"In 1930 the Republican controlled House of Representatives, in an effort to alleviate the effects of … anyone? … anyone? … the Great Depression, passed the … anyone? … anyone? … the tariff bill … the Hawley-Smoot Tariff Bill, 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."
The important lesson Ferris Bueller missed on his “day off” seems similarly lost on many national leaders today. The lesson is simple: Tariffs are bad, and free markets are good for economic prosperity. For a state that benefits from free enterprise more than most, it is ironic the Senate namesake of the Hawley-Smoot Tariff Bill was from Utah. Reed Smoot served in the U.S. Senate for 30 years, during which time he also served in the Quorum of the Twelve Apostles of The Church of Jesus Christ of Latter-day Saints. In historical hindsight, he was a terrific apostle but terrible economist.
What Smoot should have known and Ferris should have learned is that tariffs hurt worldwide economies, national industries, local businesses and household consumers. Because the U.S. economy is driven by consumption, it is particularly pernicious that tariffs on foreign goods are passed on to U.S. consumers. When the White House announced plans to place tariffs on goods from Mexico as a way of keeping a campaign promise to build a wall and make Mexico pay for it, someone in the administration must have understood that U.S. consumers would pay the higher price of Mexican products, and the plan was quickly abandoned.
Tariffs on foreign goods also hurt U.S. companies that use those raw materials as manufacturing inputs. The natural result of 25 percent tariffs on steel and 10 percent on aluminum is manufacturers either pay the higher cost of imported raw material or a higher cost of domestic raw materials. Either way, companies have a higher cost of production, thus hurting their competitiveness and the bottom line. While the administration has said it will permit companies to request an exemption from the tariffs, the result is increased government regulations that are disproportionately burdensome on small businesses, which leads to owners taking precious time away from running their business and spending limited resources on an army of lawyers.
The third way tariffs hurt the U.S. economy is the risk of retaliation on products exported from the U.S. This is exactly what is happening with the brewing U.S.-China trade war. When the White House announced $60 billion in tariffs on Chinese products, China quickly responded with a list of its own. If implemented, the tariffs on U.S. goods will reduce Utah’s direct and indirect exports; put downward pressure on the price of targeted products, thereby threatening profitability, and restrict expansion opportunities for Utah businesses into emerging Chinese markets.
When Congress imposed tariffs in 1930, lobbyists for special interest groups descended on Capitol Hill seeking protection. By the time the feeding frenzy was over, the Hawley-Smoot bill contained tariffs on over 20,000 products. The theory was the federal government could raise much-needed tax revenue after the stock market crash of 1929 by collecting taxes from foreign companies while at the same time increasing U.S. production through protection from foreign competition. The theory failed.20 comments on this story
Over the objection of 1,000 economists who pleaded with President Herbert Hoover for a veto, the bill became law, and the rest is history — history that is now repeating itself. In addition to the economics lesson, members of Congress and the president learned the painful political lesson that there is a steep price to pay when government fools around with the private sector, puts its thumb on the scale of free enterprise and picks winners and losers, instead of allowing the free market to do so. All we can hope is that someone doesn’t take the keys of Utah’s economy and run it off a cliff like a 1961 Ferrari 250 GT California.