Punishing China: Congress Parties Like It’s 1929


Back then: "Debacle Inevitable, Wall St. Now Says" was a front-page headline in the New York Times on Oct. 27, 1929, just three days after the now-infamous of "Crash of '29" that augured the upcoming decade of economic catastrophe. But that death dive was merely the dramatic climax to a more orderly sell-off that had been ongoing since late March of that year. Market commentators of the time tended to blame the decline on interest rates—in particular, they focused on a rise in margin rates and a possible rate hike by the Federal Reserve.

Little attention was paid by stock seers to the progress of a tariff bill that was making its way through Congress. On March 25, in fact, President Hoover had received a report from the House Ways and Means Committee on commodity tariffs that indicated little opposition to such a protectionist bill. Although the newly inaugurated president vowed he would never sign such broad legislation, he ended up doing just that. Hoover signed the Smoot-Hawley Tariff Act in June 1930.

The market finally bottomed on July 8, 1932, a few days after the antitariff Franklin Roosevelt won the Democratic presidential nomination, but the market didn't fully recover for a generation. A few months earlier, Hoover, working with Democrats in Congress, also signed a bill that increased tax rates on wealthier Americans. Raising taxes and tariffs—which are really just taxes by another name—right into the teeth of the Great Depression led economics journalist Jude Wanniski to opine that "most one-term presidents only have time for one truly disastrous decision, but Herbert Hoover squeezed in two."

Right now: "Bond Yields Soar, Driving Shares Down," is how the Times headline writers summed up yesterday's market action, and then followed up by attributing the 130-point drop in the Dow industrials—they're down nearly 400 points in a week—to a rising "cost of borrowing" and growing investor disappointment that the Fed seems unlikely to cut interest rates anytime soon.

There was nothing in the story—or in the entire newspaper—about today's Capitol Hill news conference where lawmakers are expected to release the details of a currency bill meant to spur China into letting the yuan rise against the dollar. Although it's doubtful the legislation will include across-the-board tariffs—unlike a previous incarnation—the bill is likely to include changes in antidumping policy, a World Trade Organization case directed at China's handling of its currency, and a requirement that the Treasury report on currency "misalignment" instead of "manipulation"—a lower standard for action.

As Goldman Sachs political analyst Alex Phillips notes, "This marks a critical step in U.S. trade policy in that, unlike previous years, some variant of this legislation stands a good chance of enactment. Although the Bush administration may threaten a veto in an effort to soften the final outcome, a medium-strength bill along the lines of the bill to be introduced [today] probably enjoys veto-proof majorities in Congress." In other news, House Democrats are considering adding 4 percent or more to the tax bills of Americans making more than $500,000 a year as a way of financing a fix to the alternative minimum tax.