Market Urbanism

Liberalizing cities | From the bottom up

“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

“Buy American” drives up cost of transit

By

by Stephen Smith

As if America’s public transportation networks weren’t hobbled enough by union wages and pensions, the Obama administration’s “Buy American” pandering is adding to the burden. One streetcar line in Houston has been sent back to the drawing board because it didn’t comply with purchasing provisions attached to federal money:

The Federal Transit Administration told Metro officials, Mayor Annise Parker and local members of Congress Wednesday that the process Metro used to award a rail car contract violated federal law and “Buy America” requirements intended to promote American employment.

To qualify for federal funds on the North and Southeast lines, the FTA said, Metro must cancel its contract with a Spanish company, Construcciones y Auxiliar de Ferrocarriles, and solicit new proposals for a purchase involving up to $205 million in federal money.

Meanwhile, Transportation Secretary Ray LaHood is pushing for all federal rail contracts to adhere to Buy American provisions, with “comparable mandates for highways.” (Though obviously this doesn’t apply to the cars running on them, and I’d imagine that the physical properties of asphalt and concrete favor local highway construction companies anyway.) These mandates have had some success in bringing manufacturing home – for the first time in 60 years streetcars are being built in America – but I have to wonder, at what cost? Just something to think about when people try to argue that transit is too expensive to ever be viable.

Edit: As a few commenters have pointed out, “Buy American” is much older than the Obama administration, and indeed dates back to at least 1982, although I’m curious as to how domestic vs. foreign procurement decisions have changed since then, as the law allows for quite a few waivers.

Comments

  3. Yes, your credibility on this subject is down the drain if you did not realize before you even posted this article that Buy American has been around at least 2 decades. Please do not use horrible management in a single transit agency – both by some officials there but moreover the contractor trying to make a buck – as a vehicle for taking shots at this administration or any for that matter. This has nothing to do with Democrats or Republicans being in the White House. Please correct this post or take it down.

  4. Buy America is Not Necessarily Going to Add Costs: You Could Be in Worse Cases Without It

    By Jonathan Feldman, PhD, Department of Economic History, Stockholm University

    Economists like to think that protectionism will always raise costs. By oppoing Buy America they are throwing the baby out with
    the bath water.

    First, Buy America does not in of itself guarantee competition, but does provide an equal playing field for even foreign firms.
    It enticed Rotem, the South Korean firm, to enter the subway market, creating a new lower cost supplier. So this is direct argument one against the claims that Buy America hurts competition, i.e. it seems more based on supposition than fact.

    Second, economists often don’t understand (or have the most superficial understanding of) industrial engineering and the organization of cost
    reduction via corporate organization, productivity enhancing practices, and the like. Companies in Japan and South Korea, highly protected, had a set of corporate, industrial relations and internal factory organization practices that radically reduced costs and helped them beat the pants off of the open, competitive U.S. producers. The result: Budd, St. Louis Car Co., and Pullman died, reducing competition because of open markets in terms of U.S. firms promoting competition. Thus, here we have a case where protectionism reduced U.S. competitors and increased foreign competitors, an even wash for the arguments proposed above. Moreover, if you can reduce costs even under a protectionist regime, the argument that Buy America is bad for competition makes little sense.

    Third, Oregon Iron Works entered as a new supplier for street cars, with one key part of their entry tied to the Buy America protections.
    By creating a new market, they created a basis for competiting in it, i.e. having a market to compete in is the sine qua non of such competition.

    Fourth, New York City uses multiple sourcing to increase competition on key subway buys. It maintains competition despite Buy America, i.e. having protectionism does not eliminate competition if you know how to competently organize a procurement.

    Finally, there are foreign competitors who can make things more inexpensively and Buy America may fairly or unfairly reward them. Yet, if you have a total open economy, reduce domestic wealth creation, then you start losing tax revenues and budgets to buy things, i.e. to organize the market. The open economy of the U.S. has hurt it against foreign nations that don’t buy into globalization propaganda and nonsense. They win and we lose. How can you have a competition if you lack the wealth/budgets/domestic industrial base to organize a competition? The myopic anti-protectionists have a very balkanized and false vision of what a real economy even looks like.

    Note: The author has been intensely studying the mass transit economy in the US for four years and has published work on this topic in books and articles. He is working on a book on the mass transit supplier base in the US.

  5. I don’t understand the sensitivity here. Where does the author claim this is a new policy? Why is the burden on him to say that Bush, Clinton, Bush, etc. were also terrible in any given article? Why is his credibility in question?

    Knowing Stephen’s take on similar issues, I’m sure he would be equally inclined to criticize all past administrations for this type of policy. But I don’t see how this is a necessary declaration in this context. Please help me understand your take.

  6. So, at the root, you are arguing that you have found ways that by preventing Americans from doing business with foreigners, Americans actually get more choice in who they do business with?

    And, even though Americans have less options with whom they may buy from, prices can be lower?

    What am I missing?

  7. Why are you tagging this to the Obama Administration?

    They are the administration enforcing it, right? Should the Obama administration be handled with special gloves? Do they not deserve the same scrutiny past administrations got?

    As I responded to JJK, ” Knowing Stephen’s take on similar issues, I’m sure he would be equally inclined to criticize all past administrations for this type of policy. But I don’t see how this is a necessary declaration in this context.”

  8. The “Buy American” provision appears to be governed by the FTA, and given the amount of leeway that the law allows, it seems that Obama’s FTA could have opted to not force Metro to redo the bid. But given that LaHood is pushing for an even stronger interpretation and the Obama administration at least dabbled with the idea of a Buy American provision in the stimulus, I don’t see why it’s unfair to say that this is now Obama’s policy as well.

  9. No one should get a free ride but you seem to be saying that the administration can just pick and choose which laws or statutes it wants to enforce. I’m sure Obama will be complicit when this requirement shows up in the next transportation bill. But to make every libertarian reader of this blog think that it’s all Obama’s fault is quite misleading. I don’t think you can quite call following a law “pandering”.

  10. I think portraying the Obama administration as “just following the rules” is misleading – somehow the President of the United States is helpless fighting against these bad laws? Has Obama said anything like, “It’s time we rethink the ‘Buy America’ provisions that are harming America’s ability to rehabilitate its transit infrastructure.” ? No. Didn’t he support many of the “Buy American” portions of the stimulus bill? In the article Stephen linked to, Obama’s Transportation Secretary is quoted:

    the trains that are ridden in the U.S. should be built in the U.S., federal Transportation Secretary Ray LaHood said

    Obama’s campaign ran ads in some states saying, “Buy American, Vote Obama”.I don’t think Stephen is portraying the Obama Administration incorrectly.But, I’ve been wrong before. Maybe you can provide examples of Obama taking a stand against these laws.

  11. Jonathan, your story of the American rolling stock industry is wrong. What happened in the 1970s was that the rolling stock market shrank, leaving American transit agencies with just a few US vendors. St. Louis and Pullman were fully protected by Buy American. As such, New York City Transit had no choice but to buy trains from them; the trains turned out to be defective, leading to breach of contract lawsuits that bankrupted both companies. Since then, NYCT has bought from foreign companies, following Buy America to the letter but not to the spirit. The first order after the St. Louis and Pullman disasters was imported from Kobe, as Reagan cut all federal funding, and went without a hitch. Subsequent orders required the vendors to establish US plants, but often only the final assembly is done in the US. In the most recent order, the car shells were made in Brazil.

    Buy America does the opposite of leveling the playing field for foreign firms. It favors big players, which can land big contracts and establish US plants. The same is true for the regulatory structure: the various globally unique FRA rules benefit companies that are big enough to be able to modify trains for the American market. Just recently, Caltrain’s request for an FRA waiver involved consultation with just the largest companies in the industry. There are a lot of smaller manufacturers that are shut out of the US market; they don’t have the capital to establish new overseas factories or pay lobbyists to write rules in their favor. Those include Switzerland’s Stadler, Spain’s CAF, the Czech Republic’s Skoda, all Chinese firms, and all Japanese firms other than Kawasaki. Those can occasionally land a US contract, but are usually unable to compete with Kawasaki, Alstom, Siemens, and Bombardier, whose US market shares far exceed their global market shares.

  12. Great comment, thanks! I’m actually excerpting it into its own post that’ll be visible in a few minutes…

  13. Foriegn companies build cars here efficientlt enough to drive GM into bankruptcy. I’m sure if Buy America is enforced on transit vehicles they will figure out how to do that as well. I’d rather pay more initially for a transit vehicle than continue paying unemployment through my taxes

  14. REPLY TO MR. LEVY
    Mr. Levy you make some interesting points, but I think that you are largely wrong. More accurately, we are talking past one another. Part of the problem here is that the post I replied to is really asking the wrong question. It asks us to analyze Buy America, which was only partially effective in helping support U.S. production. I collapsed some points in ways that were misleading, so now I will clarify.
    I might agree to some of the limits to Buy America legislation, but even the AFL-CIO argues that we need to go beyond the original formulation. Like the unions, I think we have to supplement existing provisions with something else. South Korea entered the scene long after the erstwhile dominant U.S. supplier firms departed and even the Japanese were brought in after these dominant U.S. firms had failed. But, this detail must be balanced by remaining incumbent U.S. suppliers that could have competed with both companies, but could not. Why couldn’t the remaining U.S. firms compete or even enter the still lucrative U.S. subway market? The answer to that question explains why smaller firm Oregon Iron Works can now enter new streetcar markets. The answer is the non-existence or existence of an industrial policy (in conjunction with other numerous factors).
    When I wrote that protectionism helped defeat U.S. producers, what I meant was the limits to Buy America, i.e. it did not go far enough, as I explain below. When I said that laissez-faire helped the foreign producers, I meant these limits to Buy America—limits which have partially been created by adherents to a free market type of argument. The political process (backed by those who did not go far enough) partially created a self-fulfilling prophecy. The core idea was that the Buy America policy did nothing about: (a) internal factory and industrial organization (and/or a more sophisticated R&D policy) and (b) the size of the market, two key factors I link to a comprehensive industrial policy. Countries like Bombardier and Kawasaki having companies with superior factory and industrial organization and more comprehensive mass transit markets did better. There is nothing about free markets in isolation that would have helped the U.S. producers.
    First, at one point Budd underbid and won a contract to Boeing Vertol. Budd’s failure to competently organize production (complicated by this fact) helped kill them off according to persons I interviewed who actually worked at the company. Boeing Vertol exited because (in part) Budd underbid them and because the very non-free market and highly profitable defense industry was more lucrative. The shrinking of the market complicated matters for Budd, Pullman, etc., but by the time the Canadians and Japanese came along there were no competitive/viable U.S. challengers who could win a contract (even if they were around to bid for one). The New York City subway contract was pivotal to building up Bombardier’s capacities and even helped them diversify into aerospace, that’s how significant that contract was. The mismanagement at U.S. producers prevented them from having diversified markets that might have helped them even during downturns, but see my comments in the next paragraph. The failure of industrial policy partially explains why the foreigners won because even with a contracted domestic market, there are other ways to sustain an engineering workforce, e.g. via exports (but see below). Foreigners have succeeded in part because of industrial policies, not just “free markets” (I’ll soon publish something on that question).
    The failure to sustain mass transit markets on the demand side is certainly a key weakness in U.S. policies, I would never deny that and if you got that impression from my posting (which I tried to keep brief) I am mistaken. You can look at my article in American Prospect for a more detailed analysis. If anything, the weakness of demand side stimulants highlights the need for an industrial policy (or associated budget policies) and not a laissez-faire analysis. A laissez-faire, free market, policy if anything reduces (or partially reduced) the domestic market for U.S. manufacturers (but see my qualifying comment above).
    Mr. Levy I think that you are also wrong about CAF, they just won an order from AMTRAK. They previously won an order from WMATA (Washington Metro). I interviewed that firm also and learned about various competent ways in which they organize a production system that earlier US firms lacked. On the AMTRAK order, go here: http://www.railwaygazette.com/nc/news/single-view/view/caf-wins-first-coach-order-from-amtrak.html
    Please note that they beat the FAR LARGER firm ALSTOM. So size did not really matter in this case.
    CAF is also a newcomer, like the Chinese. That is a competing explanation for the size of their markets. All large firms were smaller once.
    Mr. Levy you are partially wrong about Skoda. They originally supplied streetcars to one US city. They did so in a way that was not judged sufficiently useful to the local transit agency (for future orders) and led planners to turn to a local firm to make their own car. Their ability to do so was aided by a modest industrial policy, not by free markets. Skoda was not completely shut out of the US market. I think you are confusing correlation (being largely shut out), with causation (having a medium size). I still need to do further research on this point, so until I complete my research I will leave this as an open question.
    Mr. Levy should let the reader know that Japanese firms other than Kawasaki are not being shut out of the US market. Mitsubishi supplies systems used by the US. Kinki Sharyo has supplied LRVs to Boston, see here: http://www.kinkisharyo.co.jp/eng/e_sharyo/e_sh_seihin/e_sh_boston.htm Mr. Levy argues smaller firms were let in sometimes, but I don’t know any quantitative studies on this, but maybe other (bigger) foreign firms make a better product.
    As for medium sized firms being shut out, note that it takes resources to market internationally that a smaller firm lacks. To attribute the marketing weakness to lobbying clout alone is an interesting hypothesis, but does not explain all factors. Would Mr. Levy or others like industrial policies to help smaller firms or sanctions on corporate lobbying? (That is not a rhetorical question). I was confused as to where he was going there.
    Rotem told me that Buy America leveled the playing field for them. They are now succeeding.
    In any case, the largest train makers that are foreign regularly compete with one another, so the idea that the Buy America system prevents price or quality competition is just plain wrong which was the wrong point I was responding to.

  15. REPLY TO MARKET URBANISM:

    I honestly don’t know why you did not engage my original arguments, but simply brought up new questions. As a result, I am forced to repeat myself somewhat. Perhaps you did not accept my assumptions.

    Argument 1:
    “So, at the root, you are arguing that you have found ways that by preventing Americans from doing business with foreigners, Americans actually get more choice in who they do business with?”
    Reply to Argument 1:
    Buy America does not necessarily prevent Americans from doing business with foreigners. Where did you get that idea? In fact, according to my interviews with various lawyers, among other things, I have learned that it is consistent with WTO provisions. The Japanese and South Koreans all have formal (or informal) protectionist systems, with the level of informality apparently linked to the indigenous strength of their local producers, i.e. my guess is that if they had less competent producers they would have more formal protectionist measures, but that is not the sole reason for formality or not of course. It has to do with the historical evolution of treaties and country participation in agreements, etc. Yet, those historical factors can’t be divorced from the standing of the country as a competitor per se or perhaps even its champions.
    Buy America might prevent Americans from doing business with foreigners if there was retaliation, but that is the risk which the Japanese and South Koreans (aside from one cosmetic exception with a recent Bombardier contract) are willing to take. The Japanese and South Koreans are very sophisticated in using protectionist measures that don’t always look like such. Given Japan’s big opening to China, you could hardly say that this has hurt Japanese trade.
    I think you are missing a big, large meta point. If the U.S. continues to outsource and deindustrialize it will continue to do badly in terms of a declining standard of living and effective demand. So, this would give the US less capacity to purchase foreign goods. So protectionism via this logic can sometimes be good for foreign trade. The only argument you are giving me appears to be something based on a theory that is not consistent with reality. The Chinese have effective demand because they regulate foreign penetration. Latin America’s new wave of trade protection seems to have helped them grow, you can review the history of the Central American Common Market if you don’t like this example. It showed that long ago, increased protectionism speeded growth. The US’s very own history supports this argument. Just consult a book by Michael Hudson that lays out the complete history.
    Argument 2:

    “And, even though Americans have less options with whom they may buy from, prices can be lower?”
    Reply to Argument 2:
    I don’t think that the U.S. has been precluded from supply from foreign suppliers in the subway or other mass transit markets because in just about all U.S. rail markets (aside from streetcars and freight and some diesel stuff that is hardly cutting edge), the key suppliers are foreign. It MIGHT be that a few foreigners are kept out, but Alstom, Kawasaki and Bombardier are all regarded as having supplied a good quality subway car, so the keeping out of others (somewhat hypothetical if not irrelevant) seems unimportant in quality terms.
    The argument about lower prices is the key fall back argument of free traders. It can be argued against in any number of ways. First, in the case of mass transit systems any transit agency will tell you that the most important criteria is reliability and quality and NOT price. That does not mean that price is not considered.
    Second, transit agencies also consider lower price but under the Buy America regime Rotem was picked for Philadelphia because of its lower prices. So, Buy America did not prevent a lower priced car from winning the contract. Let’s go back to your original argument. What I just said contradicts it.
    Third, I suggest the author see a film called, “Walmart: The High Cost of Low Price” and the review of this film in the London Review of Books. There you will see how low prices can destroy communities, lower living standards, and crush jobs. Prices are not only shaped by opening competition to foreigners, they are also shaped by various factors related to industrial engineering and workplace organization, e.g. lowering overheads, learning by doing, reducing inventory, just in time systems. The U.S. producers failed in such areas. That is a key point you continue to sidestep perhaps because these arguments are not in the lexicon of free market ideology and theory. I strongly suggest that you consult various studies by Harvard Business School professors on this point, books by any number of industrial engineers, and the studies by Seymour Melman on factory organization published in the 1950s. The ideal scenario, of course, is a protectionist regime (that might be based initially on higher prices) supported by industrial modernization that lowers costs and therefore prices. Now, I can already hear the counterargument that monopoly power will prevent these lower costs from being passed on in the form of lower prices. This of course is tied to the false premise that one would completely rule out all foreign competition or competition of various sorts. In the case of streetcars, where we have only one true producer (a US firm), there is always competition from buses. Furthermore, in any industrial policy scenario I can think of, there would always be some foreign suppliers. In any case, Buy America allows for foreign suppliers and allows for them to compete with each other on price. So, you are wrong again.
    I suggest reading my article: http://www.prospect.org/cs/articles?article=from_mass_transit_to_new_manufacturing

  16. GM’s mismanagement is the core issue of why they failed, read Profits without Production, by Seymour Melman.

  17. Canada has done very well by its industrial policies, when they existed at a critical point, sufficient to help Bombardier.
    Let’s remember the US is facing a major recession in jobs. Yes, a trade war would be a disaster, but the South Koreans
    and Chinese show us that stimulus packages (properly designed) can work and help economies grow.

    On Canada, I suggest reading this:
    http://www.wilsoncenter.org/index.cfm?topic_id=1420&fuseaction=topics.event_summary&event_id=607134

  18. I honestly don’t know why you did not engage my original arguments, but simply brought up new questions.

    I’m not so interested in engaging the nitty-gritty of protectionism in a blog about urbanism. But, I did want to address protectionism, and cut to the chase and address the possibility that the concept you are defending is self-contradictory.

    Buy America does not necessarily prevent Americans from doing business with foreigners. Where did you get that idea?

    Huh? That is exactly what protectionism does, and what it was intended to do. Forget the retaliation, etc. With this type of protectionism, if a transit agency wanted to use a product that happened to contain steel that is from 1 mile from a US border, the government can step in and prevent the deal or withhold funding. (I’m not arguing that the government should fund transit)I don’t see how you anyone could argue that protectionism does not advocate preventing individuals from doing business with individuals who just happen to be from outside the government borders. That’s what it is – whether you advocate tarrifs, quotas, fines, subsidies, whatever… Do you have something against people who do not share the same taxing authority?

    The argument about lower prices is the key fall back argument of free traders. It can be argued against in any number of ways.

    You are right. Price isn’t the only metric. Let me rephrase, and bolster the question:“And, even though Americans have less options with whom they may buy from, prices can be lower / quality could be better / reliability could be higher / quantity could be higher?” I suggest reading a basic economics textbook. Or just start at the wikipedia entry for “comparative advantage”. http://en.wikipedia.org/wiki/Comparative_advantageI don’t see much value in addressing the details of protectionism (especially in a site about urban economics) if you can’t accept the fundamentals of what you advocate. In addition, I’m having a hard time not reading your comments as highly-intellectualized nationalist bigotry, so I think I’ll stick to the fundamentals.

  19. Gee wiz, “nationalist bigotry.”  Please consult the work of Alexander Hamilton.  Was he a nationalist bigot?  Let us go back to my original point, “Buy America does not necessarily prevent Americans from doing business with foreigners. Where did you get that idea?”  The sentence construction is “not necessarily.”  When foreigners source production locally in the U.S., protectionism does not prevent the U.S. from doing business with them.  Anyway, the shoe really is on the other foot.  The problem is not nationalist bigotry but the collapse of the manufacturing foundations of the United States, a country which has a hard time competing in certain areas because it lacks an industrial policy.  Just consult Robert Kutner’s book, “The End of Laissez-Faire” for a good debunking of “comparative advantage.”  Is this relevant to urban economics?  Yes, it is highly relevant for all those places in the Midwest and elsewhere suffering from deindustrialization, with thanks to free market ideologues.  I have read a basic economics textbook by the way.  I assume that this was a kind of throw away line.  I suggest that all readers of this blog, consult progressiveprotectionism: http://www.progressiveprotectionism.com/

  20. Please note any industrial policy might cost more in the short-term.  The question is long-term benefits.

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