Economic Populist Commentary

Economic commentary by a pro-capitalist, economic populist. Demand-Side Economic theory. Consists of author's economic views. Questions & comments appreciated. Dissenting views are VERY welcome and encouraged. Main "agenda" is crafting and advocacy of a "populist" economic agenda. A secondary goal is prevention of an economic Armageddon. Encouraging open discussion of US economy.

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Location: Southern California, California, United States

The author is a physician by profession, and a "student economist" by necessity. The current status of our economy necessitates the latter. The intent of this blog is to explain and discuss economics in layman terms. It is designed to promote thought and discussion. It is written by a layman. Comments and critiques of these theories and letters are welcome and ENCOURAGED. Dissenting comments are also WELCOME! They form the basis for discussion.

Thursday, November 27, 2008

TARIFFS: The Smoot-Hawley Fairy Tale

TARIFFS: The Smoot-Hawley Tariff Fairy Tale

Once again, it's necessary to debunk the Globalist fairy tales about the "damage" caused by the Smoot-Hawley Tariff. Below is a copy of U.S. GDP from 1929 through 1939. These are official government figures from the US Bureau of Economic Analysis (BEA).

Below is a copy of the chart that has key numbers underlined. The Trade Balance has been underlined in Red. Exports have been underlined in Blue. Imports have been underlined in Orange.



** Note on the above referenced charts: The 1929 Trade balance is listed as +$0.4 billion. This is a MISTAKE. It should be +$0.3 billion. Subtracting the $5.6 billion in imports from the $5.9 billion in exports gives a difference of +$0.3 billion, not +$0.4 billion.

Notice that there is a slight decline in both exports and imports by the end of 1930. The trade balance remained around 0 during the entire time. Exports bottomed in 1932 — 2 years before any revision or modification of Smoot-Hawley occurred.

The Smoot-Hawley Tariff was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods. Legislation was passed in 1934 that weakened the effect of the Smoot-Hawley Tariff. In effect, the 1934 legislation functionally repealed Smoot-Hawley. Thus, the effects of Smoot-Hawley cover only the period between June 17, 1930, and 1934. This is the time frame that should be focused on.

So in reviewing the chart, what evidence is there that the Smoot-Hawley Tariff "hurt" the economy?? Is there any evidence at all?

No, there is practically NO evidence that Smoot-Hawley hurt our economy.

The US was already in a Depression when Smoot-Hawley was enacted. Prior to Smoot-Hawley, the 1929 Trade Surplus was +0.38% of our GDP. In other words, it contributed less than 1/200th to our economy.

What happens if we focus on exports alone? Exports were $5.9 billion in 1929, and had declined to $2.0 billion in 1933, for a -$3.9 billion decline. This $3.9 billion decline was roughly 3.8% of our 1929 GDP, which had already declined by a whopping 46% over the same period of time. Thus, of the -46% GDP decline, only 3.8% of it was due to a fall in exports.

But the effects on trade must also include the reduction in Imports, which ADDS to GDP. (A decline in imports increases GDP). If the import decline is added back to the GDP total (to measure the net trade balance), the "loss" becomes only -$0.2 billion from our GDP — or less than ½ of 1% of the total GDP decline.

In other words, the document-able "loss" from the Smoot-Hawley Tariff — the "net export" loss — contributed less than ½ of 1% of our our -46% GDP decline. Overall, the Smoot Hawley Tariff caused almost 0 damage to our economy during the Depression.

To put this in better perspective, let's compare all the GDP components together:

1929 .......................................................... 1933
GDP $103.6 billion--------------------->$56.4 billion ( decreased -$47.2 billion) Consum. Expend $77.4 bil----------> $45.9 billion ( decreased -$31.5 bill) Private Invest $16.5 bil--------------> $1.7 billion ( decreased -$14.8 billion) *Trade Balance +$0.3 bil------------>+$0.1 billion ( decreased -$0.2 billion) Exports $5.9 billion--------------------> $2.0 billion ( decreased -$3.9 billion) Imports $5.6 billion--------------------> $1.9 billion ( decreased -$3.7 billion)

Again, to re-emphasize, how much difference to US GDP did the export loss make? The Trade Balance worsened by only -$0.2 billion, or about 0.19% of our 1929 GDP ( or less than 1/5th of 1% of 1929 GDP). Meanwhile, our total GDP decreased a whopping -46% (or $47.2 billion).

How much effect did a 1/5th of 1% loss of GDP have on the Great Depression, especially when spread over a 4-year period?


Again, where's all the "damage" that the Smoot-Hawley Tariff caused?? (Was it was all in "off-balance sheet" accounts?)

Based on available statistics, Smoot-Hawley had almost NO effect on the Great Depression. At the very most, caused a -3.8% decline in GDP from loss of exports. But factoring in the GDP increase from a decline in imports, it caused less than 1% of the GDP decline.

The Smoot-Hawley Tariff did not cause the Great Depression, nor did it worsen it or extend it. Claims to the contrary are not only false, but easily refutable. The evidence to disprove those claims is abundant, overwhelming, and freely available to the public.

The Smoot-Hawley myth needs to be put to rest, once and for all. The claim that it worsened the Great Depression is nothing but a fairy tale.

Economic Populist Forum

8 Comments:

Anonymous Anonymous said...

Great research. The Smoot-Hawley myth is always cited by advocates of so-called free trade, because they have no reality-based support for their theories. They are, at this point, intellectually bankrupt.

The basic theory was advanced by Henry Simons half a century ago as "freer trade [meaning, primarily, the unthinking elimination of tariffs] is the sine qua non of a durable peace." But Simons asserts that the alternative to 'freer trade' is "bilateral trading, quota restrictions, and exchange controls" - all of which, under various guises, characterize the current WTO system. Simons warns that those "alternatives to freer trade" will always lead to "single trading authorities" (mercantilism).

And here is how it ends: "Nations will seek, if only from defensive necessity, to manipulate foreign trade as a national monopoly-monopsony. . . . The collectivist trading of national monopolies . . . is essentially exploitative and essentially a power contest, imperialist in the worst sense and conducive to lower real income (and militarism) everywhere. . . . It goes without saying that, to play this game effectively, we must also regiment our economy internally. Total warfare is efficient warfare, whether in a military or an economic form."

And that is from the historical founder of the Chicago School. It was a grand concept - to design a political economy with individual freedom as the guiding goal. And then to go a step farther and proclaim world peace as the logical outcome, there's a truly grand concept! But it appears now that the spawn of this grand design must be swept up and emptied into the dustbin of history - like many another theory-based systemic reform movement.

"Freer trade" meaning systematic reduction of tariffs with little attention to whether the result truly is actually tending toward world peace or toward individual freedom or toward a free enterprise economy - such "freer trade" is, indeed, a fairy tale.

What about Ron Paul's approach? Ron Paul understands exactly what Henry Simons was aiming for. It can be said that their approach failed, except that it hasn't really been tried. But does that matter, in the present dilemma? Do we have the opportunity today that we had half a century ago, or has it been squandered? Are we looking at a "New American Century"? The answer is all too obvious.

In a world gone mercantilist, a world in which the U.S. has been conquered without even knowing it, (recommended as the supreme victory by the Chinese strategist Sun Tzu), we must choose between a totalitarian economy and . . . a tariff barrier!

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