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Donald Trump: A 21st Century Protectionist Herbert Hoover
Here’s a historical fact that Donald Trump, and many voters attracted to him, may not know: The last American president who was a trade protectionist was Republican Herbert Hoover. Obviously that economic strategy didn’t turn out so well — either for the nation or the GOP.
Does Trump aspire to be a 21st century Hoover with a modernized platform of the 1930 Smoot-Hawley tariff that helped send the U.S. and world economy into a decade-long depression and a collapse of the banking system?
We can’t help wondering whether the panic in world financial markets is in part a result of the Trump assault on free trade.
Trump is also now running full throttle on an anti-immigration platform that could hurt growth as well and alienate Republicans from ethnic voters that the GOP needs if it is going to win in 2016.
We call this the Trump Fortress America platform. He clearly sees international trade and immigration as a negative sum game for American workers.
He recently announced that as president he would prohibit American companies like Ford from building plants in Mexico. He moans pessimistically that “China is eating our lunch” and is “sucking the blood out of the US.”
But strategic tax cuts and regulatory relief after the anti-business rule-making assault by Obama, not trade and immigration barriers, are the solution to America’s competitiveness deficit.
A draft of Trump’s 14-point economic manifesto promises that, as president, he would “modify or cancel any business, or trade agreement that hinders American business development, or is shown to create an unfair trading relationship with a foreign entity.”
His immigration stance would not just deport illegal immigrants, but even lock the golden doors to those who come lawfully for opportunity, freedom, and jobs. This could hardly be further from the Reaganite vision of America as a “shining city on a hill.”
“Decades of disastrous trade deals and immigration policies have destroyed our middle class,” Trump writes in his latest policy manifesto. This “influx of foreign workers,” he continues, “holds down salaries, keeps unemployment high, and makes it difficult for poor and working class Americans — including immigrants themselves and their children — to earn a middle-class wage.”
There’s some evidence that competition for jobs in very low-skilled occupations holds down wages, but for the most part immigrants fill niches in the labor market that natives can’t or won’t fill. They add to the overall productivity of the labor force while starting new businesses, and thus are net creators of jobs.
Tech CEOs will tell you there might not be a Silicon Valley were it not for foreign talent and brainpower.
In the 1980s and ’90s the United States admitted nearly 20 million new legal immigrants — one of the largest waves of newcomers in our nation’s history. Over that time period, the U.S. created nearly 40 million new jobs, the unemployment rate plunged by half, and the middle class saw living standards rise by almost one-third (from 1983-2005).
When Washington gets the macroeconomic policies right — on taxes, trade, regulation and the dollar — economic opportunity flourishes.
Free trade is also one of these prosperity building blocks, and Trump’s call for tariffs as high as 35 percent are worrisome in the extreme. We want Americans and workers all over the world to have access to the best-quality products at the lowest possible price. This is the centuries-long economic law of comparative advantage first taught to us by David Ricardo.
Take the Ford plant in Mexico. If it’s more profitable for Ford to produce trucks in Mexico, fine. As the supply of Mexican trucks goes up, this creates higher income for all Mexicans who then go out and spend the new money, not just at home, but in purchasing U.S. goods and services available on the market. And the purchase of American goods and services builds up the U.S. economy. It’s win-win.
Trump is correct that there are unfair trading practices around the world. We know, for example, that China pirates US technologies and patents. They counterfeit our goods.
But slapping Trump’s punitive tariff on imported Chinese goods will hurt America at least as much as it does Beijing. The same is true for rolling back the Reaganite NAFTA — a great success. Mexico is now our second-largest export market. China is No. 3.
China is our No. 1 import market, with Canada second and Mexico third. Those three countries together lead our total trade. Do we really want to pick an economic war with them?
Because the U.S is the hub of the global trading system, a lurch toward protectionism in America would give other nations an easy excuse to erect higher trade barriers and the domino effect could shut down the global trading system. No wonder financial markets are so jittery.
Trump’s idea of a 35 percent tariff on imported goods would be the biggest tax increase on U.S. consumers in modern times. This won’t help the poor. Wal-Mart has been one of the greatest anti-poverty programs in world history, and it has achieved the “everyday low prices” that greatly benefit the poor and middle class in part through low-cost imports.
But trade is also surprisingly vital to American jobs. A Heritage Foundation study finds that “international trade has boosted annual US income by at least 10 percentage points of GDP relative to what it would have been without global trade, which translates into an aggregate gain of at least $1.7 trillion in 2013, or an average gain of more than $13,600 per US household per year.”
Free trade is also the greatest antidote to world poverty and deprivation in world history. Over the past three decades, according to the World Bank and other sources, the spread of free trade has lowered abject, dollar-a-day poverty by nearly 1 billion people.
Hundreds of millions have moved into the middle class primarily in China, India and elsewhere in Asia, in parts of Latin America and in sub-Saharan Africa — a phenomenal achievement, underscoring the benefits of free trade and open markets.
To his credit, Trump accurately recites many of the terrible problems afflicting the American economy:
“Today, nearly 40% of black teenagers are unemployed. Nearly 30% of Hispanic teenagers are unemployed. For black Americans without high school diplomas, the bottom has fallen out: more than 70% were employed in 1960, compared to less than 40% in 2000. Across the economy, the percentage of adults in the labor force has collapsed to a level not experienced in generations.”
But the American problems that Trump complains about — stagnant growth and wages and slow job growth — can be found principally in Washington, D.C., not Beijing or Mexico City.
Start with substantially cutting or even eliminating the corporate tax. Then stop the double tax on multinational profits by moving to a territorial system, like everyone else in the world. Also, shift to full cash expensing for new investment in plants, equipment and building structures.
Then reform the personal tax code by lowering the rates, getting rid of corporate cronyist deductions, simplify the whole system and rip out tens of thousands of regulatory pages from the IRS code. We prefer a flat tax structure.
We have seen firsthand companies from Medtronics to Burger King flee the US for lower tax nations because our tax rates are 10 and even 20 percentage points higher than nations like China, Canada, and Ireland.
This is like imposing a tariff on our own goods and services. The real victims, according to a study by the American Enterprise Institute, are American workers who earn lower wages and find fewer jobs.
Next, a pro-America energy policy that expands the North American shale oil and gas revolution, ends the war on coal states, builds pipelines, drills on federal lands and allows the export of our vast oil and gas sources — in other words, the precise opposite of the Obama energy strategy — will create millions of new jobs.
Then tackle America’s massive regulatory burden, which under Republicans and Democrats has expanded exponentially — ObamaCare, Sarbanes-Oxley, Dodd-Frank, the Consumer Financial Protection Bureau, EPA and the National Labor Relations Board — the incredible maze of licenses and regulatory codes that pose a huge barrier to small new-business startups.
Finally, a strong and stable dollar policy that ensures that the value of tomorrow’s greenback will be the same as today. In the 1970s and 2000s, the collapse of the dollar led directly to the collapse of the economy. Right now, the unstable dollar is a huge deterrent of future investment from abroad or at home.
Ideally, Fed monetary policy should aim at a commodity price rule bolstered by forward-looking inflation-sensitive market prices.
Trump says his goal is a pro-business policy that rewards companies that “invest in America, return to America, or stay and thrive in America.” Let us add, “create in America.” The good news is that the draft 14-plank economic plan that we have seen from Mr. Trump contains variations on most of these ideas. They worked. Growth exploded.
That happened under Republican Reagan and Democrat Clinton. And both were free traders who favored legal immigration.
This article was written jointly by Stephen Moore and Lawrence Kudlow, co-founders with Arthur Laffer and Steve Forbes of The Committee to Unleash Prosperity.
Published in Economics
Hoover is not Trump and this is not the Great Depression. Nor, regarding immigration, is this the America of 100+ years ago. I’ve seen some bad historical analogies in my time, but this takes the cake.
Exactly! That has been my thought for weeks now. I thought protectionism was completely discredited from the great depression. We never retain the lessons of history.
“Trump says his goal is a pro-business policy that rewards companies that “invest in America, return to America, or stay and thrive in America.” Let us add, “create in America.”
Are there any companies like that? I don’t think the average person really understands how global the supply chain for the typical ‘American’ company is.
Protectionism today would be much worse than it was under Hoover. ‘Made in America’ is a fiction, and trying to implement a fiction by law would destroy the economy.
So the markets are trading on something Trump said .. the man must be some kind of light bender.
The actual last protectionist President was Ronald Reagan, who imposed “voluntary” import quotas on Japanese automakers, and flat-out tariffs for Harley-Davidson. Result, Reagan successfully won a 49-state landslide.
It’s fascinating and typical to see Smoot-Hawley trotted out again, as if every tariff ever would necessarily be that stupidly high, or as if the United States still had a trade surplus instead of a vast deficit.
It seems to me that free trade has become the functional equivalent of tariffs back then. The establishment reflexively believes free trade will solve every problem, so every problem generates more demands for free trade moar moar.
Meanwhile, the US economy waves bye-bye, the problems grow and fester, and the only response the establishment has is to dig deeper and deeper.
The latest scheme, the TPP, will solve the problem of public unhappiness with the present policies by turning over government functions to a foreign bureaucracy insulated from American unhappiness.
Or so I’ve read, but I don’t know, because the actual deal is a secret.
Pitiful. That’s how far the US government has fallen, and how devoted it is to “free trade.” It will render itself irrelevant to protect “free trade” from potential harm.
Something is wrong here. At least Trump has noticed. And if he can totally wreck the supposed consensus for the status quo merely by running his mouth then the supposed consensus wasn’t much of a consensus after all.
Advantage: Trump.
Don’t worry the DOW bounced back a bit today. Must have been something Bernie Sanders said.
I agree with Kudlow re free trade but disagree re immigration.
Good article. If we don’t trust Washington to regulate our access to health care, I don’t know why we should trust them to regulate our access to foreign products.
Protectionism is confused almost by definition, but Trump’s version is confused to the extreme. Lots of screaming about other countries stealing our jobs and locking us out, and about how a “really smart guy” as president can create jobs. How? By good management rather than reduction of the leviathan state, by punishing American companies which make rational economic decisions to build factories in Mexico, and by punishing consumers with tariffs. I”ve seen little to nothing from Trump about real solutions such as cutting regulations, corporate taxes, and subsidies to priviledged industries. (Which would, for starters, help Oreo and Ford choose America).
Hoover thought he could judiciously manage the economy and apply pinpoint tariffs. Wrong as he was, Trump looks to be much worse. If the Hoover-Trump comparison is off, it’s only because Trump out-Hoovers Hoover by a mile.
How do YOU know? Did you ask them? Cite primary evidence of this claim please.
…and the double-Irish Dutch tax sandwich
Prosperity for who?
ahh I see…
On a less aggressive note Mr. Kudlow, I take issue with your statement that, “Tech CEOs will tell you there might not be a Silicon Valley were it not for foreign talent and brainpower.” According to USA today, Asians are super-represented at Silicon valley but Blacks and Hispanics are severely under-represented.
Some cultures are better at capitalism than others. Vancouver is doing fine with Hong Kong Chinese immigrating their to escape communism. France is fine with Vietnamese immigrants but not so fine with Algerian immigrants. Hispanic immigrants to me seem alot like the Irish. They are more problematic than (Confucian) Asian immigrants and Jewish immigrants but not quite as problematic as Somali immigrants.
For all of Trump’s faults (I am not a trump fan) it is fair to recognize that some minorities are easier to assimilate than others. Is it really that unreasonable to have a immigration policy designed to benefit America?
http://www.usatoday.com/story/tech/2014/05/29/silicon-valley-tech-diversity-hiring-women-minorities/9735713/
The fact that these people have succeeded economically has no causal relationship to anybody else’s poverty. If it does you, have to make the case for it. It used to be that the majority of humans were dirt-poor peasants. Globally that is not the case anymore.
My husband is a stockbroker, and not more than an hour before I saw this headline, he asked first me, then his smartphone, “Wasn’t it Hoover who passed the Smoot-Hawley Tariff Act? Trump sounds just like him.”
Smoot-Hawley was not a disaster for the United States, but I read somewhere recently that it was a disaster for Europe, particularly Germany.
Well according to High-school civics. Germany was screwed over because after they lost WWI they had to pay a ton of money in reparations. Inflation utterly destroyed German currency between the Summer of 1921 and January 1924.The rest is deeply unpleasant history.
P.S. Germany is not unusual in this. Argentina’s loss of democracy and prosperity was also largely due to inflation.
There’s been a lot of cake here lately.
You’re not supposed to notice such things. Report to re-education, citizen.
Forgive me for pointing out that Washington is in fact regulating your access to health care.
But that’s completely different, right?
I’m very well aware of Washington’s hyper-regulation of health care, that’s why I used that example. Republicans are almost universal in their disdain for Obamacare. Hence my point that there is consistency in Republicans opposing regulating foreign trade.
I’ll grant that the kabuki theater troop in Washington is consistent in your example. But this is more a sign of the irrelevance of the Republican party than its consistency.
We have the trade policy of the Confederate States of America, advocated by such leading Republican lights as Al Gore and Bill Clinton, violated by the last Republican president to remain popular, but at least the party is consistent in framing the issue as the same as something completely different.
Meanwhile, on the issues the party disagrees with the democrats, it is simply brushed aside. For example, the hyper-regulation of health care- or the hyper-regulation of everything else, for that matter.
In those cases the Republican party may as well not exist. By now the GOP leadership has tamely accepted that the party descended from the Slavocracy Abraham Lincoln fought against will get to keep its Obamacare. Now it has moved on to attempting to figure out the best way to mock and attack Conservatives who still want to repeal it, with the plain goal of making the complaints from their democrat masters cease.
Much like how the establishment also treats people who haven’t accepted the sheer unbridled magic of free trade.