The Big Lie of Protectionism

Both the US and the UK have massive Balance of Payments deficits. The UK currency has collapsed against both the dollar and the euro. Both countries have seen much of their manufacturing industry move to the Far East and large numbers of their working classes have seen their high paying manufacturing jobs replaced by MacJobs.

Yet, in both countries politicians shy away from protecting their own economies. One reason why protectionism is a dirty word because politicians fear it will turn the recession into a 1929 type depression.

The Big Lie in all this is that the Great Depression was made worse by US protectionist measures, like the Smoot-Hawley legislation.

In fact, that is not so. There is no evidence that the US's protectionist measures made the depression worse.

"Politicians and commentators keep warning that "protectionism is what made the Great Depression Great". It's a good line. Pity it isn't true.

Protectionism didn't cause the Great Depression.

The US Federal Reserve chairman, Ben Bernanke, agrees."  [BBC Economics Editor]

Nor is it true that the US measures encouraged other countries to do the same thing.

"But didn't protectionism help transmit America's problems around the world? Well, not really. Bernanke, Barry Eichengreen and other distinguished economists have established pretty convincingly that it was the gold standard that helped turn a mismanaged US stock market crash into a global slump - by causing a prolonged and devastating period of falling prices."

So what did cause the Great Depression?

In a classic work, Milton Friedman and Anna Schwartz say the US downturn of the 1930s was the Fed's fault, by failing to inject cash into a fragile banking system after the crash of 1929.

At a party for Friedman's 90th birthday, Bernanke (then a Fed Governor), said: " I would like to say to Milton and Anna: Regarding the Great Depression - you're right, we did it. We're very sorry. But thanks to you, we won't do it again."

All this has been known in academic circles for a long time. So, why do politicians repeat the lie and why isn't the public being told the truth. Why are demands for protectionism being ignored?

Why are told repeatedly that globalisation is a very good thing.  So it is, but it is only a very good thing for the rich and multinational companies. They get to buy low in the East and sell high in the West. It has not been a good thing for the lower and middle classes. Look at the average income levels in the US over the past ten and twenty years. The working class are sinking quickly and the middle class are sinking slowly.

Given that a lot of the media are owned by the rich and multinational companies it is not surprising that the Big Lie gets repeated and the truth about globalisation gets concealed.

When UK and US companies with factories in the East can so easily buy our politicians it is not surprising that no action is taken.

Transferring manufacturing capacity and technology from the West to the East also has political and military implications.  I suspect that in a few years time, when China starts showing its strength,  there will be lots of long faces and little pink memos in Western governments over what we are doing now.

In the UK we stupidly thought that we did not need a manufacturing base. Why make things when we could live off banking and the City of London?  We can now see the reality behind that delusion.

Both the US and UK are in dire financial straights. Unless our currencies are going to continue to fall we need to manage our economies in the national interest. Not just in the interests of the very rich.

The fallacy is that it can all be left to the market. That has been shown to be untrue in the case of the financial markets. Leaving it to the markets has resulted in our present problems. Now the fallacy that globalisation can be left to the market must also be exposed.

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