Friday, February 6, 2009

Smoot-Hawley & Me

From the Desk of Joe Rollins

I wanted to give my readers a little history lesson and discuss the Smoot-Hawley Tariff Act that was enacted on June 17, 1930. By many accounts, this law was one of the largest – if not the single largest – catalysts of the Great Depression. I was reminded of the Smoot-Hawley Tariff Act when I was reviewing the stimulus act currently being debated by the Senate and noted that it contains strict “Buy American” provisions.

When asked about the “Buy American” provisions in an ABC interview last night, President Obama said, “I don’t want provisions that are going to be a violation of World Trade Organization agreements or in other ways signal protectionism. I think that would be a mistake right now. That is a potential source of trade wars that we can't afford at a time when trade is sinking all across the globe.” It will be interesting to see whether the Democratic-controlled Congress will pass the bill over President Obama’s objection.

You might remember H. Ross Perot, who sought the office of President of the United States in the 1992 and 1996 elections. Perot was a funny little Texan who ran on the 1992 ticket as an independent candidate. Of course, during that time period the country was in a recession and Arkansas governor Bill Clinton was running on his, “It’s the economy, stupid,” slogan. In the end, Ross Perot took enough votes away from President George H.W. Bush to allow Bill Clinton to win the election. We all know that President Clinton went on to serve for two terms.

What brings Ross Perot to mind is that in the mid 1990’s, he ran a strong anti-NAFTA campaign. I can still remember him standing behind the podium, exclaiming that if NAFTA were approved, you’d hear a great “sucking” sound from jobs being sucked out of the United States and into Mexico. At that time, Bill Clinton and Al Gore were actively campaigning for NAFTA’s passage. Additionally, Ross Perot made the blanket statement that if NAFTA was approved, we would have over 1,000 banks fail in the United States in the coming year. It’s interesting to note that less than 100 banks have failed in the United States from 1992 through 2009.

In any case, Ross Perot was dead wrong on NAFTA. In fact, NAFTA created jobs not only in the United States but also in Mexico. This illustrates that free trade is the most important aspect we can have as a country. It allows us to export our goods and technology to foreign countries and allows those countries to export their products to the United States without the burden of tariffs.

During the Presidential campaign, it was interesting that President Obama was critical of NAFTA and is dead-set against the Columbia free-trade provisions. I cannot help but think that President Obama’s thoughts on those issues relates to his strong support by labor unions during the campaign. The provisions that are contained within the new stimulus act principally state that infrastructure projects carried out under the program use U.S.-made steel and iron ore. Once again, this is a bill sponsored and financed by the American labor unions to protect American jobs. President Obama has already pushed through and signed two major labor union-sponsored bills that clearly will be a detriment to business. I don’t know about taking the influence out of government, but clearly these were passed as payback for campaign contributions.

There’s important new legislation coming up that will test President Obama’s campaign pledges. Even though only 12.4% of the U.S. workers are under labor union contracts, those same unions provided enormous support for the Obama campaign. There’s a new bill that will be introduced shortly called The Employee Free Choice Act, more commonly referred to as the “card check” bill. Basically, it’s designed to promote unionism in American industry.

Rather than have a secret-ballot election by the workers as to whether or not they want a union, a union would be able to declare representation of the employees without the employer’s ability to object. It is a bill so un-American and so ultimately destructive to American industry that it’s hard to fathom anyone supporting it.

President Obama supported the bill before he was elected, although he hasn’t said whether or not he continues to support it in its current form. His decision, whatever it will be, will either put him in odds with the vast majority of the American industry or the unions that provided significant support to his campaign. It will be interesting to see whether President Obama is true to his word that he will not be influenced by campaign supporters by withdrawing his support from a bill that could encumber businesses.

If union representation was such a good thing, then why do only 12.4% of American workers unionize? I think the answer is obvious, and any bill that promotes unions would hurt our business opportunities in international commerce.

In any case, it’s important that we learn from our prior mistakes. Smoot-Hawley created very strict import duties for goods imported into the United States. In response, the rest of the world also created tariffs, which prevented U.S. companies from exporting into foreign markets. There has been no single bill that has universally been acknowledged as hurting the U.S. economy any more than the protectionist Smoot-Hawley Tariff Act in the 1930’s.

It was interesting to read recently what Dallas Federal Reserve President Richard Fisher had to say about the “Buy American” provisions in the current proposal: “Protectionism is the crack cocaine of economics. It provides an immediate high that leads to economic death. We cannot afford to go down that route.” Fisher is a nonvoting member of the Federal Reserve’s policy setting committee this year.

I only hope that when the Senate revises the stimulus act, any protectionist provisions are eliminated. While it is intuitive to indicate that we should buy American, it’s important to consider the consequences. While it may benefit union members in the United States, they are currently a vast minority. That means that 87.6% of the U.S. population would have to pay a higher price only to protect the jobs of the 12.4% that are covered under labor union contracts.

The worst thing about protectionism is that it may cause other countries to institute their own form of tariffs. Given the current economic softness in the economy, we cannot afford for us not to be able to sell exports.

The devastating effect of the Smoot-Hawley Tariff Act is well-documented. Let’s not make the same mistake.

It was interesting to read about the elections in Iraq last weekend. I saw very little information on the news regarding the elections, but I was able to read the full accounts in the New York Times. The New York Times has had reporters in Iraq during the entire war. I often thought the coverage was biased, but frankly, it was the only source of information on what was really happening on the ground in Iraq. It was a breath or fresh air to see the Kurds, Sunni and Shiites casting their votes throughout the country. It’s reported now that only 50% of registered voters voted in the election – about the same as in the U.S. Perhaps voters in Iraq has become just as apathetic as voters have been in years past in the United States.

Additionally, it is not unsurprising that there were many challenges to the votes. I suppose this is typical for most democracies – just look at West Palm Beach, Florida in the 2000 U.S. Presidential election!

What I find strange about the election in Iraq and the minimal corresponding press coverage is the incredible importance of the event. Perhaps it didn’t sink in that a nationwide election was occurring in an Arab country for a freely elected government. It’s hard to even imagine that after the generations of dictatorships and infighting in Iraq that it is possible they could govern themselves on a democratic basis.

There was one clear loser in this election – Iran. Iran did everything in its power to influence the election and put in Muqtada al-Sadr as the de facto influence in Iraq. For the most part, Iran’s actions were unsuccessful. As Iran falls further into economic chaos due to the low price of oil and their young population protests more violently against the radical Islamic administration, it cannot be anything but positive to see a freely elected democracy next door.

For all of those who declared Iraq to be an ultimate failure and a disaster, the democratic voting should disprove those statements. While it may not be a perfect democracy, Iraq is certainly significantly better than it was under Saddam Hussein’s dictatorship. While we all could debate whether or not it was prudent to ever begin the war in Iraq, no unbiased person could say now that we did not give the 28 million Iraqis an opportunity for a better way of life. Congratulations to them, and now let’s get out of their way so they can succeed (or fail) on their own without the U.S.’s involvement.