Sunday, February 8, 2009

As part of his early transition into the Oval Office, President Barack Obama would do well to take some time each day reading up on Great Depression history and studying the myriad economic theories surrounding it. It would be instructive, not just for the past but for present circumstances, as he faces a Democrat-controlled 111th Congress that is channeling Republicans of the 81st Congress from 1929.

Tucked within the economic stimulus bill the House passed last week was a clause requiring state and local public works agencies to buy American iron and steel for their reconstruction projects, and the Senate expanded it to all manufactured goods. It was modified slightly on Thursday as Senators had a second thought. If the nation is going to spend $43 billion to $100 billion on infrastructure revitalizing the civil engineering, architecture and construction industries, it sounded reasonable that the spending should also be used as a catalyst for other American products like U.S. Steel’s steel, DuPont’s plastics, 3M’s chemicals and so on. But a brief history lesson will show them the folly of their ways.

In 1929, in an effort to stimulate the American economy after the stock market crashed, Sen. Reed Smoot and Rep. Willis Hawley, both Republicans, used similar logic to create the Smoot-Hawley Tariff Act, raising tariffs on foreign goods to record levels. President Herbert Hoover signed the bill against the opposition of more than 1,000 economists and numerous business executives. The result was a trade war with Europe, which increased its tariffs on U.S. products. Ultimately, U.S. exports and imports decreased by more than 50 percent in a single year, transforming the recession into the Great Depression (yes, the Mississippi Valley drought of 1930 helped, too). But at least Smoot-Hawley left open the freedom to import, whereas what the leadership of the 111th Congress originally wanted to eliminate imports outright.

Canadian Ambassador Michael Wilson sent a letter to both Senate leaders asking them to “ensure that the legislation does not include elements which restrict trade.” They also intimated that the “Buy America” policy could violate obligations set forth by the North American Free Trade Agreement. That was a slight stab at Mr. Obama, who said during his campaign that he wanted to re-negotiate NAFTA. The European Union all but concluded that if the provisions were left in the bill and passed, other countries would follow suit.

The stimulus bill has a way to go before it reaches Mr. Obama’s desk, but if strong “buy American” mandates are present at that time, he will have no choice but to veto the bill. Otherwise, he will be forever known as Barack H. (Hoover or Hawley) Obama.

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