By Tim McMahon
“As the bill moved through Congress, formal protests from foreign countries flooded into Washington, eventually adding up to 200 pages. Both houses voted aye nonetheless. While the legislation sat on the President’s desk, 1,028 American economists called for a veto. Herbert Hoover made it the law of the land anyway, swallowing his own reservations and, on June 17, signing the Tariff Act of 1930”.– Time Magazine
You may have heard of Smoot-Hawley and not have a clue what language they are speaking.
According to Wikipedia, The Smoot-Hawley Tariff Act was an act signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels.
It was such a bad idea that 1,028 economists in the United States actually signed a petition against this protectionist legislation. They knew what the result would be.
They knew that after it was passed, many countries would retaliate with their own increased tariffs on U.S. goods, and that is exactly what happened.
A bill that was designed to increase American jobs had the exact opposite effect as exports and imports with the rest of the world plunged by more than half.
Robert Prechter of Elliottwave International believes the social mood that spawned the Smoot-Hawley Act was actually the catalyst for the 1929 stock market crash. In his 2002 best-seller Conquer the Crash he said,
“One example of action impelled by defensive psychology is governments’ recurring drive toward protectionism during deflationary periods. Protectionism is correctly recognized among economists of all stripes as destructive, yet there is always a call for it when people’s mental state changes to a defensive psychology. Voting blocs, whether corporate, union or regional, demand import tariffs and bans, and politicians provide them in order to get re-elected. If one country does not adopt protectionism, its trading partners will. Either way, the inevitable dampening effect on trade is inescapable. You will be reading about tariff wars in the newspapers before this cycle is over.” (Robert Prechter- Conquer The Crash, chapter 13)
Subsequently the severe reduction in U.S.-European trade from its high in 1929 to its depressed levels of 1932 spawned the start of the Great Depression.
Anyone who has taken Economics 101 has heard that restrictions on free trade always end up making everyone poorer. This is because it creates inefficiencies in the balance of trade.
Suppose an item that used to cost $1.00 has a $1.00 tariff tacked on to it in order to make the “predatory foreign imports” cost more than the $1.90 American made products.
Yes, it would have helped the American producer and temporarily helped the unemployment rate, at the expense of it’s trading partners. But in so doing it would also hurt the buyer (who presumably is also an American) who now has to pay almost twice as much for the same product (which he wouldn’t have done had the government not intervened.)
In addition to this one product what then happens next reminds me of an old Arabian proverb: “If the camel once gets his nose in the tent, his body will soon follow.”
In this case what follows is a load of other products get added to the list of “protected items”. In 1928, while running for president Hoover promised to help beleaguered farmers by raising tariffs on agricultural products.
After being elected and talking to economists President Herbert Hoover actually asked Congress for a downward revision in overall tariff rates. But fellow Republicans Senator Reed Smoot, from Utah, and Representative Willis C. Hawley, from Oregon co-sponsored the Smoot-Hawley Tariff Act which raised rates instead. Although 1,028 economists urged him to veto it, Hoover signed the bill anyway. Partly because of his campaign promise and partly because of social mood.
Although his original intent was to protect the American Farmer according to the U.S. Department of State website, “Once the tariff schedule revision process got started, it proved impossible to stop. Calls for increased protection flooded in from industrial sector special interest groups and soon a bill meant to provide relief for farmers became a means to raise tariffs in all sectors of the economy.”
So even though Hoover knew it probably wasn’t a good idea his hand was forced by special interests and the social mood of the day.
What does that have to do with today?
Ripped from Today’s News–
WASHINGTON (AFP) – A new “Buy American” push in President Barack Obama’s economic stimulus plan is sparking protests about protectionism from US businesses and trading partners.
Obama has pushed for swift passage of the American Recovery and Reinvestment Act as vital to prevent the collapse of the fragile US economy as it reels from the global financial crisis.
The US House of Representatives passed an 819 billion dollar economic stimulus package Wednesday with a “Buy American” provision that generally prohibits the purchase of foreign iron and steel for any stimulus-funded infrastructure project.
The massive tax cuts and spending package has moved to the Senate, where lawmakers are working on their own version that extends the “Buy American” initiative beyond the House’s iron and steel mandates to include all US manufactured goods.
So this time around it is the Democrats who are in the hot seat. Obama promised to help the “Working Class” and especially the U.S. Auto manufacturers with the current stimulus bill…
What will the Democratic Congress do? Will they choose what is correct in the eyes of economists or what is politically expedient? If ,as I suspect, they choose the expedient can they avoid the fate of Hoover?
I find it ironic that during the election Obama portrayed himself as the new Franklin Delano Roosevelt (FDR) but in actuality he may be forced into the role of being the new Herbert Hoover.