The most recent came when Trump asserted on the O’Reilly Factor last week that birthright citizenship is not guaranteed by the 14th Amendment. Even though that’s what what it says. And his abhorrent views on immigration sound like principles of the worldview usually associated with the Left–identity politics, wealth as a fixed pie to be divided among classes, and that individuals in the labor market don’t move up the ladder.
But what should concern voters disinterested in immigration or even sympathetic toward Trump’s views are his potentially devastating ideas on trade.
According to Trump; China, Japan, and Mexico are “killing us” economically. In addition to devaluing their currencies, “they’re taking all of our jobs” by sending us cheap goods, he says. Misunderstood by Trump is that our trade deficits are what John Tamny calls “our reward for going to work every day” in his new book Popular Economics. In a recent piece Tamny writes, “The Chinese, Japanese and Mexicans aren’t ‘killing us economically’ as much as their exports to the U.S. are an explicit market signal that the U.S. remains the most economically productive nation on earth.”
As Mary O’Grady of the Wall Street Journal points out in a piece about his “defective economics”, Trump has not said if his plan would be to devalue the dollar or put up protectionist tariffs as he has in the past. But that any blowhard politician would want to “fix” something that isn’t broken should trouble an American electorate ever-hungry for growth and its products such as the iPhone, Uber, and self-driving cars.
But it’s happened before–and the result was arguably the stock market crash of 1929. Of the varying schools of thought as to what brought about the Crash, perhaps the closest coincidentally was the Smoot-Hawley tariffs, as argued in The Way the World Works by the late Jude Wanniski, advisor to Ronald Reagan and the man who coined the term supply-side economics.
It must be noted that Wanniski finds the “foundations” of the roaring twenties in a 1924 speech by Calvin Coolidge at the National Republican Club in New York. A career politician, Coolidge argued after high tax rates during World War I that the “Treasury Department should study the possibility of tax reduction… for all taxpayers of the country and emancipating business from unreasonable and hampering exactions.”
Experience does not show that the higher rate produces the larger revenue. Experience is all in the other way. When the surtax on incomes of $300,000 and over was but 10 percent, the revenue was about the same as when it was 65 percent. There is no escaping the fact that when the taxation of large incomes is excessive, they tend to disappear. In 1916 there were 206 incomes of $1,000,000 or more. Then the high rate when into effect. the next year there were only 141, and in 1918, but 67. In 1919, the number declined to 65. In 1920 it fell to 33, and in 1921 it was further reduced to 21….
I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden.
Coolidge got a bill through Congress that brought the top tax rates down to 25 percent from 1925-8, finally 24 in 1929. As Wanniski notes, the New York Times index of industrials shot up from 90 to 134 at the end of 1924. Through 1925, 181; 1927, 245; 1928, 381; up to its highest in September 1929 at 469.
Wanniski also counters interpretations on the Right about the nature of the boom.
Murray Rothbard has a broad definition of what constitutes “money,” and so reckons the expansion from 1921-1929 as an “inflationary boom,” the money supply by his reckoning having increased by 61.8 percent over the eight years. His America’s Great Depression seems untroubled by the fall in the consumer price index over eight years, from 53.6 to 51.3. Because their definition of money is narrow, Milton Friedman and Anna Schwartz are forced to argued that while the stock market has boomed, the economy did not.
But as Wanniski notes, GNP grew from $70 billion to $103 billion while consumer prices fell. Still to this day the Crash is blamed on “speculation.” But the author argues that the market was correct at its peak and that “the Crash came because the chemistry of a few individual political minds turned the system toward stupendous error.”
In other words, people who held the same set of views on trade as Donald Trump.
One of the planks of Herbert Hoover’s platform while campaigning for the presidency in 1928 was protectionism.
“One of the most important economics issues of this campaign is the protective tariff,” said Hoover in an October, 1928 campaign speech. “The Republican Party stands for protection… designed to give adequate protection to American labor, American industry and the American farm against foreign competition.”
A year later after winning the presidency a high-tariff bill began to make its way through Congress. There had been debate about what the tariff should cover, and the market fluctuated in reaction to varying reports all year (covered in Wanniski’s book).
But finally on October 23 news about an important vote in the Senate about the tariff bill reached the trading floor. The Dow Jones Industrials “nosedived” and fell 21 points. In his book, Wanniski features the October 23 and October 24 front pages of the Times.
“By eleven o’clock [the next day, the 25th] the market had degenerated into a wild, mad scramble to sell, wrote John Kenneth Galbraith in his classic The Great Crash. “In the crowded boardrooms across the country the ticker told of a frightful collapse.”
On the 28th the Times featured an article on the front page headlined “LEADERS INSIST TARIFF WILL PASS.” The next day is now known as Black Tuesday. From its September peak of 381, the Dow closed at 230, wiping out about 40 percent of its value.
President Hoover wouldn’t sign the tariffs on over 20 thousand imported goods into law until June 17 of the next year, 1930. Before he did, a collection of 1,028 economists sent a letter asking Hoover to veto the bill. Graeme K. Howard of General Motors cabled that passage of the bill “would spell economic isolation [and the] most severe depression ever experienced.” Thomas W. Lamont, a partner at J.P. Morgan said, “I almost went down on my knees to beg Herbert Hoover to veto the asinine [Smoot-Hawley] Tariff.”
But if it is true that the tariff legislation not only coincided with, but caused the crash, the obvious question is why the Crash came in October when it became law the following June. To be sure, Wanniski (and certainly this writer) says “it is never possible to say with precision why the stock market rises or fall.” Rather, the market consists of countless minds collaborating to calculate and discount the expected future earnings of companies. The smartest money in the world simply saw Washington about to commit a colossal error, and corrected their expectations accordingly.
And the markets got it right. Both imports and exports plummeted as over sixty countries–including Britain, Canada, Switzerland, Spain, among many others–retaliated against U.S. goods through restrictions and tariffs of their own. As Jim Powell writes in his book FDR’s Folly, countries retaliated to inflict “the worst losses on Americans–typically products very different from those affected by Smoot-Hawley.” From 1929 to 1932, imports from Europe fell from $1.3 billion to $390 million; and exports from $2.3 billion to $784 million.
Which brings us back to Trump. What would Jude Wanniski say in the wake the Dow’s plunge last week? While he’d remind us that it’s impossible to know the cause for sure, in his book he writes “the most important information coming to the market is political news… because it can instantly and dramatically alter the market’s future income streams.” And it looks more each day like Trump is serious about running for the Republican nomination–which, according to polls would likely mean a Democratic White House in 2016. Regardless, America would be denied pro-growth leadership.
This post is not alone in making the connection. Larry Kudlow wrote about it in a piece at CNBC and spoke about it on his radio show Saturday, even mentioning Smoot-Hawley. Writing for Reason online, Ira Stoll goes further and actually blames Trump for the turbulence. Again, we can’t know for sure, but that’s besides the point. At the very least, Donald Trump has expressed political views that would be devastating for the American economy.
Donald Trump is undoubtedly great at business operations, just as Herbert Hoover was a great engineer. Trump would be better to stick to things he’s good at, like telling people they’re fired on NBC.