Topic: Economics
Cap and Trade is Obama’s Smoot-Hawley
History repeats itself. It is amazing how similar the 1920s and 2000s have become. First, were the unsustainable economic booms; then came the busts. Of course the easy money policies of the Federal Reserve caused both busts.
by Kenn Jacobine
(libertarian)
Thursday, July 2, 2009

Then there is the government's response to both crises public works programs, lots of stimulus spending, more easy money by the Fed, and tax hikes on the rich. For sure, these policies did not cure what was ailing the economy in the late 1920s and they are not curing our economic ills today in the late 2000s. Really, the only dreadful piece of the government's response to the crisis in the 1920s that is missing from today's response is trade protectionism.

Hold on one minute. The House this past week passed the president's cap and trade legislation. Now, I know that cap and trade has nothing to do with trade between countries and protectionism. It is not legislation intended to protect domestic products against foreign competition like the Smoot-Hawley Tariff was intended to do in 1929. Instead, cap and trade is intended to protect the environment against foreign substances. On the surface, to compare the two measures is a stretch. However, the consequences of cap and trade if passed by the Senate will be very similar to those of Smoot Hawley during the Great Depression.

In 1929, the Smoot-Hawley Tariff placed duties on thousands of imported products in order to make them less competitive against domestic U.S. products. Naturally, our trading partners placed equally heavy tariffs on U.S. goods entering their countries. This had the effect of raising the costs of all good at a time when many were losing their jobs and couldn't afford to pay more for things. It is acknowledged by many economists that Smoot-Hawley and the wave of international trade protectionism that it brought forth was a major contributor to worsening an already sharp economic downturn.

Similarly, cap and trade will raise costs for consumers on virtually every product they buy. Because the goal behind the legislation is to artificially hike the price of electricity and gasoline in order to lessen their use by Americans, higher prices will appear for everything made in plants that use these resources. This naturally includes everything from food to computers to trucks.

To their credit, Americans are already hoarding their money. A report last week indicated that the household savings rate in this country has jumped to 7 percent - the highest rate in years and up from 1 percent in 2007. Higher prices on goods caused by cap and trade are not going to reverse this trend. As a matter of fact, according to the Heritage Foundation, cap and trade will significantly increase necessary household energy costs by at least $1500 a year. Cap and trade amounts to nothing more than a tax increase on everyone including middle class Americans thus another Obama campaign promise broken.

The Smoot-Hawley tariff contributed to the crippling of the American economy during the Great Depression. Cap and trade, although not a trade protectionist measure, will have similar consequences during this depression. It will raise the cost of living which will make consumers cut back on spending further. Production will then decrease further and unemployment will increase more. Perhaps it's already too late, but if our so called leaders would just read the history books they could save us a lot of economic hardship.

Kenn Jacobine teaches internationally and maintains a summer residence in Haywood County, North Carolina. Visit his blog site online at: The View from Abroad.

©2009 Kenn Jacobine, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Thursday, July 2, 2009
Last modified: Thursday, July 2, 2009

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Reader Comments:

Posted By: Hiram
Date: 2009-07-03 14:25:16

Bravo, Kenn!  I had not seen the analogy between Cap and Trade vs Smoot-Hawley until you pointed it out.  That's a keen historical observation.  Thankyou.

A few comments: the possibility that C&T will contribute to stagnation of the economy primarily caused by massive Keynesian misguided financial intervention into the natural business cycle, as happened previously, is very real. I'm not sure your description  "although not a trade protectionist measure" is true.  As you point out the effects are the same.  I would argue that as S-H was externally protectionist, obstructing local productive innovation and development of competitive efficiency, so C&T is internally protectionist, necessitating (from the viewpoint of the instigators) the building of a huge bureaucracy (with concomitant continuing costs passed on to the consumers)  to enforce it.  Naturally that organ of the state will be used for a purpose that is not mentioned in the bill nor advertised to the public: the stifling of small innovative competitors who could bring efficiency to the energy sector in favor of entrenched large inefficient producers.  This is a form of protectionism, but internal-- just as "Real ID" is an internal passport contrasted to an actual passport which is an external document.

C&T is worse than just another tax.  It inevitably means less energy for the consumers, ie. rationing.  And what happens when some consumers become small energy producers?  I can almost guarantee you that the C&T gestapo engendered as the enforcement arm of this bill will be retargeted to be out stamping the countryside looking for those of us using unregistered methanol/ethanol stills or absorbing untaxed sunlight into our solar thermal generators.  

Now, you point out that C&T is "intended to protect the environment against foreign substances", which I'm sure you mean to be the publicly stated intent (ie. disinformation) of the authors, not that you agree that C&T will achieve that intent in any way.  Point 1: carbon dioxide is not a foreign substance to the biosphere.  The fossil record clearly shows times when CO2 levels were significantly higher than today, and global bioproductivity was higher.  Point 2: some organisms see carbon dioxide as a useful energy storage medium-- obviously higher plants absolutely need it-- but I recently saw an article in a molecular biology publication that investigated a species of Archaea found in the midocean vents which used geothermal energy in conjuction with sulfur chemistry to convert carbon dioxide into methanol and methane-- two really good fuels.  Instead of fearing CO2 and allowing it to be used as a rationale by big government to scare people into accepting an authoritarian energy police, I believe we should study and emulate these organisms, to find ways to on a small distributed unregulated scale to use CO2 to make, use and sell fuel.

 

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