Tariffs may play big role in economic downturn

Posted: Monday, July 08, 2002

Call us armchair detectives, but we have a prime suspect in the mystery of what is killing the economy.

Steel tariffs were announced in March. Wall Street's decline began in March.

Ipso isn't always facto, and there are other factors, but there is corroborating evidence in this case.

Everyone understands one of the reasons the United States has one of the highest living standards in the world is that during the 20th century, average trade duties declined from the 20 to 25 percent range to 5 to 10 percent.

Steel price increases have been on the order of 20 to 70 percent since March, economist Larry Kudlow said in National Review.

He surmised that the damage may offset the benefits of the Bush tax cuts for many industries.

Worse, it may have ignited a trade war with Europe.

History has provided a lesson on this issue.

An economic boom fueled by tax cuts in the 1920s ended with protectionist trade legislation signed 72 years ago.

As always, the market had followed the course of this legislation and when headlines proclaimed bipartisan assurance the Smoot-Hawley bill would pass, the market crashed, as detailed meticulously in Jude Wanniski's classic book "The Way The World Works." Passage of the bill and its signing by the president flattened any recovery, as other nations retaliated swiftly.

"The stock market crash of 1929 and the Great Depression ensued because of the passage of the Smoot-Hawley Tariff Act of 1930," Wanniski said.

President Hoover had set the nation on the road to Depression by increasing taxes as one of his last acts in office. New Deal policies kept it there until World War II.

It also may not be mere coincidence that the tech sector fell apart while the previous administration was waging war against Microsoft, a linchpin in the tech sector, on behalf of the software giant's competitors.

Protecting domestic industry against competitors, foreign or domestic, is not sound government policy. It can murder the market.

-- The Florida Times-Union, Jacksonville

July 7

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