By now you have all heard that Trump is gonna slap down some tariffs on steel and aluminum. Absolutely none of America’s top economists believe free trade harms Americans, in fact, it’s practically unanimous in the economic community that free trade does more to help.
However, some “historians” will like to say that protectionism made America great. What they like to point to is Hamilton-Clay’s “American System,” a 19th century, three-part economic plan to prop up the American economy into an industrial powerhouse. First by building new roads and canals; secondly, raise tariffs to protect domestic manufacturers; and thirdly preserving the national bank.
Now did it work? Yes, after all the Federal Government spent tens of millions of dollars on infrastructure and factories. However, was it necessarily “great” or economically efficient?
Far from it. In fact, protectionism was one of the prime causes of American cronyism –, especially in its peak during the Gilded Age.
In fact, the interventionist policies of the American System which Trump wants to bring back (billion dollar infrastructure plan and repealing NAFTA) lead to massive inequality and corruption.
The robber barons like the railroad industrialist, Cornelius Vanderbilt received per-mile subsidies and large grants and low-interest loans to create his railroad monopoly. Likewise, Andrew Carnegie was able to amass a large fortune due in great part for Uncle Sam shielding his steel enterprise from foreign competitors.
His commercial enterprises also took advantage of protectionism and tariffs. One obvious rationale for protectionism – and the one mentioned favorably by Andrew Carnegie, Bostaph explains, was the “infant industry” argument. This was tantamount, with iron and steel production, to an “infancy” dating to 1789, a period of more than 100 years. “Basically,” he writes, “what happened in both the iron and railroad industries during this period was that government was used as a means for socializing costs while privatizing profits.” (p. 41) Tariffs on the supply side advantaged domestic iron and steel producers. One factor inspiring Carnegie’s decision to build a large mill was the Tariff Act of 1870. Bostaph explains, “Protected by that duty and producing rails on a large scale in a state of the art plant, they expected to take the domestic market away from the British, as well as from their American competitors.” (p. 44)
However, Trump and his followers aren’t the only ones who have been mistaken by the history of protectionism.
Keynesian economists Stephen S. Cohen and J. Bradford DeLong in their book, Concrete Economics make the same error, arguing that the high tariff, interventionist policies beginning with Hamilton, all the way up to Eisenhower, are what successfully made the American economy strong.
David Gordon gives a powerful critique of the fallacious narrative they put forth:
America, under the high tariff pro-industrial policy the authors support, became the most prosperous economy in the world; and the success of state-directed economies in China and East Asia adds further evidence. Is it not simply obstinate to deny this?
This argument is vulnerable at two points. The first of these will be familiar to any reader of Bastiat and Hazlitt. Granted that the American economy has attained great prosperity, how do we know that prosperity would not have been even greater under the laissez-faire regime our authors disdain? Must we not examine “what is unseen,” as well as “what is seen,” as Bastiat long ago noted?
Have we been too hasty in this response? The authors might be taken to answer us in this way: “The United States had every chance of sharing what W. Arthur Lewis called the economies of temperate European settlement. These other countries — Australia, Argentina, Canada, and even the Ukraine — became in the nineteenth century great granaries and ranches for industrial Europe. But none of these developed the industrial base to become fully first-class balanced economies in the late nineteenth century. … When commodity price trends turned against them, they lost relative ground. By contrast, the twentieth century became an American century precisely because America by 1880 was not a gigantic Australia.”
Here once more our authors have begged the question. They assume that, in the absence of “industrial policy,” the United States would have been a largely agricultural country. Why think this?
The doubt here is more than an abstract possibility, of the sort Cohen and DeLong view with contempt; and this raises the second line of attack that may be directed against their “it works” argument. There is little reason to think that Hamiltonian policies led to American prosperity. True enough, tariffs were often high, and nineteenth-century governments favored internal improvements. But tariffs were virtually the only source of government revenue, and the size and scope of government was minuscule in comparison to today’s bloated state. Why not ascribe the success of the American economy to the relative freedom of the economy rather than to industrial policy? Appeal to the “concrete” avails nothing; facts without theory are blind. The question becomes all the more pressing when one considers that the authors count as a case of successful state intervention the government’s making land available through the Homestead Act of 1862. The fact that the government made it very easy to acquire title, rather than selling land by auction to the highest bidder, is somehow counted as a triumph for state policy. If one is going to call a way of privatizing land an instance of state oversight of the economy, the case for state control of the economy is readily made. To readers who do not share the biases of Cohen and DeLong, though, their procedure will seem akin to calling white black.