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. Excerpts:

"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."

"In 1903, reflecting on his trip [to the U.S.], [Alfred] 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.”"

"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."