“A Smoot-Hawley Moment”

As a rule I don’t like to put editorial pieces out in front of students, but I did mention this one in Wednesday’s class in response to Anthony’s question, so I should post about it so that you can form your own opinion. This was in the March 23 issue of The Wall Street Journal.

When does a single policy blunder herald much larger economic damage? Sometimes it's hard to know ahead of time. Few in Congress thought the Smoot-Hawley tariff was a disaster in 1930 …

It is certainly one of the more amazing and senseless acts of political retribution in American history. …

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The House legislation may also be unconstitutional on equal protection grounds given that it treats a homogeneous group of individuals differently depending on which companies they work for. It is one thing to treat the companies that receive federal funds differently from those that don't. But the individuals receiving bonuses may have nothing to do with the decision to receive TARP money. The House's 90% tax on some bankers but not others is only a step away from deciding to impose a higher tax rate on employees of any company out of political favor -- say, tobacco companies, or in the next Republican Congress, the New York Times Co.

Which brings us to the Smoot-Hawley analogy. With such a sweeping assault on contracts and punitive taxation, Congress is introducing an element of political risk to economic decisions that is typical of Argentina or Russia. The sanctity of U.S. contracts has long been one of America's competitive advantages in luring capital …

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The other Smoot-Hawley comparison relates to our new President. Herbert Hoover sent mixed signals about the tariff until he finally bent to a panicked GOP Congress. President Obama has behaved in the past week as if he can appease and "channel" Congressional anger without being run over himself. So not only did he incite the Members last Monday, he welcomed the House bill on Thursday. By the weekend, cooler White House heads were whispering that the mob had gone too far, but it will take more than words to kill this terrible legislation. Mr. Obama will have to fire a gun in the air -- which means threatening a veto.

On Inauguration Day, we wrote that our young President has a first-class intellect and temperament. Our question was whether he is tough enough. So far the answer is no. He has failed to stand up to a Congress of his own party on anything difficult -- from stimulus priorities, to earmarks, to protectionism against Mexican trucks. Mr. Obama needs to face down the AIG mob, or his Presidency may be its next victim.

The content of this post will not be on any tests – this is just about keeping you all on the same page with where I went with a classroom discussion about current events.