Economists are just now beginning to appreciate the power of narrative in explaining how people believe the economy actually works. These narratives are not always the truth, and certainly not always the whole truth. But a compelling narrative can profoundly influence how people think the economy functions. Robert Shiller, the new president of the American Economics Association, pointed this out in his recent presidential address: “President-elect Donald J. Trump is a master of narratives.”
So sit right back and let me tell you a story about one of the hidden costs of Donald Trump’s economic motto: Buy American and Hire American.
Last year, the hard-working staff here at Spoiler Alerts sojourned to Paris for a few days to talk about the 2016 election. In the interest of marital bliss, I took my spouse with me. The problem was getting there.
My trip was on behalf of a German Marshall Fund of the United States program that was funded by the State Department. And as it turns out, federal government-sponsored travel already operates under the “Buy American and Hire American” principle. The “Fly American Act” requires the federal government to “use US air carrier service for all air travel and cargo transportation services funded by the US government.” This is simply a small part of the larger “Buy American” strategy that dictate a lot of federal government procurement practices.
Because the federal government was paying my dime to get to Paris, I had to book it through a US carrier. The Drezner household was paying for my wife to come with me, which meant she had more travel options. This led to an interesting dichotomy in our itineraries. My darling and thrifty wife had no problem finding a ticket to Paris for about $500 with a safe but no-frills Icelandic carrier. I, on the other hand, booked the lowest American-based carrier I could find – at $2,500. The kicker? My flight wasn’t even on a US airline, but a code-share with a European airline that shall remain nameless.
So, as a result of the Fly American Act, I had to pay roughly five times the market price for a trip to Paris. I hereby apologize to the American taxpayers that had to foot the bill. No, wait, I don’t – this wasn’t my fault, I was simply following the law. Now, maybe the proper conclusion to draw from this narrative is that the federal government shouldn’t be paying for me to go to Paris. That’s fair. But a lot of American officials have to fly to a lot of different places around the world. This sort of overage begins to add up. So maybe the proper conclusion to draw is that “Buy American” provisions carry significant costs that are rarely discussed.
For another example of this, consider Trump’s jeremiad against pharmaceutical firms for importing drugs from overseas. At Wednesday’s news conference, he said: “We’ve got to get our drug industry back.” But as the New York Times’s Keith Bradsher reports, a “Buy American” strategy for drugs would make it harder to keep health care costs down:
[A]ny move to curtail pharmaceutical imports could raise drug prices, not bring them down, experts warned. That’s because many of the cheaper drugs in the United States come from abroad …
Mr. Trump “is somewhat looking in the wrong place if he’s trying to get imports down,” said Chris Rogers, a trade analyst at Panjiva, a trade data consulting firm in New York.
The companies that are the biggest exporters of generic medicines to the United States take the same position. “Although we have been expanding our exports to the US, we are not raising costs as much, which helps the Americans to be able to afford the same medicines at a cheaper rate,” said Snehashish Sen, the manager of costing at Cipla Ltd., one of the largest Indian manufacturers of generic drugs. “I do not see how we are hurting the sector. In fact, by making medicines more affordable, we are helping Americans.”
In a quick analysis of trade data for four common families of pharmaceuticals, Panjiva found that imports of statins, anticonvulsants and insulins had doubled, while imports of proton-pump inhibitors had risen sixfold over the past five years. The imports consisted heavily of generic drugs, and three-fifths of them came from India, although Eastern Europe has become an increasingly important supplier as Israeli and Swiss companies set up factories there.
The compelling narrative of Trump’s “Buy American and Hire American” motto is that it is good for American workers, because it will create more jobs. There is some small grain of truth in that statement – but what are the costs of creating those jobs? The counter-narrative is that Americans are also consumers and taxpayers, and the costs of these policies are higher than the benefits.
We have had many previews of what the protectionist policies proposed by the incoming administration will do to the US economy. And the previews suggest that Trump’s actual policies will stink.