Posted on 02/04/2009 2:40:10 PM PST by UCFRoadWarrior
Thomas Sowell: Another Great Depression?
With both Barack Obama's supporters and the media looking forward to the new administration's policies being similar to President Franklin D. Roosevelt's policies during the 1930s depression, it may be useful to look at just what those policies were and-- more important-- what their consequences were.
The prevailing view in many quarters is that the stock market crash of 1929 was a failure of the free market that led to massive unemployment in the 1930s-- and that it was intervention of Roosevelt's New Deal policies that rescued the economy.
It is such a good story that it seems a pity to spoil it with facts. Yet there is something to be said for not repeating the catastrophes of the past.
Let's start at square one, with the stock market crash in October 1929. Was this what led to massive unemployment?
Official government statistics suggest otherwise. So do new statistics on unemployment by two current scholars, Richard Vedder and Lowell Gallaway, in their book "Out of Work."
The Vedder and Gallaway statistics allow us to follow unemployment month by month. They put the unemployment rate at 5 percent in November 1929, a month after the stock market crash. It hit 9 percent in December-- but then began a generally downward trend, subsiding to 6.3 percent in June 1930.
That was when the Smoot-Hawley tariffs were passed, against the advice of economists across the country, who warned of dire consequences.
Five months after the Smoot-Hawley tariffs, the unemployment rate hit double digits for the first time in the 1930s.
This was more than a year after the stock market crash. Moreover, the unemployment rate rose to even higher levels under both Presidents Herbert Hoover and Franklin D. Roosevelt, both of whom intervened in the economy on an unprecedented scale.
Before the Great Depression, it was not considered to be the business of the federal government to try to get the economy out of a depression. But the Smoot-Hawley tariff-- designed to save American jobs by restricting imports-- was one of Hoover's interventions, followed by even bigger interventions by FDR.
The rise in unemployment after the stock market crash of 1929 was a blip on the screen compared to the soaring unemployment rates reached later, after a series of government interventions.
For nearly three consecutive years, beginning in February 1932, the unemployment rate never fell below 20 percent for any month before January 1935, when it fell to 19.3 percent, according to the Vedder and Gallaway statistics.
In other words, the evidence suggests that it was not the "problem" of the financial crisis in 1929 that caused massive unemployment but politicians' attempted "solutions." Is that the history that we seem to be ready to repeat?
The stock market crash, which has been blamed for the widespread suffering during the Great Depression of the 1930s, created no unemployment rate that was even half of what was created in the wake of the government interventions of Hoover and FDR.
Politically, however, Franklin D. Roosevelt could not have been more successful. After all, he was the only President of the United States elected four times in a row. He was a master of political rhetoric.
If Barack Obama wants political success, following in the footsteps of FDR looks like the way to go. But people who are concerned about the economy need to take a closer look at history. We deserve something better than repeating the 1930s disasters.
There is yet another factor that provides a parallel to what happened during the Great Depression. No matter how much worse things got after government intervention under Roosevelt's New Deal policies, the party line was that he had to "do something" to get us out of the disaster created by the failure of the unregulated market and Hoover's "do nothing" policies.
Today, increasing numbers of scholars recognize that FDR's own policies were a further extension of interventions begun under Hoover. Moreover, the temporary rise in unemployment after the stock market crash was nowhere near the massive and long-lasting unemployment after government interventions.
Barack Obama already has his Herbert Hoover to blame for any and all disasters that his policies create: George W. Bush.
Doug Irwin and Mario Crucini, in separate book-length manuscripts, have concluded that the S-H Tariff smashed the U.S. economy to the tune of a 5% HIT on GNP. Put in perspective, that's 2.5 times the impact of 9/11; 1.5 times the impact of the 1973 oil shock; 5x the impact of Katrina; and 5x the impact of the Navigation Acts that caused our revolution.
Impact of the Tariff
Smoot-Hawley Tariff Act “imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the US,” quadrupling previous tariff rates.
Although the tariff act was passed after the stock-market Crash of 1929, many economic historians consider the political discussion leading up to the passing of the act as a factor in causing the crash and its eventual passage as a factor in deepening the Great Depression. Unemployment was at a troublesome 9% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16% the next year and 25% two years after that. The annual rate of unemployment in the United States never fell below 9% during the entire decade of the 1920s.
As America, seen through the tariff, and European countries, increasingly resorted to protectionism as an economic policy, the general amount of international trade radically decreased, causing the world economy to slow. Protectionism is the economic policy of restraining trade between nations, through methods such as high tariffs on imported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports, and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over.
In part as a result of the Hawley-Smoot Tariff and other countries’ responses to it, the post-World War II world saw a push towards multilateral trading agreements that would prevent a similar situation from unfolding. This led in part to the Bretton Woods Agreement in 1944 and the General Agreement on Tariffs and Trade (GATT) in the 1950s.
There is still some historical debate as to how harmful the tariff was to the US domestic economy. Those who view trade as a zero sum game maintain that tariffs can be beneficial to a domestic economy if other countries do not retaliate with tariffs of their own. However, the economist David Ricardo proposed that free trade is a positive sum game and protectionism inevitably harms a domestic economy, as was the case with the British corn laws. Also, various schools of economic thought including classical, Austrian, and neoclassical support the general concept that tariffs inevitably lower revenue, harm trade, and reduce the general welfare of the economy. Zero-sum describes a situation in which a participants gain or loss is exactly balanced by the losses or gains of the other participant(s).
Abolitionalists of Smoot-Hawley argue that it angered major trading partners who retaliated. Canada for example not only raised its tariffs but forged closer economic links with the British Commonwealth, and US-Canada trade plunged. France and Britain protested and developed new trade avenues. Germany developed a system of autarky. Imports plunged two-thirds from $4.4 billion (1929) to $1.5 billion (1933), exports fell from $5.4 billion to $2.1 billion, in both cases far more than the 50% fall in GDP. The tremendous drop in foreign trade was a stunning shock to the proponents of Smoot-Hawley, and effectively destroyed advocacy of high tariffs in the US.
http://www.nationmaster.com/encyclopedia/Smoot_Hawley-Tariff
Alas, the federal gov’t is tasked with regulating trade, not you. Article 1, section 7.
I guess that one poster who blasted me for saying Smoot-Hawley didnt agree with what Friedman called it...Smoot-Hawley
“Imposing import tariffs on all products would be disasterous under any administration.”
How about we match tariffs?
You are a one-note-wonder. Aside from GDP having grown in some years in spite of Hawley Smoot (a statement of fact granted, but having no bearing on the net effect of Hawley Smoot), have you any other arguments?
Useless chart...since it shows nothing in regard to overall economic growth during the time
Tariffs are TAXES plain and simple.
It is astounding that here on FREE Republic, we have arguments in favor of HIGHER TAXES (tariffs) and LESS FREEDOM (to trade with whom we want).
Welcome to your National Socialism.
Unfortunately you are right...they would label Ronald Reagan as a protectionist...and Duncan Hunter, too
The first chart shows that Trade was decimated by tarrifs.
The second chart shows that a nascent recovery in the Stock Market was snuffed out by tarrifs.
Quite useful to prove the harm of Hawley-Smoot.
The best tarrif is none. I don’t want to feed the Feds any more cash; they just burn it. I don’t want my prices increased. If other countries want to tax their citizens’ consumption with tariffs, let them.
Milton Berle....
Because your lack of facts debating whether Smoot casued/continued the Great Depression surely would rule out Milton Friedman....
Exports accounted for ~5% of GDP.
Consequences from SH (trade war) eliminated 66% of exports.
There was no domestic demand to take up the slack.
There is a multiplier of 1.2 to 1.8 for every dollar of GDP added to / removed form the economy.
5% of GDP x 66% eliminated = 3.5% GDP destroyed in year 1.
3.5% GPD x 1.2 to 1.8 = 4.2% to 6.3% GDP destroyed by year 3.
Or put another way...
US was a net exporter with collapsing domestic demand, and SH led to the rest of the world refusing to buy American.
Tariffs are not taxes “plain and simple”. They are also an effective method for diplomacy, negotiating trade deals, and protecting industries that are vital to US survival.
True....the current Free Trade extremism is really a detriment to our national defense....and the wealth-redistribution to China just helps them build their military.
Not a single critical poster of this thread has been able to offer evidence contrary to what was posted....none
Dude. Seriously.
"whether Smoot casued/continued the Great Depression"
I have never argued Smoot caused the Depression.
You accused me of being monofocused on trade. You are wrong. You can review my posts on FR for examples of Fiscal, Monetary, Micro, Macro, and other economic principles. You are wrong making suppositions about me, ones which are easily checked. It goes to show the weakness of your regimen before believing in anything that crosses your nose, like protectionism.
Caused the great depression? No one who understands the issue should ever make that claim. Only the most economic illiterate among us would believe that the total collapse of world trade didn't prolong and deepen the depression even though, throughout history, a collapse in global trade always led to global recessions and depressions.
So when Bush “protected” the Steel Industry with tariffs and U.S. industries that consumed steel were greatly harmed, that was good for us. Got it.
“Protection” only means avoiding the consequences of competition. We can surely “protect” industries, which means they can avoid competing, delivering lower quality and quantity at higher prices.
Thanks, I’ll take the protection of the Free Market.
No mention of the growth in GDP...
We have near un-restricted free trade now....and unemployment is up while the GDP is dropping. I am sure Sowell has some non-supportable theory as to why this is good
It still doesnt explain why GDP grew during most of the Smoot period
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