Our Tariff Swaddling Clothes
ALEXANDER HAMILTON is the Leonardo of American political thought. The reader is struck again and again by his versatility, the justness of his perception, and the invariable freshness of his style. His treatment of the protective tariff, of which he was a powerful advocate, is no exception. But presentday defenders of our protective tariff policy will derive no comfort from Hamilton’s clean-cut analysis of the purpose and intended effect of a protective tariff in 1792.
Viewing our vast resources of timber, iron, and water power, Hamilton pictures the United States, a nation then devoted almost exclusively to farming and commerce, as a future great manufacturing nation as well. However, having in mind our limited manufacturing experience and scarcity of liquid capital, it appeared to him that the only means of immediately attracting capital from agriculture and shipping to the hazards of manufacture was some form of government subsidy.
A bounty to be paid from the national treasury to the American manufacturers was favored by some. Hamilton, however (always the practical politician as well as the artist), advocated the alternative plan of assisting the manufacturer to collect the bounty direct from the American consumer, thus avoiding any further strain on the overburdened treasury. This would be done by having Congress impose a substantial tariff on imported merchandise. The importer of foreign merchandise would be forced to raise the price of the imported article in the American market, while the American manufacturer, participating in the increase in price, but exempt from paying the duty, would be free to pocket the increase in price received from the American consumer.
The burden on the consuming public was to be continued only until our struggling manufactories were as firmly and profitably established in the United States as were agriculture and shipping. The tariff swaddling clothes were then to be discarded. Unfortunately, Hamilton’s plans in the end miscarried. The infant industries grew up, but the tariff persisted.
I
To-day the public ignores the fact, which Hamilton so clearly recognized, that the protective tariff is a bounty paid by the American consumer to the American producer. People appear to look upon tariff protection as one of nature’s gifts, like the sunshine or fresh air, enjoyed by the protected producer without cost to anyone else. The soothing sound of the word ‘ protective ’ probably has something to do with this. But the general kindliness of attitude toward the tariff is based principally on the latter’s reputation as the Laboring Man’s Friend. As long as the average wage-earner continues to believe that his full dinner pail (if he is lucky enough still to have one) depends on the tariff, any arguments against it will be dismissed as relatively unimportant.
American economists repudiate the protectionists’ claim that the tariff is responsible for the high wage scale in the United States. Their usual explanation of our relatively happy lot is that the great natural resources, per capita, in this country, combined with the unusual energy and inventiveness of our people, have made possible an average return on capital far beyond that of other countries, and that our capitalists have found it necessary to share this high return liberally with labor, because the demand for skilled and semi-skilled labor in the United States has normally equaled or exceeded the supply. Under this view the danger to the wage-earner, now that free government land is no longer at hand to absorb a surplus labor supply, lies not in the repeal of the protective tariff but in the repeal of existing restrictions on immigration. It would be rash to assert that this ‘high productivity-high wages’ theory is indisputably sound. But it has the merit, at least, of being consistent with the known facts, while, as will be later shown, the protectionists’ explanation for high wages in the United States is utterly refuted by the facts.
The protectionists’ success in convincing a large part of the American public that high tariffs produce high wages results largely from the coincidence that we have had high wages and a high protective tariff throughout most of our history. Malaria, now known to be caused by the bite of infected mosquitoes, was long thought to be caused by bad air (mala aria) rising from marshy ground, because it was particularly prevalent in marshy regions. The fact that there were large, populous sections of the globe where there were plenty of marshes and no malaria was disregarded. A similar coincidence, combined with a similar disregard of disobliging facts, has created and maintained the ‘high tariff-high wages’ myth. The disobliging facts are these.
First, wages were high in the United States long before the protective tariff was adopted here. Indeed, one of the principal arguments against the protective tariff in Hamilton’s time was that the wage scale was so much higher in the United States than in Europe that it was futile to hope that the American manufacturer, however highly protected, could compete with the European manufacturer. Second, wages in all European countries have remained low as compared with the United States, despite the fact that many European countries have even higher protective tariffs than our own. Third, the European country which has the highest wage scale, England, has the lowest tariff, while Spain, the country with the lowest wage scale, has the highest tariff. Fourth, it has been demonstrated again and again that wealth and prosperity cannot be created or maintained by legislative fiat. A statute under which billions of paper marks or rubles are turned off the government printing presses may result in redistributing wealth and, for a limited time, in giving the illusion of prosperity, but such artificial stimulus does not add to a nation’s wealth or permanent prosperity, and the same is equally, if not so strikingly, true of tariff legislation.
II
The truth that the tariff is not responsible for high wages cannot be too often reiterated. But the real case, after all, against the tariff is not the absence of its supposed virtue, but its positive vices. These have never been more flagrant than in the SmootHawley Tariff’ of 1930.
The first count against any tariff is its discrimination against one group of citizens for the benefit of another. As has been pointed out, high-tariff advocates speak of the American tarifl as if it were a kind of manna sent down from the clouds for the favored American producer, providential in character and taking nothing from those who do not share, or fully share, in the ' protection ’ afforded. This idyllic view of the situation is an illusion. The object and the result of the tariff are to make it possible for the protected producer to sell his product to the American buyer, at a price in excess of that which he would otherwise be able to obtain for it. If a particular tariff schedule fails to do this, then that schedule has failed to reach its objective.
Of course, if the buyer happens also to be a seller, the tariff tribute received on what he sells may offset or more than offset the tariff tribute paid on what he buys. But if he is not in this fortunate class, the tariff is a heavy and unceasing drain on his pocketbook. The Montana wool grower who, thanks to a 24-cents-a-pound tariff on wool, gets a tariff bounty of, say, $4000 a year from the American woolen manufacturer and consumer can well afford to pay $2000 a year in tariff bounties on the commodities consumed in his household and ranching operations; he still comes out $2000 a year, net, to the good. But the cotton grower in Arkansas or Mississippi is not so fortunate. He may pay only $1000 a year in tariff bounties to protected American producers, but, getting no tariff tribute whatsoever in return, he suffers a net loss from the tariff of $1000 a year — a loss which is frequently the margin for him between a decent living and poverty.
The second count in the indictment against the tariff is its wastefulness. Thanks to our unrivaled developed natural resources, our trained body of machine workers, and our pioneering in mass production, the United States can produce thousands of commodities more cheaply than any other country. Our oil products, copper products, wheat, cotton, meats, automobiles, moving pictures, electrical equipment and supplies, farming machinery, cash registers, and sewing machines compete successfully in all markets of the world, and at a profit which gives to both capital and labor in America a return surpassing that of any other nation.
It is these dominating industries which determine the American standard of wages. They are not, on the whole, benefited by the protective tariff system and would willingly forgo their own protective duties, if any, provided that the protective duties as a whole were lowered or removed, so that they could buy their materials more cheaply and thus reduce their costs of production. Their highest prosperity goes hand in hand with the prosperity of their customers in Europe, Canada, Asia, and South America, as well as in the United States. It is in the mines, factories, and fields of these producers that American genius and surplus capital find their natural and most productive outlet. It is their great and deserved prosperity, a prosperity independent of American tariff bounties, which has made possible and will continue to make possible the high wage of the American workman.
The maintenance and intensification of our policy of ‘ protection ’ give artificial stimulus to the production of products requiring a high percentage of hand labor, a special technique, or natural resources with which our country is not peculiarly well endowed. These hothouse industries divert capital and labor from activities in which they would be most effectively employed into relatively wasteful fields of activity.
If we were still in the colonial or semicolonial stage, and protectionists to-day could, like Hamilton in 1792, advocate the tariff as a temporary expedient to give our ‘infant industries’ an initial boost, a great deal could be said for their position. But the industries which are calling for high protection to-day are, with rare exceptions, those which do not have their roots in our natural resources or in the special genius of our people. They are infants which will never grow strong (however fat they may become), because they are congenitally defective. The wastage of the American consumer’s money in sustaining these parasitic industries, which absorb capital and labor that would be otherwise more advantageously employed, is colossal. After all, it is not the amount of income measured in dollars, but the amount of income measured in purchasing power, which is the true measure of prosperity.
If tariff support were removed, some of these weakling industries, forced to stand on their own feet, would develop resourcefulness and vitality, which would eventually bring them unprecedented prosperity and growth. Others might perish. But, if they did, their place would be filled by the expansion of sounder industries. These industries have already developed, and are in a position to increase, their foreign markets. Obviously, however, they cannot continue indefinitely to sell goods to consumers abroad unless the goods sold abroad are paid for. We already have a larger proportion of the world’s stock of gold than is desirable. The rapid expansion of our foreign loans cannot go on forever. If we are to continue to sell abroad, our foreign customers will have to pay us in goods, and the natural and advantageous things for us to accept in payment are the thousand and one products which European and other foreign countries can produce more cheaply and with better workmanship than we can ourselves. Let American capital and labor flow in their natural channels, without interference by tariff legislation, and the country as a whole cannot help but be benefited in the long run by the change.
The third count against the tariff is the fact that it enhances the danger of war. Everywhere abroad to-day one finds fresh resentments caused by our barring foreign products through our recent tariff legislation. France, England, and many other nations have adopted or propose retaliatory measures. But this bitterness, however deplorable, is not the most serious aspect of the tariff situation. Tariffs make for war primarily by curtailing the ties that make for peace.
International communications, transportation, and banking are developing to a degree where, if unimpeded, they would place war, at least among the nations of America and western Europe, almost beyond the range of possibility. Men like Albert Ballin, the German shipmaster, and Sir Ernest Cassel, the British banker, who had almost everything to lose by the disruption of their business relations, came closer perhaps to forestalling the threatening European war in 1914 than ministries, diplomats, or kings. Multiply such men by tens of thousands and they will be a more dependable guarantee of peace than any number of peace treaties or battle fleets. As long as our tariff barriers stand, these peacemaking ties can never be fully developed.
The last count against the tariff is its degrading effect on our political life. The average tariff bill covers a great many items. Because of this, and also because the tariff has long been a political issue, the public tends to overlook the fact that a tariff bill is merely a patchwork of private bounty bills, each backed to the limit by the prospective beneficiary. The testimony of Senator Grundy concerning the war chest of the Pennsylvania Manufacturers Association served merely to bring out in a particularly striking way what everyone familiar with the Washington scene has long known that millions of dollars are spent annually by interested producers in electioneering and lobbying for tariff favors.
Pledged by their party platform and goaded to distraction by financially interested constituents, even the best of our Congressmen and Senators participate in the periodic logrolling incident to the enactment of a new tariff law. Votes for Schedule A are bartered for votes for Schedules X and Y, frequently against the best interests of a majority of the logroller’s own constituents and almost invariably without reference to the best interests of the country as a whole. In this process of government-by-barter, national interests are trampled into the mire in the wild scramble for the choicest foothold in the tariff trough.
What this country needs even more than a good five-cent cigar is a political leader with the conviction, courage, and ability to deliver the electorate from its outworn fetish of tariff protection.
III
The reply frequently made to the indictment of the protective tariff’ is that, whatever its faults, it has become an integral part of our economic system, and that the dislocation of business which would result from the repeal of the tariff would more than offset any benefits derived.
This reply loses much of its force by virtue of the fact that the advocates of free trade (except perhaps a certain ‘lunatic fringe’) propose that the tariff be abolished, not at a single stroke, but by the application of a fixed schedule of reduction extending over a considerable period of years. Moreover, the present tariff results in the very antithesis of stability. Its so-called ‘flexible’ provisions empower the Tariff Commission and the President, acting together, to change rates — upward or downward — on proof that the existing rates give too little or too much protection to the domestic producer. Foreign producers are invited to come in and show that rates should be reduced; American producers, that they should be increased.
Furthermore, the status quo, under a protective tariff system, is at all times in peril, not so much from free-traders as from those in the protectionist camp. A rudimentary understanding of human nature, not to mention the specific history of our tariff, free land, pension, and other government bounties, should instruct us that, as long as the government continues to hold itself out as granting tariff favors, the pressure to increase the rates on items now protected, and to add new items, will be irresistible. Stability will be possible only when a fixed policy of favors to none is firmly established.