2007-08-07

Economists Against Protectionism - WSJ.com

Economists Against Protectionism - WSJ.com

Economists Against Protectionism

By PAT TOOMEY
August 1, 2007; Page A15

On May 4, 1930, 1,028 economists signed a petition urging Congress and President Herbert Hoover to reject the Smoot-Hawley Tariff Act, arguing that "increased restrictive duties would . . . operate, in general, to increase the prices which domestic consumers would have to pay." Neither Congress nor the president listened, but the stock market certainly did.

Though many associate the Great Depression with the stock market crash on Oct. 29, 1929, the market actually rallied during the six months following Black Tuesday, while the defeat of Smoot-Hawley appeared likely. The market turned south again in April 1930 as those hopes of defeat gradually dimmed.

The Dow Jones Industrial Average sank a full 8%, from 250 to 230, over just two trading days in June 1930, in direct response to the Senate's passage of Smoot-Hawley and Hoover's announcement that he would sign it. Exacerbated by other flawed governmental policies, an international trade war continued to drive the market down until the Dow hit a low of 41 on July 8, 1932, having lost 89% of its value from its September, 1929 high. It would be 25 years before the market recovered its 1929 peak.

Unfortunately, Congress is suffering from a bad case of amnesia. Over the past several months, protectionism has reached a fever pitch with lawmakers in both Houses clamoring to attach their names to as many as 50 anti-trade bills.

In the Senate, Max Baucus (D., Mont.) and Chuck Grassley (R., Iowa) have joined longtime protectionists, Chuck Schumer (D., N.Y.) and Lindsey Graham (R., S.C.), in sponsoring legislation to punish China for currency intervention. Tomorrow, hearings in the House Ways and Means Committee commence with a host of protectionist measures on the agenda, including legislation by Reps. Timothy Ryan (D., Ohio) and Duncan Hunter (R., Calif.) that would allow the Commerce Department to increase duties on China. Not to be outdone, the top-tier Democratic presidential candidates are falling over themselves to reject the free trade policies of Bill Clinton's Democratic Party.

In this respect, Congress hasn't changed much over the past 77 years. Thankfully, economics hasn't changed much either: 77 years after 1,028 economists stood athwart protectionism yelling "stop!" a new batch of economists are just as determined to turn back the rising protectionist tide.

The Club for Growth is disseminating a petition advising Congress "against imposing retaliatory trade measures against China." Like its historical counterpart, this petition is signed by 1,028 economists from the left and the right. They come from all 50 states and include four Nobel laureates, three former chairmen of the Council of Economic Advisors, former members of Congress, a former Treasury secretary, and economics professors from our country's most prestigious universities.

While the signatories on this petition will certainly disagree on a host of other issues -- at least 20 signed a 2003 petition against the Bush tax cuts -- they all agree that, in the words of the petition, "there is no foundation in economics that supports punitive tariffs."
Adam Smith long ago observed that "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy." As members of Congress should know -- but unfortunately don't -- the maxim of the family applies equally to a nation. This simple truth explains the irresistible logic of free trade.

Free trade among and between people of various nations is the mechanism that allows producers to maximize their comparative advantage while consumers maximize the value they receive for their dollar. Free trade allows American producers to sell jets and software to the Chinese, while American consumers buy toys and apparel from China -- a win-win proposition for both buyer and seller.

Protectionists attempt to disrupt the market's natural tendency to seek efficiency by imposing tariffs in order to artificially increase the price of foreign goods relative to domestic competition. Thus, tariffs are simply a tax on American consumers, and it would be Americans, more than the Chinese, who pay the price. The very people Sens. Schumer and Graham claim to help will suffer from the higher prices, fewer jobs and potential trade war that will result from their legislation.

As the Club for Growth petition demonstrates, support for free trade is virtually universal among reputable economists. More importantly, history has shown the devastating consequences of protectionist policies. Let's hope Congress steps back from this precipice and rejects the misguided policies of Smoot, Hawley, Schumer and Graham.

Mr. Toomey is the president of the Club for Growth. More information about the petition is at http://www.clubforgrowth.org/

related:
Protectionism - the real threat to growth, stability
Stand Up, Free-Trade Democrats!
THE PETITION TO STOP PROTECTIONIST MADNESS

2 comments:

otis said...

Protectionism is dangerous but it isn't that dangerous.

It is certainly not the opinion of most economists that the Smoot-Hawley Tariff caused the great depression.

It is more commonly believed that the depression was caused by a business cycle downturn coupled with contractionary policies by the Federal Reserve.

That being said, risking a trade war with China, for no good reason is neither good economics nor good politics.

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