History repeats itself. It is amazing how similar the 1920s and 2000s have become. First were the unsustainable economic booms; then came the busts. Of course the easy money policies of the Federal Reserve caused both busts. Then there is the government’s response to both crises: public works programs, lots of stimulus spending, more easy money by the Fed, and tax hikes on the rich. To be sure, these policies did not cure what was ailing the economy in the late 1920s and they are not curing our economic ills today. Really, the only dreadful piece of the government’s response to the crisis in the 1920s that is missing from today’s response is trade protectionism.
Hold on one minute. The House this past week passed the president’s cap and trade legislation. Now, I know that cap and trade has nothing to do with trade between countries and protectionism. It is not legislation intended to protect domestic products against foreign competition as the Smoot-Hawley Tariff Act was intended to do in 1929. Instead, cap and trade is intended to protect the environment against foreign substances. On the surface, comparing the two measures is a stretch. However, the consequences of cap and trade, if passed by the Senate, will be very similar to those of Smoot-Hawley during the Great Depression.
In 1929, the Smoot-Hawley Tariff Act imposed duties on thousands of imported products in order to make them less competitive against domestic U.S. products. Naturally, our trading partners placed equally heavy tariffs on U.S. goods entering their countries. This had the effect of raising the costs of all goods at a time when many were losing their jobs and couldn’t afford to pay more for things. It is acknowledged by many economists that Smoot-Hawley and the wave of international trade protectionism that it brought forth was a major contributor to worsening an already sharp economic downturn.