Wednesday, December 31, 2008

Have you seen these men?...

Meet the infamous Willis Hawley and Reed Smoot, original authors (although the end product was highly amended) of the much-maligned Smoot-Haley Tariff Act that is roundly excoriated for making the Great Depression so great.  To be sure, it was not the only cause, perhaps not the major one, but nothing deepened the economic crisis like the protectionism it put firmly into law.
Nevertheless, the act added poison to the emptying well of global trade (see chart). The worldwide protection of the 1930s took decades to dismantle. And bad monetary and fiscal policies were at least based on the economic orthodoxy of the day: economists would tear each other apart over the heresies of John Maynard Keynes. On protection, there was no such division. More than a thousand economists petitioned Hoover not to sign the Smoot-Hawley bill. Bankers like Lamont sided with them; so did editorialists by the score.

The “asinine” bill began as a much smaller beast: the plan was to help American agriculture, which had slumped in the early 1920s. Congress passed several bills to support prices and subsidise exports, but all were vetoed by Calvin Coolidge, Hoover’s predecessor. With no obvious logic—most American farmers faced little competition from imports—attention shifted to securing for agriculture the same sort of protection as for manufacturing, where tariffs were on average twice as high. To many of its supporters, “tariff equality” meant reducing industrial duties as well as raising those on farm goods. “But so soon as ever the tariff schedules were cast into the melting-pot of revision,” this newspaper wrote, “logrollers and politicians set to work stirring with all their might.” [More]
Their ghosts still haunt us, as protectionism not only lives, but currently thrives, to the horror of modern economists just like their predecessors. The incoming administration would have to surprise most observers to put liberalizing trade issues as a high priority. Reading the accounts from the thirties also leaves the uncomfortable suspicion economists have not gained much, if any respect over the years.

The deepening economic downturn has been hard on a lot of people, but it has been hard in a particular way for economists. For most of us, pain and apprehension have been mixed with a sense of grim amazement at the complexity of what has unfolded: the dense, invisible lattice connecting house prices to insurance companies to job losses to car sales, the inscrutability of the financial instruments that helped to spread the poison, the sense that the ratings agencies and regulatory bodies were overmatched by events, the wild gyrations of the stock market in the past few months. It's hard enough to understand what's happening, and it seems absurd to think we could have seen it coming beforehand. The vast majority of us, after all, are not experts.

But academic economists are. And with very few exceptions, they did not predict the crisis, either. Some warned of a housing bubble, but almost none foresaw the resulting cataclysm. An entire field of experts dedicated to studying the behavior of markets failed to anticipate what may prove to be the biggest economic collapse of our lifetime. And, now that we're in the middle of it, many frankly admit that they're not sure how to prevent things from getting worse. [More]

(Boy - can you imagine the economist jokes that are going to emerge after this debacle?)

But the sadder aspect of this flashback comparison is the recurrent and lamentable role of agriculture in strangling world trade. Interestingly, the same Republicans who have bravely or insanely decided to oppose the upcoming stimulus package see no hypocrisy in supporting subsidies and tariffs for agriculture in the US.  In fact, some are the biggest champions of shielding me from global competition.

The failure (to date) of the Doha Round primarily over agricultural subsidies may enact an enormous toll as trade continues to spiral down and calls for trade barriers disguise themselves like a workable answer. Even grain farmers ignore the importance of exports while fixated on supplying ethanol plants.

In fact, years from now we could have our own history/economics test answer to rival "The Smoot-Hawley Tariff Act".

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