Friday, January 9, 2009

Back to Destructive Economics

After the Stock Market Crash of 1929, government made sure this downturn would become a depression.  In May-June of 1929 Congress attempted to increase farm incomes by enacting tariffs on agricultural commodities.  There was a surplus of crops everywhere, including Europe which had recently recovered its agricultural potential from World War I.  Much of these crops entered the U.S. as imports, helping to hold U.S. crop prices low.  So by applying tariffs to these imports and making them expensive, buyers would turn to U.S. crops, bidding up the price of farm commodities, and increasing farm incomes.

However, other industries were not about to let agriculture benefit alone.  Scores of industry representatives testified in Congressional hearings that they too needed protection from foreign competition. When these hearings finally ended, there were 20,000 pages of testimony.  Hoover signed the Smoot-Hawley tariff on June 17, 1930, raising the price of imports by an average of 59% for over 25,000 different goods.  Predictably, other governments enacted their own trade barriers in retaliation.  As the world retreated into protectionism and isolation, wealth rotted. Next to the bank runs, the Smoot-Hawley tariff was the largest factor leading to the Great Depression and all the misery it caused.

Today we have our own financial problems.  How are we responding?  The Wall Street Journal recently reports, "The U.S. steel industry has now joined autos and ethanol in the conga line to Capitol Hill. Sort of. Steelmakers aren't seeking government bailout money -- a la Detroit and Wall Street -- but they are pressuring President-elect Obama and the new Congress to stack any stimulus proposal in favor of domestic producers, even though that would inevitably come at the expense of the nation's overall economic health." 

Friends: this is why we teach economics; this is why our job is important!

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