That Old Hoot-Smalley

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Shibboleths are tribal test words, used to distinguish friend from foe. The Hebrew word long ago meant, roughly speaking, grain. The Book of Judges in the Bible relates how men of Gilead recognized Ephraimites who were seeking to slip through their siege by asking all passers-by to pronounce the word. If they replied with a sibilant S instead of the Sh sound, they were killed.  Shibboleths have a long and colorful history in war.  In politics, they have grown more complicated over time.

An important shibboleth of supply-side economics, a political pop culture that emerged in the 1970s, is the conviction that the Smoot-Hawley tariffs somehow caused the Great Depression. The proposition was broached in 1978 by Jude Wanniski, then an editorial writer for The Wall Street Journal.

In The Way the World Works, in 1978, Wanniski asserted, “The stock market crash of 1929 and the Great Depression ensued because of the passage of the Smoot-Hawley Tariff Act of 1930.”

Wanniski’s reasoning, which was probably based on a series of conversations with Columbia University economist Robert Mundell, was that forward-looking equity markets recognized that a resultant decline in trade would worsen the debt position of foreigners; they would sell dollars; and the Federal Reserve would raise interest rates to avoid a fall. It was all part of what Wanniski termed the “Mundell-Laffer hypothesis,” a reinterpretation of economics, he said, of Copernican proportions.

By the mid-1970s, the causes of the Great Depression were slowly, laboriously, coming to be seen as having had to do mainly with bad monetary policy decisions by the Federal Reserve Board. So economists were surprised by the argument that protectionist measures were at the heart of the collapse of world trade.

Charles P. Kindleberger, of the Massachusetts Institute of Technology, described in public Wanniski’s proposition as “far-fetched” and, privately, as worse than that. Various other international economists took stabs at debunking the claim over the years.  And when Milton Friedman was asked point blank at Hillsdale College in 2006 if the Smoot-Hawley Tariff had caused the Great Depression, he replied,

No. I think the Smoot-Hawley Tariff was a bad law. I think it did harm. But the Smoot-Hawley Tariff by itself would not have made one-quarter of the labor force unemployed.

Yet the shibboleth has persisted. Smoot-Hawley gained cinematic immortality when speech writer-turned-actor-turned economic journalist Ben Stein led a bored class through a discussion of the statute’s D-causing propensities (“Anyone? Anyone?”) in Ferris Bueller’s Day Off. Vice-president Al Gore sought to teach the lesson himself in a debate with H. Ross Perot, in 1993. Sarah Palin, in Going Rogue: An American Life, wrote that “Massive government spending programs and protectionist economic policies actually helped turn a recession into the Great Depression.”  And, in a memorable speech on the floor of the House of Representatives in 2009, Michelle Bachman (R-Minnesota) got all tangled up in the boilerplate:.

The Hoot-Smalley Act, which was a tremendous burden on tariff restrictions, and then of course trade barriers and the regulatory burden and tax barriers. That’s what we saw happen under FDR that took a recession and blew it into a full-scale depression. [Transcribed from C-SPAN; the names were corrected when Bachman’s remarks were printed in the Congressional Record.]

Now economist Douglas Irwin, of Dartmouth College, has put a stake through its heart.  In Peddling Protectionism:  Smoot-Hawley and the Great Depression, a short, clear and graceful book, in which maps, photographs and cartoons complement the handful of tables and graphs, Irwin makes a surprisingly lively story of the tradition of tariff revisions in the United States, the domestic politics that produced the Smoot-Hawley statute, in particular, and the various retaliatory measures that ensued.

In the process, he carefully examines Wanniski’s argument and its strange afterlife (assembling all the anecdotes related here) and concludes that while it probably made the Depression worse than it would have been otherwise, it certainly did not cause the slump.

Irwin, who earned his PhD at Columbia in 1988, is a distinguished historian of international trade.  In Against the Tide: An Intellectual History of Free Trade in 1996, he chronicled the ups and down since Adam Smith of the argument that open markets beat closed ones as a means of fostering growth and creating wealth. In The Genesis of the GATT, co-authored with Petros C. Mavroidis and Alan O. Sykes., he set out clearly the steps that eventually led to the creation of the World Trade Organization.

Peddling Protectionism is essentially the warm-up exercise for the forthcoming Trade Policy Disaster: Lessons from the 1930s, Irwin’s Ohlin lectures of last year, to be published in due course by MIT Press. But what a piece of work it is — if only economists would write more books like it about other controversies! (Peddling Protectionism is, of course, an echo of the title of an earlier, more ambitious critique of supply-side economics from the perspective of trade theory – Paul Krugman’s 1994 Peddling Prosperity: Economic Sense and Nonsense in the Age of  Diminished Expectations,  still a deeply interesting book.)

Looking back, Irwin says, the striking thing is how much the trade debate has changed in the past eighty years.  Compared to the across-the-board tariff on competing imports that was enacted in the midst of a global recession in 1930, present-day Congressional resistance to free trade agreements with Colombia and South Korea looks pretty mild.

In fact, after it was revealed last week that China has offered the Colombian government to build a rail link between that nation’s Pacific and Atlantic coasts that would serve as an alternative to the Panama Canal, there were signs that opposition to the treaty was diminishing. (It was signed four years ago by George W. Bush but remains unratified by the Senate.) “Even if the WTO is not moving on Doha, the integration of the world has made protectionism a policy that is much less viable because the economic costs are more apparent,” Irwin wrote last week in an email.

So give Wanniski some credit for that, then.  (He is no longer here to defend himself.) The shibboleth he devised has been effective, weeding out opponents of open markets.  But that victory came at considerable cost.  His off-kilter theorizing about causes of the Great Depression obscured in many minds, liberal and conservative alike, the far more persuasive research performed by Milton Friedman and Anna Schwartz in their A Monetary History of the United States, its salient chapter recently republished as The Great Contraction.

Friedman’s finding was that the Federal Reserve Board was the villain in the Great Depression, failing to understand its newly-created powers and neglecting to carry out its traditional mission to stem panics by lending freely when they arose.  Three times zigging when it should of zagged, once zagging when it should have zigged, the central bank, he argued greatly aggravated what might otherwise have been a “normal” recession.  And it was that analysis that underpinned the Fed’s response to the recent crisis.   “Regarding the Great Depression, you’re right, we did it.  We’re very sorry,” Fed chairman Ben Bernanke famously told Friedman on the occasion of a ninetieth-birthday celebration. “But thanks to you we won’t do it again.”  And sure enough, when the crisis came, they didn’t!

Eighty years after the election of Franklin Roosevelt, thirty years after that of Ronald Reagan, it is clear that the old shibboleths have lost most of their power. New ones doubtless are being devised today, by skirmishers on all sides. The situation feels very different, it is true.  There is, for example, the extraordinary horizontal differentiation of “the media” that has taken place. Wanniski’s voice was greatly amplified by the editorial page of The Wall Street Journal, with its two million readers. Yet columnist Peggy Noonan wrote last week in the WSJ that it had been Rush Limbaugh who for twenty years “has been the nation’s most reliable and compelling explainer of conservative thought.” Limbaugh seems less likely somehow to repeat Wanniski’s feat: to discern an intellectual revolution in “the Mundell-Laffer” hypothesis and turn it, for however short a time, into an economic slogan.

The great battles of the future in all likelihood will continue to have their origins in technical economics. That is, after all, where the brains are. An ambitious historian of thought may someday make it clear that a spillover from a strange guerilla battle at the University of Chicago, among Mundell, Friedman and Harry Johnson, caused the “supply side” movement to take the form it did – but only after the news pages of the WSJ, in the persons of reporters Lindley Clark and Albert Malabre, and the paper’ editorialists, under Robert Bartley, quietly chose up sides.

In the meantime, trolling continues in the deeper currents of the present day