Friday, October 01, 2010

The 1930s: Could It Happen Again?

Tuesday's Wall Street Journal carried a rather innocuous staff editorial entitled A Game of Trade Chicken.

In it, the staff wrote,

"The U.S. and China are slouching toward a trade war, with the House of Representatives aiming to vote this week on a bill to impose duties on Chinese goods if Beijing doesn't revalue its currency against the dollar. Two can play at that game, however, as China is proving as it responds to earlier U.S. protectionism.

China's Commerce Ministry Sunday unveiled its final order in an antidumping investigation against U.S. poultry. Effective yesterday, Beijing is levying duties ranging from 50% to 104%, depending on the producer, on imports of products such as chicken feet. The Chinese government claims U.S. companies sell in the Chinese market at a price less than their cost of production. In a separate case in August, Beijing slapped countervailing duties of between 4% and 31% on the imports, claiming U.S. agricultural policies unfairly subsidize chicken production in America.

These moves must be about politics because the economics of the cases make no sense. Far from dumping, U.S. poultry producers can sell chicken products in China at a premium over the American market because Chinese consumers prefer parts of the bird that Americans don't like—especially the feet, a delicacy known as "phoenix claw." And while it's hard to dispute that subsidies distort the U.S. agricultural marketplace far beyond anything Adam Smith would recognize, to the extent China feels the effects they amount to a U.S. subsidy for Chinese consumers.

This case also came after years of Chinese frustration with an unrelated move on Capitol Hill to block imports of cooked Chinese chicken over misguided safety concerns. Chinese chicken producers had complained about U.S. practices for a long time. In the face of mounting American protectionism, Beijing simply couldn't say no to its own domestic lobby anymore.

As for American lawmakers—and Mr. Obama—the chicken case is a warning. Merely because retaliation hurts China's own economy doesn't mean Beijing won't give in to political pressures to respond to American protectionism.

We're blithely told that a full-scale trade war a la the 1930s can't break out again because everyone knows better. But that's what we were told about the other lessons of Depression economics, and our leaders have already remade nearly every one of those mistakes. In a game of trade chicken, everybody will lose."

This case has hardly made the major media headlines, yet, for its potential consequences, it surely must be one of the most chilling and important news items of the past week.
That last paragraph says it all, does it not?
"...because everyone knows better. But that's what we were told about the other lessons of Depression economics, and our leaders have already remade nearly every one of those mistakes."
Worth repeating to really let it sink in.
We've had, by now, $1 trillion of nearly-pointless so-called stimulus spending. All that borrowed and printed money, which will have to be repaid somehow, has done no more to reduce unemployment, create jobs, than FDR's myriad make-work spending programs after which the stimulus was explicitly modeled.
Economists have criticized the stimulus bills for ignoring the reality that today's consumers, as taxpayers, realize that Keynesian fiscal pump-priming has to be repaid from higher subsequent taxes, so they feel poorer simply by watching such programs enacted.
While it's true that Bernanke's Fed hasn't shrunk the money supply as his predecessor did in the 1930s. If anything, he has erred on the side of excessive easing, creating a liquidity trap with 0% interest rates.
And now we have our Congress embarking on a trade war with our major creditor.
Smart. Really smart.
Between the new, beggar-thy-neighbor currency devaluations among major nations, and this new tilt toward tariff and trade wars, we're well on our way to repeating much of what made the US depression of the 1930s last so much longer and be so much more severe than it was in other countries of that time.
What was that about those who don't learn from the past are destined to repeat it, especially their prior mistakes?

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