Protectionism and the Great Depression

DESCRIPTIONEichengreen and Irwin

One thing you hear all the time is that protectionism caused the Great Depression. I’ve always seen this as an attempt at a Noble Lie; there’s no good reason to believe that it’s true, but it has been used to scare governments into maintaining relatively free trade.

But the truth is quite different, as a new paper by Barry Eichengreen and Doug Irwin shows. Protectionism was a result of the Depression, not a cause. Rising tariffs didn’t even play a large role in the initial trade contraction; like the spectacular trade contraction in the current crisis, the decline in trade in the early 30s was overwhelmingly the result of the overall economic implosion. Where protectionism really mattered was in preventing a recovery in trade when production recovered.

So let’s tell it like it was. If free trade is a good idea — which it mostly is — it should be sold on its genuine merits, not with scare stories.

Comments are no longer being accepted.

zapster November 30, 2009 · 10:01 am

I’m starting to wonder…in my own business I’m seeing shortages of electronics components, and searching for the cause I’m finding that many are made only in china, some only by a single company. Looking around, it seems to be that the move toward fewer and fewer sources of everything seems to have gone global. This is not what I remember the concept of free trade being marketed as..it was supposed to increase competition, not decrease it. It’s unfettered monopolization on a monumental scale. This can’t be good.

Mark A. Hall November 30, 2009 · 10:04 am

Dear Professor Krugman:

Can you please elaborate on your statement “If free trade is a good idea – which it mostly is” as it pertains to the U.S. and China trade policies and how it is affecting our recovery efforts?

Thank You,

Mark A. Hall

LD November 30, 2009 · 10:11 am

“Where protectionism really mattered was in preventing a recovery in trade when production recovered.”

Yes, that has what has ALWAYS been argued. In fact, it was the length of the Great Depression that gave it its name. So, in the end, Krugman is simply arguing what has always been the case.

The Fed Caused the Depression, Hoover made it worse, and FDR made it even worse.

Andy November 30, 2009 · 10:18 am

Due respect Paul, but the argument I usually hear is that protectionism prolonged the depression.

Sergey November 30, 2009 · 10:18 am

‘The Free Trade’ is slogan that used by corporations to hide shift of production to 3rd world while sale products back to the West. Initially it sounded like reduce production cost while still captured our wealth. Today it is clear the they moved foundation of our wealth oversea and we sink in dept in attempt to maintain our standards of living.

Take a look at Free trade:
China talks about free trade, but China doesn’t allow export of most manufacturing goods.

You can only sell good that produced using local work force. I really like to see such capitalism in US.

robob18 November 30, 2009 · 10:43 am

Firstly, reading the NYTimes about the FEC, looks like some commissioners need to be standing in line at the unemployment office:

//www.nytimes.com/2009/11/27/opinion/27fri4.html

Secondly, good protectionism differs from bad protectionism by nurturing growing industries instead of protecting declining inefficient industries as demonstrated with this Texas wind project:

//www.wind-watch.org/news/2009/05/13/wind-farm-gets-tom-green-county-tax-abatement/

The past is important here because a new project has been announced for the same area in partnership with the Chinese, using stimulus funds:

//www.bloomberg.com/apps/news?pid=20601103&sid=aY5rXUJG5KwI

and we need to encourage ‘build American’ as well as ‘buy American’.

It seems the rule should be: ‘encourage/protect jobs which are face-to-face and can’t be exported’ which would be construction jobs, infrastructure projects, maintenance projects that have been deferred, water purification projects, etc.

Gretchen Morgenson (as usual) scarily illustrated the secondary point of Fed lending yesterday:

//www.nytimes.com/2009/11/29/business/economy/29gret.html?scp=5&sq='bank%20lending'&st=cse

we must keep expanding the money supply to avoid a spiral, and we are not succeeding; protectionism cannot stand in the way of monetary expansion right now.

Perhaps the best way to keep from contracting would be to directly subsidize (on a sliding scale, to help small businesses more) a 2-5% increase in numbers of employees by businesses, based on their 2008 payroll tax forms or state unemployment tax forms.

It would be fast because the numbers are already in Federal and state computers, hard for the GOP to demagogue (against help for businesses in an election year ?), and as long as tied to actual hiring would keep money circulating.

Too simple; something’s wrong.

JoyfulC November 30, 2009 · 10:47 am

Free trade would only work if everyone played by the same rules — but they don’t/won’t.

Globalization seems to have greatly increased the wealth of a few, but at a cost to everyone else.

Randy Patrick, Human Origin and Primate Evolution Lab, Indiana University November 30, 2009 · 10:47 am

I have a question that may or may not deal with free trade and global financial systems but I think it does. I have read that Global GDP has risen from 11 trillion in 1980 to somewhere around 141 trillion by 2007. This represents approximately a 40% per year growth that appears to me to be a bubble of massive proportions. Are these numbers real? If they are then will they lead to depressed commodity prices (among many other things) as the global GDP drops to a more realistic number? Like 30 to 40 trillion. Does this indicate a depression-like unwinding of prices that will last years or a decade or longer?

Joseph O’Shaughnessy November 30, 2009 · 10:54 am

Well, first of all, my recollection is that exports and imports were a small percentage of GNP in those days. I don’t think that tariffs either before or after 1929 had much of an influence on the economic conditions.

While tariffs and global trade are important today, we need to see them in proper perspective. We need to carefully examine the use of imports by U.S. firms to increase profits when they reduce the American work force. We cannot continue to create jobs in China and subtract jobs in the U.S. The next new wave of technology must create jobs here at home.

If we use the example of a company that designs a product here, has the raw materials sent to China, has the product made and packaged there and shipped here, we may have a less expensive product for consumers. But we will also have far fewer people with the ability to buy the product and eventually, theoretically, no one to buy products.

If imports are five or ten percent of our economy, they should be treated appropriately. We should focus most of our attention on the ninety or ninety-five percent of the domestic economy that does fuel jobs and can create more.

We need 5 million jobs. We can create them almost overnight with government intervention. But we can’t do it twice. Those 5 million must be replaced in a year by 5 million created by the private sector.

If the private sector can’t do it, then government will have to step in and create those industries, like battery technology, biomechanics, solar and wind energy and forms of flexible-fuel transportation. We can’t starve the people to pay for foolish ideology and long-debunked economic assumptions.

We know how to do it. It is called civil service and it works quite well. The Republicans better get their heads out of their morass, because a Socialist-economy can become more than a sign on a tea-bagger poster if they don’t stop their obstructionism. In fact, the signs will have been prophetic.

It can happen here.

History says that the People will make it happen if it comes to that. Not all the corporate-industrialist-pandering, Rush Limbaughs, Glenn Becks, Sean Hannitys and Bill O’Reillys in the world will persuade the hicks that there is food on the table when it finally runs out.

Bill H November 30, 2009 · 10:55 am

“One thing you hear all the time is that protectionism caused the Great Depression.”

I have actually never heard that. I read a lot, including a lot about economics, and I read dozens of economic blogs, and I have never even one time heard that. I have friends who are Republicans and friends who are Democrats, and the Great Depression has been in conversations quite a lot over the past year and, guess what, not one time have I heard anyone ever suggest that protectionism caused the Great Depression.

So how are you “hearing it all the time” if I’ve never heard it before at all? Strange.

Like Andy, I have heard that protectionism worsened and prolonged the Great Depression, but never that it caused it.

Robert November 30, 2009 · 10:59 am

Andy – quite right.

The argument that protectionism cauysed the Depression is not meant to suggest it caused the downturn; rather that it prevented a speedier recovery.

No miss-selling there.

RSDallas November 30, 2009 · 11:32 am

Mr. Krugman,

You are right to say that protectionism did not “cause” the Great Depression. It’s clear that the Great Depression was caused by the decisions of our Nations Federal Reserve relating to the money supply, coupled with an extremely high level of debt incurred by both the general public and businesses in the US. SOUND FAMILIAR? The depression was further exasperated by the FOOLISH policies perused by FDR & his socialist goons. SOUND FAMILIAR?

Everything from price fixing, wage controls, the Smoot – Hawley Tariff Act of 1930 and most of all the Feds decisions relating to the money supply both before and during the Great Depression. Just Google what the unemployment rate was between 1929 and 1940.

Why don’t you write about the fact that our Nation has experienced several depressions prior to The Great Depression in 1929 of which were in fact VERY devastating for the Nation, but they only lasted on average about 2 years. Banks went broke, business closed and unemployment was high in each of these occurrences. The only difference was that our elected Officials REFUSED to stick their noses in these events until 1929.

Henceforth the depressions prior to 1929 were quick & decisive events that proved to be VERY efficient in correcting bad decisions by our public & private sectors by re-allocating capital and resources to more productive uses. Just look at the events of 1920 – 1921! Google it up folks! By 1923 unemployment had gone from high double digits to under 5%. There is no better example than this of how our markets can efficiently correct themselves if the Government will GREATLY reduce their roles during these events.

Recessions and Depressions have been around since the beginning of time and will continue even after this one is considered over. That’s the nature of markets. Unfortunately our elected officials DO NOT UNDERSTAND that the market has to re-set itself after experiencing an extended period of prosperity because resources and capital end up being allocated in unwise ways in the later stages of a prosperous times.

This current event may fade (which I doubt), but the PIPER will eventually DEMAND payment at some point in time! It’s the BASIC LAW OF ECONOMICS! I am certain of one thing. This event and the decisions being made by Bernanke & Obama’s goons should clearly provide the answers as to if the Keynesians or the Austrian influenced economist are right. Barring that the left winged, socialist don’t successfully use the same misguided excuse of “we could of and should have done more”.

Yes, Mr. Krugman you and the rest of the “If I Wish I Could Have” Camp need to heed the advice of my old friend: If if ands and buts were candy nuts we’d all have a Merry Christmas! But I guess you and others won’t stop until you try to eliminate ALL the risk associated with life through Government involvement in all aspects of our lives. It won’t work. The constitution reads “We the people” not “We the government”.

Merry Christmas America!

Bob Dobbs November 30, 2009 · 11:39 am

Free trade is a good idea? Sure, if everybody’s on a level playing field.

Say a tannery in my town closed down because it couldn’t compete with Chinese tanners. It delivered high-end, high value product; but the cost of worker safety and treating toxic waste made them uncompetitive. This actually happened.

What made the Chinese more competitive? Cheaper labor? Not alone, the workmanship locally was better? Productivity? No, the local tannery was very productive. But the Chinese tanners could dump their waste products in the river, didn’t need elaborate environmental measures to protect the workers.

Is free trade a good thing if the way to compete with the Chinese is to go backwards and do things the way they do it? I don’t think so. We can trade with them, but only if they abide by the same production rules that we do; otherwise, we become China.

There can be no such thing as “free” trade. There must always be rules that encourage positive outcoms put in place by the only organizations with a hope of doing the right thing for the benefit of the greater number — governments, governments in negotiation. And the U.S. has to take back its seat at the table after declaring “free trade” and taking off for a 20-years smoke break.

MHD November 30, 2009 · 11:50 am

If this is true and one accepts that credit financing for technological improvement/change is the “Lever of Riches”, does it not follow that the way out lies with increased credit flows to this sector? Although capital, and especially risk capital, is “on strike” for higher returns at an assured level wouldnt motivations either of greed, deisre for efficency, mercantilism or even nationalism make all nations and trading blocks desireous of any solid marginal improvements?

scientella November 30, 2009 · 11:58 am

We do not have “free trade” with China so long as their currency is pegged.

Free trade is the most effficient way to get widgets to people.

It is not however a good idea if people have too many widgets. We need to find a way to calculate over consumption as a negative externality. A sort of internal externality which tallies an individuals cumulative consumption and the point of not just diminishing returns but negative returns.

Lucas November 30, 2009 · 12:02 pm

Free Trade is not a good idea when only one side is interested in free trade.

It is always interesting to see you write how free trade is good. Can you really show a country we have two way free trade with?

Looking at our trade with South Korea, Japan, China, and India we don’t find free trade. What we find is they will export to us but keep imports limited. Just check out how hard it was for Apple to get into South Korea with the IPhone.

Our discussion should always have been about fair trade but our Multi-nationals wanted and got free trade.

First the Multi-nationals outsourced manufacturing jobs,

and I didn’t speak up because I wasn’t a factory worker.

Then they outsourced call centers,

and I didn’t speak up because I didn’t work at a call center.

Then they outsourced IT jobs,

and I didn’t speak up because I wasn’t in IT.

Soon they will outsource Economic Professors,

and I won’t speak up because I’m not an economic professor.

Marty Arnold November 30, 2009 · 12:07 pm

What you say “could” be true but there is one very LARGE problem with your whole concept & that is the US & the UK are really the only ones that practice “free trade” with the US blindly allowing it’s biggest & richest companies to use cheap labor in an 3rd or 4th world Nation it can find…

Unless China & the rest of the world practices “free” trade then any Nation that cares about it’s own people needs to put into place a simple rule stating, every dime spent by the government is to be spent on products that are 100% American” Where the ability to provide goods can not be done then the SBA should fund start up companies to provide for those missing supply’s & products….

This Country has/is still is playing the trade game with BOTH hands tied behind our backs, a game that has cost our Nation well over 50% of it’s manufacturing base with more being lost every day….

Tom Hickey November 30, 2009 · 12:15 pm

Is the declining dollar a hidden tariff in that it makes exports less expensive abroad and imports more expensive in the US?

Of course, this only holds with counties in the floating exchange rate regime, not those that peg to the dollar, like China.

Ransome November 30, 2009 · 12:18 pm

Currently we seem to be dividing into two camps, the Rothbardian anarcho-capitalists and everyone else. A first cousin to Libertarianism, anarcho-capitalism blames the government for every economic ill because it interferes with the purest forms of capitalism and the free market. Until the government is over thrown or minimized out of existence, people cannot be free. It is a Cult of Capitalism, really. Its perspectives include small or no government, no deficit regardless of economic conditions as deficits come from government interference, no or low taxes, individual freedom, the constitution, strong military, no social safety nets, emphasis on personal responsibility, no or few regulations, free trade, sanctity of contracts, ends justify the means, privatization of all services, including the military, return to the gold standard, elimination of the Fed, no central planning as it leads to socialism, their greatest fear, as socialism deteriorates into a dictatorship. By extension, liberals and progressives are the greatest threats because they tend to plan and centralize social safety nets.

There are economic theories behind this socioeconomic worldview that needs understanding, drawn from a plethora of similar camps, such as the Austrian School, the Libertarians, the Randians, the Monetarists, and the Anarchists, As far as being freedom loving individualists, they are surprisingly organized, militant and undemocratic, willing to spread dis-information and disruption. The more cultist militant anarchists are sometimes referred to as the Conservative lunatic fringe of the New Republican Party that is now requiring loyalty oaths and purity tests. Rothbard went to great pains to ensure the government overthrow would be peaceful but one wonders what will happen in practice. The cult is more like a third party as they scorn both Republicans and especially Democrats who are collectively personified by Obama and the most evil of the economists, Dr. Krugman, who believes in social safety nets, government planning, intervention and, gasp, deficit increases and just now, possibly protectionism as a foil to a job destroying trade imbalance.. I have not found a single economist that celebrated a negative trade imbalance except Milton Friedman who looked at it in terms of money and not jobs.

Jonathan Finegold Catalán November 30, 2009 · 12:24 pm

Professor Krugman,

Could you perhaps produce a graph with data on U.S. trade and U.S. production?

Patrice Ayme November 30, 2009 · 12:25 pm

Sorry, I made a crucial typo: the Smoot–Hawley Tariff Act passed in 1930, not 1931 (it is sometimes known under its official name, the Tariff Act of 1930). It was an act signed into law on JUNE 17, 1930.

the fear SH generated had been instrumental to the Wall Street crash of 1929, and thus it was momentarily withdrawn, so the markets recovered. They replunged when they saw it pass, and the rest is history.

CalS November 30, 2009 · 12:43 pm

The difference today is that we are a net importing nation. There’s no getting around that fact. No free-trade voodoo can hide the fact that we are no longer producing wealth.

We continually hear that education is the bromide that will solve everything. That is, simply put, baloney. The answer is NOT education. It’s very clear that even white-collar jobs are beginning to disappear overseas.

We continually hear that we’ll develop new products. This is nothing more than whistling past the graveyard. The blunt truth is that the bulk of our consumable manufactures are imported; so that had better be many, many new products. Not only will this not happen, any new products developed here will simply be farmed out overseas. Already GE is importing parts for its wind turbines and is considering moving all wind turbine manufacturing overseas. So much for green jobs. Of course the joke is that ‘green jobs’ never would be able to replace lost manufacturing jobs here at home; not even close.

It’s also abundantly clear that new manufactured products will likely be developed overseas as well. As we”ve gleefully shipped manufacturing overseas we’ve reduced our capacity to innovate. A skill not practiced is a skill lost.

The grand blunder is that a nation based on exports will never make tyhe adjustments needed to balance the equation.

This is action we must take ourselves and it must happen fast.

Fat chance though. We’ll become an increasing poor country with a thin veneer of the very wealthy with a tiny middle class to carry their water. The ‘average’ person will only subsist.

robob18 November 30, 2009 · 12:52 pm

Gee – ‘high priest of Keynesianism’ ! Hopefully the cat properly genuflects as you pass through a room:

//www.newsweek.com/id/224694/page/4

Looks like Ferguson is in high dudgeon and fits perfectly with the sophistry previously mentioned – he neglects the point Bush’s Keynesianism was employed in ‘good times’, squandering all the hard work of the Clinton years, much flowing unquestioningly to defense contractor out-sourcing.

His point about the banks cutting back on Treasury purchases compared to the last administration is another proof of the ‘capital strike’ phenomenon, antithetical to what one would think and the CW.

Glad you will be in D.C. on Thursday:

//thecaucus.blogs.nytimes.com/2009/11/29/business-titans-and-others-expected-at-jobs-summit/?hp

Actually hope you’re still there from Sunday and talking with Austan Goolsbee about more wind projects !

nafbenisak November 30, 2009 · 12:56 pm

It sounds like you’re leaning toward tariffs. They were the main source of fed revenue in the 19th c. Only tariffs can singly fund the budget, grow domestic industry, and repatriate jobs. Tariffs ‘level the playing field’ against foreign labor exploitation, other government’s subsidies to their workers, e.g., healthcare and education.

This s not a postindustrial economy. Manufactured products are consumed at an ever increasing rate. It’s just that the factories are located elsewhere. The values inculcated in the workplace stabilize the society and give the money worth.

The working class has no power between the multinational corporate Republicans and the investor-broker Democrats. Their disenfranchisement may be temporarily ameliorated by some federal WPA like program, but this is unlikely since unemployed state workers will swell the ranks.

The US will increasingly look like a banana republic, with a top 15% living in luxury on profits made by supplying the lower 85% with the bare necessities.

Wasn’t Marx’s point that wealth can only come from more efficient production. So why do we allow capital gain on commodity speculation? Didn’t the oil bubble and its bursting cause the collapse of ’08. Just think of what the gold bubble’s bursting will do.

Pam November 30, 2009 · 1:00 pm

I have yet to see or hear a convincing argument as to why free trade is a good thing.