Phil Gramm and Donald J. Boudreaux
In their new book, The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism, former Senator Phil Gramm and Cato Adjunct Scholar Donald J. Boudreaux, an economics professor at George Mason University, dismantle the seven core arguments often used by progressives to justify bigger government. They show that government intervention—not so-called failures of capitalism—poses the greatest threat to economic and personal freedom. Read on for a powerful excerpt on tariffs below.
Tariffs and the Nineteenth-Century American Economy
Proponents of protective tariffs often cite the nineteenth century as an example of how tariffs can spur industrialization and economic growth by protecting US producers from foreign competition. 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.” He’s not alone. Patrick Buchanan, University of London economist Ha-Joon Chang, the American conservative intellectuals Oren Cass and Michael Lind, and many other protectionists frequently cite America’s impressive nineteenth-century economic expansion as evidence that tariffs promote economic growth. But the facts don’t bear out this claim.
In the first half of the nineteenth century, a political movement led by Henry Clay, often referred to as the “American System,” sought to fund roads, canals, and bridges using money from the sale of public lands and the imposition of higher tariffs. The chief nineteenth-century American intellectual proponent of protectionism as an industrial policy was the publisher Henry Carey, who championed the Morrill Tariff of 1863 as a major funding source for the Civil War. He also fought unsuccessfully against the resumption of the gold standard and postwar tariff reductions. Carey’s case for protectionism and public investment was bolstered both by Alexander Hamilton’s earlier calls for subsidies to promote upstart American industries from established foreign rivals, as well as by the influential work of the German and American economist Friedrich List, the era’s most notable academic proponent of industrial protectionism. But Alexander Hamilton, who supported the industrial subsidies that Congress rejected, was skeptical of high tariffs, as no tax revenue is collected on goods that tariffs keep out of the country, and tariffs funded 90 percent of the government. He also was concerned, as Irwin notes in analyzing Hamilton’s Report on Manufactures, that high tariffs “sheltered inefficient and efficient producers alike, led to higher prices for consumers and gave rise to smuggling which cut into government revenue.”
America’s remarkable economic dynamism and growth during the nineteenth century are undeniable, as is the fact that the US government used tariffs throughout that century as its principal source of revenue. Congress did not have the constitutional authority to tax income until 1913, and early efforts to tax whiskey caused a rebellion. Taxing imports was administratively easy, and because these taxes were passed along to consumers in the form of higher prices, tariffs (at least at moderate levels) were politically expedient, as many of the ultimate payers of these taxes didn’t realize they were being taxed. But as the government increased tariffs to fund infrastructure projects, they became a major political issue. Political opposition and market forces worked overtime to reduce average tariffs on imports.
The earliest US tariffs were meant to raise revenues, not to protect industries. While the Tariff Act of 1816 was clearly aimed in part at paying off debts from the War of 1812, those supporting the tariff also touted its impact in protecting domestic producers. Douglas Irwin describes this tariff as the first one in American history with any serious protectionist intent. The protectionist argument would be used again in the 1820s, when tariffs were raised not only to fund extensive public works but also to protect manufacturers. By 1830, as a result of the 1828 “Tariff of Abominations,” the average tariff rate on all merchandise imports hit an all-time high of 57.3 percent. From 1816 through 1830, US industrial output grew at an average annual rate of 4 percent.
The election of Andrew Jackson marked the rise of the Democratic Party, which emerged as a political backlash to the 1828 tariff. With the Democratic sweeps in the elections of 1828 and 1830, tariffs were reduced. Starting in 1831, average tariff rates on all merchandise imports began to fall. This decline wasn’t steady, but it was dramatic. By 1860 the average tariff on all imports was down to only 15.7 percent, one of the lowest tariff rates in the world, having fallen 72 percent over this thirty-year period. During these three decades, when the average tariff on merchandise imports fell on a secular basis, the average annual growth rate in industrial output was 6.7 percent—more than 40 percent higher than it was during the earlier years when average tariff rates were rising. By 1860 industrial output was 563 percent greater than in 1830. This increase in output far outpaced the 144 percent growth of the US population. Irwin describes the few decades immediately preceding the Civil War—decades of falling average tariff rates—as a period of “rapid industrialization,” adding that “between 1839 and 1859, the manufacturing sector expanded from about 15 percent of GDP to 21 percent of GDP.”
During the Civil War, the government hiked tariff rates to fund the war effort. By 1870 the average tariff stood at 44.9 percent. From 1870 to 1890, average tariff rates on all imports again fell, this time to an average rate of 29.6 percent, a 34 percent decline. As average tariff rates fell, industrial output grew during these two decades at an average annual rate of 6 percent—one-third faster than was experienced during the era of rising tariff rates from 1816 through 1830. In 1890 the McKinley Tariff sought to raise industrial tariffs, but in the 1890 and 1892 elections the free-trade Democrats were swept into power and reduced industrial tariffs. Despite the severe panic of 1893, economic growth and industrialization continued to expand for the rest of the century.
In short, the most rapid periods of industrial expansion in nineteenth-century America occurred when average tariffs on all merchandise imports were falling. …
… That period of stupendous growth occurred in a country with more economic freedom than any people who had ever walked the face of the earth had experienced. That freedom unleashed productive effort and spawned entrepreneurship that, combined with the huge natural resources of the country and unrestricted foreign investment and immigration, produced the American economic miracle. To attribute this economic growth to the government’s tax policy or any other single cause would be foolish, but there is no basis on which to argue that the industrialization of America was promoted by the fact that tariffs were the nation’s chief revenue source in the nineteenth century or, more generally, that America’s economic growth was fueled by protectionism.
Protecting Jobs Rather than Consumers
In an effort to avoid the overwhelming economic logic and evidence showing that freedom to trade fuels economic growth and high living standards for working people, contemporary protectionists are now trying to reorient the trade debate by claiming post-Enlightenment policies have mistakenly emphasized consumption rather than jobs and production. Asserting, as former Sen. Marco Rubio (R‑Florida) has done, that “what the market determines is most efficient may not be best for America,” these protectionists insist that the objective of trade policy should be to promote good, well-paying jobs rather than the well-being of consumers. Oren Cass contends that an economy should emphasize “a healthy labor market, rather than merely rising consumption.” Robert Lighthizer puts the point even more starkly: “Americans are producers first, consumers second.” On its surface, this argument has some appeal. Aren’t jobs at least as important as consumption? But at its root, prioritizing jobs over consumption is a siren song, and like all sirens’ songs, it leads to a trap.
Production is the means that enables consumption. Productive activities—including, of course, human work—are therefore necessary for consumption. And because that which isn’t yet produced cannot be consumed, production must occur chronologically before consumption. No serious person discounts the importance of production or doubts that consumption is possible only to the extent that we produce. But contrary to the claims of people such as Rubio and Lighthizer, it doesn’t follow that production is undervalued or suppressed in an economy in which consumers are free to spend their incomes as they choose.
In a free society, consumers determine what is produced by exercising their right to spend the incomes they have earned, through their work and thrift, to promote their well-being. The prices that emerge from free consumer choices direct labor and other resources to produce the mix of goods and services that consumers most want to acquire. Businesses that can most efficiently produce what consumers want and sell it at the lowest prices get to produce these outputs. Those businesses that are not competitive are either forced out of business or directed into other lines of production.
In a market-driven system, consumers decide what is produced, how it is produced, and which jobs are created; however, those who are calling to shift the focus from consumption to jobs are really proposing that we allow them to tell society which jobs are created, where labor is employed, and how capital is invested. The proposal to focus the economy on “good jobs” and not the free decisions of those who earned the income in the first place is industrial policy under which self-appointed guardians, using subsidies and tariffs, tell the plebs what is best for them to produce and consume. This debate is as old as man. The idea of allowing the “best and brightest” to choose has been tried and rejected for eons. Letting those who earn their income by the sweat of their brow decide how they spend their income is a new and revolutionary idea.
In light of the nation’s ample experience with what government decision-making promotes, who can possibly believe that politicians and bureaucrats have unique insights both into what is in the people’s best interest to produce, and unique information about how best to produce it? And even if government officials did possess such insight—which all the lessons of history deny—experience teaches that these officials would, over time, promote their own interests at the expense of the interests of workers and consumers.
In reality, the push for tariffs and industrial subsidies is mostly the result of transactional politics. Would Republicans and Democrats in the election year of 2024 have tried to outbid each other to have American taxpayers and consumers pay $900,000 per job created or saved in manufacturing when those jobs pay, on average, roughly $92,000 annually if those unionized industrial employees weren’t the swing voters in the states that decided the 2024 presidential election? And when the bills for that policy arrive, who pays? When foreigners retaliated in response to the recent industrial tariffs, the cost to American farmers was $27 billion in lost sales. The Trump administration responded by increasing the amounts taxpayers paid as farm subsidies.
And when the government tries to conceal the negative effects of tariffs and subsidies, the costs grow. In 2023 Morris Chang, founding chairman of Taiwan Semiconductor Manufacturing Corporation, which accepted billions of dollars in subsidies to build computer-chip manufacturing facilities in Arizona, mused that “if you give up the competitive advantage in Taiwan and move to the United States—which has already happened—costs would be 50% higher than in Taiwan.” If US-subsidized computer chips cost 50 percent more than the world market price, how long will it be before Washington imposes tariffs on foreign-made chips? As chips play a significant role in modern manufactured goods, will domestic producers be able to compete in selling products made with more expensive inputs?
When firms in a free market produce outputs that consumers won’t buy, the money they lose is their own. They are compelled by their personal interests to correct their errors as quickly as possible or to find other lines of business. But when government industrial-policy planners and tariff advocates make mistakes, they have strong incentives to try to cover up their mistakes with more subsidies and tariffs. When Americans didn’t buy the Edsel, Ford lost money and stopped selling the model. In contrast, when Americans didn’t buy heavily subsidized electric vehicles (EV), the government imposed tariffs on EV imports—taxes that consumers pay. These mistakes multiply, and the costs to society grows.
Excerpted from the book The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism by Phil Gramm and Donald J. Boudreaux. Used by permission of the publisher Rowman & Littlefield. All rights reserved.