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Act of Congress:
Smoot-Hawley Tariff Act (1930) |
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Tax Freedom Day "Tax Freedom Day" is the name given by the nonprofit Tax Foundation to the day that the average U.S. citizen has earned enough income to cover his or her taxes for the year. The Tax Foundation begins with government figures of all federal, state, and local taxes collected, including payroll taxes, sales taxes, property taxes, and corporate taxes (which are ultimately paid by the consumer). To calculate the average tax burden, this number is divided by the government's figures for total income earned in that year. Between 1990 and 2003, the average taxpayer worked between 109 and 120 days to pay taxes in any given year. In 2003, Tax Freedom Day was expected to fall on April 19th, or 109 days into the year. The Laffer Curve and Voodoo Economics At a party in the late 1970s—or so the story goes—economist Arthur Laffer used a cocktail napkin to sketch an upside-down U that became the basis for an entire movement in economic policy. The Laffer Curve, as the U came to be known, represented the theory that as taxes went down, government revenue would actually go up, as lower taxes would stimulate the economy and provide more receipts. Laffer's theory was adopted as part of Ronald Reagan's platform in his 1980 presidential campaign, and after he became president, Reagan pushed through the largest package of tax cuts in history. Counter to his expectations, the deficit mushroomed, and Laffer's theory was discredited. While most scholars agreed that a budget deficit would grow by slightly less than the full amount of a tax cut, because some economic growth would result, credible economists from across the political spectrum agreed that the net effect would be negative. During the 1980 presidential primaries, Reagan's opponent George H. W. Bush had ridiculed his theories as "voodoo economics." Twenty years later, Bush's son, President George W. Bush, promoted another package of enormous tax cuts, arguing that they would stimulate the economy, government receipts would increase, and the budget gap would be closed. Bush's detractors, who viewed the maneuver as blatant pandering to wealthy constituents, called it voodoo economics all over again. |
Many people reading this entry might know the following and no more about the Smoot-Hawley Tariff Act (P.L. 71-361, 46 Stat. 590):
Economics teacher: In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the ... Anyone? Anyone? ... the Great Depression, passed the ... Anyone? Anyone? The tariff bill? The Smoot-Hawley Tariff Act? Which, anyone? Raised or lowered? ... raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression. Today we have a similar debate over this. Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve. Anyone know what this says? It says that at this point on the revenue curve, you will get exactly the same amount of revenue as at this point. This is very controversial. Does anyone know what Vice President [George H. W.] Bush called this in 1980? Anyone? Something-d-o-o economics. "Voodoo" economics.
Ah, yes, those lines delivered to a deeply disinterested high school class occur in one of the most memorable scenes in coming-of-age-film history. But what was not covered by actor Ben Stein—a speechwriter (under President Richard M. Nixon) turned comedian and actor—in that economics lecture? What else can this entry teach us about the economic climate surrounding the Smoot-Hawley Tariff Act that the film Ferris Bueller's Day Off (1986) did not? Anyone? Anyone? We will soon see.
The most important thing to know about the economic climate that spawned the Smoot-Hawley Tariff Act (and the other tariff bills that came before it) is this: in the days in which those acts were written, April 15 had much less significance than it does today. Federal income taxes, though authorized by the Sixteenth Amendment to the Constitution, were much lower and barely affected most Americans.
The Basics of Tariffs and Trade in American History
Tariffs had been a major topic of U.S. economic policy since 1789, when President George Washington's administration used a tariff to raise revenue to help fund the new national government. However, tariffs were used for other reasons as well. Sometimes the U.S. government placed tariffs on certain finished goods or raw materials to gain an economic advantage over foreign nations that sent a lot of goods to America. It also used these "protective tariffs" to keep foreign industries (for example, the English iron industry) from outselling and driving out of business comparable American industries (like the American iron and steel industry) because the foreign industry was either more established, had a better product, or sell their product at a cheaper price than could its American counterpart. The use of protective tariffs was a divisive issue to many Americans, such as those in the South, who sold agricultural goods or raw materials to overseas industries that would make the finished products. In fact, at times foreign nations who traded with America but were hurt by the use of these tariffs would enact their own tariffs on American goods sold in their country, therefore making the American goods more expensive abroad and less likely to be purchased.
So, tariffs could either be for revenue, trade, or protectionist purposes. In the economic climate of the late 1800s and early 1900s, the tariff issue came to a head in American politics.
Predecessors to the Act
In the 1890s following the Civil War, the nation was in a period of rapid growth. It went from thirty-five states in 1867 to forty-eight states in 1912, and with the growing national government came the responsibility for funding that government. America was just beginning to industrialize to a level where it could compete with other nations, however, it was not a leader in commercial production. The 1890s were still a period dominated by the United Kingdom and France. At the time, the British empire stretched over most of the world. The United States was still relatively young.
It was under these conditions that the McKinley Tariff was passed in 1890. In the presidential election of 1888, Republican Benjamin Harrison defeated Democrat Grover Cleveland, who had supported free trade (trade among nations without tariff restrictions). President Harrison's administration believed that American industries needed protection, so they wanted to pass protective tariffs. In fact, protectionist economic policies became the foundation of the Republican Party's economic outlook for the next two decades. The McKinley Tariff was the first in a string of tariff-raising bills that would set U.S. economic policy. It raised the tariff rate to a record high of 48 percent. It also set off a trend of American trading partners passing tariffs of their own in retaliation for the McKinley Tariff's passage.
The second major tariff passed during that era was the Payne-Aldrich Tariff. This bill, passed in 1909 by a Republican-controlled Congress, attempted to lower the average tariff rate paid on imported goods. However, the act caused little real change in the economic landscape of the United States. Politically, it angered progressive Democrats who had begun to gain some national prominence.
With Congress was so closely divided between the Democrats and Republicans, the Democrats were able to secure the proposal of the Sixteenth Amendment to the U.S. Constitution on July 12, 1909, in exchange for the Payne-Aldrich bill's passing. The Sixteenth Amendment was ratified on February 3, 1913, and created the federal income tax, giving the U.S. government an alternative manner in which they could fund the federal government. The United States then became less reliant on the income tariffs produced. At last, the Democrats had gained a foothold in developing the economic policies of the United States.
The final important precursor to the Smoot-Hawley Act was the Underwood-Simmons Tariff, which was passed in 1913 shortly after the Sixteenth Amendment was ratified. President Woodrow Wilson, who would lead the American people through World War I, was still in the early days of his first term. He appeared before a joint session of Congress, a rare occurrence, to make known his support for reforming U.S. tariff policies. Sponsored by Representative Oscar Underwood of Alabama in the House of Representatives and Senator F. M. Simmons of North Carolina in the Senate, the two legislators for whom the bill was named, this effort at tariff reduction eliminated tariffs on many goods, such as linens, iron, farm equipment, foods, and raw materials. Yet the effects of this legislation were largely unnoticed because, shortly after its passage, the world was thrown into World War I. International trade was hampered by aggressive military action taken by Germany, and the level of imported and exported goods dropped off significantly.
Postwar Economics and the Great Depression
The immediate economic boom right after World War I led to high expectations that were unrealized once the postwar economy returned to normal. Further, the policies passed during the 1920s reflected the Republican Party's belief that it was best to allow industry to drive the country as an economic engine. Congress passed bills setting low taxes on income and investment and establishing policies unfavorable toward international trade. However, a massive crisis unfolded that would severely hamper the nation's economy. In October of 1929 the stock market crashed, sending the country toward the Great Depression. Many major industries lost money in the market's crash, and workers at all levels were hurt either by the loss of their savings or their jobs. By 1932 almost one-quarter of Americans were unemployed.
It was in the middle of this rapidly deteriorating economic situation that the Smoot-Hawley Tariff Act was passed. The country sank deeper into the Great Depression because of the poor economic climate created in the 1920s, high unemployment rates, and other nations that enacted their own protectionist trade measures in retribution.
Bibliography
Bartlett, Bruce. "The Truth About Trade in History."
United States Information Agency. "An Outline of American History: Chapter Nine: War, Prosperity, and Depression."
| Wikipedia: Smoot-Hawley Tariff Act |
The Smoot-Hawley Tariff Act (sometimes known as the Hawley-Smoot Tariff Act; officially the Tariff Act of 1930)[1] was an act signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels. In the United States 1,028 economists signed a petition against this legislation, and after it was passed, many countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports were reduced by more than half. [2]
Many economists, historians, and government officials have determined that the act was a contributing factor to the severity of the Great Depression.[3]
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Although rated capacity of the U.S. manufacturing sector had increased tremendously in the post-WWI period, actual output, income, and expenditure had not. Under the direction of Republican Senator Reed Smoot of Utah, the party had drafted the Fordney-McCumber tariff act in 1922 which increased tariffs with the purpose of increasing domestic firms' market share. Weakening labor markets in 1927 and 1928 prompted Smoot to propose yet another tariff increase (Smoot-Hawley Tariff Bill).
In his memoirs, Smoot made it abundantly clear:
"The world is paying for its ruthless destruction of life and property in the World War and for its failure to adjust purchasing power to productive capacity during the industrial revolution of the decade following the war."[4]
The act was originated by Senator Reed Smoot, a Republican from Utah, and Representative Willis C. Hawley, a Republican from Oregon.
When campaigning for president during 1928, one of Herbert Hoover's many campaign promises to help beleaguered farmers had been to increase tariffs of agricultural products. Hoover won, and Republicans obtained comfortable majorities in the House and the Senate during 1928. Hoover then asked Congress for an increase of tariff rates for agricultural goods and a decrease of rates for industrial goods.
The House passed a version of the act in May 1929, increasing tariffs on agricultural and industrial goods alike. The Senate debated its bill until March 1930, with many Senators trading votes based on their states' industries. The conference committee then aligned the two versions, largely by moving to the greater House tariffs.[5]
In May 1930, a petition was signed by 1028 economists in the United States asking President Herbert Hoover to veto the legislation, organized by Paul Douglas, Irving Fisher, James TFG Wood, Frank Graham, Ernest Patterson, Henry Seager, Frank Taussig, and Clair Wilcox.[6][7] Automobile executive Henry Ford spent an evening at the White House trying to convince Hoover to veto the bill, calling it "an economic stupidity".[8] J. P. Morgan's chief executive Thomas W. Lamont said he "almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff."[9]
Hoover opposed the bill and called it "vicious, extortionate, and obnoxious" because he felt it would undermine the commitment he had pledged to international cooperation. Later events would reveal Hoover was right: the international community levied their own tariffs in retaliation after the bill had become law. However, in spite of his opposition, Hoover yielded to influence from his own party and business leaders and signed the bill.[10]
Franklin D. Roosevelt spoke against the act while campaigning for president during 1932.[5]
Retaliation began long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to increase rates against American products, even though rates could be increased or decreased by the Senate or by the conference committee. By September 1929, Hoover's administration had received protest notes from 23 trading partners, but threats of retaliatory actions were ignored.[5]
In May 1930, the greatest trading partner Canada preemptively imposed new tariffs on 16 products that accounted altogether for around 30% of U.S. exports to Canada.[11] Canada later also forged closer economic links with the British Commonwealth. France and Britain protested and developed new trade partners. Germany developed a system of autarky.
Both Reed Smoot and Willis Hawley were defeated for reelection in 1932, the controversial tariff being a major factor in their respective losses.
At first the tariff seemed to be a success. According to historian Robert Sobel, "Factory payrolls, construction contracts, and industrial production all increased sharply." However, larger economic problems loomed in the guise of weak banks. When the Kredit-Anstalt Bank of Austria failed, the global deficiencies of the Smoot-Hawley Tariff became apparent.[10]
U.S. imports decreased 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports decreased 61% from US$5.4 billion to US$2.1 billion, both decreases much more than the 50% decrease of the GDP.
According to government statistics, U.S. imports from Europe decreased from a 1929 high of $1,334 million to just $390 million during 1932, while U.S. exports to Europe decreased from $2,341 million in 1929 to $784 million in 1932. Overall, world trade decreased by some 66% between 1929 and 1934.[12]
There is not any universal agreement about the effect of the tariff. According to the U.S. Statistical Abstract, the effective tariff rate was 13.5% in 1929 and 19.8% in 1933 with 63% of all imports being duty-free. From 1821 through 1900 the United States averaged 29.7% effective tariff rates and peaked in 1830 at 57.3% with only 8% of all imports being duty-free, dwarfing the Smoot-Hawley rate. In addition, imports during 1929 were only 4.2% of the United States' GNP and exports were only 5.0%. Smoot-Hawley's effect on the entire U.S. economy may have been small, compared to the monetary policy of the Federal Reserve System. By 1937 the effective tariff rate was reduced to 15.6% when the reaction of 1937–1938 occurred, demonstrating no statistical correlation between this economic downturn and tariff levels. Senator Robert L. Owen testified at the hearings on HR 7230, the bill to make the Federal Reserve banks a national property, that "In 1937, when the Federal Reserve Board called upon the banks to raise their reserves to twice what they had been before, there was a contraction of credit of two billion dollars.[13]
Using panel data estimates of export and import equations for 17 countries, Jakob B. Madsen (2002) estimated the effects of increasing tariff and non-tariff trade barriers on worldwide trade during the period 1929–1932. He concluded that real international trade contracted somewhere around 33% overall. His estimates of the impact of various factors included about 14% because of declining GNP in each country, 8% because of increases in tariff rates, 5% because of deflation-induced tariff increases, and 6% because of the imposition of nontariff barriers.
The Smoot-Hawley Tariff Act "imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the United States", quadrupling previous tariff rates.
Although the tariff act was passed after the stock-market crash of 1929, some economic historians consider the political discussion leading up to the passing of the act a factor in causing the crash, the recession that began in late 1929, or both, and its eventual passage a factor in deepening the Great Depression.[14] Unemployment was at 7.8% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933.[15]
As a result of the Smoot-Hawley Tariff and other countries' responses to it, the world after World War II saw a push towards multilateral trading agreements that would prevent a similar situation from unfolding. This led to the Bretton Woods Agreement, in 1944, a great lessening of global tariffs starting in December 1945, and the General Agreement on Tariffs and Trade, in the 1950s.[16]
However, the American Tariff League Study of 1951 which compared the effective tariff levels of 43 countries found that only seven countries had a lower tariff level than the United States (5.1%). Eleven countries had effective tariff rates higher than the Smoot-Hawley peak of 19.8% including the United Kingdom (25.6%). The 43 country average was 14.4%–0.9% higher than the U.S. level of 1929.
In addition to tariffs, many countries implemented non-tariff barriers to protect their industries in the aftermath of World War II after experiencing the dangers of dependence on imports for vital supplies brought upon by free trade policies. Many nations felt the ill effects of embargoes, naval blockades and submarine warfare upon their national security. An example of this involved Britain and France importing all of their watches and clocks from Switzerland and Germany prior to World War II. They discovered that the lack of a watch industry was a great handicap in building defense equipment during the war. Both nations determined never to be without a watch industry again and placed embargoes on watch imports after World War II.[17]
Non-tariff barriers would become more important in the post-WW II reconstruction period. Japan for example, with an effective tariff rate of 1.6% in 1951 would put many non-tariff barriers in place. In June 1952 Japan's "Basic Policy for the Introduction of Foreign Investment into Japan's Passenger Car Industry" placed quotas, tariffs and commodity taxes on imports that closed the Japanese automobile market to American manufacturers for nearly two decades.[18]Japan would also make extensive use of licensing agreements which would transfer foreign technology to Japan in exchange for limited market access as in the case of the U.S. television industry. With Japan's home market protected, Japanese manufacturers could make large profits at home to off-set the cost of selling their goods at reduced prices in foreign markets (dumping).
In the discussion leading up to the passage of the North American Free Trade Agreement (NAFTA) then Vice-President Al Gore mentioned the tariff as a response to NAFTA objections voiced by Ross Perot during a debate in 1993 they had on the Larry King Show. He gave Perot a framed picture of Smoot and Hawley shaking hands after its passage.[5] In 2009, during debate on the floor of the United States House of Representatives, Congresswoman Michelle Bachmann (R-MN) referred to the act as the "Hoot-Smalley Tariff" and mistakenly claimed that it was the work of Franklin D. Roosevelt's administration.[19]
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