Where To Go On Trade

Based on a report produced by Americas Majority Foundation to be ready by January 2017:

My old friend, the late Richard Nadler, reviewed the political history of trade policies from the founding of our nation through the end of the 20th century. His analysis rebuked the idea that protectionism was something that our founding fathers supported but it was a policy widely debated and included reviewing the nuance not often discussed.

Tariffs were the primary way that the federal government funded its operation throughout much of the 19th century and provided significant revenues throughout most of history until the Great Depression. There was no massive welfare state and the federal government percentage of the overall economy was exceedingly smaller than today. Much of the debate around tariffs were similar to what we hear about the effect of marginal tax rates among businesses and individuals today and what the proper rate for maximum revenues is.

In 1831, Albert Gallatin penned Free Trade Memorial as part of a free trade convention put together by John Calhoun, countering the high tariffs passed in the 1820’s. The goals of the convention were to lower and flatten tariffs to accompany spending cuts to reduce the national debt. Gallatin observed, “Moderate rates will do as they always do, produce a greater proportionate revenue than when raised to an extravagant rate.” I doubt that many supply siders would disagree with this. (From a historical note, South Carolina threatened to secede over the high tariffs but a combination of Andrew Jackson threatening to hang Calhoun and others if they did secede and the reduction of tariffs prevented the American Civil War from occurring a generation earlier.)

Our founding fathers were raised in the era of the economic theories of mercantilism in which as colonies, the British government restricted the colonies’ ability to trade. Adam Smith’s “Wealth of Nations” rejected the mercantilist theory to protect the home market but while supporting the benefit of free trade, he did mention that nations can pursue tariffs in certain situations including:

1. National and bounties to encourage navigation and naval industries, encouraging stronger defense and aid in commerce.
2. Protecting infant industries with temporary assistances and bounties, with emphasis on the word temporary.
3. Temporary tariffs against nations as part of a retaliation against protectionist nations to induce those nations to change policies.

Adam Smith understood the real world and noted that there would be cases that imposing tariffs were a necessary evil to gain entrance to new markets but the goal was always to expand trade. Alexander Hamilton was a protectionist but his protectionism was designed to help infant American industry, to provide a manufacturing base to go with Americas’ agricultural, and to strengthen and diversify our manufacturing base. Hamilton’s recommended tariff rates were significantly lower than what many free traders viewed as needed to raise revenues in the 19th century and Hamilton’s dilemma was dealing with an economy rural in nature with heavy manufacturing; making it vulnerable to outside forces that could easily cut off its exports in agricultural goods.

Abraham Lincoln was a protectionist and during the Civil War high tariffs were used not only to protect American industry but also to raise money for the war. While we don’t know if Lincoln would have lowered tariffs or maintained the higher rates to build a more industrial nation, Republicans did support high tariffs over the second half of the 19th century and through the first third of the 20th century.

The nation saw substantial increases and increased immigration levels which actually created a new market for domestic home goods. As Richard Nadler noted in his book Peril of Pat, “You can’t pick a 55 year stretch of American history and find decline” in reference to idea that the period between 1860 to 1914 as a golden age as some modern day protectionist as a Golden age for American workers. Productivity increased and so did GNP but many workers saw slow rise in income compared to the liberalized trade era following World War II till 1970’s before the expansion of the welfare and regulatory state.

It is difficult to draw a direct comparison since due to productivity increases, and America’s reliance on a gold standard, the last half of the 19th century was deflationary and while workers income from 1860 thru 1900 rose just .6% per year; the dollar was stronger and wages may have been higher due to the stronger value of money. The biggest loser in the last half of the 19th century were farmers who found themselves paying off their debts with stronger dollars while the actual price of their goods declined. This was good for urban workers but not good for the farmer who was barely making ends meet. The last half of the 19th century saw a debate over trade policies and monetary policies as many in the Western United States wanted to see a more inflated currency and more access to world goods as cheaper price. Americans workers were able to buy more with their wages due to increase productivity and deflation, and America was becoming more urban, thus the deflation actually benefitted many of the new urbanites. Interestingly, the increase in immigration helped create a domestic market and by the end of the 19th century one third of Americans were not born in the United States but were immigrants; nearly three times the levels that we see today among the percentage of immigrants not born here, both legally and illegally.

The 1920’s and 1930’s proved to be a testing ground for what we can call Trumponomics. Trade barriers remained high in the 1920’s but the Coolidge administration also lowered tax rates and reduced government spending so we did see modest income growth for workers and a high GNP. So growth occurred during a period of immigration restriction and high tariffs. As Warren G Harding became President, the country was in such a severe recession that the word depression may have been more accurate but the Harding administration essentially allowed the market to heal itself and the 1920’s boom began. The Great Depression of the 1920’s did not occur due to Harding’s refusal to invoke government interventionist policies but instead lower tax rates and reduce government spending. Hoover did the complete opposite of what Harding did in 1929 and 1930; the Great Depression became Hoover’s albatross.

The lesson of the Great Depression showed the limitation of high tariffs when Hoover sent rates even higher with Smoot-Hawley in 1930 as a solution to protect jobs as result of the 1929 downturn. Tom Sowell noted that 3000 economists predicted retaliations which become a reality after the passage of Smoot-Hawley. As Sowell observed, “The unemployment rate in the United States was 6% in June 1930, when the Smoot-Hawley tariffs were passed-down by its peak of 9% in December 1929.” After this tariff was passed, the unemployment jumped 15% a year later and by 1932 election, slightly over one out of every four American worker was unemployed. Smoot-Hawley did play a role of deepening the 1929 recession and turning it into a long term economic downturn that lasted more than a decade.

Sowell in his book, Basic Economics, explained, “One of the most tragic examples of such restrictions occurred during the worldwide depression of the 1930’s, when tariff barriers and other restrictions went up around the world. The net result was that world exports in 1933 were only one-third of what they had been in 1929…. Just as free trade provides economic benefits to all countries simultaneously, so trade restrictions reduce the efficiency of all countries simultaneously, lowering standards of living, without producing the increased employment that was hoped for.”

Trump’s economic plan is a combination of experimentation with Trump advisor combining a traditional supply side Republican policy with a nationalistic industrial policy of rewarding Midwest manufacturing jobs. Trump’s advisor Steve Bannon noted, “Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement… It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Shipyards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.” In 1920’s, Coolidge economics worked because it limited government policies on the domestic side but Hoover, when faced with economic crisis, reverted to a progressive stance of using government interventionist policy that included higher taxes, and more government stimulus. The fear is this direction Trump is headed and what it will lead to?

Another aspect of protectionism is that many companies will be coming to Washington to seek protection for their industries. Jay Cost in his book, Republican No More, noted, “The final policy a strong protective tariffs, was not so much an economic necessity as it was a political one. The Tariff benefitted key electoral constituencies, keeping them with the GOP even if other aspects of its program did not aid them.” Jay Cost described how the political class intermingle with the many of the wealthy; a 19th century version of the globalist class but protectionism was as much political as economic as corporations lobbied for protection for their business. Today’s globalist may be tomorrow’s economic nationalist, seeking their own piece of protection.

Throughout our history, it was not uncommon for an American President to seek temporary rehabilitation against other countries to open up trade opportunities for American goods and services; something that even both President Bush and Reagan did in their years as President. Both Presidents did put on “tariffs” on selected goods and industry to other countries but their goals were to liberalize trade not to restrict it and that these steps were temporary means to open up trade and reduce barriers to American goods. (There is plenty of economic data to show that these temporary tariffs and import restrictions were counterproductive, a risk that one takes in instituting temporary tariffs in order to create a more liberalized trading system.)

Trump’s administration can certainly use these tactics even if their goal is to liberalize trade but as the recent Carrier episode showed, we should be leery of a President who uses his bully pulpit to threaten American corporation with consequences if they choose to move companies overseas while the state government adds a seven million dollars sweetener to the pot. (Sarah Palin even condemned the Carrier deal post-election as crony capitalism.) If there is a lesson to hold here, the lesson is two-fold. The first being that corporate taxes matter as companies do view taxes as part of doing business and if it is too high they look elsewhere. The second is that increase in business regulations equally matter since they too affect the bottom line. The long term strategy would be to lower the corporate tax and review regulations. There is so much the Presidential bully pulpit can do.

Trump’s tax and regulatory plans recognize that dealing with the cost of doing business includes the tax and regulatory burdens imposed by government matters. In the aftermath of the 1929 stock market crash, Herbert Hoover implored business leaders to keep wages high and production moving forward while encouraging state government to begin reconstruction. Hoover used his Presidential pulpit to encourage businesses to keep production high and not lay off their workers but his policy mix ended up undermining his bully pulpit. If Trump enacts the right policy and there are signs that he is willing to do that on the tax side, then his plan will succeed. The lessons of Hoover can’t be ignored. Bad policy mix will undermined the bully pulpit.