Freedom from Want 3: Smoot-Hawley, Stimulus, and Austerity

In my latest reading of Freedom from Want: American Liberalism and the Global Economy, Edward Gresser talked about the Smoot-Hawley Act, a protectionist law that was enacted during the Presidency of Herbert Hoover.  Many defenders of free trade maintain that the Smoot-Hawley Act exasperated the Great Depression.

Gresser narrates that there was support for Smoot-Hawley because businesses in America feared having to compete with foreigners, who paid their workers less and could thus sell their goods more cheaply.  But, as Gresser notes, the Act actually reduced or eliminated tariffs on some items, such as petroleum and coffee.  This overlaps with what I was saying yesterday----that there may be things that other countries produce better than us, and so free trade is probably a good thing in those areas.  Moreover, it's good to get certain things cheap.  I just get scared when American workers have to compete with foreign workers who are paid less to produce the same things that we do, for (in my opinion) that brings down the American standard of living.  Apparently, Smoot-Hawley had the same sort of approach towards trade.

But Gresser narrates that Smoot-Hawley became extremely problematic.  Smoot-Hawley raised tariffs, and, in a time of deflation, the result was that American consumers did not buy as many imported products.  That hurt (and in some cases even devastated) the economies of the countries that were making those products, and so some of them retaliated by not buying American products, which further damaged the U.S. economy.  President Franklin Roosevelt tried to repair this situation by making trade agreements with countries on an individual basis, but it was really after World War II that a policy of trade was dramatically launched and that institutions were created (i.e., the World Bank) for that.  Franklin Roosevelt supported free trade, not only because of the damage that Smoot-Hawley created, but also because he felt that it could lead to peace (since you're unlikely to attack a nation with which you are trading) and worldwide prosperity.

Gresser also discusses the issue of stimulus vs. austerity, an issue that confronts us today.  Gresser says that Japan during the Depression went the stimulus route----which entailed "public works, government loans, [and] mass printing of money"----with the result that "Japan pulled out of the Depression before any other industrial country" (page 81).  But Gresser goes on to say that Japan was not "successful enough", for some of its army officers sought to attack China in an attempt to "secure export markets and raw materials for Japan's factories, employment for its farmers, and glory for themselves" (page 82).

Germany, by contrast, went the austerity route, as it remembered "the hyperinflation of the early 1920s" (page 82).  Its austerity route included higher taxes, reduced government spending, and balancing the national budget.  According to Gresser, this "further depressed the German economy" (page 82).