Wednesday, February 23, 2011

Domitrovic on Warsh's Smoot-Hawley analysis.

Econoclasts author Brian Domitrovic responds to David Warsh's recent dismissal of Jude Wanniski's theory that the Smoot-Hawley tariff bill triggered the Great Depression:

David Warsh has said imponderable things about supply-side economics in the past. Mundell won the Nobel "for the work he had done in the 1950s,” in contradiction to the Nobel citation and any plain reading of the citation’s works cited. Similarly, it takes defiance to adduce approvingly Ben Benanke’s fawning before Milton Friedman, given that Anna Schwartz has specifically called Bernanke out for grossly misreading A Monetary History.

I too hope that one day “An ambitious historian of thought may someday make it clear that a spillover from a strange guerilla battle at the University of Chicago…caused the ‘supply side’ movement to take the form it did – but only after the news pages of the WSJ…quietly chose up sides.” But I think we should add something, namely, “…so as to make Econoclasts obsolete.”

I’ve fingered through the new book enough to say that it looks like Warsh has put words in Douglas Irwin’s mouth. Why we would expect anything else I don’t know. Warsh zeroes in on Jude Wanniski while Irwin discusses the man in Peddling Protectionism about a tad more than I discuss Warsh in Econoclasts. A little bit, but in all quite lost in the cascade of everything else.

As for the “political pop culture,” in the shibboleth lesson the score gets evened with pop philology. The fact remains that Jude Wanniski profoundly advanced the discussion on the Great Depression, and this is not to suggest that he was anything but correct.

Here was the problem in 1930. Farmers were still getting killed, as had been the case for decades, and they had set up quite an extensive lobbyist shop in Washington. These operatives had been banging on Congressional doors in the interest of a tariff in favor of their clients to little effect for some time, but in 1930 two big things were added to the arsenal. The first was industrialists looking at their year-over-years from 1929 to 1930. They wanted to do something big and quick to goose the bottom line. They saw the tariff lobbying establishment in DC and joined it. When people of their caliber came a calling (not just the farmers), Congress listened.

But also, and boy does Warsh miss this, given progressive taxation (even at the low Mellon rates), the deflation that had kicked in made the decreases in federal receipts more than real. Hoover was in desperate straights to raise revenue to finance the debt, and here’s a tariff with renewed prestige with the eastern businessmen in tow. In other words, the persistence of progressive taxation had something to do with the passage of Smoot-Hawley. And when Smoot-Hawley didn’t work as a revenue source in the face of negative bracket-creep, marginal rates were tripled in 1932.

So to say S-H didn’t cause the Depression is not quite on the mark. It was part of an array of faulty moves on the fiscal side that accelerated the slide in the absence of the raising of the price of gold. No Milton Friedman here, mind you, but lots of Mundell at the Nobel podium.

Then there's Warsh’s obliviousness to the international banking effects. In 1925, the US had guaranteed the Versailles reparations scheme. The deal was that Germany would trade in the US and use half the dollar receipts to pay off the loans from the US banks that had covered the reparations once and for all.

Well, if you’re going to make the viability of the US banking system dependent on international trade, you’d better not pass Smoot-Hawley and expect that system not to hit quite a rough patch. It is inconceivable that had Coolidge somehow been president in 1930 he would have permitted the destruction of one of his VP's masterstrokes, the Dawes plan. And this is not to mention the banking failures down the prairie that have been shown in the lit to correlate to the tariff. Douglas Irwin mentions Jude Wanniski en passant for three pages, and David Warsh says this changes everything. I am sure I am not alone in preferring a new seriousness on this important issue.

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