Our Solemn Farce: Reënter the Tariff
I
THE defeat of the McNary-Haugen Farm Relief Bill has again brought the tariff to the fore as a political issue. The protective tariff now affords wheat and corn farmers little or no protection. The farmers believe that this bill, if enacted, would have made the present tariff on farm products effective, and its defeat by Republican protectionist leaders has embittered the farmer against them and against the tariff policy that they represent. The significant feature of the present movement to reopen the tariff question is that it is particularly active in Iowa, Washington, Oregon, and other Western states which have been bulwarks of the Republican Party.
The McNary-Haugen Bill, although nominally designed to assist all farmers, including the cotton grower, was introduced primarily for the benefit of the producers of wheat, corn, and livestock. It provided that the Federal Government should supply a fund and the necessary machinery for buying up the excess wheat, corn, hogs, and cattle produced in the United States over the amount required for domestic consumption, and should sell this surplus for whatever it would bring in foreign markets. The Government’s expenses and losses were to be recouped by a tax to be paid by the farmer. The restriction of the domestic supply to the domestic demand would, it was assumed, raise the price in the United States of the principal domestic farm products to an amount equal to their price in the world market plus the protective tariff on them.
For example, the protective tariff on wheat is 42 cents a bushel. If the tariff were fully effective the price of wheat in the American market would be 42 cents a bushel higher than in foreign markets — that is, the American consumer would pay a tariff bonus of 42 cents a bushel to the American farmer. But the tariff is at present almost completely noneffective because the annual wheat crop in the United States is from 10 per cent to 20 per cent in excess of the normal domestic consumption. This surplus, hanging over the domestic market, forces down the price of the entire wheat crop in the United States to approximately the level of the foreign price of wheat. Many a farmer who could make a comfortable living if he were able to sell his wheat at the present foreign price of $1.40 per bushel plus the tariff of 42 cents is hardly able to ‘ break even ’ at the present price of $1.40. The McNary-Haugen Bill, by removing the 10 per cent to 20 per cent domestic surplus, would, it was hoped, make the tariff on wheat effective and raise the price of wheat consumed in America to the price in the foreign markets plus 42 cents a bushel.
It has been asserted that the farmer should by private means restrict production to the domestic demand, and thus secure from the American consumer the increase in price which the protective tariff is intended to afford him. This, however, is impossible in the case of the grain and livestock farmer. Producers of such crops as Burley tobacco and raisins and of other crops that can be profitably grown only in certain limited areas have formed successful coöperative associations, and through these have controlled production and increased the price level of their products; but no one has yet devised machinery for coöperative restriction of the production of wheat, corn, and livestock. It would obviously be futile for any individual farmer to leave, say, a fifth of his wheat crop uncut with a view to reducing production and increasing the level of domestic prices.
The underlying objection to the McNary-Haugen Bill is that the assistance which it would render to the farmer must come out of the pockets of the rest of the country. Its plan is to rob Peter to pay Paul. As Secretary Mellon said in attacking the bill, ‘It is, of course, apparent at once that the effect of the bill will be to increase the cost of living to every consumer of the five basic agricultural commodities in this country.’ Moreover, there is no indication that this burdening of one group for the benefit of another would result in a net benefit to the country as a whole. Quite the contrary. By artificially diverting to the production of farm products land and labor which could, and otherwise would, be more economically devoted to the production of other commodities, the subsidizing of farm products would be injurious to the country as a whole. These objections to the bill are thoroughly familiar. They are, in substance, the same as those which for years have been urged by the free trader against the protective tariff. The feature peculiar to the present situation, which has stung the farmer to revolt, is that Secretary Mellon and other Republican leaders who have been the foremost opponents of the bill are among the principal beneficiaries and most solemn defenders of the present effective protective tariff on manufactured goods.
The farmer is naturally asking why, if it is bad policy for the country to subsidize the farmers by making the tariff on wheat, corn, and livestock effective, it is not equally bad policy for the country to continue to subsidize the manufacturer of wool or aluminum by maintaining the present effective tariff on these articles. If the so-called ‘practical’ considerations advanced by the protectionists in favor of the protective tariff in general are unpersuasive as applied to an effective protective tariff on cereals and livestock, why are they not equally unpersuasive as applied to manufactured products? He is coming to the conclusion that the Democrats, who joined forces with the Administration in defeating the bill, were probably on the right track in maintaining that the sound way for the farmer to obtain relief is not by forcing Congress to saddle the country with additional tariff burdens for his special benefit, but by having existing tariff burdens removed.
II
The principal arguments on which protectionists rely to support the protective tariff are: (1) the ‘infant industry’ argument — a protective tariff is needed to foster desirable new industries which, once having been given the opportunity through protection firmly to establish themselves, will thereafter be able to carry on without tariff protection; (2) the ‘American wage’ argument— the protective tariff is necessary to maintain the high wages and resulting high standard of living of the American workman; and (3) the ‘national defense’ argument — certain American industries which would be vital to the United States in time of war cannot be maintained in this country without tariff protection.
The infant industry argument was originally advanced during the early years of the Republic, at a time when there was practically no industrial manufacturing carried on in this country. There was, of course, much handwork, such as spinning, cabinetmaking, weaving, and cobbling, but machine-made products were almost all imported from Europe. It was urged that if manufactories, conspicuously of iron and coarse cotton cloth, could once be firmly established in the United States, the proximity of the American manufacturer to supplies of cheap raw material and the saving in cost of transportation of the finished products to the American market would make it possible for the American manufacturer to sell his product to the American consumer at a lower price than the latter had previously paid for the European product. But until skilled mechanics could be trained or induced to settle here, and economical methods of manufacture could be worked out from experience, production in America would be more expensive than in Europe. During this initial period the American manufacturer would not be able to meet the price of his European competitor except at a loss.
Since at that time the supply of liquid capital in the United States, even for enterprises promising large immediate returns, was small as compared with the demand, this prospect of initial loss hampered, it was thought, the rapid development of manufacture in the United States. Therefore, to stimulate the investment of capital in American manufacture by protecting new American industries, Alexander Hamilton and others urged, ultimately with success, that a tariff on imports of cotton cloth, iron products, and various other commodities be imposed for the purpose of fostering infant American industries. The tariff, by raising the price of the European product in the American market, was to make it possible for the new American manufacturer to obtain from the American consumer sufficiently high prices for his products to yield him an immediate profit. The justification for thus burdening the American consumer in favor of the American manufacturer was that protection would be given only until the industry had had a reasonable opportunity to establish itself, and that, once firmly entrenched, the American manufacturer, without protection, could and would undersell the European producer in the American market. The eventual saving to the American consumer would more than compensate him for the additional cost borne by him during the period of protection. The temporary nature of the duty was invariably stressed. Hamilton, for example, in his famous protectionist Report on Manufactures, declared, ‘The continuance of bounties’ (in which Hamilton rightly included protective tariffs) ‘on manufactures long established must almost always be of questionable policy, because a presumption would arise in every case that there were natural and inherent impediments to success.’
The American infant industry argument, however sound originally, is to-day obsolete. Most of the protected American industries have been in existence so long that Hamilton’s statute of limitation has run against them — if by this time they cannot stand on their feet unaided, there is a strong presumption that the industry is unsuited to the United States. Moreover, even in the case of new industries, the basis for the infant industry argument has ceased to exist. This country to-day so abounds in capital that investments are sought by American business men in Russia, Germany, South America, China, and wherever else profits, immediate or future, are in prospect. If an industry in the United States gives reasonable promise of eventual success, ample capital is readily at hand for its development.
In considering the second, the high wage, argument of the protectionist, it should be borne in mind that wages were much higher in the United States than in Europe long before the United States adopted a protective tariff. One of the arguments against protection in the early days was based on this fact. Would the American farm hand or sailor leave farm or ship to work for a lower wage in an American factory? Obviously not. How, then, it was asked, could the American manufacturer, forced to pay the high American wage, hope to compete in price, after the temporary period of protection, with the products of cheap European labor? The protectionists replied that, since American farm products and American ships, despite the higher wages paid to the American workman, successfully competed with those of Europe, there was no good reason why American factories, once they were firmly established, should not also be able to compete successfully with those of Europe.
The modern protectionist disregards this historical fact. According to him, protection has created the high American wage; remove protection, and the American wage, together with the high standard of living of the American workman, must fall. Putting the matter in a concrete way, he points out that the American manufacturer pays his workmen fifty cents an hour for the same work for which the German manufacturer pays his workmen only thirty cents an hour. This being the case, it is obvious, says the protectionist, that if the protective tariff is repealed one of two things must happen: either the German manufacturer will undersell his American competitor even in the American market, or the American employer must cut the wages of his employees.
In claiming that the American manufacturer needs tariff protection to make it possible for him to continue the high American wage, the protectionist not only forgets that the higher wage scale in the United States existed before protection, but disregards the fact that in foreign markets, in which the American manufacturer and farmer is unprotected, American farmers and many American manufacturers successfully compete, despite the higher wages paid their employees, with European and Asiatic competitors. The American cotton planter pays his men five times as much as the wage paid to the Chinese coolie or Egyptian fellah, and yet American cotton dominates the markets of the world. The American automobile manufacturer pays a far higher wage than the German, and yet the Dodge and Cadillac outsell the Opel and Benz wherever automobiles are used. The protectionist makes no attempt to trace the alleged connection between protection and high wages. He fails to explain why the wage scales of Germany and France, which have long had exceedingly high protective tariffs, are below that of England, which has long had free trade. He fails to explain how it comes about that the protective tariff makes it possible for the American workman to pull himself up by his own bootstraps, and why, if the tariff is the real basis of the high American wage, the workmen of the high-tariff countries of Continental Europe have been unable to achieve the same high standard of wages by adopting the same simple expedient. Since no explanation is given, presumably none exists.
The argument has been advanced that the tariffs of France and Germany do not bring high wages in their train because the artificial hothouse treatment is effective only where the tariff wall encloses a sufficiently large territory— a continent. Again no reasons are given why a matter of area should involve so vital a difference in result; or why Germany, which has almost the same diversification of industry as the United States, should respond so sluggishly to the treatment alleged to be so tonic in the case of the United States.
Unbiased students of the wage question hold that the high wage scale in America results from the greater productivity of the American workman; that so long, and only so long, as this is maintained will the American wage scale exceed that of Europe; and that the protective tariff, by artificially diverting labor into fields less productive than those in which it would naturally be employed, tends, on the whole, to lower, not to raise, the American wage scale. This explanation is intrinsically reasonable, and, unlike the protectionist theory of the American high wage, is consistent with the fact that the high American wage antedated the protective tariff and with the fact that the countries of Continental Europe, despite their high tariffs, have not succeeded in producing a high scale of wages.
The position that the high wage scale in America is based on the greater productiveness of the American workman does not imply that the American workman is more industrious than the European workman. It simply means that our ampler and better-developed natural resources, the more widespread use of labor-saving devices, the higher efficiency of industrial management, and perhaps the greater alertness of the American workman, enable him to accomplish more.
Let me illustrate. In Europe as many as five laborers are frequently found working on a fifty-acre farm, producing, say, 1000 bushels of wheat per year. The machinery used is so crude and the cultivation so intensive that the laborers are fully employed on this small acreage. With somewhat less intensive cultivation these laborers could probably maintain a one-hundredacre farm, with a yield of 1600 bushels. By substituting modern agricultural machinery for scythes, rakes, and ploughs pulled by hand, they could cultivate five hundred acres yielding 8000 bushels per year. In the United States an ample acreage of good farm land and the employment of efficient agricultural implements and machinery would permit of the full utilization of the productive capacity of these laborers. Although it could not fairly be claimed that the fruitfulness of their labor would be increased from 1000 to 8000 bushels, — the labor that went into the manufacture of American farm implements and machinery must of course be taken into account, — nevertheless, after making all necessary allowances, the productivity of these same laborers in the United States would be very greatly increased.
A similar and in some industries as great a difference between European and American productivity is found in manufacturing. Unrivaled developed resources of iron, copper, coal, oil, and timber, combined with a use of labor-saving machinery not approached in European factories, have made it possible for the American workman to achieve a measure of production far outstripping that of the European workman. The recently issued report of the British Coal Commission shows, for example, that in 1924, a normal year and the latest as to which figures are available, the production of coal in the United States was 734 tons per man, as compared with 246 tons per man in Great Britain, 167 tons in France, and 234 tons in Germany.
If the laborer were a serf or apprentice the greater fruitfulness of his labor might redound solely to the benefit of the employer. But in the United States, where, except in a few backward communities, the laborer is free to change employment and employer as he pleases, wages are governed by productivity, and in general the workman’s wages roughly reflect the success of his labor.
The third argument of the protectionists, that a protective tariff is necessary to preserve certain industries vital to this country in time of war, has unquestionable force. Wellequipped chemical and dye plants might, for example, be a more valuable war asset to the nation than many brigades of infantry. But it does not follow that the present all-inclusive protective tariff is sound. To maintain the present tariff in order to protect dependent war industries is using a truck for a job requiring only a wheelbarrow.
A large majority of industries in the United States can be successfully carried on without tariff protection. Of those which would be crippled or destroyed by free trade, many would either have no vital military importance or, upon the outbreak of war, could and would be reëstablished in time to replenish stocks of imported goods on hand when the emergency arose. The remaining industries — those which would be seriously crippled by the removal of a protective tariff and whose maintenance is really essential for war purposes — should be treated as an industrial arm of our military establishment, and, as such, should be given adequate protection. But in return for this tariff subsidy the Government should insist that these protected industries preserve their plants in readiness for war purposes. An analogy is found in the so-called Jones Act of 1920, under the provisions of which Congress, in effect, gave the American shipowner a subsidy of one dollar for every two dollars of capital which he would invest in the construction of new ships in American shipyards, but only upon condition that the ships be constructed and equipped along lines laid down by the Navy Department to make them readily convertible for war use.
III
The farmer, having failed to obtain effective protection for his major farm products, and painfully aware that protection for others adds materially to his business and living expenses, from the fences around his fields to the hat on his head, is asking what, if anything, the protective tariff gives him in return. Finding that the protectionist arguments, long accepted on faith, lose their plausibility when closely scrutinized, the farmer has begun to demand that the tariff shall go. In his impulse to rid himself of the tariff it is to be hoped that he will not lose sight of the fact that ill-timed tariff repeal would lead to serious disorganization of American industry, farming included. In any radical modification of the tariff this must be guarded against. The repealing act should be framed so as not to take effect until after a considerable period of time.
Even the most ardent free trader, if familiar with business conditions, must concede that free trade is less important to agricultural prosperity than stability and confidence. The worst move the farmer could make would be to force Congress to repeal the tariff at one session and then permit Congress to reimpose it at the next. A cooling period would also be valuable in that it would give American manufacturers and growers who were convinced that they could not profitably continue without tariff protection an opportunity to liquidate at a minimum of loss or transfer to a branch of manufacture or agriculture not dependent upon the tariff. American industry, as shown in the successful change from a peace to a war footing and back to a peace footing, in the period from 1916 to 1920, is amazingly resilient. With reasonable time for readjustment, and with assurance that the new policy would be adhered to, there is basis for confidence that the change from protection to free trade would not adversely affect American industrial prosperity even temporarily.
Delay, furthermore, would permit adequate consideration of other questions which the repeal of the protective tariff would reopen. For example, the sugar planters of Hawaii, despite hampering Federal labor legislation which takes no account of the peculiar conditions prevailing in Hawaii, are at present, owing to tariff protection, reasonably prosperous. If tariff protection were withdrawn, justice would require that the Federal Government resurvey the Hawaiian labor situation. Considerable time will also be needed to work out a well-matured plan of tariff for revenue, to replace the present protective tariff.
The political effect of an about-face by the Northern farmer on the tariff is unpredictable. The swing, for the moment, seems to be toward a strengthening of the Farm Bloc, nominally Republican but really Independent. If, however, the progressive wing of the Democratic Party should dominate the next National Democratic Convention, the logical swing of the Western farm group would be to Democracy. A Democratic Party uniting the old South and the new West on a platform of tariff for revenue only would revitalize American politics by transforming a mere party label, covering factions as wide apart as the poles in principles and character, into a homogeneous and vigorous party.