Paul Krugman has sunk to the level of complete idiocy with this latest recommendation. All through most of the 1920’s a debate was raging in Congress over the passage of a bill to put large tariffs in place, most notably on imported steel. The argument pro was to protect American industry by making imported products non-competitive. The argument con was that other nations would respond with similar tariffs on American goods and trade would cease. The law was passed, other nations retaliated by raising their tariffs on American goods, exports collapsed, the stock market crashed, the Roaring Twenties ceased, the Great Depression began.
Edited from a Wall Street publication:
So after President Herbert Hoover took office in March 1929, Congress immediately set to work on a new tariff regime. This is an important point, because you have to picture that this legislation was winding its way through committee long before eventual passage in June 1930. It is a fair statement to say that the prospects for Smoot-Hawley had something to do with the October 1929 market crash itself.
On Monday, October 28, the New York Times ran a front-page story on possible passage of Smoot-Hawley, the next day, on Tuesday the 29th, the day of the Crash, other national papers had picked up on the issue.
Now Krugman wants to do the same thing again. Of course it is not the steel industry this time. Steel was a major import in 1930, now it’s goods from China. It is forgivable for the man in the street to think this is a good idea. We’re all a bit miffed that everything seems to come from China and the world of economics is not broadly understood.
What would China do? What would American industry do? What would other nations do? We have spoken previously of the economic tenet called Rational Expectations. All players act, I should say react, in their own best interest. One rational expectation would be for China to cease funding our debt. This could cause a 200 to 300 percent increase in the currently very low rate of interest we are paying on our skyrocketing national debt.
Another expectation is China would raise its prices to recoup the tariff. U.S. manufacturers cannot produce goods as cheaply as the Chinese. If they could, they would be doing it already. The cost of everything we get from China would increase, and likely by more than the rate of the tariff itself. When Smoot-Hawley was enacted, even nations not directly affected perceived an opportunity and instituted high tariffs as well.
Einstein is usually the one credited with defining an idiot as someone who repeats the same mistake while expecting a different result. Krugman is an ideologue posing as an economist. Yes, I know he was awarded the Nobel Prize in economics. That only serves to confirm my opinion of him.