This collapse in growth should not turn into a slowdown as severe as The Great Depression. The scale and pace of the authorities’ response has been astounding, and brilliant. We have done more in the last 6 months than the Japanese did in the first 6 years of their downturn, and we have avoided making the mistakes of 1929 when bank depositors lost their life savings, where taxes were hiked, rates kept high, and where fiscal contraction was preferred over Keynesian expansion. As David Smith of the Sunday Times put it, this is now a battle between King Kong and Godzilla – not a one-sided fight.
However, one thing still worries me, and might tilt that fight in the direction of Depression. Protectionism. In mid 1930, there were some tentative signs that the US economy was stabilising – but then the Smoot-Hawley Tariff Act became law. Going against both a huge consensus of economists (1028 of them signed a petition against the Act), and against the wishes of the President, two Republicans, Smoot and Hawley had huge grassroots support and managed to pass the bill imposing significant tarrif hikes on imports to the US. According to Selwyn Parker’s excellent book The Great Crash, global trade effectively came to a standstill at that point and the global growth collapse resumed. Could the US be about to make the same mistake again?
The American Steel First Act would mean that only US manufactured steel could be used for any government project – a clear protectionist measure. On top of this, new US Treasury Secretary Geithner recently came out with this statement: “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency”. This could lead to US companies being able to seek import duties on Chinese goods. Could we be approaching our generation’s own Smoot-Hawley moment?