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Let's have an Honest Trade Debate
Howard Richman, 10/9/2010

The October 9-10 issue featured the most misleading commentary that I have yet read in the Wall Street Journal: Goodbye, Free Trade? by Dartmouth economics professor Douglas A. Irwin.

The entire first page is spent trashing the Smoot Hawley tariff. Then the author subtly admits that that Smoot Hawley tariff, which didn't go into effect until 1932, was basically a justified reaction by the United States to several of our trading partners either going off the gold standard or devaluing their currencies in 1931. Essentially, the United States had to respond to other countries devaluing their currencies by either shipping away gold, devaluing the dollar, or limiting imports. We chose to limit imports. He is correct that we would have been better off devaluing the dollar.

Irwin's primary economic recommendation in this piece can be proved nonsense by a simple thought experiment. He writes:

If all major central banks were to intervene in foreign exchange markets to drive down the value of their own currencies, none would succeed in changing nominal exchange rates, but it would be equivalent to a world-wide easing of monetary policy.

Here's a thought experiment that I devised which proves that his suggestion does not result in any new money being created, it just results in central banks swapping each others' bonds:

Assume that the People’s Bank of China sells a 670 yuan Chinese Treasury bond and uses the proceeds to buy 100 dollars which it uses to buy a 100 dollar U.S. Treasury bond and that the Federal Reserve sells the same 100 dollar U.S. Treasury bond and uses the proceeds to buy 670 yuan which it uses to buy the same 670 yuan Chinese Treasury bond.

Irwin's comparison of the current depression with the Great Depression completely ignores the fact that U.S. trade is out of balance now, not in balance as in the 1930s. As a result, a tariff program that would balance trade, such as the scaled tariff that we have proposed, would have a significantly beneficial effect upon our economic growth, not the slightly negative effect of the Smoot-Hawley tariff.

Comment by jambok Klink, 10/10/2010:

All thee ao called "Economicates" Hundrededs can not agree. The recovery was having the ww2.

So- Go back to basics. There is a devaluation solution