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Home > Social Issues
Smoot-Hawley Fiction
by Bob Powell, 2/15/09
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Smoot-Hawley tariff "protectionism" is continually being blamed for the Great Depression: "OMG, that would start a trade war and hurt our exports. After all, doncha know that caused the Great Depression?!!!" Trouble is, our enormous trade deficit shows we've been in, and lost, that war. Creating balanced trade and Buy American are perfectly consistent with fundamental economic development principles and are not simply "protectionism." "Free trade" proponents commit economic treason by perpetrating pro-"free trade" propaganda. Not to put too fine a point on it, they're lying. Here's why it's obvious. And it wasn't FDR's New Deal that prolonged it either.

Introduction

I've previously described what's at the root of The 9/22/08 Economic Crisis. I submit that the greatest cause is that what's known as "free trade" has created an enormous "trade" deficit and undermined wages. I describe the dynamic driving the insanity at The Fallacy of Composition. The comparably enormous devastation is described in my periodic Jobs & 'Trade' Data Updates. The latest so far is Jobs & 'Trade' Data Update Nov08, but there will be updates soon; check my homepage.

It's not rocket science to understand that, if a person's or a region's or a nation's income is less than it's outgo, that entity's economic well-being is doomed because borrowing cannot go on forever. Duhhh.

Any talk of doing something to correct the trade imbalance or raise wages, brings cries from free-trading Republicans, DLC Democrats and other right-wing ideologues that reducing the trade deficit would require "protectionism" (very bad, you know).

Free market ideologues object to measures to increase wages as "populism" (very, very bad) and interference in the "free market" even though There's no 'free market' for Labor. The anti-populists want you to live on the same low wages, with the same low standard of living, as workers in China. It's "populist thinking"; it's "Socialism and contrary to the market economy that has made America the envy of the world and the place for real opportunity" to even suggest another course. Such unAmerican foolishness has devastated the U.S. economy. It's had even greater impacts on Colorado Springs, which as of Nov 08 has lost 38% of its manufacturing jobs and 48% of IT jobs since 2001.

No matter what might be suggested (tariffs, fair trade, trade barriers, labor & environmental standards, Import Certificates to create balanced trade, or even halting "reverse protectionism"), the myth that Smoot-Hawley tariff "protectionism" brought on the Great Depression is cited.

OMG, doncha know? ... that would start a trade war and hurt our exports! It caused the Great Depression! We don't want that again!

As I note below, "trade" deficits on the order of $700B/year are proof positive that we've been in a "trade war" for decades. We've been defeated. "Free trade" proponents did not simply lead the surrender, they collaborated with the enemy.

Note:

Our economic enemies are euphemistically called our "trading partners," e.g., fascist China; no, it's not communist anymore. The threat is not "socialism", it's fascism (and libertarian ideology that, despite its professed agenda of "individual freedom," inevitably morphs into fascism because, with only "individual freedom", a society is effectively in chains).

The problem is we're insufficiently socialist in areas where only considering the whole (systems thinking) can be effective. I describe some of those areas at Invisible Hand Drops Ball & Economics 101.

The aim of the "free trade" fear-mongering that raises the Smoot-Hawley specter is to pre-empt any attempt, by any means, to correct the trade imbalance. That would reduce the profits of multinational corporations that, like vampires, have drained, and continue to drain, the nation's economic life blood.

It doesn't matter that there's virtually no serious talk in the media or no tariff proposals in Congress, "free trade" proponents perpetrate pro-"free trade" propaganda by raising the Smoot-Hawley myth. Not to put too fine a point on it, they're lying.

This article describes why that's obvious.

Contents:
- Examples of propagating the myth:
1. Total Trade was minuscule relative to GDP.
2. The drop in Total Trade was minuscule relative to the drop in GDP.
3. Causality! Smoot-Hawley was passed 8 months after the October 1929 stock market crash.
4. Current U.S. policy already put the U.S. in a "trade war" ... we've unilaterally surrendered.
5. The U.S. trade balance did not suffer during the 30s! Principles of economic development.
6. Perpetrators of the Smoot-Hawley myth can only make a purported case by looking at total trade (exports + imports), focusing on some features and ignoring others.
7. The Smoot-Hawley Tariff wasn't a big increase from tariffs already in place.
8. So what did cause the Great Depression?
9. Another Myth: FDR's New Deal did it!!! No, it didn't.
- What made it worse? Two things: 
    - Bernanke apologizes for past Fed actions
    - The Gold Standard and Austrian (libertarian) Ideology
- There's nothing wrong with "protectionism".

Examples of propagating the myth:

- Why the downturn went global by Jason Margolis, 1/19/09 on The World from PRI: In the past few decades, recessions have largely been contained to specific countries or regions. But this time, the recession went global. The World's Jason Margolis explores why.

In 1930, the US Government passed the Smoot-Hawley tariff. That raised tariffs on more than 20,000 imported goods. Many countries retaliated. Trade plunged, setting off The Great Depression.

This story is particularly egregious because its sources are The Heritage Foundation, the Brookings Institution, and the Counsel of Foreign Relations; they're all right-wing, extremist organizations.

- Buy-American Stimulus Provision Sparks Debate by Scott Horsley, 2/3/09 on All Things Considered.

Actor and economic commentator Ben Stein riffed off this history in the movie Ferris Bueller's Day Off:

"Anyone? Anyone? The Great Depression? The Hawley Smoot Tariff Act ... did it work? Anyone? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression."

It's not just fans of the movie who might think protectionist moves can backfire. The U.S. touched off a trade war in the 1930s when it raised import duties on thousands of foreign goods.

... Supporters say the Buy American provisions are a far cry from those punitive tariffs, and they note federal public works projects have long given some preference to American-made supplies. Still, diplomats from Canada and the European Union are warning of possible retaliation if Congress follows through with the requirement. And that has some big U.S. companies worried about losing business overseas.

"This sends absolutely the worst signal at a sensitive time for the global economy," says John Murphy, vice president of the U.S. Chamber of Commerce.

... Obama has a mixed track record on trade. During the primary campaign, he called for renegotiating the North American Free Trade Agreement. But he later appeared to soften his stance. And many of his economic advisers have strong free-trade credentials.

Yale University political scientist Kenneth Scheve says many Americans have grown skeptical that free trade is working for them. He adds that pressure for protectionism typically mounts during economic downturns — even if measures like Buy American turn out to be short-sighted. ...

There's much wrong with these repetitions of right-wing, "free trade" talking points. And these examples come straight from the heart of the dreaded "librul" media: public radio's NPR and PRI.

What's "short-sighted" is to continue the way we have.

Smoot-Hawley could not possibly have had even a minor effect on the Great Depression, much less have been its cause. This assertion is most often, as here, presented as fact. I hate to be harsh, but it's a lie that so-called "protectionism" touched off a "trade war" and caused the U.S. to slide into the Great Depression. Here's why.

1. Total Trade was minuscule relative to GDP. 

A "Total Trade" downturn is about as likely to have tripped up the economy and caused a Great Depression as a human being would be likely to be tripped by an ant.

Let's look at the data on GDP and "total trade" (exports plus imports) to see why.

Find the data used to create the graphs below here:
- "trade" U.S. Total Exports & Imports 07/1866-10/1969
Exports (export data desc file), Imports (import data desc file).
- GDP from the National Income and Product Account (NIPA) Historical Tables 

The graph below shows "Total Trade" (imports + exports) and GDP. Note that the trade values are negligible (pretty darned close to ZERO) on this scale:

Total Trade" (Exports plus Imports) and GDP. "Total Trade" is really, really small in comparison to GDP.
 

The "Total Trade" values must be expanded to even see them. Expanding "Total Trade" values by 100X puts them at approximately the same level as GDP. Here it is:

"Total Trade" and GDP with the trade scale expanded by 100X.
 

Below the graph of "Total Trade" as a percentage of GDP shows the assertion is obviously ridiculous. "Total Trade" (imports + exports) was between 0.4 and 0.8 percent of GDP.

A less than 1% of GDP factor could not possibly have caused a recession, much less a Great Depression.

"Total Trade" was between 0.4 and 0.8 percent of GDP.
 

2. The drop in Total Trade was minuscule relative to the drop in GDP.

GDP dropped $47.2B from 1929 to 1930. The drop in "Total Trade" from 1929 to 1933 was only $0.54B.

Drops in GDP and Total Trade ($B)

The drop in "Total Trade" from 1929 to 1933 was only 1.2 percent of the drop in GDP over that same period. It's impossible that a 1 percent effect could cause an economic collapse like the Great Depression.

The drop in "Total Trade" from 1929 to 1933 was only 1.2 percent of the drop in GDP over that period
 

Note this is similar to a point made in The Great Betrayal (1998) by Pat Buchanan. Buchanan isn't correct about much, but he's got it right when he quotes an economist who points out that:

"... from 1929 to 1933, America's GNP fell from $104 billion to $56 billion, a loss of $48 billion. However, net exports fell by only $700 million, and domestic spending declined by $47.3 billion. In other words, net exports decreased by 1.5 percent of the fall in GNP, as domestic demand fell by the remaining 98.5 percent! It is patently absurd to fuss over that 1.5 percent fall and overlook the other 98.5 percent." p. 249.

3. Causality! Smoot-Hawley was passed 8 months after the October 1929 stock market crash.

From FREE TRADE AND PROTECTIONISM (Your Job and Your Way of Life) by Alfred E. Eckes, Jr. [Alfred E. Eckes, Jr., is Ohio Eminent Research Professor in Contemporary History at Ohio University.]

The Smoot-Hawley Tariff was said to have caused or exacerbated the Great Depression, but when one looks at the facts and goes into the archives and reads the record, one comes to a quite different interpretation. How could the passage of the tariff in June 1930 somehow have spooked the stock market in October 1929? Furthermore, Smoot-Hawley really wasn't much higher than the previous tariff. Two-thirds of U.S. imports under Smoot-Hawley came in duty-free, and when the tariff was enacted, more items were added to the free list than were taken from the free list and made dutiable. Nonetheless, the conventional wisdom is that it raised the American tariff to a record level. That's not supported by the data.

From Protectionism wasn't the problem by Stephanie Flanders, 4 Feb 09.

The depression certainly did see a collapse in global trade and capital flows, and a descent into protectionist tariffs and laws. But a fair reading of the evidence suggests these were more the result of the global downturn than the cause.

According to Peter Temin, a distinguished economist at the Massachusetts Institute of Technology, exports were 7% of American GDP in 1929. They fell by 1.5 percentage points in the next two years.

Given the fall in world demand in those years, not all of that fall can be attributed to other countries' retaliation against the US tariffs. And even if it were - overall, GNP over the same period fell by 15%.

So, on any reasonable assumptions, Temin says "the fall in export demand can only be a small part of the story." And, as he points out, even that loss in foreign demand from the tariff would have been partly offset by the fact that the tariff diverted demand from foreign to home-made goods.

His conclusion? "Any net contractionary effect of the tariff was small."

This point is correct, but it turns out that exports were a much smaller percentage of GDP than stated just above. Exports were .42% of GDP in 1929. While exports dropped by 53.7% by 1931, exports were only 0.42% of GDP in 1929 and 0.26% of GDP in 1931.

                                            $ in Billions

Variable Year:

1929

1930

1931

1932

1933

GDP

103.6

91.2

76.5

58.7

56.4

Exports

0.437

0.32

0.202

0.134

0.14

Imports

0.367

0.255

0.174

0.11

0.121

Balance

0.07

0.065

0.028

0.024

0.019

Tot Trade

0.803

0.575

0.376

0.244

0.26

TotTrade/GDP %

0.78%

0.63%

0.49%

0.42%

0.46%

ExportDrop/GDPDrop

0

2.2%

2.0%

1.5%

1.4%

ImportDrop/GDPDrop

0

2.5%

1.9%

1.6%

1.4%

From 1929 to 1931 the (Export drop) / (GDP drop) was 2%. Tiny.

Exports were between about 0.2 and 0.4 percent of GDP from 1929 to 1941
 

4. Current U.S. policy already put the U.S. in a "trade war" ... we've unilaterally surrendered.

"Free trade" proponents maintain that other countries won't buy things from us anymore if we raise tariffs (If We Buy American, No One Else Will By DOUGLAS A. IRWIN, 1/31/09). Well, gee, they're not buying all that much from us now relative to what we buy from them. 

"Trade" deficits on the order of $700B/year are proof positive that we've LOST the trade war. We've been defeated. "Free trade" proponents did not simply lead the surrender, they collaborated with the enemy. 

U.S. International Trade in Goods and Services Highlights, February 11, 2009. The Nation’s international deficit in goods and services decreased to $677.1 billion in 2008 from $700.3 billion in 2007.

5. The U.S. trade balance did not suffer during the 30s!  Principles of economic development.

And it's the trade balance that's important. Read about fundamental principles of economic development at U.S. Jobs and a Stable U.S. Economy Depend on Creating Balanced Trade (find a longer treatment at Principles of Economic and Workforce Development). They are

  1. attract and promote primary employers ... that is, companies that ship products out of the region to bring in more funds than are sent out.
  2. attract and promote companies that spend money locally to increase the economic multiplier effect.
  3. do not attract, and do not promote, "import companies" that send more funds out of the community than they bring in. Examples: Wal-Marts and other big box stores. They also destroy local businesses that do spend funds locally.

In summary, more funds must come into a region than go out for the region to grow and it's a major benefit to circulate and recirculate the funds within a region. The delta between #1 and #3 (funds in minus funds out) is the "trade balance" and #2 is promoting buy regionally ... or, for the nation, Buy American! This is as true for regions within the U.S. as it is for the U.S. as a whole.

What's sad ... and hypocritical ... is that economic development professionals understand these principles, but largely ignore the second and totally ignore the third for political and ideological reasons. They even ignore the first when it comes to the nation as a whole (hence the loss of manufacturing and the "trade" deficit). The "free traders" now oppose "protectionism" that would stop the offshoring of jobs and they oppose Buy American. Opposing these principles for the nation amounts to economic treason ... it's a betrayal of the nation's economic and military security.

Here's the graph of the trade balance over the 30s that shows there's no significant trend up or down:

Trade balance 1910 to 1940

And remember, it's the trade balance (recall those fundamental economic development principles described above), not "total trade" that's the important determinant of economic growth.

Given no significant trend for the trade balance, it's not surprising that the export and import graphs look very similar. Note there were drops in both exports and imports in the early 20s and the economy boomed.

Exports from 1910 to 1940

Imports from 1910 to 1940

Another point on causality: For heaven sakes, a depression is when the economy is stagnant. Wouldn't it be a surprise if both imports and exports didn't fall thanks to less economic activity? Both imports and exports fell about equally as shown above. One would think that, if tariff "protectionism" caused others to escalate not buying from the U.S. (i.e., prompting a "trade war"), that U.S. exports would have fallen faster than imports. They did not.

6. Perpetrators of the Smoot-Hawley myth can only make a purported case by looking at total trade (exports + imports), focusing on some features and ignoring others. 

[Remember, it's not the (exports + imports) that's important it's (exports - imports) = balance ... but never mind.]

Total Trade from 1910 to 1940

So they make their so-called Smoot-Hawley, fear-mongering case by pointing to the meaningless drop-off in "total trade." There was an earlier, equal, but more precipitous drop in the early 20s, but they don't talk about that.

7. The Smoot-Hawley Tariff wasn't a big increase from tariffs already in place.

From Could Globalization Fail? by Thomas Palley, YaleGlobal, 13 April 2006:

The Smoot-Hawley tariff was passed in June 1930. Its economic effects were minor for the US given the pre-existing high tariff structure and the minimal extent of US engagement in trade. Indeed, those effects may even have been beneficial in that spending switched from imports to domestically produced goods. Yet, for 75 years, free traders have sought to blame Smoot-Hawley for the Depression and thereby make a case for free trade. The rooster crows at dawn, but does not cause the sunrise. Smoot-Hawley did not cause the Depression.

8. So what did cause the Great Depression?

Reason 1: Unequal distribution of wealth
Reason 2: Bursting of a speculative bubble

From Main Causes of the Great Depression by Paul Alexander Gusmorino 3rd : May 13, 1996

"... the main cause for the Great Depression was the combination of the greatly unequal distribution of wealth throughout the 1920's, and the extensive stock market speculation that took place during the latter part that same decade."

Unequal distribution of wealth is important because it causes a downward spiral of demand and economic activity.

Lagging compensation has currently led to the devastation of the U.S. economy. See

The 9/22/08 Economic Crisis, 9/24/08, What's at the root of the 9/22/08 economic crisis? An explosion of "trade", fiscal, and personal debt encouraged by government and Federal Reserve policies. Why? Compensation growth has fallen far behind productivity growth. Why? Five factors.

It's obvious that we've had the bursting of bubbles, dot-com and real-estate, created by Alan Greenspan's Fed. We've also reached extremes of economic inequality.

Trying to Revive the Bubble Economy: Obama's Awful Financial Recovery Plan By MICHAEL HUDSON

... The resulting dot.com and real estate bubbles were not inevitable, not economically necessary. They were financially engineered by the political deregulatory power acquired by banks corrupting Congress through campaign contributions and public relations "think tanks" (more in the character of doublethink tanks) to promote the perverse fiction that Wall Street can be and indeed is automatically self-regulating -- a travesty of Adam Smith's "Invisible Hand." This hand is better thought of as covert. The myth of "free markets" is now supposed to consist of governments withdrawing from planning and taxing wealth, so as to leave resource allocation and the economic surplus to bankers rather than elected public representatives. This is what classically is called oligarchy, not democracy.

... the past ten years have been a golden age for the banking system and the rest of Wall Street. Like feudal lords claiming the economic surplus for themselves while administering austerity for the population at large, the wealthiest 1 per cent of the population has raised their appropriation of the nationwide returns to wealth – dividends, interest, rent and capital gains – from 37 per cent of the total ten years ago to 57 per cent five years ago and it seems nearly 70 per cent today. This is the highest proportion since records have been kept. We are approaching Russian kleptocratic levels.

It's obvious

From Could Globalization Fail? by Thomas Palley, YaleGlobal, 13 April 2006

The Smoot-Hawley tariff was passed in June 1930. Its economic effects were minor for the US given the pre-existing high tariff structure and the minimal extent of US engagement in trade. Indeed, those effects may even have been beneficial in that spending switched from imports to domestically produced goods. Yet, for 75 years, free traders have sought to blame Smoot-Hawley for the Depression and thereby make a case for free trade. The rooster crows at dawn, but does not cause the sunrise. Smoot-Hawley did not cause the Depression.

And it's an absurd lie to maintain that it did.

Besides, what we have now is not "protectionism", it's "reverse protectionism." We actually subsidize the offshoring of jobs (How the U.S. Subsidizes Offshoring of Jobs). How about let's stop that before we hyperventilate about "protectionism".

9. Another Myth: FDR's New Deal did it!!! No, it didn't.

Another ideological idiocy is that somehow FDR's New Deal prolonged the Great Depression. This was parroted by freshman Representative Steve Austria (R-OH):

"When Roosevelt did this, he put our country into a Great Depression. ... He tried to borrow and spend, he tried to use the Keynesian approach, and our country ended up in a Great Depression. That's just history."

Later he had to reverse himself on this, yet continued to be totally wrong:

"I did not mean to imply in any way that President Roosevelt was responsible for putting us into the Depression, but rather was trying to make the point that Roosevelt's attempt to use significant spending to get us out of the Depression did not have the desired effect. Roosevelt did not put us into the Depression, but rather his policies could not pull the nation out of the recession."

To show this isn't true, either, Rachel Maddow showed this graph on 2/9/09:

The New Deal only faltered when FDR paid attention to "conservatives"

As Matthew Yglesia noted: "Austrian economics (pardon the pun) continues to take over the Republican Party".

What made it worse? Two things:

Both points below are from Protectionism wasn't the problem by Stephanie Flanders, 4 Feb 09. "Politicians and commentators keep warning that "protectionism is what made the Great Depression Great". It's a good line. Pity it isn't true."

Bernanke apologizes for past Fed actions

In a classic work, Milton Friedman and Anna Schwartz say the US downturn of the 1930s was the Fed's fault, by failing to inject cash into a fragile banking system after the crash of 1929.

At a party for Friedman's 90th birthday, Bernanke (then a Fed Governor), said: " I would like to say to Milton and Anna: Regarding the Great Depression - you're right, we did it. We're very sorry. But thanks to you, we won't do it again."

The Gold Standard and Austrian (libertarian) Ideology

Austrian libertarians are delusional in thinking a "gold standard" or some other sacred basket of commodities would prevent depressions. 

But didn't protectionism help transmit America's problems around the world? Well, not really. Bernanke, Barry Eichengreen and other distinguished economists have established pretty convincingly that it was the gold standard that helped turn a mismanaged US stock market crash into a global slump - by causing a prolonged and devastating period of falling prices.

It was the gold standard - in effect, a fixed exchange rate system anchored by the price of gold - that led the world's leading economies into a deflationary spiral. That was because the only way for deficit countries to stem the resulting flow of gold - money - out of the country was by shrinking domestic demand, which led to a further downward spiral in prices and incomes.

Since everyone was doing the same thing (and surplus countries like the US were not allowing inflows of gold to stimulate demand), this didn't help countries out of their hole - they just collectively dug themselves deeper and deeper. The first countries to dump the gold standard were also the quickest out of deflation and the quickest to recover.

The libertarians are correct that extraordinary increases in the money supply have created an extraordinary problem. But they get the causality wrong. The Federal Reserve (not a government agency) increased the money supply over time to keep the "free trade" party going for its bank owners and allied multinational corporations.

There's nothing wrong with "protectionism".

If you're not willing to protect the U.S. economy, what are you willing to protect? The Soviet Union collapsed because its economy failed. Thanks to "free trade", the manipulation that created the economic bubbles that have now collapsed, and the deregulation (lawlessness) that led to bankster pillage, we now face a similar fate.


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