Will Congress repeat Smoot-Hawley debacle?

By Brian Ochsner (baochsner@aol.com) At this time of year, Memorial Day and now D-Day, we reflect upon the sacrifices that soldiers have made for our country. It's also good to look back at our economic history, review our successes and make sure we don't repeat our mistakes. The Democrat-controlled Congress now appears bent on repeating the disastrous economic blunders of the late 1920's and early 1930's. Namely, believing that higher import tariffs and income tax rates will make our economy more robust and 'protect' American jobs and incomes from foreign competition. That's like strangling the goose who lays the golden eggs. I'll tell you which two senators are today's Smoot and Hawley, and why this kind of misguided thinking is dangerous for America's economy.

In 1930 – when the US started its descent into the Great Depression - there was a hue and cry for Congress to 'do something' to help struggling farmers and workers. Sound familiar? President Hoover urged that tariff rates be reduced to promote trade, but Senator Reed Smoot and Rep. Willis Hawley (ironically, both Republicans) introduced a bill – the Smoot-Hawley Act - that increased tariffs to record levels on over 20,000 imported goods.

The debate on tariffs started in 1929. After the stock market crash in October, enough support was garnered to pass the bill. President Hoover then reluctantly signed it on June 17, 1930. It resulted in American exports plunging by over 65%, and pushed the US economy over the proverbial cliff. You may be asking – why am I bringing this up now, and why is it relevant today?

There's been recent talk from Senators Chuck “Smoot” Schumer (D-NY) and Lindsay “Hawley” Graham (R-SC) that 'something needs to be done' to correct the large trade deficit the US has with China. Senator Graham has complained about China's 'currency manipulation' and how it's hurt South Carolina textile manufacturers.

They believe that raising tariffs on Chinese goods to 27% will 'get China's attention,' force them to revalue the Yuan to more American-friendly rates, and level the playing field for US manufacturers.

Unfortunately, this is misguided economic stupidity. Even if the US Dollar and Chinese Yuan were at a 1 to 1 ratio, the US couldn't compete with Chinese slave labor, where workers are paid a fraction of what Americans earn for the same work. Not to mention their manufacturing facilities and infrastructure are more modern than ours. We've encouraged this activity by buying billions of dollars of cheaper Chinese goods over the past few years.

China is also our second largest holder of US Treasury debt behind Japan. Our congressmen are in no position to bully or demand anything from the Chinese about the Yuan-US Dollar exchange rate (or anything else). The Chinese are very financially savvy, and they'll lower the value of the yuan to the US Dollar on their terms – not ours.

If Congress did pass this economic insanity, it would be like you going into the office of your mortgage banker (who holds your largest debt) and slapping him in the face. Chinese lending has helped prolong the positive economic growth in the US over the past few years. Asian money along with cheap US interest rates extended the American prosperity party through booming real estate values. Many owners of real estate used their property as their personal ATM, kept spending this newfound cash to keep the good times rolling.

Given our huge balance of trade deficit, we need as much exporting to other nations as possible. Enacting these import tariffs and starting a full-blown trade war is the last thing our economy needs. My hunch is that President Bush will veto these tariffs, if they make it to his desk. However, given his judgment on other issues, that's not exactly a 'slam-dunk,' as George Tenet would say.

If these tariffs are signed into law by the President (or Congress overrides Bush's veto), I'm not saying we're heading into another Great Depression. But 'Smoot-Hawley 2007' wouldn't be a shot in the arm for the American economy. If (or when) this bill comes up for a vote, tell your Senator and Congressmen to vote no.

Doing nothing is much better than doing something stupid like this.