Supply-Siders Battle Their Tariff Critics

A mannerism is stymying economic discussion about the President Trump tariffs, as it has since the first presidential term. This is the accusation among economic purists that it is craven and outrageous that supply-siders—the very carriers of the Reaganite tax-cut economic tradition—would accommodate their views to tariffs now that powerful and charismatic President Trump is for them. Judy Shelton got a taste of patent medicine of this sort when she was mobbed out of a Federal Reserve governorship. Critics seized on her advocacy of the gold standard while she suggested that money under Fed auspices should be in healthy availability given the Trump fiscal policy. Critics see “gold standard” and think “tightness” and “austerity,” as if the gold standard did not perfectly finance the greatest growth spectacles of all time like the industrial revolution. In democratic societies, one deals with the forces of lame opinions.

Supply-siders have counted among their number the most dedicated and profound of all students of political economic history and the relevance of that tradition to contemporary problems. A look at any of the historical essays of Robert Mundell’s will jerk one alert to this reality. Jude Wanniski is another mighty oak among such supply-siders. He was the one, in the 1970s and beyond, who delved into tariff history and economics and re-presented the major thrusts of American political economic history to the nation as it gathered itself to rout stagflation out of existence. The current supply-sider perspective on tariffs comes straight out of Wanniski, in particular his historical studies of the tariff. Here’s a good rule of thumb for all those, including the most credentialed of economists, who wish to consider, and perhaps challenge, the supply-sider perspective on tariffs: sit at Wanniski’s feet and listen.

Wanniski’s 1978 book The Way the World Works went over how the 1930 Smoot-Hawley tariff occasioned the Great Depression. The argument is a piece of cake to make. Stocks in April 1930 were at the same level as at the beginning of 1929—o crash, where is they sting?—collapsing when President Hoover indicated he would sign, as he did in June, what became the tariff with the highest rates in history. This followed up on Hoover’s ending the series of top income tax rate cuts that had been going on the whole decade of the 1920s. In December 1929, instead of cutting income tax rates still more, he gave a tax rebate.

Here is what the world of investors and business directors got to behold as of early 1930: a floor to the income tax was now established—the president would not lower the top rate under the current level of 25 percent (it had been zero for eons until 1913); and a tariff that with any exacerbation of the price deflation of the 1920s would become the biggest ever. A very considerable new income tax and the biggest tariff—the most extensive complement of federal taxes in American history was materializing right then, in winter 1929/spring 1930. Of course investors and directors of business responded by pulling out. Of course the Great Depression happened then and there.

The nitpicking Wanniski gets! The 1922 tariff was a bigger increase over previous duty levels than was Smoot-Hawley. Trade only accounted for a small share of economic activity. There were always tariffs in American history. On their own terms, how the critics (and these are academics) turn a blind eye to international finance, to how the American banking system, having floated the Versailles reparations program, had to have Germany in particular keep exporting like mad to the United States to maintain dollar payments to American creditors has never been clear. Smoot-Hawley took dead aim at the new heightened vulnerability to foreign flows of the American banking system, and by year’s end in 1930 that system was experimenting with the death rattle. Then property taxes went to seven percent of GDP, eliminating the possibility of housing payments. Two huge components of banking assets, foreign loans and mortgages, annihilated by early 1930s taxation. Jude told you so. Sit at his feet and listen.

What is sad is to see the army of Federal Reserve economists and their countless fellow-travelers in academia brush all this away and aver that the Federal Reserve’s not supplying enough money in the early 1930s was the principal and all but sufficient cause of the Great Depression. This argument is empty. It has been ever since Mitton Friedman and Anna J. Schwartz put it on 700 pages of paper in 1963. Rising like a giant Grim Creeper out of the glories of the industrial revolution, as the 1920s ended, was a tax establishment blowing away all previous standards. Income taxes, nonexistent seventeen years before, now at the minimum 25 percent at the top and as of eighteen months past Smoot Hawley, 63 percent. The biggest tariff ever. In the early 1930s, suddenly the highest property taxes ever, probably by three-fold. There is monetary demand, which monetary supply will balm, when taxes jump to sky high? There is not. Taxes caused the Great Depression. Supply-siders have begged the heavens: Could these people please stop it with the money supply and the gold standard?

The supply-sider perspective on the tariff is that free trade is the single worst present the United States has ever given itself, on one specific and all-important criterion. The specific reason that the United States, having not had one to speak of before, started an income tax in 1913 was to relieve itself of a tariff and entertain the possibilities of free trade. Here is the supply-sider view on tariffs: free trade and certainly tariff reduction are wonderful, but the price is an income tax? Are you nuts?

It is incredible to see all the proofs that economists have on the excellence of free trade. They seem not to be aware of how good they are. We know this because the economists do not apply the same proofs to the income tax. If they really believed their proofs (and they should), they would apply them to the income tax and become a noisy gong for a zero income tax. Don Boudreaux in taking a whack at my explanations in this regard says to be careful and specify that economists can credibly be for tariff duties whose revenues rise with rates. The problem is that this has been clear to everybody for centuries. What remains unclear, and the sticking point, is why we have the term “free trade.” To the extent we do—and we most certainly do—the supply-siders ask, what about free income?

Economics has played ball with the income tax, against all counsel of its equations (the ones it uses for tariffs) because of its own social and status anxiety. The first broad generation of American economists, of the Gilded Age, were nebbish cloistered bookworms who missed out on being a doer in the greatest era of being a doer, the industrial revolution. Instead of adjusting to this reality like a Mensch, they lashed out. The captains of industry, the doers extraordinaire, had made the tariff their baby, dictating its lines to Congress. Therefore the economists piped up with logic about how bad it was, economically. (It sure was bad—all the solo tariff ever accompanied was the greatest episode of economic history ever.) And in a terribly fateful move, economists encouraged the switching of a tariff for an income tax, the spirit of 1913, when the income tax came on and the tariff was substantially reduced.

In 1930, the tut-tutting reached a feckless extreme. A thousand economists signed a letter urging Hoover not to approve the tariff. The thousand urging him to keep cutting top income tax rates in December 1929, and not to increase the top rate to 63 percent in 1932, never got together. Economists were totally jake with those moves.

I have likened economists’ espousal of free trade to the date a lapdog brings to a dance. A social nonentity who succeeds in dragging a dolled-up partner to the prom or whatever is so proud, disbelieving, and covetous that it is unthinkable for that nonentity to ask someone else there to trip the light fantastic or, heavens, leave the date there and pack off to the after-hours eatery with someone else. Free trade was the meal ticket that brought economists out of nowheresville to their warm place of being consulted, respected, ensconced in gothic offices of universities, and drawing salaries like middling professionals. There is no way they were going to forsake their lady luck of free trade. Writing a letter en masse to Hoover saying keep cutting the top income tax rate below 25 percent would have shown their free-trade dates a new side that they did not really have in them. This would have said, “that’s right, sweetheart, I’m for a low tariff, but not at the expense of an income tax.” Bogart would have pulled it off, as Mary Astor became ever more his slave. Do we need to say that these people are not Bogart?

In 2019, I helped squelch the Saez/Zucman book hyping a weird positive history of the income tax, The Triumph of Injustice, a book that tried to argue that the reason the United States did not have an income tax for its opening phases of history was that it was inconsistent with plantation servitude. The authors had a very hard time of it on places like Squawk Box, but my review pointing out what everybody knows in American history, that the Old South used the income tax as a tool of manipulation (Virginia’s limped into the twentieth century), to buy off poor white support for Herrenvolk society and the domination of African-Americans, just might have been the coup de grace to a publicity tour that ended with noticeable abruptness. Economics has never matured in its consideration of the income tax. Supply-siders know this better than anybody. The very reason we have supply-side economics is that “mainstream economics” never could not get real about the income tax, and in the 1970s, with inflation, income tax rates were eating the economy alive.

Whatever equation proves free trade also necessarily proves zero rates in other tax domains, first and foremost the domain of income. When economists say free trade, they are therefore misspeaking. They are being selective in choosing how to apply their equation.

A quarter century ago, Wanniski conceded to Pat Buchanan that he would consider a tariff explicitly on the longstanding principle of hammering the income tax at once. “I’ve told you over the years,” Pat, “that I would support a higher ad valorem tariff, to 10% or even 15%, as long as domestic tax rates on capital are slashed simultaneously.” Wanniski knew he was playing with matches, but he also knew that letting circa 40 percent income taxes sail into the future in the 21^st century might imperil the American Dream, as in fact happened.

The day is getting late in salvaging traditional American growth, opportunity, and prosperity—GDP growth at sub 2-percent per annum this millennium, half or less of the pre-income tax norm. Canny supply-siders still have their heads together about keeping their eye on the prize, the income tax, while trying not to have government ruin trade as surely it will if left to its own devices. The principled purist gallery calls them inconsistent.