In a Wall Street Journal article the point is made that we may be headed into another Great Depression.

What’s worse, we’re close to repeating the mother of all policy errors, the one made not in 1937 but in 1930—the one that started the Great Depression. We’re on track to resurrect the 1930 Smoot-Hawley Tariff Act.

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Last week the House passed the Currency Reform for Fair Trade Act. It’s an amendment that gives dangerous new protectionist powers to the notorious Smoot-Hawley Tariff Act, the proximate cause of the global Great Depression, which after all these years is still on the books

The bill is official named the “Currency Reform for Fair Trade Act” and is H.R.2378 if you’d like to read the full text here.  The first paragraph lays it out.

To amend title VII of the Tariff Act of 1930 to clarify that countervailing duties may be imposed to address subsidies relating to a fundamentally undervalued currency of any foreign country.

Basically, the bill proposes that we will put a new or increased duty on any products from a country that has a currency that we view as undervalued.  China will meet almost every description of an undervalued currency that is present in the bill.  By imposing huge tariffs on Chinese imports, a large portion of the inexpensive products Americans rely on, a trade war and perilous inflation are the two results we should expect.

But is this kind of protectionism really all that bad?  Let’s review history and how the Smoot-Hawley tariff act affected the American economy.  In all fairness, the trade war that set the scene for the worst financial disaster in American history, was set in motion in 1921.  Warren Harding then enacted the Emergency Tariff Act of 1921 which paved the way for the Tarrif Act of 1922.  Between the two of these laws, America put unprecedented duties on agricultural goods.

As the existing tariffs had not seemed to have caused a calamity (unless you were in the agriculture sector) the political leaders in America pushed for much more sweeping duties on hundreds of thousands of imported products.

As for Hoover, he was determined to raise tariffs and by June 1930, when a delegation of bishops and bankers paid him a visit to ask for more public works projects amidst a tumbling economy, the President told them, “Gentlemen, you have come sixty days too late. The Depression is over.” On June 16, he then issued a statement through the newspapers that he would be signing a bill, in an attempt to aid those businesses damaged by the downturn. [1]

No parallels there..  Obama has declared the Recession over and Congress is putting in the Currency Reform Act to increase tariffs on tens of thousands of imported goods in the hopes aiding American businesses hurt in the recent downturn.  That whole thing about not learning from history and dooming ourselves to repeat it thing is echoing loudly .. for some of us.

And here’s a little video that shows how Smoot-Hawley affected us then and what we may be doing to ourselves yet again.

[1] Smoot-Hawley – http://www.buyandhold.com/bh/en/education/history/2002/smoot_hawley.html

The A.R.R.A. (stimulus bill), has provisions in it that only allow the money to be spent on “manufactured goods” that are made in America.  While a welcome gift to the American steel industry and steelworkers union, reaction from foreign trading partners much colder.  American companies now face the proposition of being blocked from bidding on contracts in other countries.  Canada and the EU have raised extreme objections to the move and are considering two counter-measures.  First, they have petitioned the World Trade Organization, which is largely for show, but also allows them to take the second action – putting tariffs on American goods going into their countries.  By petitioning the W.T.O., those countries are not vulnerable to claims from the U.S. that they are engaging in unprovoked anti-trade actions.

Caterpillar Tractor is undertaking an effort to be involved with major projects in China.  Due to the recent placement of a tariff (tax on imported goods) on Chinese tires, the American heavy equipment manufacturer may find it much tougher to sell it’s machines in the rapidly-growing Chinese economy.  China has already filed a grievance with the W.T.O. and is now moving to place counter-tariffs on American imports of chickens and auto parts.

Highly-controversial agricultural subsidies have existed for decades.  Some farm subsidies are actually larger than the cost of the product itself.  The U.N. found in 2001 that the U.S. subsidy on a pound of cotton was more than 52 cents per pound.  It costs just above 20 cents per pound to grow cotton in some countries outside the U.S.

Mercantilist policies are also being applied to our neighbors to the south.  Restrictions on Mexican trucks on U.S. highways are making it more expensive for Mexican manufacturers to put their goods on American shelves.  While not a direct tariff, it has the same effect.  How long will it be before American goods are less welcome in Mexico?

Protectionism was a major factor in turning the 1929 recession into the great depression.  It was the leading factor into making the U.S. depression up to 5 years longer than in most other nations in the world during that period.  By taking the same steps, making the same mistakes, and being naive of history, we could be inviting the next great depression.

SEIU for Obama Pin

Trial lawyers and gigantic unions make billions of dollars off of the backs of the working class and are the puppet-masters of the White House and congressional leadership. Too much is owed to these monstrous organizations – and they know it.

The leader of California’s giant United Health Care Workers West, Sal Rosselli, had the basic union strategy quoted from him as, “It’s between our vision of a bottom-up union movement and Andy Stern’s[SEIU's president] idea that a few folks in Washington should control all the decisions.”. Andy and Sal want to make sure that they control those few people.

All of the unions have an interest in a government-run, tax payer funded health care system.  The current bill would relieve them of tremendous liabilities for their overly-generous benefits.  Although the bill considers that health care benefits be taxable for the common worker, unions would get a free pass.  The bill also opens the door to allow unionization of health care workers everywhere, and could end-up making it required.  Of course they are for the public option, but not because its better for anyone other than the union leadership.

The administration is putting protectionist tariffs in-place to protect the United Steel Workers union.  In retaliation, the affected trade partners are going to tax incoming auto parts and chickens.  Those affect smaller unions (and non-union workers) which make it a calculated, acceptable loss.  This short-sighted move is exactly what helped move the recession into a depression in the 1930′s.  Smoot-Hawley anyone?

Trial lawyers are just as influential.  Tort reform has been incredibly successful at increasing access to care in rural areas and cutting costs in both California and Texas.  The trial lawyers lobby is so powerful so that even though there is a proven tactic available, it will not be considered by the President or congressional leaders Pelosi and Reid.

Perhaps they can’t help themselves.   Maybe they just don’t care.  We have to.

Should our health care, economic, or national security put in the hands of greedy union leaders and trial lawyers?  Who elected them?  The unions are controlling the current congress and white house by calling in IOU’s for having given them the presidency and a congressional majority.  We don’t owe the unions anything and I’m tired of paying for politicians having given their souls to these devils of industry.

In a recent Telegraph article, it is suggested that President Obama is making some historic mistakes in the handling of the American economy.  The author goes so far as to say that these mistakes are the same as those made by leaders just before and during one of the darkest financial times in U.S. history – the Great Depression.

The basis for this concern is that Obama’s belief that Keynesian economic policies will return the U.S. economy to growth by printing money and stuffing it back into the economy.  Short-term this will create false and unsustainable spikes of growth.  If the economy doesn’t grow organically, it will have no support.  This creates a spiral of out-of-control spending to prop-up the false economy with more printing and spending. It is precisely these policies that made the depression longer and deeper in the United States than in other countries where they took more of a laissez-faire approach – most of which had come out of the depression by 1931.

As a side-effect, the dollar will drastically weaken as an oversupply of money is created.  This will inflate the cost of goods as it will take many more dollars to purchase commodities.  High inflation will suppress demand and increase the velocity of the economic death-spiral.  Of course, Keynesians would print and spend more to combat the ever-decreasing G.D.P. which keeps this whole circle of ineptitude going. (print more money->spend it->weakened dollar->inflation->decreased demand->increased unemployment->rinse and repeat).

Many economists also point at Hoover’s mercantilist trade policies as a factor in worsening the depression in America.  The Smoot-Hawley tariff act was a protectionist law that raised tariffs on 20,000 imported goods.  In a move showing a naivety of economic history, President Obama is suggesting a 55% tariff on Chinese goods.  When taken with Obama’s anti-free trade rhetoric, striking similarities to President Hoover’s errant thinking become evident.

Let’s not forget the draconian tax increases that come with the Keynesian belief that the government must stabilize demand during times of economic trouble.   By the end of 1931 President Hoover recommended a gigantic income tax increase in an effort to save the country from skyrocketing deficits.  Marginal rates rose by as much as 38% to a high of 63% on taxable income and the effect on household spending was dramatic.  Barack Obama is already floating trial balloons on the subject of middle-class tax increases to pay for all the entitlements and other government spending he is promoting.

Some argue that we are not heading into repeat of 1929-1937.  In Steven Levitt’s article, This is Not Another Great Depression, Levitt makes the case that we are not on the road to a depression because G.D.P. has not changed when evaluated between Q4 2007 and Q4 2008.  But what about the 4 successive declines¹ from Q3 2008 through the second quarter of 2009 – a total drop of almost 3% and a trend that has not yet reversed.

Unemployment statistics are also in stark disagreement with Levitt’s assertion.  Since the start of the recession near the end of 2007,  unemployment has gone from 4.9% to its present 9.7%.  During the height of the depression era, unemployment swelled to over 20%, but if we look at 1930 when the depression was beginning to take hold, the unemployment rate was only 8.9% – nearly a point lower than today.

Today’s employment numbers are also less accurate than those kept during the depression.  Currently, if a worker becomes discouraged and just quits looking, he falls out of the statistics.  That person is no longer unemployed.  Some estimations² put the disparity due to this difference in accounting at somewhere between 5% and 10%.  That would put our current unemployment rate, adjusted for the rules used in the depression, at between 14.8% and 19.8% – much worse than during the start of the depression and approaching dangerously close to the worst numbers achieved in the 1930′s.

Just prior to the Great Depression, Russian economist Nikolai Kondratiev made the case that economies had super-cycles of roughly forty-to-sixty years.  With the darkest days of the 1930′s roughly seventy years behind us, Nikolai would say we are due.

Looking at history, the assertion could be made that our leaders should consider doing less, spending less, and printing far less money if they truly wish to avoid an economic disaster.  The interventionist attitude of the current administration is already showing itself to be repeating history.  Canada is already adding jobs³ to their economy while losses mount-up in the United States.  Canada and other countries that are taking far more hands-off approaches, are already coming out of their recessions while we appear to be going deeper into the abyss.

Footnotes:
¹ – www.bea.gov – “Current-dollar and ‘real’ GDP” report
² – WikiAnswers – “What was the unemployment rate during the Great Depression”
³ – www.BloggingStocks.com – “Canada posts first job gain in four months”