Davidson: Government repeating mistakes of Depression

Those who write about tariffs, including the Smoot-Hawley tariff, should look more closely at the United States tariff history and quit repeating what they have been told about it. Free traders are so convinced that they are right that the see no need to look at actual data. In this article for example it is said that “Smoot-Hawley increased tariffs by 60 percent” and “trade plummeted by two thirds” suggesting that things would have been just fine had not those stupid protectionist eliminated free trade.

That is a gross misrepresentation. The US was a trade protected nation long before either Smoot or Hawley were born. Trade protection began in 1828 and lasted until after World War II. Tariffs before Smoot-Hawley were about 40 percent and the increase was about an additional 20 percent. That whopping big “two-thirds” decline in trade was a decline from 6 percent of GNP to 2 percent of GNP. Hardly enough to justify the Depression.

More important, if protection is bad how did the United States make the transition from a producer of raw materials and agricultural products in 1828 to an industrial power by the end of the century?

Shocking as it may sound to those who have never bothered to look at the data, there is a case for protection.

To see the manifest advantages of protection over free trade compare the performance of the American economy from 1869 to 1900 under tariff protection with the period 100 years latter 1969 to 2000 under free trade. From 1869-1900 tariffs were above 40 per cent while from 1969-2000 they were below 10 per cent. From 1869 to 1900 GNP quadrupled while real wages increased 50 percent, and retail prices dropped significantly. Under free trade a century later real wages declined. Real wages of most Americans peaked in 1973 and are down since.

Cambridge University economist Ha-Joon Chang taking issue with free trade says:

“The reality is that free trade has never worked very well, especially for developing countries, but it is going to malfunction even more in the coming years. Rather than trying to nurse this ailing sacred cow back to health, we should slaughter it—and concentrate our energy on designing a new system of international trade that pragmatically mixes free trade and protectionism.”

His article is at http://www.prospect-magazine.co.uk/article_details.php?id=10628

We got to where we are today with free trade not protection. We became a great nation with protection.

Free trade good protection bad. Really? To make that case free traders must cherry pick their data and ignore the rest.

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• Posted by n6532l on April 6, 2009 at 12:02 p.m.
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Davidson: Government repeating mistakes of Depression

I don't have time to say much now, but it would appear that you are cherry picking data and over-simplifying a complex system to demonstrate your point, especially in your 5th paragraph.

Real wages climbed 50% between 1869-1900 and decreased between 1969-2000 and you give tariffs the credit?

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• Posted by connerm on April 6, 2009 at 5:13 p.m.
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Davidson: Government repeating mistakes of Depression

I enjoyed this article, by the way. Great job, Todd.

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• Posted by connerm on April 6, 2009 at 5:13 p.m.
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Davidson: Government repeating mistakes of Depression

I think both writers "cherry pick" data, but Davidson tries to pawn off his "data" as fact without mentioning where the Cato Institute stands on free trade (they are for it) versus more regulatory approaches like those favored by FDR and Obama. Moreover, who is Chris Edwards?
When he says that there are "studies of this type of policy" what does this specifically mean? Are there more than one IMF/University of Bocconi study? What was specifically studied and where in the world is the University of Bocconi? Why is the cap and trade system like a tariff and specifically the Smoot-Hawley Act? I'm dubious that the study of Cole and Ohanian "concluded" that the NIRA extended the Depression. If this is so, why not directly quote the passage in the study that says so? Davidson's hand is invisible, because he's trying to pass off his ideology as economic science. Finally, why is it that Free Marketers like Davidson speak about "fixing the mess", but almost never discuss what sort of economic policies got us into this mess in the first place. Just about anyway you slice it, deregulation is at the heart of the problem.

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• Posted by Bigpapi on April 6, 2009 at 5:35 p.m.
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Davidson: Government repeating mistakes of Depression

I’m not a full free trader. Countries need to consider protecting industries critical for national defense. However claiming trade tariffs and protections create wealth can only be done with skillful cherry picking. Instead of burying logic with unrelated facts I would like to simplify. What would our economy would be like if we protected our domestic oil industry instead of buying cheaper oil from other countries? A gallon of gas would have gone north of 3 bucks years ago. Trading with other countries for what they can produce more efficiently is a win for both countries. IMHO This mess was caused buy cheap money created by the fed

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• Posted by bassbum on April 6, 2009 at 9:06 p.m.
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Davidson: Government repeating mistakes of Depression

Free market economies sort themselves out.

Messing with it hampers its ability to do so, sometimes for the better, usually for the latter.

Let's just cross our fingers and hope the big boys in Washington are doing it right - we really can't do much else.

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• Posted by handy on April 6, 2009 at 10:20 p.m.
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Davidson: Government repeating mistakes of Depression

The Achilles Heel of Free Trade

Free trade is supposed to be a win-win for all. Instead it has produced a few winners and a lot of losers. Like Communism, the theory has promised more than it ever delivered in practice.

The theory of free trade is based on the Theory of Comparative Advantage developed by British economist David Ricardo. To really understand the theory some arithmetic is required but the non math version goes like this: Suppose England and Portugal have tariffs on wine and wheat. Consumers in both countries buy up local production and then imports if it is not enough. To buy imports the price is increased to include the tariff. Producers in both countries are protected from price competition from imports. Now suppose Portugal can produce wine at a lower cost than England can produce wine and visa versa for wheat. England could profitably sell wheat in Portugal at a price that would drive Portuguese wheat producers out of business. Portugal could profitably sell wine in England at a price that would drive English wine producers out of business. This does not happen because there is a tariff that increases the price to allow domestic production of both wine and wheat in both countries.

The free trade theory says eliminate the tariff. Let English wine producers and Portuguese wheat producers go out of business. Resources devoted to English wine production are switched to wheat production and Portuguese resources devoted to wheat production are switched to wine production. Because all producers are doing what they are best at total production will increase. Because of increased production all will live better. Society will benefit from increased productivity which will result in higher real wages.

What could possibly go wrong?

Assuming nobody is cheating three things:

1. Wine production exceeds market demand.
2. Wheat production exceeds market demand.
3. Wine and Wheat production exceeds market demand.

If any of these happen the workers of one or both countries are in a world of hurt. Unemployment is going to happen and wages are going to decline. Before free trade wine and wheat production both met market demand. There is no real reason to expect tariff elimination to increase demand to meet increased production capacity.

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• Posted by n6532l on April 7, 2009 at 6:07 p.m.
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Davidson: Government repeating mistakes of Depression

The Achilles Heel of Free Trade - 2

To this big loophole in the theory of free trade we need to add cheating, incompetence, and greed. The cheating involves things like dumping and hidden protection. If we quit free trading with Japan and China how many fewer cars would GM sell to those countries?

A bigger problem is the incompetence of our government and the greed of those who benefit from free trade. Our trade negotiators go in with a bad case of “deal fever” brought on by the pressure applied to them by politicians responding to the bribes (aka campaign contributions) of greedy corporations. In the end the trade deal is a bad for the American people but is profitable for the few.

An example is the proposed free trade agreement with Columbia. Today they tax our exports but we do not tax imports from them. A selling point is that the new deal fixes that. That means that the last time we negotiated a trade deal we gave up tariffs but they did not. Why did out government make such a deal that was so bad for Americans? While they may have fixed that problem one thing is certain: the American people are going to get the short end just as they always have.

To see how far the real world of trade has diverged from the theory and how the United States has gotten the short end of the stick consider the automobile industry. Under the theory of comparative advantage nations should import products from nations that can produce more cheaply. After World War II the United States was the low cost producer of automobiles. While the United States gave up tariffs Europe and Japan protected and subsidized their auto industry. If the world had followed free trade theory, today Ford, Chrysler, and General Motors, along with free trade victims Studebaker, Nash, Hudson, and Willys would be car makers to the world. Instead they are weak high cost competitors nearly out of business.

The United States was a high tariff economy for most of its history. During more than a hundred years of tariff protection none of the bad things free traders say happens under protection happened to us. Instead we prospered. We can prosper again. But only by ending free trade as we know it.

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• Posted by n6532l on April 7, 2009 at 6:09 p.m.
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Davidson: Government repeating mistakes of Depression

I question your Achilles Heel argument based off of the following reasoning:

1. When a good is produced more efficiently at a lower price, capital is freed up in the local economy to be used on other things. This improves local quality of life.
2. If too much of something is being produced (i.e. demand is lower than supply,) over time producers find a new good or service to provide. This has certainly occured in the agricultural industry since our population has gone from about 90% farmers to 2% farmers over the last couple hundred years. I think it's more likely that the English wine growers would switch to something other than wheat production in an economy with literally millions of potential services or goods to provide.
3. Cheating, manipulation, and coercion are endemic to all systems and not just free trade. Thus, this is not a weakness inherent to free trade.
4. You can't blame free trade when countries we have free trading relationships with continue to have tariffs....this is simply bad negotiation.
5. The case of GM, Chrysler, and Ford has more than just lopsided trade agreements to blame. CAFE standards, antitrust laws (in the case of GM) unions asking too much and government intervention are all to blame as well.
6. The last point you make is that because the US was a high tariff economy throughout most of its history and prospered, we should do the same today. You assume too many things here, namely that the world economy works the same way. One hundred years ago it was nearly impossible to profitably trade most goods between countries because the technology did not exist to do so. The US was isolated from Europe by a massive ocean. These things are much cheaper now, and by removing tariffs on both ends we ensure prosperity for citizens within countries on both sides of the ocean by allowing them to utilize goods and services as cheaply as possible so they may do what they want with their remaining money.

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• Posted by connerm on April 8, 2009 at 8:58 a.m.
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