Archive for July 15th, 2011

Blaming Smoot Hawley for Great Depression is not really correct

July 15, 2011

The research on Great Depression continues and gets even more interesting.

Economic historian Douglas Irwin looks at the issue of Smoot Hawley Act (SHA) in what looks like a super book on great depression. The intro free chapter is here. Here is a videowhere Irwin discusses the book at Cato. It has a video of a movie starring Ben Stein (1986 movie — Ferris Bueller’s Day Off) and a debate between Al Gore and Ross Perot in 1990s over NAFTA. In both SHA  is criticized and suggested as a main reason for the Great Depression.

In the book Irwin says, S-H act criticism is overdone. He did argue the same in a paper written with Eichengreen and expands on the idea in this book.

What are the main ideas?

  • SHA was not in response to economic contraction. It was to gain political advantage and support agricultural sector. The latter was doing poorly and the act was initially to raise tariffs in agri sector. Infact it was proposed in peak of the business cycle not middle of depression as it is perceived.
  • As it always happens finalisation of the Act took time and by that time manufacturing items were added as well. There was lot of lobbying and rent seeking to get one’s items included.
  • By the time it was enacted, depression conditions had started to set it. Other policymakers enacted tariffs looking at US leading to further issues. So, it did lead to international reactions.
  • Economists opposed the Act but was still done leading to further conformations that politicians do what leads to winning elections. Economics is no where in the picture.
  • So though it was a factor in great depression, it was not responsible for it. GD would have remained GD without SH act as well. Monetary and financial factors set up the depression.
  • The debacle of the Act led to a change in policymaking design in US. Congress did not look at trade policy and it was assigned to US president to deal with trade policy issues
Very interesting. So we still debate GD and not sure about its causes/factors etc. The well known lessons from GD are being questioned. Some of them are:
  • One paper said Fed doubling reserves in 1937-38 was not responsible for double dip depression as banks had raised reserves earlier.
  • Another paper says Fed may have committed mistakes but Atlanta Fed did help by providing liquidity to struggling banks.
And now this bit on SH act. Pretty interesting stuff.
Here are some reviews —Economist, (very good one), Roger Lowenstein.
However, one thing came good because of SH act. Politicians are atleast serious about not doing anything with trade protections. They refer to SH act and say I am not touching this. This was seen in this crisis too. Imagine the chaos if countries implemented trade restrictions in this crisis.
The act should have been named HS Act:

Because the Constitution provides that revenue measures must originate in the House before going to the Senate, tariff legislation was often named for the Ways and Means Committee chair first and the Senate Finance Committee chair second. This implies that the legislation should be known as the HawleySmoot tariff, but Smoot played such a large role in its passage that contemporaries began to refer to it as the Smoot-Hawley tariff.

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