killer buffalo

The argument behind protectionism—the restraining of free-trade between countries through the use of tariffs and government subsidies—has always been a populist and nationalistic one.  It has been an argument pitting the first world against the third, and people of developed economies, who fear outsourcing will leave them unemployed, against international conglomerates, who often view workers in developing economies—who are willing to labor for smaller payouts—as unexploited profit.

Yet since the Smoot-Hawley Tariff drove the United States, not to mention the rest of the world, into the Great Depression, protectionism has also been a policy largely avoided when political pressures don’t demand it.  That is to say, it has become a major sticking point between economists, who know better than to support it, and politicians, who usually use it as a means of exporting blame and satisfying voters who falsely connect economic expansion in Asia with contraction in the Americas.

The primary reason that protectionism doesn’t work is that it interferes with country’s comparative advantage—their ability to produce more goods or services more efficiently.  For example, if the 111th Congress passed a law excluding the importation of all crops and President Obama signed it into law, American farmers would need to find methods of growing watermelons, strawberries, corn, and kiwis during their sub-tropical winters or risk not having access to those foods.  Needless to say many crops would become enormously more expensive or disappear from market shelves entirely.

However the Smoot-Hawley tariff of 1930, which raised American tariffs to record levels, also failed for another reason: it catalyzed an economic war where European countries retaliated with similar tariffs and American-European trade altogether fell apart.  Instead of specializing specific industries where they are most efficient, exploiting Eastern Europe’s cheap labor and Germany’s new manufacturing base, American companies struggled to produce the goods Americans demanded with limited resources.

Thus it was with implanted knowledge of the 1930s and President Hoover’s ghost at his back, that Mr Obama trudged to London Thursday for the Group of 20 (G-20) economic summit.  Indeed Mr Obama fought to stem the unproductive nationalism that so often stems from recession, and for the most part he succeeded.

The G-20 did agree to “name and shame” countries that approved tariffs and trade barriers, and they made promises for a united, global solution that includes a $1.1 trillion international loans and unanimous cooperation with the International Monetary Fund (IMF).  However, as French President Nicolas Sarkozy and German Chancellor Angela Merkel—both pressured by a renaissance in European discontent at free-market economics—pressed for increased regulation of hedge funds and investment banks that weren’t as much responsible for the financial meltdown as they were victims of it, Mr Obama relented.

During the campaign, Mr Obama fought deregulated finance as Wall St. crumbled, pointing out that America had tried it, and it didn’t work.  If President Reagan is considered the beginning of deregulation, as most people suggest he is, then it did work for twenty-five years before it failed.  The problem with saying that a lack of federal regulation over Wall St. led to the financial collapse is that federal laws don’t necessarily translate to federal oversight.  Bernard Madoff didn’t succeed in running an international $64 billion Ponzi scheme for forty-eight years because there weren’t laws against it; he succeeded because the Securities and Exchange Commission (SEC) was careless.

And just as it can be said that deregulated finance didn’t work, it can be said that regulated finance never worked.  Over the past twenty-nine years since Mr Reagan took office and deregulation began, the gross domestic product (GDP) of the American economy has grown 180%—from around $5 trillion to around $14 trillion; during the same period the more regulated economy of Europe has grown less than 80%.

From the perspective of the average American worker who has lived to see the manufacturing jobs in the Rust Belt move to China and Thailand and see the growing computer industry move software engineering first to India and then hardware production to China, protectionism still sounds pretty good.  To the American looking down Elm St. at the foreclosure signs and down Main St. at the empty buildings, regulation might sound good too.  But we tried protectionism in the 1930s.  Europe tried over-regulation in 1980s and 1990s.  We should know better.

-David Lamb

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