THE BLOG
01/22/2016 02:18 pm ET Updated Jan 22, 2017

Will Republicans Return to Their Smoot-Hawley Days?

Mainstream Republican voices seem to be increasingly, if reluctantly, accepting that Donald Trump may in fact be their party's presidential nominee? Are Republicans completely, and recklessly, abandoning their modern commitment (it wasn't always so) to the free trade ideas of their purported hero, Ronald Reagan? To the extent Trump has an economic plan to grow the American economy it boils down to two main items: risking a global trade war in the belief that the United States can unilaterally set the terms of international trade and the more plain vanilla one of lowering taxes, primarily corporate ones.

The Smoot-Hawley Tariff Act (promulgated by two Republican Senators), passed in 1930 is widely accepted by economists as greatly contributing to spiraling the world's economy deeper into depression. According to Ben Bernanke, "Economists still agree that Smoot-Hawley and the ensuing tariff wars were highly counterproductive and contributed to the depth and length of the global Depression." In the aftermath of Smoot-Hawley, U.S. imports and exports plunged. The thought that a U.S. President could actually embrace such a wholly discredited economic idea as extreme tariffs is scary. The Republican Party effectively renouncing free trade as a vital part of its cannon by embracing its Smoot-Hawley candidate is analogous to the party's evangelicals denying Jesus.

At day's end, there is one tool at Trump's disposal, which he conceded in the last debate, if China doesn't acquiesce to his demands or Mexico refuses to finance his wall - big fat tariffs.

Compare Trump's approach to growing the economy to Reagan's vision. In his 1988 State of the Union address, Reagan said, "One of the greatest contributions the U.S. can make to the world is to promote freedom as the key to economic growth. A creative, competitive America is the answer to a changing world, not trade wars that would close doors, create greater barriers, and destroy millions of jobs." Trump fails to recognize that the ecosystem of world trade, in all its complexities, is the sum result of each nation trying to tilt the odds in its favor without crossing lines that could ignite all out trade wars.

Trump's other "big idea" is of course more prosaic and in keeping with common everyday Republican rhetoric to lower taxes, particularly corporate ones. If Trump was ever asked to answer the simple question, "When was America great in your mind?" he would quickly discover that his "great" periods were surely accompanied by tax schemes he rejects. For instance, the contribution from corporations for paying the nation's bills has steadily declined over the past several decades. Despite some people's preoccupation with marginal rates it is effective rates (after accounting for deductions and credits) that really matter. To wit, corporate income taxes averaged 4.6% of GDP in the "great" 1950s, 3.7% in the 1960s and since the 1990s have remained below 2%. Last year corporations paid 1.9% of GDP in taxes, the same as they averaged in the "great" (economic) decade of the 1990s. Does Trump want to take corporations' share of paying the nation's bills back to the great 1950s when it was above 4% of GDP?

Past periods of American growth were also accompanied by higher individual marginal tax rates. The booming 1950s had a top marginal rate of 91%. One reason why the economy may not be particularly impressed by marginal tax rates is that economic growth has occurred in the context of a variety of marginal tax schemes because total federal tax receipts, corporate and individual, have remained in a fairly tight band (putting aside recession periods when revenues sunk) averaging about 18% of GDP during the post-War period. Despite super high marginal rates in the 1950s total federal tax collections nonetheless averaged 17% of GDP. In 2014 the number was 17.4%. In other words, the amount of money that the federal government is currently pulling out of the economy as a percentage of the economy (GDP) is right in-line with post-War history. In all likelihood, the percentage needs to be increased to accommodate a demographic reality - an older nation with far greater retiree demands requiring more revenue to avoid more debt financing (in addition to thoughtful entitlement reforms).

Similarly, U.S. Federal spending (despite false claims to the contrary), has remained steady as well averaging about 20% of GDP. One wonders if the voices like Trump's decrying a runaway, ever growing Federal Government ever actually study this stuff. All of the above figures are easily accessible at www.taxpolicycenter.org (a joint project of the Urban Institute and Brookings Institution).

The chance that spending and revenue line up more evenly is unlikely because of the American pastime of blaming the other guy's spending, or special interest, as the source of the problem. For instance, while Trump, along with many of his primary competitors, assails food stamp spending, the cost of that program equals the cost of the home mortgage deduction. The Center on Budget and Policy Priorities estimates that close to half of homeowners with mortgages - most middle and low-income families - receive no benefit from this deduction. What allows many well-off Americans to see themselves not as government beneficiaries is the simple fact that they often receive their benefits through deductions, not direct cash-outlays.

Trump bashes the Obama administration's purported growing of the federal government (as does the rest of his newly found party), despite the fact that there are fewer non-military federal workers today as compared to when the President took office (today's 4.2 million federal workers versus 4.4 million in 2009) and U.S. federal spending is only a hair higher today at 20.9% of GDP versus 20.3% when Obama took office.

Trump's unemployment numbers are also misguided. He (along with others) often cites today's 63% labor participation rate to undermine the stunning drop in the unemployment rate from 10% in 2009 to today's 5%. However, the labor participation rate has been declining since 1999 (it peaked then at about 68%) and is most widely attributed by economists to the simple demographic trend of baby boomers exiting the work force. In fact, the labor participation rate was actually much lower in the 1950s at around 55% and grew as the result of another demographic trend, i.e. more women entering the workforce.

The current post-financial recession growth rate, decried by Trump and others, which is low by historical standards, is also completely in line with another historical trend - since WW II the growth rate coming out of recessions has steadily declined. According to the National Bureau of Economic Research, the trough- to-peak annualized rates of expansion for the recessions of 1958, 1975, 1991, 2002 and 2009, are 5.6%, 4.3%, 3.6%, 2.8% and 2.2%, respectively.

The data suggests that growth rates decline as economies, just like corporations, become larger and competition grows. At Berkshire Hathaway's 2012 annual meeting, the ever wise and lifelong Republican, Charlie Munger, said that he thought the U.S. would be lucky to get 1% real GDP growth over the next 20 years because of rising foreign competition. Said Munger, "The world is getting very much more competitive." Trump's promise of returning stunning growth to the U.S. economy is misinformed campaign rhetoric and should be seen for what it is - nonsense.

There is no question, despite the material drop in the nation's unemployment rate, workers have not participated in sharing the economy's productivity gains and Trump is tapping into this understandable frustration. However, this is a decades old trend, not a new phenomenon. Even if Trump's supporters can be forgiven for believing that a rich powerful businessman with perceived superman powers has the answers to their problems the Republican Party cannot be.

No one expects Republicans to abandon their belief in cutting taxes but few issues are more important to the nation's growth than is trade among nations, particularly at a time when growth the world over is slowing. Will the self-described "Reagan Republican" Speaker Ryan, and other party leaders claiming the Reagan mantle, really embrace the assuredly disastrous effects that Trump's trade policies would inflict on the American economy and its workers? Ryan effectively said "yes" when he recently told Katie Couric that he could easily support Trump. Utah Senator Orin Hatch recently said, "I've come around a little bit on Trump," and even former Kansas Senator Bob Dole has indicated that he can likely make "peace" with Trump.

History's judgment is clear on Trump's authoritarian call for high tariffs, economic protectionism and his willingness to risk an all-out worldwide trade war - don't go there. Republicans have evidently ceded to accepting Trump's nativism, bigotry, Putin-admiring tendencies and his twitter-obsessed erratic temperament, but will they accept the ghost of Smoot-Hawley, too? Increasingly, the answer is yes.