How to Cause Another Depression? Anyone? Anyone?

Derek Scissors / September 23, 2010

An ugly financial bubble bursts. A misguided U.S. Congress responds by blaming foreigners and passes a trade bill that prompts widespread retaliation and exacerbates the initial popping of the bubble. That was 1930 and the Great Depression.

Fast forward 80 years. An ugly financial bubble has burst and the U.S. Congress—having already failed with trillions in deficit spending—is now blaming foreigners. A bill in front of the House Ways and Means Committee (and scheduled to be sent to the House floor next week) blames Chinese exchange rate policies for the loss of American jobs. In retaliation, it goes back to the start of the Great Depression and adds yet more protectionist measures to the Tariff Act of 1930, because the first one didn’t do enough harm.

In 1930, Congress thought it could solve America’s economic problems by punishing foreigners and was tragically wrong. The same misguided logic is being applied to China now. Proponents of the current bill claim we’re losing jobs due to the overall trade deficit, that the overall trade deficit is driven by our trade deficit with China, and that our trade deficit with China is driven far higher by the exchange rate. Each part of this is analysis is wrong. (more…)