I have talked before about Obama's fantastic economic team. I have also discussed the dangers of his campaign promises. Whether he believes his protectionist rhetoric or not - I believe he does not - it will still have an effect on his administration. The most striking thing about his campaign is its similarity to the election of 1928: economic downturn, populist president elect whose party controls Congress, the debt he owes to powerful interests who elected him (in Obama's case, labor unions), and on and on. The crack economic team he has chosen will do him little good if he ignores them as much as he did on the campaign trail.
This has concerned me so much that I have decided to post selections from a paper I wrote last winter on the Smoot-Hawley tariff. The paper is not an economic analysis (no jargon; no technical stuff). It is a discussion of the domestic political factors that led to the most damaging piece of economic legislation in American history (it was very, very bad foreign policy as well). My concern is that these factors exist today. Note especially the four factors I list in the fourth paragraph (and their explanations later in the paper).
I obviously don't think Obama will pass a relative of the Smoot-Hawley, but I do believe there is a chance for the pendulum of regulation and market intervention to swing opposite from the Bush admin's mindset, which could lead to serious constraints on future growth.
The paper will be worth your time if you look for similarities to the current situation. Click the Keep Reading link for the full text. Bold in the text was added to the paper specifically for this post.
Pandering and Promises
It was an election year. The economy seemed strong, but problems in a few sectors provided turf on which Republicans and Democrats could scramble for votes. Candidates sought to balance their platforms, making cases for good economics while promising protection to those vulnerable to global forces. In a letter to a potential supporter, one candidate promised to “protect American workmen, farmers, and business men alike from competition arising out of the lower standards of living abroad, foster individual initiative, [and] insure stability of business and employment.” Protectionist promises were sure to get votes. This may sound familiar in the 2008 election year; but this description is of the 1928 presidential contest, the problem was agriculture instead of housing, and the letter was written from Herbert Hoover to the chairman of the Republican National Committee (Hoover 1952, 196).
What makes the 1928 election worth discussing? Economics and politics have always been inextricably linked. The economic policies of the United States are heavily influenced by the political process, with its strong institutions and influence of competing interests. Trade, specifically, has often been a crucial part of the platforms of candidates for office. A comparison of the rhetoric of Barack Obama or Hillary Clinton with that of Herbert Hoover reveals that the defense of protectionism has changed little in the last eighty years. The America of 1928 was very different from the America of 2008, but the potentially damaging effects of protectionist legislation make the issue of protectionism as relevant today as it was then. Politicians still use the same rhetorical defense for it, and the process and institutions that create it have changed little. The Smoot-Hawley Tariff Act of 1930 provides a candid portrayal of the politics of protectionism.
The Smoot-Hawley Tariff Act was signed by President Herbert Hoover on June 17, 1930. It included tariff increases on fifteen categories of goods. The largest increases were in agriculture, which was Hoover’s original intent for the bill, but nearly every other imported good received protection as well (see table on page 7 for specific tariff rates). “The final bill included specific tariff schedules for over twenty thousand items, almost all of them increases. Under Smoot-Hawley, the average ad valorem rate on dutiable imports was 52.8 percent, the highest American tariffs in the twentieth century” (Pastor 1980, 78). Smoot-Hawley was the first major tariff legislation since the Fordney-McCumber Tariff of 1922.
Considered by many to be one of the most damaging acts of economic legislation in the history of the United States, the Smoot-Hawley Tariff was the product of a complex political process extending over a year. Four main domestic political factors contributed to its form and passage: (1) Powerful economic interest groups formed unlikely coalitions that successfully applied significant pressure on legislators to expand the tariff beyond their campaign promises; (2) loyalty to party doctrine required that legislators conform despite possible misgivings; (3) congressional institutions and procedures facilitated deal-making and the proliferation of rate-increasing amendments; and (4) campaign promises by Hoover and Republican congressmen obligated policy makers to protect American producers from foreign competition.
The Legislative Process
Hoover made protection an important part of his platform, noting on several occasions “that the tariff was a dominant issue between the Democratic candidate [Alfred Smith] and himself—that the Republicans would protect the nation’s property from unfair competition” (Fausold 1985, 29). Hoover promised voters that he would request a special session of Congress to address the tariff issue, focusing on protection for agriculture. He hoped it would be a quick process, allowing him to move on to other issues during his presidency.
On election day, not only did Hoover win the White House, but the Republicans were also successful in Congress. In the House of Representatives, Republicans gained thirty seats for a total of 267; in the Senate, Republicans gained seven seats for a total of fifty-six. This gave the Republicans control of both houses of Congress and the White House—ample opportunity to further the protectionist agenda. In meetings with congressional leaders, Hoover carefully specified that the tariff should be flexible, allowing the bipartisan Tariff Commission to make future rate changes. He also expressed his desire for the tariff to be mostly agricultural.
The Ways and Means hearings began on January 7, 1929. Congress advertised the hearings, inviting concerned parties to submit briefs and, if necessary, testify. Congress did not seek out groups that would have an interest in the tariff; rather, it assumed that affected groups would find out about the hearings and attend. The nature of the process meant that well-organized and well-funded groups were able to have good representation in the hearings, while many other groups went unrepresented. The agenda of the hearings lacked structure. “To an amazing degree the hearings were permitted to take whatever direction was given to them by the witnesses themselves” (Schattschneider 1935, 38). The hearings were crucial because they would shape the initial drafting and debate over the bill in the House. This gave the attending interest groups significant influence over the information Congress received, and, therefore, the shaping of the tariff.
The hearings gave disproportionate voice to those interests in favor of protection at the expense of interests against protection. They also expanded beyond Hoover’s desire for agricultural protection. Says Martin Fausold:
Eastern interests . . . were as much for tariff revision as westerners were for agricultural legislation. The farm interests also wanted tariff revisions, although confined only to farm schedules. But powerful industrialists would not hear of that. Therefore, both farm and tariff legislation would be in the congressional hopper after March 4. (1985, 37)
Barry Eichengreen argues that interests for protectionism had gained power for several reasons. The powerful forces for protectionism were a well organized, unlikely coalition, much like Bismarck’s ‘iron and rye’ coalition. Agricultural interests along the Canadian border and on the East Coast were the most vulnerable to foreign competition. The nascent Depression had decreased these interests’ ability to compete with imports. Meanwhile, light industry involved in market-tailored production subject to European competition was also vulnerable to the effects of the Depression. These two interests formed a coalition due to mutual self interest. The organization of this coalition was sufficient to overpower the fragmented industries that would not benefit from protectionism (Eichengreen 2000).
The Ways and Means hearings were held until February 27, 1929, the last brief actually being submitted in April. The Committee then worked out the details of the bill. The process here was significantly shaped by the somewhat dubious hearings. Further, Frank Taussig comments that committees like Ways and Means “are ideal for log-rolling. . . . There could scarcely be a more effective device for trading” (1931, 491-492). When the bill reached the House floor, it was subject to many amendments, allowing for a “distribution of favors all around” (Tuassig 1931, 495). Legislators were heavily influenced by economic conditions in their districts, which contributed to the substantial increase in tariff rates while the bill was on the House floor. The final result did not make significant provisions for a flexible tariff, nor was it chiefly agricultural in nature.
The House of Representatives passed the bill on May 28 and referred it to the Senate Finance Committee the following day. This committee conducted hearings from June 12 to July 18, and Schattschneider argues that these hearings were conducted in similar fashion to the Ways and Means hearings. The Finance Committee made slight reductions in industrial tariffs then forwarded the bill to the Senate committee of the whole. This committee “permitted open-ended debate in which any Senator could offer amendments and request votes of the entire Senate on tariff rates for specific goods” (Irwin and Kroszner 1996, 7). Further reductions were made on industrial tariffs, angering advocates of protection for industry. Committee of the whole deliberations went from September 4, 1929 to March 24, 1930; despite Hoover’s prediction that the tariff would be a quick accomplishment, the issue had been in Congress for over a year.
Advocates of protection for industrial production regrouped when the bill was referred to the Senate floor on March 4.
A different coalition of voting emerged, one not based on broad agriculture versus industrial interests but on vote-trading among unrelated goods. Such log-rolling was noted at the time, and this effort succeeded in reversing several of the tariff reductions that had been voted upon in the committee of the whole. (Irwin and Kroszner 1996, 8)
A key aspect of this new Senate strategy was the log-rolling coalition described by Eichengreen. Senators representing unrelated areas worked together to push industrial tariff rates back up after the committee reductions. This coalition was successful in restoring some of the industrial tariff rates. The final Senate bill still had slightly lower rate increases than the House bill, but “the value of imports on the increases was more than ten times those on the decreases” (Irwin and Kroszner 1996, 9). On March 24, the Senate passed the bill, and the Senate and House conference committees began discussion on April 3. These committees worked to resolve differences between the House and Senate bills.
The final bill was passed by the Senate on June 13 with a vote of forty-four to forty-two; the House passed it on June 14 with a vote of 222 to 153. Republicans overwhelmingly approved the bill and Democrats disapproved in both houses; however, five Democrats in the Senate and fourteen in the House voted for the bill, and eleven Republicans in the Senate and twenty in the House voted against it.
The bill was then sent to the White House for Hoover’s signature. It had largely failed to meet his desires; it contained large increases in industrial tariffs and little provision for future flexibility in rates. Hoover received pleas from many interests to veto the bill. He also received a petition signed by 1,028 economists urging him to consider the economic and political consequences of the protectionist legislation (New York Times 1930). Other opponents of the bill included powerful banking interests and western farmers. “No tariff bill has ever been enacted or ever will be enacted under the present system, that will be perfect,” said Hoover, but he still felt obligated to sign it into law. He had made protectionist promises during his campaign. “When the bill finally came to him, he could hardly do otherwise than approve. His party could not go before the country stultified by having nothing whatever to show for a year’s prolonged and conspicuous labor” (Taussig 1931, 500). President Herbert Hoover signed the Smoot-Hawley Tariff Act on June 17, 1930.
Causal Factors
Since the passage of Smoot-Hawley, politicians and scholars have studied and debated the causal forces behind the legislation. The discussion of these factors is still highly relevant to political economy. As politicians continue to use protectionism as a tool to attract voters, what principles should they learn from Smoot-Hawley?
The first major treatment of Smoot-Hawley politics was Politics, Pressures and the Tariff by E. E. Schattschneider in 1935. He argues that the tariff was a result of powerful economic interest groups. These groups were able to shape the bill due to the haphazard way in which the congressional committees formed the legislation. The influence of these groups on members of the committees was substantial and led to log-rolling. Politicians traded favors, promising not to block each others’ amendments. One senator from Massachusetts remarked that the result was “an absurdity and partly a partisan fraud to cover what the tariff really is—namely a mass of private legislation” (Pastor 1980, 80). This discontent among some legislators due to the heavy influence of interest groups supports Schattschneider’s hypothesis.
Barry Eichengreen further elaborated on this interest-influence argument. Rural interests were overrepresented in Congress, and the Republicans were strong in rural areas. The increasing pressures of the nascent Great Depression changed the incentives for light industry and agriculture along the northern border and eastern seaboard. These groups formed a powerful coalition and pushed their representative legislatures for protection. The result, argues Eichengreen, was less a result of partisan politics than it was a unique coalition of interests (2000, 45).
Schattschneider and Eichengreen are supported in this view by Douglas Irwin and Randall Kroszner. They use quantitative analysis of roll-call votes to determine the extent that the economic interests of senators’ constituents influenced their voting behavior. Their findings indicate two types of influence. First, the voting behavior on individual goods reflects the benefits to producers within senators’ constituencies, controlling for party affiliation. Second, “Senators with unrelated constituency interests formed log-rolling coalitions in order to increase tariff rates on specific goods” (1996, 21). The combination of constituency-based voting and vote trading indicates significant interest-driven legislating.
Robert Pastor has argued that the legislation simply reflected strict party-line voting. The Republican Party’s history of protectionism and its promises during the 1928 elections demonstrate that such party conformity was to be expected. While often disputed, this claim is supported quantitatively in a study by Callahan, McDonald, and O’Brien:
Our evidence would appear to provide significant new support for Robert Pastor’s emphasis on the strongly partisan nature of the voting on Smoot-Hawley. In most cases, taking into account a representative’s party affiliation and the unemployment rate in his or her state is adequate to explain his or her vote. Taking into account the specific economic interests in the representative’s district makes surprisingly little difference. (Callahan, et al 1994, 690)
These authors view their results as a powerful contradiction to Eichengreen’s analysis.
A forthcoming study bridges these arguments based on institutional determination. Economists Alan Dye and Richard Sicotte argue that while the final passage of the bill does indicate party-line voting, the process of shaping the legislation through deal-making and, most importantly, amendments reflects the power of special interest influence due to congressional institutions. “The extent to which the deal was kept within the majority party depended on the institutions that governed the amendment process” (2001, 34-35). Republican-dominated congressional committees facilitated an atmosphere of deal-making, and floor debates allowed for the proliferation of additions to the bill and log-rolling, especially for the majority party. Dye and Sicotte’s quantitative analysis confirms this hypothesis. The study, however, is not yet concrete: the article is pending revision at the Journal of Law, Economics and Organization.
Scholars do agree, however, that despite his early desires, Herbert Hoover lost control of the legislative process. “No American president has come into office with a more detailed conception of what he wanted to accomplish in economic policy and of the way to go about it than did Herbert Hoover in 1929” (Barber 1985, 65). He wanted the law to be a quick, simple upward revision of agricultural tariff rates which would allow future flexibility. However, “The president fell into the same trap that many other presidents have fallen into. Once the hearings had opened, Congress, particularly the Senate, proceeded to logroll increases in tariffs on nonfarm as well as farm commodities” (Fausold 1985, 53). Hoover was loath to exert significant influence over congressional decision making, and the bill was in Congress for over a year—so it turned into something that nobody had originally anticipated. When the bill finally reached his desk, the year-long process in Congress and his obligations to keep his campaign promises made the issue seem almost like a fait accompli to Hoover.
Relevant Lessons
Most scholars agree that solid scientific advice was not a major factor in the congressional decisionmaking process. The presentation of data in the hearings was prone to poor selection procedures. All interests were not adequately represented. When deliberation began, the construction of the bill and later amendments were a product of interest group influence, logrolling, and partisan politics instead of careful analysis of economic and international political effects. “The history of the American tariff is the story of a dubious economic policy turned into a great political success,” comments Schattschneider, and Smoot-Hawley was no different (1935, 283). The advice of over a thousand economists, in addition to important banking leaders, went unheeded by first Congress then the president. Little has changed since 1928; the protectionist efforts of politicians are often criticized by economists.
The ability of powerful economic interest groups to influence legislation through coalitions, connections, and log-rolling still exists. Loyalty to party still often requires legislators to endorse faulty ideas. Congressional institutions and procedures may still catalyze the passage of legislation shaped by interpersonal deal-making and log-rolling. Finally, presidential candidates are still in the business of using protectionist promises to garner support. This problematic combination of factors has changed little since 1928, so the lessons of Smoot-Hawley are valid for modern politicians. Presidential candidates should be aware of the potential of any legislative endeavor to expand beyond their expectations.
Sources
Barber, William. 1985. From new era to New Deal: Herbert Hoover, the economists, and American economic policy, 1921-1933. New York: Cambridge University Press.
Callahan, Collen, Judith McDonald, and Anthony O’Brien. 1994. "Who voted for Smoot-Hawley?" The Journal of Economic History 54 no. 3: 683-690.
Dye, Alan and Richard Sicotte. 2001. The institutional determinants of the Hawley-Smoot Tariff. At . 19 March 2008.
Eichengreen, Barry. 2000. "The political economy of the Smoot-Hawley Tariff". In International political economy, eds. Jeffry Frieden and David Lake, 37-46. Belmont, CA: Wadsworth/Thomson Learning.
Fausold, Martin. 1985. The presidency of Herbert C. Hoover. Lawrence, Kansas: University Press of Kansas.
Hoover, Herbert. 1952. The memoirs of Herbert Hoover. Vol. 2, The cabinet and the presidency 1920-1933. New York: The Macmillan Company.
Irwin, Douglas and Randall Kroszner. 1996. Log-rolling and economic interests in the passage of the Smoot-Hawley Tariff. National Bureau of Economic Research Working Paper Series, no. 5510.
Lichtman, Allan. 1979. Prejudice and the old politics: The presidential election of 1928. Chapel Hill: The University of North Carolina Press.
New York Times. 1930. "1,028 economists ask Hoover to veto pending tariff bill". 5 May.
Pastor, Robert. 1980. Congress and the politics of U.S. foreign economic policy 1929-1976. Berkeley: University of California Press.
Schattschneider, E. E. 1935. Politics, pressures and the tariff. New York: Prentice-Hall.
Taussig, Frank. 1931. The tariff history of the United States, 8th ed. New York: G. P. Putnam’s Sons.
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