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February 20, 2011
David Warsh, Proprietor


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That Old Hoot-Smalley

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

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15 Comments

  1. Ottovbvs wrote:

    I see Krugman demurs with your statement that the agenda will be set in technical economics. In his view it will be set by leading economic thinkers like Bachmann and Ryan. He has a point. The ascendance of the know nothings when it comes to popular understanding of economic policy is astounding.

    Monday, February 21, 2011 at 2:36 pm | Permalink

  2. admin wrote:

    A link to the Paul Krugman item:
    http://krugman.blogs.nytimes.com/2011/02/21/hoot-smalley/?emc=eta1

    Monday, February 21, 2011 at 3:47 pm | Permalink

  3. Dr. Bob Goldschmidt wrote:

    The elimination of a US job by automation or outsourcing destroys about $3,000 a month of demand in the US and worldwide. Until the technical economists resolve this loss of demand against aging demographics and free trade, I can only see our economy spiraling downward (it only being held up at present by growing federal deficits and federal reserve liquification).

    We need to consider additional options such as a shorter work week and gross profit taxes to support our costlier social support system.

    Monday, February 21, 2011 at 4:14 pm | Permalink

  4. Well, Dave, so Irwin does grant that while S-M may not have “caused” the G-D, it did aggravate it. A paper by MacKenzie shows that portions of the US where bank failure rates were the highest were in parts of the countries that hosted export goods that were hurt by the retaliation by US trading partners after S-H, and there was some pretty serious retaliation. Sure, the financial market crashes and restrictive monetary policies were primary, but S-H really did not help, not at all.

    Monday, February 21, 2011 at 7:05 pm | Permalink

  5. admin wrote:

    Yes, see especially Irwin’s Ohlin lectures.

    Monday, February 21, 2011 at 7:25 pm | Permalink

  6. Valerio Luccio wrote:

    Very nice, but Ben Stein is no an “economist-turned-actor”. He’s a “speech writer-turned- actor-turned-self proclaimed economist”. He doesn’t have a graduate degree in economics and has never worked as an economist.

    Tuesday, February 22, 2011 at 9:02 pm | Permalink

  7. admin wrote:

    Good point! Will fix. Thanks.

    Tuesday, February 22, 2011 at 10:55 pm | Permalink

  8. Ottovbvs wrote:

    Obviously Smoot H didn’t help any more than the generally beggar my neighbor protectionist nature of most govt’s policies around the world in the thirties. But Irwin’s point is the SH wasn’t the proximate cause of the GD.

    Wednesday, February 23, 2011 at 3:36 pm | Permalink

  9. Sean R wrote:

    FYI, historian Brian Domitrovic has responded to your analysis:

    http://thesupplyside.blogspot.com/2011/02/domitrovic-on-warshs-smoot-hawley.html

    Thursday, February 24, 2011 at 2:53 pm | Permalink

  10. Wayne Jett wrote:

    Mr. Warsh,

    The shibboleth you describe as constructed by the late Jude Wanniski is, to my knowledge, essentially misguided. Jude, with whom I worked the last two years of his life, did not contend that his book The Way The World Works (1978) had explained the cause of the Great Depression. He did contend that his book explained the cause of the Great Crash in its Chapter 7. But he was quite clear in expressing to me on more than one occasion that his book did not explain the reason or cause for the Great Depression and he never contended otherwise. Your quotation of his book says the Crash of 1929 and the Great Depression “ensued” due to the passage of Smoot-Hawley is not the same as saying that the Great Depression proceeded and extended year after year for the same reason.

    The point I make about my discussions with Jude Wanniski is quite clear to me because while working with him I shared an early finding of research I had begun on the Great Depression. He listened and then responded immediately that I “must write a book” reporting what I had found. I was less than enthusiastic about the idea, but my findings had been sufficiently interesting to drive me into further research.

    I found much more and now, as Jude wished, I have written a book which I do, indeed, contend explains the causes of the Great Depression. You will find further details of it on my website, as it began shipping to fulfill pre-orders this past week. I assure you it does not rely upon Smoot-Hawley as the complete or adequate cause of the Great Depression.

    Thank you for your attention to the subject, as I agree it deserves very close consideration – for its importance then and for its relevance to what is occurring now.

    Saturday, July 16, 2011 at 5:40 am | Permalink

  11. admin wrote:

    The quotation from the book (page 125) is accurate. Your argument is with Wanniski, not me. dw

    Saturday, July 23, 2011 at 11:36 am | Permalink

  12. Wayne Jett wrote:

    Thank you for your response, but it is way too thin. You insist Jude Wanniski argued that the Great Depression was caused by Smoot-Hawley when all you can cite from the great volume he wrote is that the Crash of 1929 and the Great Depression “ensued” because Smoot-Hawley was passed. He put a great deal of detail into how the Crash meshed daily with Senate floor votes on S-H, but there is no comparable argument that S-H was sufficient to cause and to extend the Great Depression throughout its course.

    That being said (again), you pass entirely without comment the assertion I make about my own book, The Fruits of Graft, that it does identify and detail the causes of the Great Depression. Since you picked a fight with the late, renowned Wanniski when he didn’t even make the claim, it would seem expected that you would leap to thrash me soundly if my claim is found to be without merit.

    Actually, I’m not looking for conflict. I’m simply asking for due attention to the historical facts which I have brought to light so they can be examined, weighed and judged. That would be more fitting than referring me to argue with a worthy man whose time here has passed.

    Saturday, July 23, 2011 at 9:30 pm | Permalink

  13. admin wrote:

    Wanniski’s time was up long ago with me. dw

    Monday, July 25, 2011 at 2:38 pm | Permalink

  14. Wayne Jett wrote:

    Mr. Warsh, your second reply is more shallow than your first. If your discussion of a perceived “shibboleth” is to have any relevance, it must be to identify the true causes of the Great Depression. But you insist upon avoiding that subject entirely, while pretending to vent some personal animosity towards the late Jude Wanniski. What is the point of your website if you do not wish to get to the merits of issues?

    Wednesday, July 27, 2011 at 3:44 pm | Permalink

  15. admin wrote:

    The comments function on this site is intended to serve a letters-to-the-editor function. It is not a chat room.

    I will mention that it’s nothing personal with Jude. As far as I could tell, he was a likeable man. But he and the line of self-absorbed and irresponsible activists who were persuaded by him have done grave harm to the tradition of democracy in the United States.

    Wednesday, July 27, 2011 at 5:49 pm | Permalink

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