Is 2011 The Second Coming of 1931?
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  • Luke Lea

    “1931 was the year that put the Great in the Great Depression. A banking crash in Europe knocked a fragile recovery off course and after the US Congress turned to protectionist trade policy with the passage of the Hawley-Smoot tariff in 1930, a global trade war wrecked everyone’s exports and the bad economic times turned truly savage.”

    The world is a complicated place, so don’t let the facts get in your way. Here is what Wikipedia has to say (I hope it is factual!) about the effects of Smoot-Hawley:

    “Economic effects:

    Historically, there has been confusion as to the actual tariff level imposed by the Smoot-Hawley Tariff. In the two volume series published by the U.S. Bureau of the Census entitled “The Historical Statistics of the United States, Colonial Times to 1970, Bicentennial Edition”, tariff rates have been represented in two forms. On page 888 in the series U207-212, the first measure is the “dutiable tariff rate” which is the tariff revenue divided by the dollar value of dutiable imports. The second measure is the “free and dutiable tariff rate” which is the tariff revenue divided by the dollar sum of both dutiable and non-dutiable imports. The “dutiable tariff rate” peak of 1932 was 59.1%, second only to the 61.7% rate of 1830. However, in 1933, 63% of all imports were never taxed which the “dutiable tariff rate” does not reflect. The “free and dutiable rate” in 1929 was 13.5% and peaked under Smoot-Hawley in 1933 at 19.8% which is significantly below the 29.7% “free and dutiable rate” that the United States averaged from 1821 until 1900.

    By 1937 the “free and dutiable tariff rate” was reduced to 15.6% when the reaction of 1937-1938 occurred, demonstrating no statistical correlation between this economic downturn and tariff levels.

    At first, the tariff seemed to be a success. According to historian Robert Sobel, “Factory payrolls, construction contracts, and industrial production all increased sharply.” However, larger economic problems loomed in the guise of weak banks. When the Creditanstalt of Austria failed in 1931, the global deficiencies of the Smoot-Hawley Tariff became apparent.[12]

    U.S. imports decreased 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports decreased 61% from US$5.4 billion to US$2.1 billion, both decreases much more than the 50% decrease of the GDP.

    According to government statistics, U.S. imports from Europe decreased from a 1929 high of $1,334 million to just $390 million during 1932, while U.S. exports to Europe decreased from $2,341 million in 1929 to $784 million in 1932. Overall, world trade decreased by some 66% between 1929 and 1934.[14]

    Using panel data estimates of export and import equations for 17 countries, Jakob B. Madsen (2002) estimated the effects of increasing tariff and non-tariff trade barriers on worldwide trade during the period 1929–1932. He concluded that real international trade contracted somewhere around 33% overall. His estimates of the impact of various factors included about 14% because of declining GNP in each country, 8% because of increases in tariff rates, 5% because of deflation-induced tariff increases, and 6% because of the imposition of nontariff barriers.”

  • Luke Lea

    “The US Senate is set to vote next week on legislation to punish China for manipulating its currency. . .”

    which is in flagrant violation of the rules of the WTO.

    So China is not supposed to abide by the terms of that treaty? Currency manipulation you realize means that the communist party leadership in China is artificially keeping its exchange rates low so as to export more than it imports. What’s not to like from the U.S. point of view? Nothing in the short-run. Chinese goods are really cheap as everybody knows. But in the long-run we realize that, hey, we’re not making much stuff anymore, many of our factories have shut down or moved overseas, there are not enough job opportunities for our high school graduates, etc., etc., etc.

    Now true China has grown equally dependent on us. They (the communist party in China) work their workers long and hard and keep half the pay (actually they force the export factory workers to save half their pay in government controlled savings institutions, which the central planning authorities are foolishly squandering on Olympic stadiums, fast trains, fantastic airports, freeways to nowhere and cities without people) and when the game of musical chairs stops there will be the devil to pay.

    Say, who in hell got us into this game in the first place? Well, Paul Samuelson played a big part. So did Paul Krugman. It was the two Pauls that did it, along with guys named Bagwhati, and Dornbush, and too many go-along, get-along academic economists to name, most of whom honestly did not know any better — they thought Ricardo was the first and last word about trade, the poor ignorant things, because they were too busy trying to apply Lagrangians and Hamiltonians to least path integrals back there in graduate school.

    God am I angry! I can see a war cloud over Asia as big as a man’s fist and I pray we don’t get involved. Maybe it’s just an hallucination though.

  • Toni

    “US economic policymakers blithely neglected the needs of our domestic economy while setting up the deeply flawed global trade and finance systems that now exist…”

    1. If economic policymakers had a magic elixir, they’d have used it already.

    2. Dr. Mead neglects what has happened extraneous to official “economic policymaking.” Congress passed bills to remake the health care and finance sectors, which together make up about a third of the economy. The EPA and NLRB are running amok. The president and his party are eager to raise taxes on “millionaires and billionaires and big corporations.”

    Businesses, small and big, are as leery of the future as Dr. Mead is. They won’t hire and invest unless they see decent odds that they can recoup the expense plus some profit. Those odds look poorer by the day.

    3. When did “deeply flawed global trade and finance systems” NOT exist? If there’s a magic elixir, bring it out.

    I doubt Smoot–Hawley II can pass the House. Thank heaven for small favors.

  • Jim.

    @Luke Lea-

    Perhaps we should allow the mathematics professors to have their way with anyone who applies Hamiltonians and Lagrangians to non-integrable functions. Or worse, non-function series of numbers. 😉

    @Toni-

    I’m hopeful that even though there is no “magic elixir” we can apply, there are certainly ideas that are not being applied because the dominant Democrats are rejecting because of political ideology.

    A likely change of administration will allow these ideas to be tried — and for some of the Democrats’ utopian yet destructive ideas to be repealed.

    2010 taught me to have faith yet in the American political system. There is still hope.

    @WRM –

    Germany owed reparations to England and France, of about the same magnitude as the debts England and France owed the US. Those unpayable debts had to be unwound somehow; the plan in place was for the US to loan hard currency to Germany with which it would repay E&F, effectively deleveraging E&F by offloading E&F’s war debts onto Germany.

    Complicating that situation was the highly leveraged 20’s stock bubble, which had an important (and often overlooked) side effect of soaking up a lot of available credit. This meant Germany had to borrow on worse / less affordable terms, which put more political pressure on the settlement (which actually had some hope for a few years of turning out all right; see Locarno / Young plan).

    But, when the margin calls started coming in because of the stock market crash, terms for Germany got completely unpayable and the whole system collapsed.

    Pressuring China to ease their currency manipulation is like pressuring America to ease the terms of its loans to England, France, and Germany in the 20’s and 30’s. *Yes, it could in fact solve a big part of the problem.*

    If they cooperate.

    We just have to convince them that cooperation is in their best interests. Didn’t work on America in the late 20’s; may not work on China today.

    It’s worth a try, though.

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