NCPA - National Center for Policy Analysis


March 25, 2009

When does a single policy blunder herald much larger economic damage? Sometimes it's hard to know ahead of time.  Few in Congress thought the Smoot-Hawley tariff -- which raised U.S. tariffs on over 20,000 imported goods to record levels -- was a disaster in 1930, but it led to retaliation and a collapse of world trade.  The question amid Washington's AIG bonus panic is whether Congress's war on private contracts and the financial system is a similarly destructive moment, says the Wall Street Journal.

In certainly one of the more amazing and senseless acts of political retribution in American history, the House saw it fit recently to slap employees of AIG's Financial Products unit with a 90 percent tax on the bonuses of anyone at every bank receiving $5 billion of TARP money who earns more than $250,000 a year, says the Wall Street Journal.

Which brings us to the Smoot-Hawley analogy, says the Journal:

  • With such a sweeping assault on contracts and punitive taxation, Congress is introducing an element of political risk to economic decisions that is typical of Argentina or Russia.
  • The sanctity of U.S. contracts has long been one of America's competitive advantages in luring capital, a counterpoint to our lottery tort system and costly regulation.
  • Meanwhile, the 90 percent tax rate marks a return to the pre-Reagan era when Congress and the political class behaved as if taxes didn't matter to growth or incentives.
  • It is a revival of the philosophy of redistributionist "justice" of the 1930s, when capital went on strike for an entire decade.

And again, the financial system will suffer, says the Journal:

  • Facing such limits on the ability to reward talent, every bank CEO will try to pay off the TARP as soon as possible, whether or not this leaves the bank with a weaker capital base.
  • Hedge funds and other investors that Treasury needs for its new Public-Private Investment Program, or for the Federal Reserve's TALF, will also be warier, if they'll play at all.
  • Treasury may promise nothing punitive for these programs, but that's also what it said about the TARP.

Source: Editorial, "A Smoot-Hawley Moment?" Wall Street Journal, March 23, 2009.

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