Sunday, February 01, 2009

Smoot Hawley Redux: The 2009 Economic Stimulus Plan

President Herbert Hoover signed the Smoot-Hawley Tariff Act into law on June 17, 1930. The Act was designed to raise tariffs on over 20,000 imported goods. . However, one of the unintended consequences of the Act was retaliation from more than 25 of the U.S.’s trading partners to the point that U.S. exports declined from $5.24 billion in 1929 to just $1.6 billion in 1932.

Thus the Smoot-Hawley Act was a prime contributor to the Great Depression that engulfed the nation’s economy until the Japanese bombed Pearl Harbor on December 7, 1941.

Despite the clear evidence that restricting trade is destructive to a nation’s economy even during good economic times, the 2009 Economic Stimulus Bill that is winding its way through the Congress and likely to be signed by President Obama contains anti-trade elements that are certain to bring on retaliation from our trading partners and push the U.S. economy further into the abyss.

Provisions of the 2009 Stimulus Bill require those receiving stimulus money to use only U.S. providers or suppliers, or to give them strong preference. This is very reminiscent of the thinking behind Smoot-Hawley. Not surprisingly, after the House vote last week passing the bill, a spokesman for Catherine Ashton, the European Union trade commissioner, said that "if a bill is passed which prohibits the sale or purchase of European goods on American territory, that is something we will not stand idly by and ignore." And Prime Minister Taro Aso of Japan denounced this portion of the Plan in Davos, Switzerland, saying, "We will resolutely fight protectionism."

The “Buy American” portion of the bill is just one of the elements that must be jettisoned before Senators and Congressional Representatives sign on. Keynesian economics is not the only bad idea the Obama Administration is bringing back from the 1930s.

Ernie Goss

1 comment:

Anonymous said...

Was the decline in 1932 due to the increased tax on imports or due to the general global economic decline. I heard much of the decline was due to the lack of regulation on margin calls.

I disagree with the assumption that the depression ended as a result of the bombing of pearl harbor.

Switzerland is a protectionist country so I'm not sure where they are coming from here.

Regardless, the banking practices and bad economy is not a result of regulation. This was the most deregulated period. Now the Democrats are charged with putting humpty dumpty back together again. What a task!