Title: Engaging in the Supply-Side Debate Over Tariffs
The current discussion surrounding President Trump's tariffs is hampered by an old-school mentality, as some economic purists label it craven and outrageous for supply-siders to accommodate their views to tariffs. This criticism, akin to a bitter pill, was served to Judy Shelton when she proposed the gold standard and suggested that money should be in healthy supply considering the Trump fiscal policy, while serving as a Federal Reserve governor nominee.
Supply-siders, renowned for their deep understanding of political economic history, find themselves at the center of this controversy. Robert Mundell, a historical essay master, and Jude Wanniski, a significant supply-sider, have both shed light on this topic. Wanniski, who delved into tariff history and economics during the 1970s, argued that the 1930 Smoot-Hawley tariff led to the Great Depression.
Wanniski claimed that the Great Depression was sparked by a combination of factors: President Hoover's announcement of his intention to sign the Smoot-Hawley tariff, which resulted in the highest tariff rates in history; an ending of top income tax rate cuts, which had been in place throughout the 1920s, followed by a tax rebate instead of further rate cuts in December 1929; and the establishment of a floor for the income tax at 25 percent.
Critics, however, often challenge this interpretation, arguing that the 1922 tariff was a more significant increase in duty levels than Smoot-Hawley and that international finance played a more significant role in the Great Depression. But this view overlooks the heightened vulnerability of the American banking system, which relied heavily on foreign exports to maintain dollar payments to American creditors.
In the 1930s, taxes jumped to unprecedented heights, posing a significant threat to monetary demand. Top income tax rates reached 25 percent in 1913, but surged to a staggering 63 percent by 18 months post-Smoot-Hawley. Property taxes also skyrocketed, annihilating major components of banking assets, such as foreign loans and mortgages. These details paint a vivid picture of the economic climate of the Great Depression.
Despite the considerable evidence pointing towards taxes as the primary cause of the Great Depression, many economists continue to argue that the Federal Reserve's failure to supply enough money was the principal and all but sufficient cause. This argument, long refuted, falls flat in the face of mounting evidence pointing towards the tax establishment's destructive roles in economy-altering tax increases.
Supply-siders argue that tariffs are among the worst gifts the U.S. has ever received, primarily due to their role in facilitating the introduction of the income tax in 1913. The income tax came with the promise of free trade, but the price was too high for supply-siders: an inherently regressive tax that chokes economic growth.
Economists seem oblivious to this reality, failing to apply the same proofs to the income tax that they do to free trade. When economists argue for free trade, they are, in essence, being selective in their thinking, failing to consider the ramifications of high income taxes.
Economists' support for free trade, however, stems from a deep-seated social and status anxiety, stemming from their failure to contribute to the industrial revolution despite possessing the tools to do so. During the Gilded Age, the first broad generation of American economists found themselves overshadowed by captains of industry, profound politicians, and powerful figures. In a desperate bid for relevance, they rejected tariffs and championed free trade, eventually switching to an income tax to fuel their arguments.
When economists urge Hoover to maintain low tariff rates, they are effectively endorsing free trade, but not at the expense of an income tax. Distancing themselves from their dates, they remain committed to their primary source of income and their standing in academic circles.
Enrichment Data:
- The supply-sider argument against President Trump's tariffs focuses on several key points: leverage as a negotiating tool, revenue vs. protection, and inflationary pressures.
- Historical examples, such as the Smoot-Hawley Tariff Act (1930) and tariff reductions during the 1960s-1980s, provide insights into the effectiveness and consequences of tariffs.
- The supply-sider perspective also involves the income tax, with the goal of reducing the overall tax burden and boosting economic activity. However, using tariffs as a revenue source contradicts this principle, as tariffs are a regressive tax that disproportionately affects consumers.
- Despite the supply-siders' opposition to President Trump's tariffs, they acknowledge the potential use of tariffs as a negotiating tool, but emphasize the importance of considering revenue versus protection and the potential inflationary pressures.
- Jude Wanniski, a prominent supply-side economist, argues that the 1930 Smoot-Hawley tariff contributed to the Great Depression, citing President Hoover's decision to sign it and the subsequent increase in income tax rates as key factors.
- Supply-siders maintain that the income tax, introduced in 1913 under the promise of free trade, has been detrimental to economic growth due to its inherently regressive nature, with economists often overlooking the tax's negative impact when advocating for free trade.
- Historically, supply-siders have drawn connections between tariffs and the income tax, with the 1913 income tax implementation following the introduction of high tariffs, creating an unfavorable environment for economic growth.
