Thursday, August 11, 2016

What happened to the GOP’s pro-market ‘supply-siders’ and free trade?

One of the strangers aspects of this strange election season has been prominent Republican “supply-sider” types giving a thumbs up to Trump-onomics.
Let me explain just how weird this is. See, Republican policymakers and pundits typically use the phrase “supply side” in a narrower or niche sense than most economists. GOP “supply-side economics” largely focuses on the importance of reducing marginal tax rates as the key policy to boost output and living standards.
Reaganomics, the Laffer Curve, all of that.
way the world works Since the Reagan era, supply-side economics has been the driving economic theory within the GOP. One typically doesn’t run for the Republican presidential nomination without proposing a sizable tax cut. And if supply-side economics had a Bible, it would probably be “The Way the World Works“, written in 1978 by journalist Jude Wanniski as an explication of the views of economists Arthur Laffer and Robert Mundell. The book contains this strong and famous claim: “The stock market crash of 1929 and the Great Depression ensued because of the passage of the Smoot-Hawley Tariff Act of 1930.”
See, tariffs are just another sort of tax — Bad! according to supply-siders — and Smoot-Hawley was perhaps the worst tax increase ever enacted. Maybe the Original Sin of economics, from their perspective.
Now this is hardly the consensus view among economists. Not that Smoot-Hawley wasn’t awful policy, but that it caused the Great Depression. From The Economist:



In fact, few economists think the Smoot-Hawley tariff (as it is most often known) was one of the principal causes of the Depression. Worse mistakes were made, largely out of a misplaced faith in the gold standard and balanced budgets. America’s tariffs were already high, and some other countries were already increasing their own.
Or as former Federal Reserve Chairman Ben Bernanke once said, “Regarding the Great Depression. You’re right, we did it. We’re very sorry.”
Still, the global outbreak of protectionism was terribly damaging in the 1930s and beyond. Economist Douglas Irwin:
The proliferation of higher tariffs, import quotas, and foreign exchange controls all contributed to the collapse of international trade. These import restrictions, combined with preferential trade blocs, destroyed the open, non-discriminatory world trading system. Once imposed, the trade barriers took root and proved difficult to remove, stifling world trade and hindering economic recovery for years to come. In fact, it took decades of negotiations after World War II, through the General Agreement on Tariffs and Trade (GATT), before these barriers were fully unraveled.
And, I would add, it’s been freer global trade and investment which have pulled a billion humans out of extreme poverty since 1980. This only reaffirms and supports the idea that free trade and open markets — what the British called “God’s Diplomacy” in the 19th century — reside at the moral and economic core of any agenda to broadly boost human flourishing and prosperity.
Now, as you may have heard, the Republican presidential candidate views protectionism as a smart, “America First” policy. To the extent Donald Trump has a core economic belief, protectionism might be the one. He’s been talking about it since the 1980s. And as I wrote in my new The Week column:
The wealthy businessman has given three major speeches this summer outlining his economic views. And they’ve all been remarkably consistent in being centered on how trade has ruined America. Near Pittsburgh in June, Trump blamed trade and globalization for “moving our jobs, our wealth, and our factories to Mexico and overseas.” At the Republican National Convention, Trump said his “different” economic vision “begins with a new, fair trade policy that protects our jobs and stands up to countries that cheat.” And in that lengthy speech to the Detroit Economic Club on Monday, Trump blamed trade deals for the Motor City’s decline: “The skyscrapers went up in Beijing, and in many other cities around the world, while the factories and neighborhoods crumbled in Detroit.” The heart of Trump-onomics remains his apparent belief — one he’s consistently promoted since the 1980s — that trade and globalization are what’s gone wrong with the American economy. If we would only tear up a half century’s worth of trade deals, America’s 1960s, manufacturing-heavy economy would somehow return.
In TWTWW, Wanniski mocked this static view of trade. He wrote that a misunderstanding of and resistance to free trade dynamism would always come from “those single entry bookkeepers in American business and labor who fear that an expansion of third world intellectual capital will just mean more competition. Do we really want Peruvians to be manufacturing steel instead of catching anchovies?” Back to the fields, China.
Of course, Trump has endorsed other policies that supply-siders favor, such as income tax cuts and deregulation, but hasn’t much talked about them until this week. For Trump, protectionism — or what Milton Friedman would call “consumer exploitation” — and zero-sum mercantilism aren’t just sections of his broader policy agenda. Rather, they’re central to his economic cosmology. It’s how the world works, according to Trump. Like I said, it’s been a strange and baffling election year.