, the “goods used outside of the country exception” was used to purchase $42.3 billion in goods that were manufactured outside of the United States, an average of $8.5 billion per year.1 The 21st Century Buy American Act would require most or all of those goods to be U.S. made, increasing demand for U.S. manufactured goods by up to $8.5 billion per year.2 Although labor markets have improved in the United States since the recession, there remains substantial slack and 2.6 million jobs were still needed to catch up with growth in the potential labor force in September 2015. I assume, based on recent research by my colleague Josh Bivens (Table 5) that wages earned by new manufacturing workers will support a macroeconomic multiplier of 1.6 in the domestic economy over the next year.3 I also assume, based on total GDP and employment levels in 2014 that a 1 percent increase in GDP adds 1.3 million jobs to the economy. Thus, the $8.5 billion increase in spending on domestic manufactured goods (with 100 percent domestic content) would increase GDP by $13.6 billion (0.08 percent), creating up to 100,000 new jobs in the domestic economy.
These are rough estimates based on well-known macroeconomic relationships. If labor markets continue to improve then the macroeconomic multiplier will shrink, but S. 2127 would continue to support tens of thousands of jobs in manufacturing and other industries supported by demand for manufactured products.
These estimates are conservative because they do not include the impact of an additional element of the 21st Century Buy American Act, which would also increase the domestic content of all purchases covered by the Buy American Act to 60 percent. This much needed rule change would ensure that at least 60,000 domestic jobs would be created by the 21st Century Buy American Act over the next year by closing the “goods used outside of the country exception.” In addition, this rule change would also increase the demand for American-made manufacturing content for all manufactured goods purchased under the Buy American Act (which averaged over $160 billion per year between 2010 and 20154).
The 21st Century Buy American Act is smart manufacturing policy and a good first step towards rebuilding American manufacturing. Its passage would set the stage for bi-partisan cooperation on fundamental reforms such as eliminating currency manipulation, which could create 2.3 million to 5.8 million U.S. jobs, including up to 2.3 million jobs in manufacturing. Both are critically needed to restart the recovery of manufacturing employment, which has added no net jobs since January 2015.
2. S. 2167 contains exceptions for “national security reasons,” and for purchases that would be “more than 50 percent more expensive” for the Federal Agency making the purchase, which I assume would apply to only a small proportion of the subject purchases.
3. This is the multiplier Bivens uses for infrastructure spending, which is similar to manufacturing in its impact on the domestic economy. Both support relatively high wage jobs in manufacturing (for both types of spending) and in construction (for infrastructure). High wages in turn support high levels of repending in the domestic economy, which generates large macroeconomic multipliers.
4. Personal communication from the office of Senator Chris Murphy, October 22, 2015.