Ronald Reagan's Speech Gets Tariffs Wrong

Tariffs didn't cause the Depression as Reagan claims. The economic policies he recommended did: as the Black Monday crash later that year showed.

I’ve been a bit stunned at the reaction to an ad featuring a 1987 speech by President Ronald Reagan about tariffs.

Donald Trump has cancelled trade talks, hiked tariffs on Canada by 10%, claimed it was a lie, and AI. News outlets and politicians who “self-identify” as progressive or liberal are pointing out that Reagan really did say these things, and Canadians of all political stripes are praising the ad and Ontario’s Progressive Conservative Premier, Doug Ford - including Conservatives, the Federal Liberal Government and representatives from two provincial New Democratic governments in BC and Manitoba.

I’m not one of them. The fact that Reagan’s speech about tariffs and the Great Depression is being shared all over the world is a real problem, because it’s wrong. The Depression was caused by the very economic policies that Reagan promoted. It’s not an accident that later that year, in October 1987, Wall Street experienced Black Monday.

The Great Depression wasn’t caused by the Smoot-Hawley tariffs. The Wall Street bubble - which was global was because of conditions exactly like today: we have a massive global asset bubble, especially in real estate, but also in stocks. Ultra low interest rates to stimulate the economy has not gone to productive investment: the world has been flooded with a tsunami of low-interest credit. In short, people are borrowing money to gamble. The crash became a Depression because instead of reflating the economy, governments pursued austerity.

Reagan is repeating a common, but since debunked view:

“One influential view, propagated by neo-liberal economists, is that this large but totally manageable financial crisis was turned into a Great Depression because of the collapse in world trade caused by the ‘trade war’, prompted by the adoption of protectionism by the US through the 1930 Smoot-Hawley Tariffs.

This story does not stand up to scrutiny. The tariff increase by Smoot-Hawley was not dramatic - it raised the average US industrial tariff from 37 per cent to 48 per cent. Nor did it cause a massive tariff war. Except for a few economically weak countries such as Italy and Spain, trade protectionism did not increase very much following Smoot-Hawley. Most importantly, studies show that the main reason for the collapse in international trade after 1929 was not tariff increases but the downward spiral in international demand, caused by the adherence by the governments of the core capitalist economies to the doctrine of balanced budget.’

The “Reagan Revolution” was a 1970s reboot of classical liberal economics - this time branded as “neoclassical” and “neoliberal” - the same policies that had created conditions for the crash of 1929.

The year, 1987, is highly relevant. Reagan was making his speech about tariffs as he was trying to cement a free trade deal with Canada.

In October that year Reagan’s decision to embrace deregulation and the same economic policies that created the Wall Street Crash of 1929 resulted in the Wall Street Crash of October 19, 1987 - Black Tuesday. It was the culmination of a string of financial failures that had started in 1986. That crash was so severe that Federal Reserve Chairman Alan Greenspan employed the “Greenspan ‘Put’”

This, according to Investopedia, is the

“market belief that the Fed would step in and implement policies to limit the stock market’s decline beyond a certain threshold. During Greenspan’s tenure, it was widely believed that a stock market decline of over 20%, which typically denotes a bear market, would prompt the Fed to lower the fed funds rate. This was seen as insurance and allayed the fears of investors that a protracted, and costly, market decline would occur.

Consider for a moment, what a statement that is about free market capitalism.

You have Reagan as President, Milton Friedman’s ideas are being promoted and have been adopted in the UK as well. As for Alan Greenspan - how libertarian is he supposed to be? He was an acolyte of Ayn Rand - so much so that when he was sworn in, Rand was one of Greenspan’s only guests.

An they have a commitment from the appointed chairman of the Federal Reserve that if the stock market drops by 20%, the central bank for the global reserve currency will intervene in the market to shield investors.

For an Ayn Rand acolyte and libertarian like Greenspan to make a standing commitment to intervening in markets is certainly the height of hypocrisy. I suspect that the reason for such an radical commitment is that it was intended to contain fears about the crisis, which were immense.

Bruce Bartlett is another Reagan economic advisor, who was working the White House during this period, who realized that the Milton Friedman’s economic ideas were wrong, and that Keynes had been correct.

This article is a great read about why the ideas that informed Reagan’s policies ruined the American Economy - and has had exactly the same destructive effects around the world where it has been adopted.

Notably, Bartlett takes issue with Friedman’s assessment of the Depression.

“As early as 1933, Keynes spelled out the correct approach to a deflationary depression in an open letter to Franklin Roosevelt published in The New York Times. He explained the vital role of government spending in raising aggregate spending in the economy, which was then frozen by deflation. Consumers and business would both constrain private spending as long as they thought prices would be lower in the future. Thus government was the only entity capable of increasing aggregate spending.

But not just any spending, Keynes noted: Government needed to buy goods and services. Pure transfers where money just goes into saving was economically impotent. Only raising the demand for “stuff” would allow money to begin to circulate. (This is why the Reagan tax cuts had far less effect in the 1980s than Republicans imagine; the defense buildup accounted for much of the growth.) As Keynes explained:

“I lay overwhelming emphasis on the increase of national purchasing power resulting from government expenditures which is financed by loans and is not merely a transfer through taxation, from existing incomes. Nothing else counts in comparison to this.… In a slump governmental loan expenditure is the only sure means of obtaining quickly a rising output at rising prices.

Clearly, Keynes meant for prices to rise as the result of deficit-financed spending on goods and services, accommodated by the actions of the monetary authority. For this reason, right-wingers have long accused Keynes of being nothing more than a crude inflationist. This is nonsense. He was talking about reflation, not inflation; that is, raising a price level that had fallen due to deflation. When inflation threatened economic stability, Keynes was a determined inflation fighter.

… Keynes was critical of the purely monetary approach to expansionary policy. Injecting money into the economy when investment and consumption are flat would have no stimulative effect. It was “like trying to get fat by buying a larger belt,” he said.

Yes, tariffs can be damaging, but the idea that free trade deals have been fantastic for Canada or the U.S. is simply false.

The U.S. became wealthy partly through protectionism and tariffs. Until the 1930s, the U.S. had tariffs of over 30%. That is why the Smoot-Hawley tariffs didn’t have such an impact. Tariffs were already in place, and they had policies to support American industry.

Every rich country got rich first through protectionism and building itself up domestically, then turning to free trade. Whether it was Great Britain, Japan, South Korea, Canada, the U.S., infant industries were protected and supported with “industrial policy,” capital, R & D, training.

Free trade deals are about net gains from trade. Within each trading economy, the new deal will change markets and there will be winners and losers. There have been a very few very big winners who are sucking up all the gains, and millions of Canadians and Americans have lost. They’ve lost their jobs and businesses and have seen their communities struggle, and the only thing they’ve been offered is to go into more debt.

The imbalance in trade between the U.S. and Canada is that Canadians sell the US more energy - especially oil - and we import finished manufactured goods. Under free trade and NAFTA, Canada - especially Ontario - lost hundreds of thousands of manufacturing jobs.

A recent article about Capital stock in manufacturing in Canada dropping makes one thing very clear: that prior to free trade agreements, our investment growth matched the US, and since them, it’s been stagnant while the US had grown.

So one of the realities of Reagan and Friedman’s policies, is that free trade helped drive deindustrialization in Canada and elsewhere.

And while people talk about personal incomes or workers wages stalling, it’s not just workers and individuals. It’s entire industries. Merger after merger and oligolopolies, and monopolies. Because the point of view of Reagan and Friedman’s economics is not an overview of the working of an economic system. It is economics from the point of view of a feudal lord or a present day oligarch.

The reason for the absolute chaos of our current economy is that today’s policymakers and today’s central bankers, and think tanks, and politicians, haven’t yet realized that Reagan and Milton Friedman were wrong.

Not just slightly wrong, but totally wrong. Repeatedly, disastrously wrong. 1987 was just the first of many economic crises - the 1990s currency crises, the dot-com crash, the global financial crisis, the Euro crisis, the OPEC oil price crisis, the pandemic crisis. The seeds of everything Trump is doing today was sowed in the 1980s. The entire Iran-Contra crisis involved ignoring an embargo in order to illegally sell arms to Iran, and using the money to fund right-wing death squads in Nicaragua.

There is lots of criticism directed at people who look back to the 1950s in the US or Canada as a time of prosperity, given many kinds of discrimination and suffering that people experienced at the time.

What is completely ignored, however, is that there was an entirely different economic framework and set of ideas in place. New Deal ideas and Keynesian policies were not perfect, but in their implementation after the election of FDR in the US and Mackenzie King in Canada, it led, not just to the creation of the North American middle class, but to a 40 year period - 1940 to 1980 - where there were no major financial crashes.

Since 1980, there have been dozens, and we are in the midst of one right now.

The Economist is now warning about “A crash that could torch $35trn of wealth” - the same crash I was warning about a year ago.

Apparently no failure is bad enough to justify reconsidering whether we are relying on the correct economic models. If they were correct, this crisis would not be happening.

The 1970s Friedmanite revolution resulted in 50 years of stagflation for many, and the current, insanely unstable current moment. Having created the crisis in the first place, the same ideas are then used to forbid and dissuade people from taking the only steps that will resolve the crisis - having government restore order.

Reagan, Friedman and many others have always had the goal of undermining the federal government, thinking that it was the source of their ills. Now Trump is dismantling it, Americans are all but at war with each other.

This has happened before, in Canada and the U.S. Extremism started to rise before the crash of 1929. The stock market isn’t the first sign of a crisis, it’s the last sign of the crisis.

The real problem with Canada’s economy, which is also the problem with the global economy: too much private credit has been extended to inflate an asset bubble that cannot possibly deliver the returns needed to cancel the debt.

We are already in a full-blown economic crisis. Trump’s weaponized tariffs are bad, but they are only the detonator for a much larger private debt bomb. The crash is already underway. The bailout in Argentina and collapses in crypto are just the visible signs of a much deeper problem.

All of this has happened as central banks in Canada, the US, the UK, the EU Japan and elsewhere keep bailing out investors with trillions of dollars, pounds, euros, etc., when what is required to stabilize the economy is not more debt, but less of it.

And what central banks are doing right now - when the concentration of wealth has never been higher - by continuing to keep interest rates artifically low - is providing oligarchs with more money to buy the few things they don’t already own.

The people tasked with managing the economy are clinging to these outdated ideas of the past. They have enormous appeal - that you can make more money by doing less, or by doing nothing. We’re well past that point

For politicians of a country under economic assault, it is entirely appropriate to go to exceptional lengths to shield our people and economy. Getting rid of false ideas that constrain us is a good start.

The crisis can be prevented and resolved and the economy can be reflated and rebalanced by:

• Creating processes that allow people to reduce and restructure their personal and family farm debts owing

• Have the National federal goverment and central bank create money in order to ensure access to capital.

• The Federal Government should aim for full employment

Opponents of these measures act as if what is being proposed is new, radical, or untried, when both Canada and the United States used these measures to recover from the Depression, fund the war effort and post-war industrialization.

Canada, as a country and as an economy, has operated for most of its existence off of the gold standard. While the rest of the world was still on the gold standard, up until Richard Nixon ended it, Canada had a floating exchange rate. It was not pegged to the dollar.

Any country with monetary sovereignty can do this.

The problem is not that it can’t be done. The problem is doing it fairly, because the real problem with Trump is that he is corrupt. That is the problem everywhere. It’s not the media that’s the problem. It’s people in the media who are corrupt. It’s not politicians, or unions, or activists, or something or someone being “toxic” that is the problem. It is the rampant corruption, which includes brazen lawbreaking without consequence, as well as the legalization of corruption.

Countries like Canada, the UK, New Zealand, Australia, Norway could all act to relieve debt. In the EU, the ECB should be free to do the same.

We are already in the greatest crisis of most of our lifetimes, and it is the direct result of the bad ideas that Reagan legislated and promoted.

This is a financial crisis. It has a financial solution.

It can be done. The obstacle, as Keynes would have said, is ideas.

“ . . . the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.” - John Maynard Keynes

Or as Josh Billings had it “It ain’t what you do know that gets you into trouble - it’s what you do know that ain’t so.’

If Trump is going to keep tariffs - and there is every indication he will - Canada needs to do what Trump won’t: invest in rebuilding our own productive capacity, with Canadian money.

The good news is that contrary to Milton Friedman, Ronald Reagan, Donald Trump and Doug Ford, is that the way the actual world and economy works means that the federal government - and the federal government alone - has the capacity to “reflate” the economy, and should step up to do so.

And to be very clear - nothing else will work.

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DFL