The Economy — The K.F. Stone Weekly

Hopefully, by the time you finish reading this week’s post, you will be able to answer the following 3 questions:

Willis Hawley (1864-1941) & Reed Smoot (1864-1941)

What are the 3 ways the federal government can raise revenue?
Who were Reed Smoot and Willis Hawley (that’s them in the photo), and what’s the only thing they are remembered for?
What is the definition of “stagflation?”

If, by the end of this post you can successfully answer these 3 questions, you will know a hell of a lot more about American political history and economic theory than the Republican Party’s putative presidential nominee.

As MSNBC news anchor Stephanie Ruhle says every weeknight on her 11:00 pm show, Let’s get smarter! But before we do, permit me to confess that I am neither an economist, nor anything more than an amateur when it comes to macroeconomics or monetary theory. Rather, I have spent a lifetime being unceasingly curious about all things intellectual, and had the good fortune to study with a couple of masters in my early years at university: Daniel Burbidge Suits, professor emeritus of economics who specialized in the field of Economic Growth Theory and Models, as well as renowned American political history professors Page Smith and Laurence Vesey. Then too, I have, over the years, devoured just about every word the exalted Richard Hofstadter, Michael Beschloss, and Doris Kearns Goodwin ever wrote.

(I guess that makes me a librarian’s best friend . . . one of the only advantages of being afflicted with Crohn’s Disease. How’s that? Well, in Hebrew, the answer to that question is רק הנאורים יבינו - namely, “only the enlightened will understand.”)

And so, without further ado, let’s roll up our sleeves, don our eyeshades, and get down to the business of learning something about taxes, tariffs, and Trump . . .

First and foremost, the federal government finances its operations with taxes, fees, and other receipts collected from many different sectors of the economy. In the last fiscal year, federal receipts totaled about $4.4 trillion, or 16.5 percent of gross domestic product (GDP). The largest sources of revenues are individual income taxes (49%) and payroll taxes (36%) followed by corporate income taxes (9%).

Another source of revenue comes from tariffs. Tariffs are a form of tax applied on imports from other countries. Most economists say the costs are largely passed on to consumers. Countries have used them to protect domestic industries, such as agriculture and renewable energy, as well as to retaliate against other states’ unfair trade practices. And, if Donald Trump wins the 2024 presidential election, thus giving him the power to (among many, other heretofore unthinkable things) make his economic vision a reality: instituting an "all-tariff policy" which would enable the U.S. to get rid of its income tax. Egad! The man actually wants to replace individual and corporate income taxes with tariffs!

Almost every country imposes some tariffs. In general, wealthy countries maintain low tariffs compared to developing countries. There are several reasons why: developing countries might have more fragile industries that they wish to protect, or they might have fewer sources of government revenue. The United States, for instance, maintained high tariffs for decades, until income taxes supplanted tariffs as the most important source of revenue in the 1930s. After World War II, tariffs continued to decline as the United States emphasized trade expansion as a central plank of its global strategy.

Trump’s insane quest for a policy of “all-tariffs-all-the-time,” (which he floated at last week’s gathering of the spineless on Capitol Hill) garnered nary a snicker - let alone a raised eyebrow - from the confederacy of dunces wildly applauding their leader. I’ve got to wonder if any of them - even if but for a nanosecond - heard a voice whispering “Smoot-Hawley . . . remember Smoot-Hawley. It was an unmitigated disaster back in 1930; it will be worse than a catastrophe in 2025.”

Smoot what? Hawley who? Reed Smoot (1862-1941) was a Republican Senator from Utah from 1903-1933; was also the first apostle of the Church of the Latter Day Saints (Mormon) to be a national political figure. In 1930, he was chair of the powerful Senate Finance Committee. Smoot's election to the Senate in 1903 by the Utah legislature sparked a bitter four-year battle in the Senate on whether Smoot was eligible and should be allowed to serve. Many Americans were suspicious of the LDS Church because of its earlier polygamous practices. In addition, some senators thought Smoot's position as a Mormon apostle would disqualify him from representing all his constituents. Many were convinced that his association with the church disqualified him from serving in the United States Senate.

Willis C. Hawley served as a Republican Representative from Oregon from 1907-1933. Although not what one might call a “shining star” within the House, he somehow rose to the Chairmanship of that chamber’s most powerful committee, Ways and Means, for the 70th and 71st Congress. From that powerful perch, he joined with Senator Smoot to coauthor the eponymous Smoot-Hawley Tariff Act in 1930. Signed into law by President Herbert Hoover against the advice of almost every titan of industry (including Henry Ford, who stayed overnight with President Hoover to repeat his belief that the bill was “an economic stupidity,” and Albert Henry Wiggin, head of the Chase National Bank of New York), Smoot Hawley (the last consequential tariff measure Congress ever passed) contributed mightily to the early loss of confidence on Wall Street and signaled U.S. isolationism. By raising the average tariff by some 20 percent, it also prompted retaliation from foreign governments, and many overseas banks began to fail. Within two years some two dozen countries adopted similar “beggar-thy-neighbor” duties, worsening an already beleaguered world economy and reducing global trade. U.S. imports from - and exports to - Europe fell by some two-thirds between 1929 and 1932, while overall global trade declined by similar levels in the four years that the legislation was in effect. It was also but one more nail in the political careers of Smoot, Hawley and President Herbert Hoover, all of whom were roundly defeated for reelection in 1932.

Historically, Smoot-Hawley would become to American economic legislation what Dred Scott v. Sandford and Dobbs v. Jackson’s Women’s Health Organization are to Supreme Court Decisions: the worst of the worst. In 1934 President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act, reducing tariff levels and promoting trade liberalization and cooperation with foreign governments. Some historians have argued that this particular tariff, by deepening the Great Depression, may have contributed to the rise of political extremism, enabling leaders such as Adolf Hitler and Benito Mussolini to increase their political strength and gain power.

As noted above, Smoot-Hawley was the last time major tariff legislation was enacted by Congress. Ever since, tariff policy has moved from the legislative to the executive branch. Ironically, another Hawley, Republican Senator Josh Hawley, the MAGA Maniac from Missouri, recently introduced S.1537, the “Raising Tariffs on Imports from China Act of 2024,” legislation. According to a report from Reuters, Senator Hawley’s proposal would raise the base tariff rate on Chinese cars by 100% (especially “EVs” - electric vehicles) from the current 2.5%, effectively putting a 125% tariff on imported Chinese vehicles. It also seeks to apply a 100% tariff to cars assembled in Mexico by China-based automakers. Besides being a disciple of “Trump’s Tariff Czar” Robert Lighthizer, the man who never met a levy he did not love, Hawley’s gambit is that this legislative ploy (which to date hasn’t signed up a single cosponsor) might get him a Vice Presidential nod. Just what is it about the family name “Hawley?”

Now, what Donald Trump proposes is, in my relatively untutored opinion, far, far worse than Smoot-Hawley. Suggesting that this "all-tariffs-all-the-time” bilge would put dollars into the pockets of the middle class is, like his tax cut, both a fraud and an outright lie . . . not to mention something which could easily pull the rest of the developed world into economic chaos. As I understand it, tariffs hike consumer prices because companies pass on the cost of the tariffs they pay. Tariffs currently account for $88.3 billion of the $4.4 trillion in revenues the U.S. government reported in fiscal year 2023. Income taxes brought in about $2.2 trillion, the Treasury Department reported. To bring tariff revenues even close to income tax levels would require a dramatic spike in import taxes, much, much higher than Trump’s proposed 10%.

His proposed 10% tax on all imports, and 60% tax on all imports from China, specifically, would also raise costs for average Americans, according to the analysis, amounting to a $2,500 annual tax hike for the typical family. That sum includes annual tax increases of $250 on electronics, $160 on clothing, $120 on oil and $110 on food.

Trump, the presumptive Republican nominee, has also said he would use revenues from import taxes to extend his 2017 tax cuts for corporations and the wealthy, which are set to expire. That would mean the top 0.1% of Americans would experience a tax cut of about $325,000 a year while middle-income families, after extending the tax cuts, would see a $1,600 net tax increase.

Paul Krugman, a New York Times columnist and a Nobel Prize winner in economics, did some quick math and posted on X that a "first-pass estimate" suggests Trump's proposal "would require an *average* tariff rate of 133 percent.” If Trump had his way, taxes on middle-income households would rise by $5,100 to $8,300 a year, according to the Center for American Progress Action Fund, a liberal advocacy group. By contrast, the top 0.1% of households would see their taxes cut by about $1.5 million a year, per the analysis, which notes that it would not be mathematically possible to replace all income taxes with tariffs alone.

Former Treasury Secretary (1999-2001), President of Harvard University (2001-2006) and the Charles W. Eliot University Professor and director of the Mossavar-Rahmani Center for Business and Government at Harvard’s Kennedy School of Government flatly stated that Donald Trump’s proposal, besides being the worst in all American history, is “. . . a prescription for the mother of all stagflations.” What is “stagflation,” and why is it so incredibly dangerous?

“Stagflation” is a not easily achievable economic amalgam of stagnant (zero) economic growth combined with high inflation and high unemployment all at the same time. The U.S.'s last memory of stagflation was in the 1970s when double-digit inflation and unemployment rates scarred the economy. To combat it, then Fed Chair Paul Volker hiked rates to 20 percent, a drastic and unprecedented move that forced the U.S. economy into a 16-month recession through November 1982. And this is what Trump’s economic plan is for America should he be reelected? In the (supposed) words of that master of the malaprop, Sam Goldwyn, “Include me out!”

There are tons of reasons why Donald J. Trump must be kept far, far away from the White House. The entire alphabet argues in favor of putting him in a padded cell: A(ttitude), B(igotry), C(upidity), D(emeaning). E(gomaniacal), F(atuous), G(ross), H(ateful), I(nsufferable), J(ejune), K(ooky), L(ethal), M(endacious), N(oisome). O(bnoxious), P(eurile), Q(uisling), R(epugnant), S(hifty). T(errifying), U(nstable), V(icious), W(hiny), X(enophobic), Y(obbish) and finally, Z(ombielike).

Class dismissed!

Filtering by Category: The Economy

#993: Far, Far Worse Than Smoot-Hawley?