Now that more than a month has passed since the October 16th publication in the Wall Street Journal of Phil Gramm’s and my piece on 19th-century U.S. tariffs and economic growth, I can share the piece in full here. It is available, free of charge, beneath the fold.
No, Tariffs Don’t Fuel Growth
Rates were high in the 19th century, but the economy boomed most when the rates were at their lowest.By Phil Gramm and Donald J. Boudreaux
Oct. 16, 2024 at 4:39 pm ETModern protectionists are desperate to find historical examples of tariffs promoting industrialization and economic growth. To this end, they increasingly argue that 19th-century America’s extraordinary economic success was fueled by high tariffs. In an essay for the Economist, former U.S. Trade Representative Robert Lighthizer insists that “when America grew in the 19th century from a modest agricultural country into the world’s largest economy, tariffs were critical to its success.” Oren Cass writes that “behind some of the world’s highest tariff barriers, the United States transformed from colonial backwater to continent-spanning industrial colossus.” Michael Lind says the U.S. during the 19th century “pursued a successful import substitution strategy that transformed it from an agrarian to an industrial economy with the help of tariffs.”
It’s true that America had high tariffs throughout the 19th century and experienced substantial economic growth. But tariffs were the nation’s primary revenue source until the ratification of the 16th Amendment—which authorized income taxes—in 1913. Alexander Hamilton, who supported industrial subsidies that Congress rejected, was skeptical of high tariffs since no tax revenue is collected on goods that tariffs keep out of the country and tariffs funded about 90% of the government.
Not until 1816 was a tariff enacted with any serious protectionist intent, according to Dartmouth economist Douglas Irwin. Protectionism peaked in 1828 with what came to be known as the Tariff of Abominations, which raised average tariff rates on all merchandise imports to an all-time high of 57.3%. During those years of rising tariff rates, U.S. industrial output grew at an average annual rate of 4%.
With the election of Andrew Jackson and rise of the Democratic Party in a political backlash to the 1828 protectionist policy, tariffs were reduced. By 1860 the average tariff on all imports was 15.7%, having fallen by 73% over three decades. During that same time frame, the average annual rate of growth in industrial output was 6.7%—more than 40% higher than during earlier years when average tariff rates were rising.
By 1860 industrial output was 563% greater than it was in 1830. This far outpaced the 144% U.S. population growth during the same period. Mr. Irwin describes the few decades preceding the Civil War—when average tariff rates were falling—as a period of “rapid industrialization.” He writes that between 1839 and 1859 the manufacturing sector expanded from about 15% to 21% of gross domestic product.
During the Civil War, the U.S. government hiked tariffs to raise revenue for the war effort. By 1870 the average tariff stood at 44.9%. But from 1870 to 1890, average tariff rates on all merchandise imports fell again, this time to an average of 29.6%, a 34% decline. As average tariff rates fell during those two decades, industrial output grew at an average annual rate of 6%—one-third faster than during the rising-tariff-rate era of 1816 through 1830. In 1890 the Republican-backed McKinley Tariff raised industrial tariffs to nearly 50%, but in the 1890 and 1892 elections Democrats swept into power and reduced industrial tariffs. While America’s economy grew throughout the 19th century, the most rapid periods of industrialization occurred when average tariffs were falling.
Proponents of more government spending used the politically expedient argument that tariffs helped infant industries by protecting them from foreign competition. But in 1831 the nation’s longest serving secretary of the Treasury, Albert Gallatin, rejected the conclusion that high tariffs promoted economic growth. He wrote that “the American people, amidst all the fluctuations and vicissitudes incident to human affairs, had never ceased to make the most rapid progress in agriculture, arts, and commerce. To ascribe that unexampled and uninterrupted prosperity, which even legislative errors cannot arrest, to a tariff is one of the most strange delusions by which intelligent men have ever suffered themselves to be deceived.”
In 1875 the great British economist Alfred Marshall visited the U.S. to see whether protective tariffs fueled economic growth. Before his visit, Marshall thought the infant industry argument for tariffs might have merit. What he observed in the U.S. changed his mind. In 1903, reflecting on his trip, Marshall wrote: “I found that, however simple the plan on which a protective policy started, it was drawn on irresistibly to become intricate; and to lend its chief aid to those industries which were already strong enough to do without it.”
While 19th-century American industrial output grew fastest when tariff rates were falling, trade policy was nevertheless largely incidental to America’s astonishing economic expansion. Growth was unleashed in a country whose citizens had more economic freedom than any people who had ever lived. It was this freedom that fueled entrepreneurship and productivity. Combined with the country’s vast natural resources and openness to foreign investment and immigration, this freedom—not tariffs—produced the American economic miracle.
Mr. Gramm, a former chairman of the Senate Banking Committee, is a nonresident senior fellow at the American Enterprise Institute. Mr. Boudreaux is a professor of economics at George Mason University and the Mercatus Center. This article is based on their forthcoming book, The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism.
