Can Obama Keep New Jobs at Home?

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Furious Lobbying

Such restrictions are not new. The original Buy American Act, still in effect, was signed by President Herbert Hoover on his last day in office in 1933, requiring the federal government to prefer U.S.-made goods. Over the years the law has been riddled with additional exemptions and waivers and partially superseded by other laws governing trade.

The existing legislation means much of the spending in the fiscal stimulus package—including for green infrastructure—will be subject to intense lobbying to ensure that the money creates jobs in the U.S. and not overseas. Paying someone to better insulate a home will clearly create a domestic job. But how much of the insulation will come from China, a major producer? Or what levels of domestic content will solar panels have to include?

Many of the biggest solar and wind power companies wouldn't be affected by domestic content rules, because they are already setting up operations in the U.S. for business reasons, says Michael McNamara, an analyst at Jefferies International (JEF) in London. For example, very large components such as wind turbine blades are expensive to transport long distances. Adds Ralph Wiechers, chief economist of the German Engineering Federation, the association for the machinery industry: "The Democrats know how important world trade is."

A lot depends on how the rules are written. German-owned factories in the U.S. "are often dependent on suppliers from Germany," says Wiechers. "Then it's a question of the definition. Is a machine made in the U.S. if 50% or 60% of the value is created in the U.S.? That wouldn't be a problem."

Another possibility is to take a long-term approach and opt for more spending on education, research, and health care. These are all areas that create domestic jobs and are crucial for future competitiveness and innovation—but take a lot longer to ramp up.

Hiring teachers could have a double benefit, creating jobs while boosting the productivity of future workers. "The rate of return to early childhood education is around 10%—a very, very healthy investment," says James J. Heckman, a Nobel prize-winning economist at the University of Chicago "Leaf raking, job corps, and sports stadiums lack such a return." Similarly, Clair Brown, an economist at University of California at Berkeley, is arguing for increasing basic research funding from the government to U.S. universities, which would create jobs in this country. "The competitiveness payoff will be with us for years to come," says Brown.

Obama's political task will be easier if other countries spend big to jump-start their economies as well. Then a rise in export-related jobs in the U.S. could make up for any jobs that leak out. Indeed, this is the best course for the global economy, with each nation supporting the others. "All of these countries affected by collapses in asset prices and facing a very severe recession have to put in fiscal stimulus," says Richard C. Koo, chief economist at the Nomura Research Institute in Tokyo. "And it has to be a global effort and not just an American effort. We all have to do it."

The announcement by Britain on Nov. 25 of a $30 billion fiscal stimulus package is a start. But, writes George Magnus, senior economic adviser for UBS Investment Bank (UBS), "so far the European initiatives have been disappointing and halfhearted." Wiechers of the German Engineering Federation is critical of the German government's reaction so far. "Every day there's a new proposal on the table. If they're going to do something, they should do it fast."

Back in the U.S., Obama faces an enormous challenge. He needs to push through smart, targeted investments that create real jobs, avert a potential deflationary spiral and economic depression, and renew the American economy for another run of long-term prosperity. It's going to take all of Obama's political smarts—and plenty of luck—to navigate successfully through this crisis.

With Peter Coy in New York, Jack Ewing in Frankfurt, and Ian Rowley in Tokyo.
Mandel is chief economist for BusinessWeek.