Why the U.S. Must reinstate Tariffs

The year 1913 was perhaps one of the most important in United States economic history. We were not attacked or embroiled in a foreign war and we did not suffer some economic hardship (just the opposite in fact). We had yet to grant women’s suffrage and our society was still racially segregated. Without major social, military or economic upheaval how could 1913 be such a landmark in our history?

The Sixteenth Amendment to the United States Constitution was ratified on February 3, 1913. It granted Congress permanent authority to levy taxes against the income of citizens and remains in place today. In concert with this amendment a law was passed by Congress – the Revenue Act of 1913 – on October 13 which simultaneously re-imposed the fleeting income tax and lowered basic tariffs (from 40 percent to 25 percent).

By switching from tariffs to taxes the government was able to greatly increase the money it brought in and expand itself (the expansion has never stopped to this day). The side-effect however was that it kicked off a century of foolhardy trade policies which have been the death of our modern manufacturing and industrial base. During the throes of the Great Depression the United States – and most other nations around the world – put up major barriers to trade which are said to have worsened the economic climate.

Tariffs increase the cost of some goods; but the problem was never the tariffs or the prices. The problem was unemployment; which during the Great Depression sat at unprecedented proportions. Americans simply could not afford consumption, not because goods were too expensive but because they had no money to buy anything. In the 1930s the entire economy started cutting jobs simultaneously in all sectors. This destroyed disposable income and forced the economy to grind to a halt.

Another reason for the Great Depression was a lack of government oversight and regulation. Prior to the Great Depression the United States suffered through many “depressions” and many more "recessions” as the boom-bust cycle of unregulated markets swung wildly in either direction. The growth of the mid and late 20th century was in part a result of keen governmental oversight. The economy experienced massive growth at the turn of the century as well, but that growth was still much more susceptible to the boom-bust swings of unfettered natural markets.

The point is, many people look at the increase in tariffs and say that it directly relates to the economic downturn. This conclusion is simply not supported by much evidence; the relationship is spurious at best – murder rates also rise in concert with increased ice cream sales, not because of an ingredient in ice cream but because crime rate and ice cream consumption both coincide with warmer weather.

For generations, American policymakers and experts – like the world’s leading Depression “expert” and Federal Reserve chairman Ben Bernanke – have looked at the trade protection of the Depression with scorn. They should have been looking at it as a model for coping with difficult times. The United States cannot compete with wage rates in Latin America and Asia, but our obligations to “free-trade” propelled us into a fight we are doomed to lose.

If the United States simply placed a tariff – or even a quota – on Chinese imports it would be able to counteract the imbalance and make homegrown alternatives seem more reasonable. The U.S. doesn’t produce anything of substance in its “modern” economy, we all live on imports in every phase of life (you are probably reading this right now on a computer filled with Asian-made components).

Tariffs are not a cure-all, but they are the easiest method of protecting domestic production. The United States has abandoned the concept because of the lack of understanding we have on tariffs regarding economic fundamentals. We ignore the fact that trade deficits make us weak because we believe they also make us appear wealthy. We have obligated ourselves to play by the rules of “free-trade” because we know that it does allow for some individuals to become extremely wealthy. We choose to ignore all the underlings who are left with nothing even when “We, the People of the United States of America” are the ones being left out.