Doug Irwin on 19th-century Tariffs

by Don Boudreaux on July 29, 2011

in History, Science, Seen and Unseen, Trade

Jason asks me by e-mail “What is the best single article you know of [to explain why] high US tariffs in the 19 century were not why the US economy grew as it did then?”

Good question – save for the fact that picking a single article is difficult.  Scholarship seldom advances both significantly and unambiguously with a single article.  Although there are exceptions in economics – Hayek’s “Use of Knowledge in Society,” Demsetz’s “Toward a Theory of Property Rights,” and John McGee’s “Predatory Price Cutting: The Standard Oil (N.J.) Case” are three that leap immediately to mind – the complexity of the economy and the often-multiple plausible competing hypotheses that might explain some phenomena require, practically, that streams of research (both theoretical and empirical) be produced and absorbed before reasonably firm conclusions are reached.

With the above caveat, I’ll take a shot at answering Jason’s question – but with two articles rather than one; both are by Douglas Irwin:

1) “Interpreting the Tariff-Growth Correlation of the Late 19th Century”; American Economic Review (May 2002); pp. 165-169.  After presenting data from the 19th century from more than a dozen countries (including the U.S.), Doug concludes this superb – and superbly concise – paper by saying:

Rather than higher tariffs causing higher growth, the relationship could be spurious: land-abundant countries [including the U.S.] relied on customs duties to raise government revenue and also enjoyed favorable growth prospects, with little link between the two.

2) “Tariffs and Growth in Late Nineteenth Century America,” World Economy (Jan. 2001), pp. 15-30.  Here’s a pdf draft version.

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{ 49 comments }

Invisible Backhand July 29, 2011 at 12:36 pm

“The thing about tariffs is – they do the trick” Keynes, April 17, 1933

http://dagblog.com/reader-blogs/thing-about-tariffs-they-do-trick-keynes-april-17-1933-8787

morganovich July 29, 2011 at 2:36 pm

yup. yet another in the long litany of things keynes got wrong.

the only reason anyone even uses his theories is to consolidate governmental power. government stimulus does not create recovery, but it’s incredibly appealing to politicians seeing reelection in a bad economy.

juan carlos vera July 29, 2011 at 11:18 pm

I agree…
That’s how democracies work today: Political scammers, associated with shadow thieves, creating laws to steal money from people and use that money to promote and finance their businesses.
The key to break this damn fate is to remove from politicians all their power to make laws… I think this crucial human step imply that all of us must realize we are being cheated…

Kirby July 30, 2011 at 7:15 am

I don’t know why, but ‘the collective is being cheated by the powerful’ rubs me the wrong way.

Kirby July 30, 2011 at 8:40 am

ooooh waiiiiiit. It must be because the RICH and FEW are ‘donating’ most of the $$.

muirgeo July 30, 2011 at 9:40 am

Jaun Carlos for King of our Anarchy and Kirby for Court Jester. You guys are just too brilliant with your solutions.

Kirby July 30, 2011 at 11:56 am

King of our Anarchy….


………

Also: Do you deny that the rich pay most of the taxes, whereas the powerful special interests receive most of the taxes? I’d like to see you try to make a case against.

muirgeo July 30, 2011 at 2:21 pm

Yes King of our Anarchy… silly huh…but he said it. As always its clear that most libertarians have not thought about pragmatic application of their principles into the real world.

So I would ask King Carlos of the State of Anarchy how do we take away the power from the politicians and has he ever read Animal Farm?

muirgeo July 30, 2011 at 2:29 pm

Kirby quipped, “Also: Do you deny that the rich pay most of the taxes, whereas the powerful special interests receive most of the taxes? ”

Yes the rich pay most of the taxes* and yes they receive most of the taxes.

If you think they are two different people then how come the “powerful special interest” are not the richest and thus paying most of the taxes?

Now as you say, ” I’d like to see you try to make a case against.”

*not by percentage especially when SSI, Medicare, state and local are figured in.

juan carlos vera July 30, 2011 at 4:25 pm

Dear muirgeo:
1- Don’t worry about my doubtful libertarian pragmatism. Imagine, you, what would happen if only it is ensured the reign of justice and is put in jail all such scammers like you defend.
2- “…how do we take away the power from the Politicians…?, is your question. You should respond it. Your Homework…
3- Ahhh, I forgot… I believe that the tariff you impose on this message make it impossible to reach you capsule…

Kirby July 30, 2011 at 7:01 pm

They aren’t the richest because the rich do not pay 50% of their salary in taxes directly to one individual special interest group.

Slappy McFee July 29, 2011 at 12:47 pm

If your goal is to consolidate power in the hands of government bureaucrats and increase prices for the consumer, than yes, tariffs do indeed work.

Alex Nowrasteh July 29, 2011 at 1:20 pm

This paper offers a great micro example of how tariffs did not promote development in 19th century America:

“Did Late-Nineteenth-Century U.S. Tariffs Promote Infant Industries? Evidence from the Tinplate Industry” by Douglas Irwin
The Journal of Economic History (June, 2000)

• The American tinplate industry flourished after receiving tariff protection under the McKinley tariff of 1890.
• The main input for the tin plating industry was steel, so tin plating would have become profitable in the US when the price of steel fell to international levels (specifically the UK). Prices for steel in the US converged roughly a decade after the passage of the McKinley tariff.

2 possible factors prevented tin plate production in US prior to tariff:

1. Price of inputs.
2. Lack of previous production experience. This was mostly resolved by immigration of skilled Welsh tin plating experts.

• US tariffs on steel kept the price of steel artificially high, delaying the start of a tin plating industry.
• Although the tariff created a tin plate industry, it was not welfare maximizing. The extra cost paid by consumer and the deadweight loss of taxation to protect the industry did not make up for the extra production of tin plating. The welfare maximizing solution would have been to eliminate the tariff of steel as early as possible, jumpstarting the creation of US tinplating decades earlier.

Don Boudreaux July 29, 2011 at 2:15 pm

Thanks for this post, Alex. I was unfamiliar with this paper by Doug.

He is a first-rate economist, historian, and scholar.

Ken July 29, 2011 at 2:58 pm

Wasn’t the primary reason the US could have high tariffs and it not really hurt trade because tariffs were such a small percentage of transportation costs, that even with high tariffs, the end price of imported goods didn’t change that much? I think I read that in The Box by Marc Levinson.

Regards,
Ken

kyle8 July 29, 2011 at 4:10 pm

Rather, transportation costs fell throughout the nineteenth, and twentieth centuries, (and are still dropping!) So, tariffs often did not even keep up with this fall in prices.

Ken July 29, 2011 at 11:00 pm

Kyle8,

I’m sure transportation costs fell throughout the nineteenth century; my original post never claimed otherwise. What I was saying is that tariffs, as a percentage of total costs, in particular transportation costs, weren’t significant, even if transportation costs were declining in the nineteenth century. With the advent of large transportation ships and the box container, dramatically reducing loading and off loading times at docks, in the twentieth century, transportation costs became insignificant, making prices far more sensitive to tariffs.

Regards,
Ken

Sam Grove July 29, 2011 at 3:03 pm

It’s interesting how some people who complain incessantly about wealth concentration go on to support wealth concentrating policies such as tariffs.

kyle8 July 29, 2011 at 4:07 pm

I think it is perfectly understandable that you can have high rates of growth along with high tariffs. In fact this is often seen in newly industrializing economies.

In the case of the United States the Tariffs were often the only form of extant taxation that a company or individual might encounter. I would love to have high tariffs right now if I could do away with the income and property taxes!

Remember, it is all a matter of choices. If you have high tariffs or currency manipulation such as China has, which has the same effect, then you are hurting the purchasing power of your population, but you may enjoy higher exports, or in some cases higher employment.

This is not optimum, but not necessarily ruinous, a lot depends on other government actions such as direct taxation, and business regulations.

Kirby July 30, 2011 at 7:19 am

Your entire post can be summed up in three words:
I love Mercantilism

kyle8 July 30, 2011 at 9:03 am

absolutely silly, As I said, it is a matter of choices. Mercantilism is not a workable system and was not workable in the nineteenth century.

But the kind of tariffs I described can be used if a society does not have to pay a lot of other tax costs, it might not even result in lower growth than the society which pays high income taxes.. You are being an ideologue.

kyle8 July 30, 2011 at 9:21 am

Let me be certain about terms here. Mercantilism involved not only tariffs but outright bans on any manufactured goods produced by the mother country, and it extended to a colonial trade empire. It included a mad scramble for control of natural resources and the mercantilist nations suffered under heavy taxation as well as tariffs.

That is not what I am talking about at all. Broad based tariffs, not those designed to single out a specific industry for protectionism, are a legitimate way to fund government. As with other forms, there are costs as well as benefits.

It is a historical fact that many newly industrializing nations used this as a way to fund government with some success. The cost is that government costs are born by the population as a whole rather than concentrated on the wealthiest. But that is also a benefit as the costs are more diffused.

Kirby July 30, 2011 at 11:58 am

The line between ban and punitive tariff is nonexistient to the macroeconomy. Take a look at British mercantilism. They never actually banned anything, they just used rigid price control to force the producer to eat costs (sound familiar, Obama?) and imposed punitive taxes on any goods traded with its rivals- France and Spain chief among them.

kyle8 July 30, 2011 at 11:20 pm

No, they actually outright banned all trade with rivals for their colonies which was part of the reason that they always had to put down rebellions in colonies.

CarsonN July 29, 2011 at 5:00 pm

” I would love to have high tariffs right now if I could do away with the income and property taxes ! ” –kyle8

____

…who actually pays a tariff — the buyer or seller (??)

(..same question on sales taxes, in general)

Bill July 29, 2011 at 8:21 pm

Depends on elasticities of supply and demand.

Zofton July 29, 2011 at 10:14 pm

[Bill: "Depends on elasticities of supply and demand" ]

…yes, in general economic theory. However, in the real world– price elasticity is almost always negative (a price increase reduces the quantity demanded/sold).

Therefore, a tariff is usually paid by the seller/exporter… either directly to the government taxing authority, or indirectly thru the lower quantity of goods sold/exported at the higher (tariff-added) selling price.

Importers/buyers/consumers are also indirectly hurt by a reduced level of choice, but don’t have to pay the government tariff/tax out of their pocket.

Thus, foreign producers/exporters were the ones directly paying those 19th Century American tariffs. So it’s not surprising that American producers could thrive unaffected with a strong domestic & international market.

(Note the somewhat similar situation today within the U.S. with the so-called “Amazon.com taxes” : state governments seek to tax/tariff the ‘imports’ of out-of-state exporters/seller like Amazon.com.
Amazon management correctly sees that they will be paying these internet taxes… not the resident citizen/importers of the taxing states, as is falsely alleged).

vikingvista July 29, 2011 at 10:34 pm

I think what Bill means by elasticity is not whether the demand slope is negative, but HOW negative (and how positive the supply slope). Bill is exactly right. Except for the unlikely case where the slope is zero, the tax is paid by both trading partners, regardless of who it is directly levied upon. The only question is how much of the tax does each partner pay. Elasticities determine that.

vikingvista July 29, 2011 at 10:40 pm

Excise taxes are better not because you, I, or kyle8 don’t wind up paying them (tax costs always get spread around). They are better because it is easier for NOBODY to pay them. That helps keep taxes and government down to size.

Hunter July 29, 2011 at 6:01 pm

You do realize that there were almost no other federal taxes other than tariffs and excise taxes. Both of which are consumption taxes. Add that the size of the federal government was incredibly small with very limited regulation of the economy.

MWG July 29, 2011 at 8:35 pm

^This.

It’s funny how some will claim that it was the tariffs that led to growth, while ignoring everything you listed.

Jim Rose July 30, 2011 at 12:40 am

The 19th century peacetime U.S. government was a post office, a customs house, a land sales office and few soldiers fighting indians to steal their land. A few percent of GDP.

a government that is a few percent of GDP and with few regulatorty powers is no barrier to modern growth.

muirgeo July 30, 2011 at 2:32 am

Not until this is fixed… http://www.itulip.com/images/currentbalance.gif … will our economy improve and our wealth grow.

Kirby July 30, 2011 at 7:23 am

The current balance of what, I ask? I fail to see World War Two having an impact on, well, anything on the graph.

JR July 30, 2011 at 5:00 am

FYI, Taussig’s “Tariff History of the United States” is available as a free eBook here:

http://mises.org/resources/997/Tariff-History-of-the-United-States

I haven’t read it, but the sellers call it “the definitive work on the tariff of the 19th century in the US” so it would certainly be worth mining for useful information.

Jim Rose July 30, 2011 at 5:53 am

don,
on scholarship advancing both significantly and unambiguously with a single article try ed leamer’s Lets take the con out of econometrics in 1983.

applied economics is still counter-punching 30 years later – see Angrist, Joshua D., and Jörn-Steffen Pischke. 2010. “The Credibility Revolution in Empirical Economics: How Better Research Design Is Taking the Con out of Econometrics.” Journal of Economic Perspectives, 24(2): 3–30.

But still too often by ignoring the issues of data mining, publication bias, and fragile inferences from data. see leamer’s rejoinder on some of this.

John Sullivan July 30, 2011 at 7:48 am

This is a silly topic, although in order to debate the protectionists, perhaps a necessary one. There is always a loss of wealth due to high tariffs, just as there would be if the government raised revenue in other ways, however, if the general domestic economic expansion that was happening at the same time was great enough, the overall growth would be greater than the losses due to tariffs.

The proper way to look at this is to study the specific products that weren’t imported due to the tariffs and what those would have saved our economy from having to produce them ourselves. That would be our net loss from the tariff program and it has nothing to due with the econmic gains that were otherwise taking place in the midst of our industrial revolution.

Jobs are never lost due to free trade. Instead, they are changed. Jobs move; they aren’t lost. The accusation that the demand for man’s “labor” is lost is spurious. It is precisely the divison of labor that enables labor to move into making new things as we experience more efficiency making old things. This applies to products made here as well as everywhere.

Ricardo’s Law of Advantage doesn’t need empirical data to make it valid. To admit that it does is a fallacy and it lends credibility to those who who argue against free trade. Other factors are always at work that may make it appear that a Law of economics does not work in reality. The empirical studies will never take into consideration all of the historical factors that make for what actually occurred in history.

If I exchanged 2 horses for 3 cows, the fact that someone came over to my barn the next day and saw only 2 cows does not mean that I received only 2 cows. This example demonstrates what we are dealing with when we feel that we need to empirically demonstrate the maxims of pure logic. Logic doesn’t need demonstration; it is a priori, in our minds.

The fact that someone would choose to import something to save money means one thing-that a savings is experienced that can be either spent or invested in things that wouldn’t have occurred had not the savings been made. Any displaced labor due to consumers changing preferences are shifted to providing them with other things that require new labor to produce. This is known as ‘progress’.

The argument that the displaced labor never finds new work is also bogus. The only cases where that might be true is when government intervention and regulations slow the transition down.

What is true with regards to the protectionist claims is that the displaced labor often never experiences the same income as they had before the displacement. But that is because the consumers no longer value the skills they posess. The workers no longer deserve the income they used to have if there is less demand for those types of products with a higer labor factor in them, all things considered. Should we consult the blacksmiths of the 19th centruy? Or better yet, should we be forced to buy the old prodcuts they used to make, as a measure of social justice?

The proper question is how much richer would we have become without protective tariffs.

kyle8 July 30, 2011 at 9:29 am

Your entire argument centers upon whether the tariffs are “high” as you say, and whether they are protectionist, rather than merely a relatively low, broad based tariff used for gathering income. As we are talking about the USA in the nineteenth century, I am of the understanding that they were the latter rather than the former.

Don’t get me wrong, I am in favor of free trade. I just think that it is possible to have a growing economy if the tax burden is low, regardless of how those taxes are administered.

Probably the tax which does the least harm would be excise taxes, but I don’t know of any studies which prove that.

John Galt July 30, 2011 at 11:12 am

Three billion years before our sun runs out of fissionable hydrogen, our galaxy will collide which the supermassive Andromeda Galaxy. The blackhole at the center of their galaxy will destroy every visible star in our sky and our own planet as well.
Let us imagine the benevolent Andromedans offer to alter course for a mere 5% resource tariff. Given 5% of our oxygen, water, and other elements as a tribute annually, they reasonably offer to temporarily allow to exist until this tariff kills our world.
Sooner rather than later, you are forced to fight or make flight from a tariff imposer. In the long run we are all dead, under a tariff, this long run becomes a whole lot shorter.
The 20% we surrender to Uncle Sam is about as useful as the bright shining stars of the Andromeda Galaxy, which you can sometimes see as a fingernail-sized swirly-smudge steadily approaching us on a clear moonless night.

tarran July 30, 2011 at 7:05 pm

The blackhole at the center of their galaxy will destroy every visible star in our sky and our own planet as well.

Citation needed.

Kirby July 30, 2011 at 9:09 pm

Now let’s pretend that by firing a series of hydrodgen bombs at Jupiter, say, we could alter its orbit enough to effect that of the sun enough to miss the Andromeda galaxy entirely. We get another 3 billion years to have our core freeze over and our planet to be exposed to solar wind, enough to kill everything not in a very thick hazmat suit. And never forget the cockroaches.

kyle8 July 30, 2011 at 11:18 pm

Nevertheless, funding at least 20% of government is just as certain as the death of the galaxy, so I don’t get what the big deal is.

DG Lesvic July 30, 2011 at 12:28 pm

John,

Excellent thinking and writing.

No Treason to ignore Tarrifs July 30, 2011 at 10:37 am

In your wallet this moment, you might find a portrait of true evil, former secretary of state Alexander Hamilton. His tariff scheme destroyed this nation with a civil war. Reject this blood money as a medium of exchange.

Dali portrays the grim Mandelbrot fractal reality of war, which inevitably constricts all options with successive escalating tariffs as the worse get on top of the rest.

http://uploads4.wikipaintings.org/images/salvador-dali/the-face-of-war-1941.jpg

The inescapable result of Keynesian Fiat Authority, as it usurps the unseen of Hayekian Coordinated Chaos, is a holocaustic harvest by the unseen few.

Only fools smile at mythical Gaussian charts of eternal historic prosperity.
The wise are well fortified and robust to the fat tails of as yet inconceivable black swans that will assuredly obliterate this empire, and everything you think you know.

Kirby July 30, 2011 at 12:02 pm

Which civil war was this, pray?

Ron H July 30, 2011 at 4:34 pm

The War of Northern Aggression that erupted in armed conflict in 1861.

Although Hamilton died in 1804, his belief in high tariffs didn’t, and eventually such tariffs as the “tariff of Abomination” in 1828 led to serious division between northern and southern states.

juan carlos vera July 31, 2011 at 3:22 am

“Use of Knowledge in Society” is an excellent piece for thinking; and “The Pretense of Knowledge”, too…

Haanover July 31, 2011 at 11:41 am

Some U.S. Federal Tariff History:

- Hamilton Tariff of 1789. Rates 5-10% for Federal revenue and protection of domestic manufacturing.

- Tariff of 1816. Protectionist reaction to War of 1812 — and large British stockpile of iron & textiles that under-priced American goods.

- Tariff of 1824. Further protective tariff primarily against cheaper British commodities.

- Tariff of 1828 (aka “Tariff of Abominations”). Protective tariff for northern U.S. industrial states, with highest ever peacetime rates (62%-92% on all imported goods). Severely harmed agricultural-based economy of U.S. southern states; the South was forced to buy higher-priced Northern goods, and sell their own products more cheaply to the North.

- Tariff of 1832. A reduced protectionist tariff to quiet the conflict over the 1828 Tariff (rates cut to 35%). South still unhappy, with South Carolina threatening secession from the Union.

- Tariff of 1842 (aka “Black Tariff”). A protectionist tariff countering previous Congressional compromises that would have reduced 1832 tariff rates to 20% by 1842. This Bill raised average tariff rates to about 40% on almost all imported good– and imposed much stricter collection/payment requirements. Iron imports were specially targeted at rates over 60%… with nails & hoop iron taxed at over 100%.

By 1843, imports to America were cut 50% … and exports by 20%. The tariff was repealed in 1846.

- Tariff of 1846 (aka “Walker Tariff’). Reversed the high rates of the Black Tariff to more normal protectionist levels. It imposed America’s first standardized tariff by categorizing goods into distinct schedules at identified ad valorem rates, rather than taxing imports on a case-by-case basis. These 1846 tariff rates initiated a 14-year period of relative free trade (by 19th century standards) lasting, until the high Morrill Tariff of 1861.

- Tariff of 1857. Major tariff reduction to about a 17% average rate.

- Morrill Tariffs 1861+. Increased effective rates about 70%. It was drafted and passed before the Civil War began or was expected, and is not considered ‘war’ legislation; demand for war revenue did prompt the the Second Morrill Tariff, (Revenue Act of 1861) with even higher tariff rates.

High protectionist rates of the Morrill Tariffs extended thru the remaining 19th Century, until the Revenue Act of 1913 (Underwood Tariff) which sharply cut tariff rates.

=

Nemoknada August 1, 2011 at 7:40 am

“…with little link between the two.”

So tariffs don’t hurt? That should be news around here.

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