A Suicidal Country

Townhall.com ^ | 02-26-03 | Paul Craig Roberts

[Pelham]

And what is it that we are supposed to know about the Smoot-Hawley tariff? I often see it implied that the Smoot-Hawley act caused the stock market crash of 1929 and/or the Great Depression.

But oddly enough Smoot-Hawley was passed after the stock market had already crashed. Only those gifted with the Secret Knowledge About Tariffs know how it could have caused an event that preceeded it, and unfortunately they don't share the secret of that mystery with mere mortals.

[Pelham]

A good find. But that article doesn't buttress the claim that Smoot-Hawley made the Depression worse. In fact it marshalls evidence that Smoot-Hawley had little impact.

The usual story of the Great Depression is that some combination of falling consumption spending and falling investment spending had resulted in the equilibrium level of GDP being far below its full employment level. By raising tariffs on imports, Smoot-Hawley would have reduced the level of imports, but would not have had any direct effect on exports. This simple analysis seems to lead to a surprising conclusion: by reducing imports, Smoot-Hawley would have raised the level of aggregate expenditures in the economy (by increasing net exports or (EX - IM)) and, therefore, increased the level of GDP relative to what it would otherwise have been.

A potential flaw in this argument is that it assumes that Smoot-Hawley did not have a negative impact on U.S. exports. In fact, it may have had a negative impact on exports if foreign governments were led to retaliate against the passage of Smoot-Hawley by raising tariffs on imports of U.S. goods. If net exports fell as a result of Smoot-Hawley, then the tariff would have had a negative macroeconomic impact; it would have made the Depression worse. In 1934 Joseph Jones wrote a very influential book in which he argued that widespread retaliation against Smoot-Hawley had, in fact, taken place. Jones's book helped to establish the view among the public and among scholars that the passage of Smoot-Hawley had been a policy blunder that had worsened the Great Depression.

Did Retaliation Take Place?

This is a simplified analysis and there are other ways in which Smoot-Hawley could have had a macroeconomic impact, such as by increasing the price level in the U.S. relative to foreign price levels. But in recent years there has been significant scholarly interest in the question of whether Smoot-Hawley did provoke significant retaliation and, therefore, made the Depression worse. Clearly it is possible to overstate the extent of retaliation and Jones almost certainly did.

What Was the Impact of the Tariff on the Great Depression?

If there was retaliation for Smoot-Hawley, was this enough to have made the tariff a significant contributor to the severity of the Great Depression? Most economists are skeptical because foreign trade made up a small part of the U.S. economy in 1929 and the magnitude of the decline in GDP between 1929 and 1933 was so large. Table 2 gives values for nominal GDP, for real GDP (in 1929 dollars), for nominal and real net exports, and for nominal and real exports. In real terms, net exports did decline by about $.7 billion between 1929 and 1933, but this amounts to less than one percent of 1929 real GDP and is dwarfed by the total decline in real GDP between 1929 and 1933.

[Pelham]

Would you rather have the lower or the higher growth rate? And if we don't have free trade, and we want a high growth rate, guess who will be footing the bill for investment? That's right, good old Uncle Sam. Keynesianism needs to stay in its grave where it belongs. Free trade will not only make the economy grow faster, it will end the need for wars.

"Keynesianism"? I've never seen anything concerning tariffs discussed in Keynesian economics, and I'm curious to know where you found such a discussion.

[Nick Danger]

While it is true that [protectionist measures] worsen aggregate economic conditions, by diffusing economic pain in a roughly egalitarian fashion they increase social cohesion.

They only work against the "offshore supplier" problem. They don't work against the other problem -- which I think is as least as big -- which is that labor in general is shrinking as a component of value-added. Returns on economic activity are increasingly to capital, not labor. This sounds like Marx rising from the grave, but we can put him back if we act in time. The trouble is that hardly anyone except Marxists are even talking about this.

IBM had a PC factory in Texas for awhile where the lights were hardly ever turned on, because there were no people in there. It was all machines. Pour sand in this end, computers in boxes came out the other. There was one job for a guy to sit there and watch a panel for alarms... that was it.

That in fact turned out to be more expensive than having at least some people involved, provided that they were in Thailand. But it was a glimpse of the future. Machines are taking over a huge fraction of the jobs that used to provide average people with decent livings. Most people only think of this in terms of manufacturing: robots and the like. But in fact computers have eliminated a lot of the information collection-and-dissemination activity that once constituted middle management. The Internet -- a bunch of computers and wires -- is eliminating jobs in retail sales, customer service, account maintenance, purchasing, on and on.

The distribution of the proceeds of machine labor is going to be a big deal. The socialists have an answer to this problem, and if we don't want socialism we are going to have to come up with a different answer. What we won't have is a society that looks like Venezuela, where a half-dozen families do very well and everyone else lives in a tree.

[ggekko]

"We can not compete with China or Indonesia..."

You cannot compare apples to oranges. In the US we have the most advanced transporatation, power, and communications infrastructures in the world. These foundations automatically make any US worker about 100 times more productive than his third world counterpart. This inherent prodcutivity edge should more than offset the wage differential.

In the WSJ today they had an article about the paper industry. This industry is beleaguered by foreign competition but wage differentials are not the main culprit. The US companies have the second highest cost of captital in the world. This is caused by criminally stupid tax policy mainly designed by Democratic class baiters.

To help US workers compete better in the global economy we need a coporate tax policy that is not riven with class envy and populist demagoguery.

[Pelham]

Germany and Britain were major practitioners of colonialism, also known as mercantilism.

Germany was in fact a very minor colonial power, having had but one colony. Moreover "mercantilism" is not synonymous with colonialism. The economy of Japan is mercantilistic, as is that of Mainland China, and at last check neither has any colonies.

[philetus]

The playing field is never going to be level again.

[Buckeye Bomber]

The economy of Japan is mildly socialistic, and China is doing what they call "market socialism". I learned what mercantilism is in 6th grade social studies. Perhaps you ought to do some research.

Japan's Economy:
http://www.diba.es/icps/working_papers/docs/WP_I_81.html

China's Economy:
http://www.cato.org/events/china/papers/dorn.html

An intriguing article on mercantilism can be found here (http://mars.acnet.wnec.edu/~grempel/courses/wc2/lectures/mercantilism.html). Note the definitions they list.

[Buckeye Bomber]

So you believe that higher tariffs would not force the government to invest more in the American economy?

[Buckeye Bomber]

Germany had at least 6 colonies before losing them to the Treaty of Versailles: Cameroon, German East Africa, German Southwest Africa, Togo, German New Guinea, and Samoa. Those don't seem like something you could call one colony. Face it, Germany was a colonial power. I think that might have had something to do with World War 1...

[Arkie2]

In 1930, the impact of the most protectionist legislation ever passed in the U.S. was devastating. Most people believe the Depression was triggered by the financial crash of October 1929. In fact, by the spring of 1930, both the American and European economies had weathered the storm, thanks in large part to robust international trade which had remained brisk despite the crash. By the end of 1931, however, Smoot-Hawley had set off a wave of retaliatory tariff measures in twenty five other countries, crippling the trade boom. By early 1932, the Great Depression had set in, paralyzing economies in Europe and America.

Economic collapse wasn't the only consequence. Then, as now, rapidly growing global trade worked only because of a solid global financial system -- the connective tissue that binds countries to one another, even when diplomacy is at an impasse. At the time, the currency that fueled world trade was Britain's pound sterling, just as the dollar does today. But as Britain watched first the U.S. and then one country after another turn their backs on world trade, it decided it could no longer manage the world's money. In September 1931, it abandoned the gold standard.

The pivot for global money is global trust -- especially among governments, corporate leaders and bankers. It works through credit -- a word whose root meaning is trust. During the booming twenties and well into 1931, huge sums were swapped all over the world, with bankers trusting in repayment. That trust broke in 1931 following Smoot Hawley and Britain's resignation as world money manager.

By the end of 1932, the atmosphere among the world's political, economic and military elites was one of suspicion, paranoia and hatred. Once the international monetary system broke down, internal authoritarianism and external wars became inescapable.

[Tokhtamish]

Where was wealth destroyed in the 9-11 attacks? It was altered, not destroyed. And you insult my college education.

If you're too dense to comprehend that wealth is destroyed when property is destroyed, then you're dumber than Michael Moore.

Apparently Buckeye Bomber has never heard of opportunity costs. It goes something like this. Capital that is used to reconstruct is capital that otherwise might have been used to construct, to add wealth. Replacement is not growth. Too much replacement, in fact, chokes off growth.

Capital not destroyed ? Tell that to the airline and tourism industries which were ravaged after 9/11. Tell it to what is left of the Bali tourism industry. Tell it to the industry that lost centuries of human capital in the Twin Towers (Yes, Buckeye Bomber. Basic Common Sense, experience, the kind that sees past naive slogans and assumptions to real world consequences, that would never assume anything so foolish as free trade will abolish human pride, greed, and envy, is capital.).

Capital is not destroyed ? What ahistorical nonsense. War IS the large scale destruction of physical and human capital. I suggest, Buckeye, that you if you read some history you might learn a much more grownup view on human motivations.

[Buckeye Bomber]

Capital and wealth are two different economics concepts. And for some reason, I sense some condescension in your post. If you can't tell the difference between wealth and capital, blah blah blah. I won't sink to the level of your insulting posts.

Anyway, back to discussing facts, rather than insulting people. War does destroy capital, that much is true. However, there is nothing better for wealth than a war. Aren't Conservatives always saying World War 2 took us out of the Depression, not the New Deal (I agree with that assessment)?

Opportunity costs: that which you give up to do something else.

Explain to me how too much replacement chokes off growth. A lot of replacement means a lot of economic growth. Tell your ideas to the auto industry or the computer industry. Our society is built on replacing things.

In the end, the economic exchange I speak of would eliminate wars, which destroy capital in large amounts. But of course, I'm naive and inexperienced, as opposed to you, who is a font of wisdom. Even though every single economic expert would agree with my position, and you're just an angry, insult-ready jerk. Naive slogans? How about condescension. I think that is rather annoying.

Most annoying ways to disagree with someone on Free Republic:
1) Insult them.

2) Use poorly made charts and/or graphics.

3) Use an idiotic graphic you made.

4) Tell someone they are dumb because they are young.

5) Call someone a Socialist or a Democratic Underground renegade.

6) Pretend to want to argue logically, then slip in a blatant emotional appeal to try and win converts to your side.

7) Compare a person you disagree with to someone not many people are going to like (such as, I don't know, Michael Moore?).

8) Point out flaws in there grammer or spelling.

Just a short list, posted for no particular reason.

[Buckeye Bomber]

I take comfort in the fact that if your argument was cogent, you won't resort to the age-old "You'll understand when you're older, son" argument.

It doesn't matter what you think anyway, or Willie Green for that matter. Free trade is already happening, and it will continue to occur despite you. The only thing that could stop the global push for free trade is a global thermonuclear war. Even Clinton was for free trade, and he's an idiot and in the pockets of the unions! There may be some bumps in the road, but in the end, we will be safer and more prosperous.

[Willie Green]

Even Clinton was for free trade, and he's an idiot and in the pockets of the unions!

Klintoon was for "free" trade because he's a traitor to the United States. He knows that the economic consequences will motivate more of the dumbed-down populace to embrace his Big Government social welfare programs. And as is typical of hypocritical communist tyrants, he would enjoy the luxuries of the elite global politburo aristocracy.
Dubya's motivation for 'free' trade, while different than Klintoon's, is virtually indistinguishable in end result. Rather than targetting the unwashed masses with his propaganda, he tailors his arguement to appeal to a constituency at the opposite end of the socio-economic spectrum. These people literally do not care what happens to the ignorant unwashed masses as long as they can live safely and lavishly in their gated communities, manipulating government puppets to do their bidding.

"Free" trade is a two-edged sword;
Klintoon hacked at us with one side,
and now Dubya slices and dices us with the other.
It makes little difference with which cutting edge we get cut,
in the long run, we are still being bled to death.

[Buckeye Bomber]

You can tell you are witty and intelligent by the quality of the "funny" name you came up with for Clinton. I think these name parodies are possibly the lowest form of political debate available. Republicans and Democrats do it alike, and it sounds like we're having politics as written by sitcom writers. And I also think automatically calling someone you disagree with a Communist, Socialist, Fascist, Racist, or anything of that sort is also an idiotic debate tactic.

There is no difference between you and the lowest conspiracy theorist. We'll see if your theories come to pass. I'll keep an eye out for the black helicopters too.

[thepitts]

Before the United States can reconstruct the world, it must cease deconstructing itself. For that task, the country will need a champion.

That's why I voted for bush, once.

[Pelham]

International trade accounted for less than 5% of American GDP before the Depression. Even eliminating foreign trade entirely, which didn't happen, can't account for the severity of the Depression in the United States.

Bank failures accounted for the severity of the Depression in the United States, with the money supply shrinking 30% from 1930-33. Restrictive laws prohibiting branch banking were a major factor, as described by Schumpeter.

[Pelham]

"The Sun Never Sets on the German Empire"

Sure, Bucky, we've all heard that one.

Germany was not even a unified country until the 1860s, and acquired its overseas colonies only after that time. To include Germany with Britain as "a colonial power" is bizarre to say the least.

Germany's efforts at colonialism are always described as late and inept. But maybe you can be the first to write the book on Germany's epic colonial history.

[Pelham]

Well, Bucky, I didn't learn about mercantilism in 6th grade. And with only 100 or so books on economics in my library I don't know if I have made up for my late start.

I couldn't get your link on mercantilism to open so I didn't get to see what they had to say. Feel free to post it, as I've yet to see mercantilism equated with colonialism.