Remembering 1971, Richard Nixon And Tariffs David Glasner? (Also, Don Trump Is A Creampuff)

A Benjamin Cole post

For people of a certain generation, the brilliant, cunning, yet curiously tone-deaf and self-destructive Richard Nixon, U.S. President (1969-1974), is a bottomless well of interesting stories.

Remembered by a dwindling few is that Sunday of August 15, 1971 when Richard Nixon slapped on a 10% tariff, or import surcharge, on nearly all goods entering the United States. Hard as it is to believe today, Nixon also instituted nationwide wage-and-price controls, and took the U.S. dollar off of gold.

And you think Don Trump talks tough? Nixon walked the walk.

Indeed, just a little bit of Camp David weekend work for Nixon, who took to the airwaves that summer evening to tell the American public,  “If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.”

Not only is Trump a piker, but he could take lessons from Nixon how to frame an argument.

BTW, top-blogger Scott Sumner will be especially appalled at this: The Dow Jones Industrial Average rose 33 points the next day on Monday, August 16, its biggest daily gain in history—history!—up to that point, and the New York Times editorialized, “We unhesitatingly applaud the boldness with which the President has moved.”

Balance Of Payments

There were always many reasons fair and foul for every Nixonian policy, and the “Nixon Shock” was no different. Nixon wanted to get re-elected, and was going for short-term gains.  Playing to the crowd was routine. (I will leave it to Scott Sumner to explain why Wall Street loved trade tariffs.)

But there was also a prominent economic theory of the time that chronic trade deficits impoverished a nation, even if free trade was a good idea. A nation running perennial trade red-ink, and consequent mounting debts to foreigners, would eventually face serous and sustained currency devaluation, meaning citizens could afford less on global markets.

Put bluntly, after the debt-reckoning, instead of traveling overseas and living like kings, Americans would stay home and clean hotel rooms for rich international visitors.

Today

Indeed, it remains a curious feature of modern-day U.S. macroeconomics that federal domestic borrowing to run the national budget is roundly jeered, but trade-induced mounting debts to foreign powers are touted as a positive.

To be sure, the U.S. Federal Reserve seems to be able to print money to monetize debts, national and offshore, though that is hardly a popular sentiment in many circles. For now, I heartily recommend this solution, btw.

But the free-traders say worry not, that the offshore holders of trillions of trade-gained U.S. dollars must invest in the U.S., and that is a valid observation too—but if foreigners “invest” in the U.S. by buying bonds, it just means nationals owe foreigners money to maturity, or 30 years on long-term U.S. Treasuries. If foreigners buy dividend stocks, or property, then nationals owe them dividends or rents in perpetuity.

Americans may be cleaning toilets yet for offshore wealthies. The Chinese own the Waldorf, btw.

Analogies

Sometimes you will read that that no one anymore bakes their own bread, fixes their own car, and slaughters pigs. So the software programmer trades his services for those goods and services, and everyone benefits. International free trade is like that, and everyone benefits.

But there is still an uneasy feeling.

Are U.S. citizens trading software programming to afford bread, auto repairs and pig-meat cutlets—but also mortgaging the house?

Only to the tune of $500 billion to $700 billion a year, the amount of recent U.S. trade deficits.

The free traders obscure that part of the analogy.

Conclusion

David Glasner blogged recently that free trade is perhaps the most gloried totem in all of macroeconomics.

Still, the advantages of free trade are theoretical, and the world is full of huge structural impediments and institutional imperfections.

Not only that, if free traders were truthful, they would concede that the U.S. economy is taking on mounting debts held offshore.

If you think pointy-headed academia is becoming hostile to non-PC ideas, then try telling modern-day macroeconomists that free trade as conducted today might not be great for the United States, that there may be immediate and also long-run consequences worth exploring.

Now that is a non-PC topic.

PS. Unfortunately, from an intellectual perspective the Nixon experiment with 10% tariffs was short-lived, only four months. After the tariff experiment, the real U.S. GDP expanded by 5.3% in 1972, followed by 5.8% in 1974, so if tariffs were harmful, it may not show up in the data. In fact, the GDP data looks great, but then perhaps without the tariffs the growth rate would have been higher.

PPS. It does seem free traders cite theory when theory works, and then structural impediments, when that works. For example, the U.S. dollar is a reserve currency, so the US can pay off foreign debts by printing money. That is a structural impediment, or institutional imperfection, that works in U.S. favor, often cited by free traders.

8 thoughts on “Remembering 1971, Richard Nixon And Tariffs David Glasner? (Also, Don Trump Is A Creampuff)

  1. Great fun, but “nations” are arbitrarily designated groupings if people, same goes for “national” statistics. Balance of payments statistics are hokey, more so than ever now globalised corporates dominate world trade and reflect their urge to minimise tax more than anything. Free trade is good driven by the much ignored law of comparative advantage.

  2. I think all sides of the trade debate overestimate the effects. South Korea has a protected market, South Korea is pretty nice, it probably just doesn’t matter a whole lot. That said, the voters are strongly against free trade, so a smart politician should also be against it. Put up a modest tariff I say to get power, it won’t matter a whole lot and then you can claim you’re responsible for any new factories built!

  3. James and Justin– thanks for reading.

    It seems to me that South Africa actually flourished under trade sanctions, and developed its whole coal-to-liquid fuel industry.
    Anyway, fun to take a tour down memory lane with good old Richard Nixon.

  4. The theory sounds all good until people in the US who work for foreign companies are considered, and then the appeal of Donald’s trade wars breaks down. I wish we could stop conjuring up the Titanic on which to rearrange the deck chairs with goofball theories like we have too much demand for gas and we’re sending too many jobs over seas. The ensuing chaos simply creates too many red herrings.

  5. I had another thought about this situation: Nixon had probably the most accommodative monetary policy ever.Fast forward to now, when central bankers assume the priesthood of sub-2% inflation at all costs, suppose that the supply side is global and a 10% tariff is slapped onto imported goods. It really isn’t hard to predict what would happen in that scenario, and that it would have a negative impact on output.

  6. This is the standard confusion between Countries and the people within a country. Sure if you enslaved everyone in a country and made them eat locally produced gruel and forced them to make consumer goods, the “Country” would do great in terms of balance of trade. But the people in the country wouldn’t be doing so well. This is the basic impact of reducing free trade – it limits options for the people while perhaps being better for the Country as an accounting entity. I know which I prefer. In the same vein I always wonder at people who praise the German economy for its large surpluses – this means that the German people are living much less well than they could – in other words financial repression. The purpose of life is not to die rich, it’s to live. Miserliness is just as much a sin as spend-thriftiness.

    Also your argument about foreigners buying up a country due to its tendency to run trade deficits doesn’t make sense in a fiat currency regime – if the foreigners start repatriating their dollars back to the US to buy up real estate – what do you think will happen to real estate prices in the US? And what do you think this increased asset price would do for the economy. The foreigners can’t buy without someone selling, and presumably if they sell they have better things to do with their money and have considered the problem about where they will have to live if they sell. And furthermore, these assets are all in the US and all taxable if desired by the population of the US. So this argument that the dirty foreigners are buying up all the nice houses just is crazy.

  7. Scott Sumner pointed out that the Smoot-Hawley tariff was a big contributor to the recession of August 1929-October 1930, as it reduced the volume of trade. It’s more likely that it was the monetary stimulus and price controls that stimulated Wall Street into its frenzy.

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