Gore's Other Big Lie

Former Vice President Al Gore is able to explain things in the simple language used by elementary school teachers, so he tends to be believed even when he is conveying misinformation.

For example, his prediction that sea level would rise by up to 20 feet over the twenty-first century was sufficiently believed that many attributed the damage of Hurricane Sandy to rising sea levels, even though, according to a careful analysis by Professor Nils-Axel Mörner of the University of Stockholm, sea level has not risen at all this century.

But Gore's simplistic explanations are not just limited to climate change. In his 1993 NAFTA debate with Ross Perot, Gore claimed that the U.S. Smoot-Hawley Tariff act caused the Great Depression of the 1930s worldwide. Holding up a photo of Senator Reed Smoot and Representative Willis C. Hawley, Gore said, as if talking to elementary-school children:

We've also had a test of his [pointing to Ross Perot] theory. In 1930 when the proposal by Mr. Smoot and Mr. Hawley was to raise tariffs across-the-board to protect our workers, and I brought some pictures, too. This is a picture of Mr. Smoot and Mr. Hawley. They look like pretty good fellows. They sounded reasonable at the time. A lot of people believed them. The Congress passed the Smoot-Hawley protection bill. (He [pointing to Ross Perot] wants to raise tariffs on Mexico.) They raised tariffs, and it was one of the principal causes, many economists say the principal cause, of the Great Depression in this country and around the world.

It turns out that Perot, not Gore, was correct about Mexico and NAFTA. Mexico cheats through foreign currency purchases to keep the peso low and the dollar high, so that, despite NAFTA's tariff reductions, Mexican products are artificially inexpensive in the United States and U.S. products are artificially expensive in Mexico. Federal Reserve Chairman Ben Bernanke reported in a November 2010 speech (see Figure 8) that between September 2009 and September 2010, the Mexican government devoted 3.64% of Mexico's GDP to foreign currency purchases.

And economic historians now agree that Gore was wrong in his statement that Smoot-Hawley was a cause of the Great Depression. For example, Christina Romer, President Obama's first chair of his Council of Economic Advisors and a student of the Great Depression, wrote in her Encyclopedia Britannica entry about the Great Depression:

Scholars now believe that these [protectionist] policies may have reduced trade somewhat, but were not a significant cause of the Depression in the large industrial producers.

Gore was also wrong in his false implication that tariffs were passed in the United States due to the personal persuasiveness of Senator Smoot and Representative Hawley. Actually, from Washington's presidency to Smoot-Hawley, the United States had developed into a manufacturing powerhouse behind high tariff walls. Furthermore, the Smoot-Hawley tariff was only marginally higher than the Fordney-McCumber tariff of 1922, which had contributed to the prosperous 1920s in the United States.

The Economics of Tariffs

The economics of tariffs is much more complicated than Gore's simplistic "tariffs are bad" argument. When trade is balanced, tariffs indeed do more harm than good to trading partners, because they reduce the ability of each country to take advantage of the other's comparative advantages. But when mercantilist countries intentionally keep trade out-of-balance, trade-balancing tariffs are beneficial to the trade deficit country.

Mercantilist China currently produces both what they produce with comparative advantage and what we produce with comparative advantage. Then they only trade with us for products that they can't produce at all. In December 2011 the Chinese government raised its already high tariffs of about 25% on American automobile exports, forcing Cadillac and Jeep to build their new factories in China in order to have continuing access to the Chinese automobile market.

As a result of actions such as these, combined with foreign currency purchases to keep the yuan low and the dollar high, the Chinese government keeps reducing U.S. net exports to China. In fact, our net exports of goods with China hit a new low of a negative $311.6 billion over the 12 months ending in October as shown by the graph below:

 ChinaTradeThru1012 2.gif

Why Smoot-Hawley was a Mistake

During the 1920s, the United States followed a mercantilist strategy similar to that now being followed by China. Britain of the 1920s was the primary victim of our mercantilism.

In 1925, when Britain returned to the gold standard with an overly-high exchange rate after going off the gold standard during World War I, the United States and France returned to the gold standard with overly-low exchange rates. As a result, the U.S. and France experienced the roaring 20s, while Britain was mired in a trade-deficit caused recession.

Also, Britain began to experience the financial difficulties that inevitably envelop countries with persistent trade deficits. In order to buy more imports than they export, trade deficit countries must borrow from their trading partners or sell assets such as gold. At first their credit rating is good, but eventually they get so deeply into debt that they are no longer worthy of further credit.

The trade deficits followed by financial problems scenario played out in Britain in the early 1930s, just as it is now playing out in today's trade deficit countries, including Greece, Portugal, Italy, Spain, and the United States.

Mercantilism helps its practitioners but impoverishes its trading partners. Eventually, it ruins the export markets for the trade surplus countries' products which destroys the trading system. Balanced trade can grow forever, but mercantilism eventually produces financial crises, like those that began in 1929 and 2008.

When Al Gore claimed that Smoot Hawley was a mistake just because it was a tariff, he was mistaken. Smoot-Hawley was a mistake because the United States was a trade surplus country with a billion dollar per year trade surplus. Trade surplus countries can end worldwide recessions by taking down their trade barriers and by stimulating their economies. Their increasing purchases of imports would improve the financial condition of their customers and increase their exports.

Britain's Counter-Tariff Ended its Depression

As far as trade deficit countries are concerned, the key to prosperity is balanced trade. To achieve balance, they can apply tariffs just to the countries with which they have trade deficits. Ideally, the tariff rate should be scaled to the size of their trade deficit with each country and reduced as trade moves toward balance, so as to give trade surplus countries an incentive to take down their trade barriers.

In 1932, in response to the Smoot-Hawley tariff, Great Britain established an "imperial preference" trading system with its colonies and independent dominions. The British engaged in free trade within their commonwealth while placing high tariffs on the rest of the world, including trade surplus countries such as the U.S. and France.

As a result, Great Britain climbed out of the Great Depression during 1933, so that by January of 1934 (see Figure 1) it had completely recovered. Tariffs can be very beneficial to trade deficit countries. Meanwhile, the United States remained mired in the Great Depression until 1939, thanks to the foolish policies of the "new deal," now being imitated by President Obama.

Fast forward to the United States and the present. If a trade-balancing tariff system, such as the WTO-legal scaled tariff, were enacted by Congress, the United States would experience an economic boom, much like the one that got Great Britain out of the Great Depression in 1933. But America does nothing because almost everyone with power in Washington believes Gore's misinformation about tariffs.

The authors maintain a blog at www.idealtaxes.com and co-authored the 2008 book, Trading Away Our Future. Dr. Howard Richman teaches economics online. Dr. Raymond Richman received his economics doctorate from the U. of Chicago