Smoot-Hawley as a Black Swan

September 17th, 2011

From Thomas Sowell:

There was no Great Depression until AFTER politicians started intervening in the economy.

There was a stock market crash in October 1929 and unemployment shot up to 9 percent — for one month. Then unemployment started drifting back down until it was 6.3 percent in June 1930, when the first major federal intervention took place.

That was the Smoot-Hawley tariff bill, which more than a thousand economists across the country pleaded with Congress and President Hoover not to enact. But then, as now, politicians decided that they had to “do something.”

Within 6 months, unemployment hit double digits. Then, as now, when “doing something” made things worse, many felt that the answer was to do something more.

Both President Hoover and President Roosevelt did more — and more, and more. Unemployment remained in double digits for the entire remainder of the decade. Indeed, unemployment topped 20 percent and remained there for 35 months, stretching from the Hoover administration into the Roosevelt administration.

Don Boudreaux slightly disagrees:

Sowell is correct generally – correct that government interventions and other failures put the “Great” in the “Great Depression” – but he is incorrect in his suggestion that Smoot-Hawley sparked such a major increase in unemployment.  Smoot-Hawley certainly didn’t help matters, and likely hurt just a bit.  But as Doug Irwin argues in his new book Peddling Protectionism, foreign trade was too small a part of America’s economy in 1930 to have enabled Smoot-Hawley – as ill-advised as it unquestionably was – to be a major factor in deepening and prolonging the Great Depression.

A far worse government failure than Smoot-Hawley was the “Great Contraction” – the Fed allowing the money supply to fall by one-third between 1930 and 1932.

The cost of “doing something”