Sunday, December 18, 2016


"The thing is I can't afford to pay the heat and I had to send my kids to live with relatives. They keep cutting shifts down at the just don't get picked everyday."
--Jim Braddock (Cinderella Man)

One of the negative scenarios on the Trump possibility spectrum involves restriction of trade in attempts to 'level the playing field' and 'save jobs.' Restricting trade always and everywhere results in lower standard of living because of productivity losses from less specialization and trade.

The benchmark tragedy in this regard involves the Tariff Act of 1930, also known as the Smoot-Hawley Act. As America slid into Depression in 1929, Reed Smoot, a Republican senator from Utah, believed that jobs were being lost because foreign countries were selling too many goods at low prices to US consumers, thereby undermining the livelihoods of millions of hardworking Americans. Working with Congressman William Hawley of Oregon, Smoot devised a series of tariffs and duties to be imposed on imports that would serve to protect American jobs. The act containing those tariffs was signed into law by Herbert Hoover in 1930.

The central feature of the Smoot-Hawley Act was a tariff hike on dutiable goods to an average of nearly 60%, with duties on many imported goods quadrupling.

Predictably, global trade dried up. As prices rose on many goods, US consumers, many of whom were unemployed, cut way back on purchases in attempts to make ends meet. Production and capital investment ground to a halt as demand plummeted.

America's trading partners also reacted in kind. Trade barriers went up worldwide, thereby reducing business to be done by many of those American's whose jobs had been 'protected.'

Between 1929 and 1933, US imports and exports fell by more than 60%. The unemployment rate tripled to 25%.

Exacerbating the problem was the design of Smoot-Hawley tariffs, which generally taxed imported goods at a fixed amount rather than as a percentage of product value. As demand fell, the taxable percentage of products grew as their value collapsed. A reinforcing cycle commenced--the less trade there was, the more difficult it became.

Although FDR was able to change the structure of tariff control in 1934, the spirit of 'managed trade' embedded in the Smoot-Hawley Act still influences US foreign policy.

By driving economic malaise to new depths and lengths, Smoot-Hawley helped put the 'great' in the Great Depression.

Here's hoping that we avoid the rhyme of history related to trade restriction.

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