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Smoot-Hawley II

I was hoping to try to ignore the stimulus efforts for a while, as it seems we've been writing about them a lot lately. But I saw this today, and it's scary, so I figured I'd pen one more missive before laying the topic aside for a while.

First a bit of background. Economists argue about a lot of things, but one area that most of them agree on is that protectionism is bad (meaning, when countries put up trade barriers to try to direct their economic efforts inward towards their own products and services). While protectionist measures sometimes feel good, history shows they inevitably bring retaliation from other countries, and overall economic growth quickly declines because it's so much harder to trade with other countries.

The number one example of the negative impact protectionism has on economic growth has to be the Smoot-Hawley Tariff Act of 1930. Over 1,000 economists immediately petitioned President Hoover to veto the bill, and many industry heavyweights also vigorously opposed it. But it was signed anyway, and sure enough, the world quickly erupted into trade wars that many believe lengthened and made the global depression more severe.

"Why the economic history lesson," you ask? Because apparently the Congress is filled with men and women who missed the "Causes of the Great Depression" lecture in their American History course. Sure enough, faced with an economic environment some are comparing to the early 1930s, the House included a "Buy American" clause in the recently passed stimulus bill. This NY Times editorial summarizes the provision this way:

Steel industry lobbyists seem to have persuaded the House to insert a "Buy American"? provision in the stimulus bill it passed last week. This provision requires that preference be given to domestic steel producers in building contracts and other spending. The House bill also requires that the uniforms and other textiles used by the Transportation Security Administration be produced in the United States, and the Senate may broaden such provisions to include many other products.

The rest of that article warns of the slippery slope such provisions put us on. They haven't gone unnoticed either - ABC News reports the international response to these provisions has been swift and very negative.

Hopefully those legislators who did make it to class and learned some of the Great Depression's causes, or at least aggravating factors, will be able to muster enough support to avoid making the exact same mistakes this time around.

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