Thursday, March 22, 2018

Vox Popoli: Mailvox: Stupid cons and Smoot-Hawley

Sean asks about an old conservative trade chestnut:

The Conservatives on talk radio keep screaming about Smoot-Hawley. Those tarriffs if I remember right, the prevailing wisdom made the depression worse. What is the counter argument to that and how does it apply to what is going on now? Just curious. I have a hard time grasping arguments, and I know Vox is right but I would just like to better understand why the Levin's are wrong.

I really do not understand why conservatives insist on continuing to pay attention to ignorant and deceitful posers like (((Ben Shapiro))) and (((Mark Levin))). These guys simply do not know what they are talking about and it is absolutely and eminently clear to everyone who does that they neither know the basic facts involved nor understand the core conceptual issues that make those facts important.

Every single talking head who makes any reference whatsoever to Smoot-Hawley is a poser and a fraud who knows nothing about economics or economic history. This is basically a variant of the "Um, Ricardo?" pseudo-rebuttal to an argument for tariffs or other forms of protectionism. It is proof that the speaker has heard about the subject, but doesn't actually know the subject at all.

The point is so trivial that I dealt with it in a single paragraph in The Return of the Great Depression ten years ago and haven't seen the need to mention it again since.

For many years, it was supposed that the Smoot-Hawley tariff of 1930 played a major role in the economic contraction of the Great Depression. As more economists are gradually coming to realize, this was unlikely to have been the case for several reasons. First, the 15.5 percent annual decline in exports from 1929 to 1933 was less precipitous than the pre-tariff 18.3 percent decline from 1920 to 1922. Second, because the amount of imports also fell, the net effect of the $328 million reduction in the balance of trade on the economy amounted to only 0.3 percent of 1929 GDP. Third, the balance of trade turned negative and by 1940 had increased to nearly ten times the size of the 1929 positive balance while the economy was growing.

Unless Levin is concocting some new and highly improbable mathematical scenario based on chaos theory and the Smoot-Hawley butterfly, he's flat-out wrong.
To put it in more simple terms, there was nowhere nearly enough international trade taking place at the time to cause or account for the Great Depression. Whoever originally came up with that idea didn't know what they were talking about and didn't understand economics. And neither does anyone who still takes the ridiculous idea seriously.

The reason the Great Depression happened was the same reason that the financial crisis of 2008 happened. Everyone was overleveraged and the total amount of money being borrowed collapsed. That is why an average of 1,287 banks failed every year from 1930 to 1933. The historical credit collapse had vastly more impact on the economy than a smaller annual decline in exports than had been experienced seven years before as a result of the Fordney–McCumber tariff act.