Zombie Doughface — James Buchanan in 1834

Those still supporting globalist free-trade high-immigration policies are accused of “Zombie Reaganism,” though that policy mix is more Zombie Bushism, derived from the gimcrack “Washington Consensus.” Now Zombie Reaganites, notably Dan McLaughlin of “National Review” have accused President Trump’s followers of “Zombie McKinleyism” – support of high tariffs and protectionism generally — and suggested they hanker after the policies of the 1890s. If we must venture into the distant past for our economic policies, I would instead suggest a “Zombie Doughface” approach, re-adopting the economic policies of the much-maligned 1850s Democrat Presidents Franklin Pierce and James Buchanan, which were close to optimal.

To go through those possibilities in ascending order of attractiveness in today’s conditions: Zombie Reaganism has increasingly fallen down in the past two decades. With worldwide Internet availability from about 1995, global product sourcing suddenly became much easier and apparently less risky. This combined with the foolish “Washington Consensus” to produce a mania for globalization in general and outsourcing production to Third World hellholes with low wage rates in particular. I wrote in the 2000s about this, pointing out that it would have the effect of equalizing earnings between Western citizens and the unwashed hordes of the Third World.

That might be tolerable if done gradually, with true free-market policies in rich countries that brought rapid global growth and tight population controls in poor countries to prevent them from outbreeding the available technology. Instead, we got incredibly foolish socialist policies on both interest rates, artificially suppressed by governments, and energy usage, which became government-directed to guard against the largely imaginary menace of climate change. The result was economic growth far below the level at which globalization might have been tolerable and the consequent immiseration of the Western working class. That immiseration has been made far worse in the last decade by insane immigration policies that have brought the teeming riff-raff of the Third World to the West’s doorsteps, depressing wages even in such localized trade-proof services as hairdressing.

The Western working classes have revolted, and quite right too. The whole zombie-Reaganist “globalization” scheme, when combined with climate-change government bossiness and excessive immigration, became nothing more than a leftist economists’ plot to deprive the Western working class of the living standards to which they were entitled. Reaganism, zombie or otherwise, has failed and must be discarded.

Zombie McKinleyism, unlike zombie Reaganism, has the virtue of not having been tried since World War II. McKinley and his Republican predecessors raised tariffs to an inordinate height – the McKinley Tariff of 1890 raised the average tariff on imports from 38% to 49.5%. The policy was more successful than it deserved to be, because Britain, the United States’ most important competitor, continued its very foolish policy of unilateral free trade. That allowed U.S. manufacturers to raise prices in the domestic market and dump excess production on Britain and its colonies.

The world’s steel industry, for example, migrated in this period from Britain where the Bessemer process had been invented to the United States and the equally protectionist Germany. However, the benefits of this policy did not go to ordinary Americans. Since immigration to the U.S. was completely free, foreigners flooded in, preventing the tariffs’ upward effect on wages, but instead giving the big U.S. manufacturers excessive monopoly profits. Those profits made their bosses “robber barons” and the world’s first billionaires – and encouraged the rise of Progressive socialism and meddling to combat them.

President Trump has reverted to McKinley’s tariff policies, claiming that the McKinley administration was the high point in U.S. living standards. It could have been, had immigration been curtailed as it would be in 1924. On the other hand, if Britain had followed even minimal self-preservation in its trade policies, perhaps imposing a low 10% Imperial Preference tariff as it would in 1932, the benefit of McKinleyism to the U.S. economy and the damage to the British economy would have been much less, balancing the equation.

The argument against tariffs is that they reduce world trade and prevent the Ricardian effect of allowing production to find its economically optimal location. I have argued previously that Ricardo assumes a world without non-trade barriers, with currency exchange rates that do not fluctuate (for example in a Gold Standard) and without hostility between potential trading partners. In practice, those conditions are almost never fulfilled, and none of them apply in our current world. Hence a low level of tariffs, averaging up to 20%, may well be optimal in the real world. That policy’s Ricardian costs are modest, it avoids the frictional costs of production shifting to and fro between countries as exchange rates move, and it provides a degree of protection against geostrategic threats.

One particular question is the tariff effect of the Value Added Taxes in the EU and other countries. Contrary to their proponents’ claim, they are not tariff-neutral. Imagine in a tariff-free world, two automobile manufacturers making similar $30,000 cars, one in the EU with a 20% VAT and one in the U.S. with no duties. Then both autos will cost $30,000 in the United States, both autos will cost $36,000 in the EU. Elementary economics then tells you that the U.S. manufacturer will sell fewer autos in the EU at $36,000 than the EU manufacturer will sell in the U.S. at $30,000 – about 10% less if the price elasticity of autos is about 0.5. Thus, the EU’s VAT is equivalent to a tariff of about 10%. U.S. state sales taxes offset this calculation, but they are levied at rates well below the EU’s 20% plus VAT rate.

Turning now to the historical period whose policies are most appropriate for today, we arrive at the economically glorious presidencies of the “Doughface Democrat” Presidents Franklin Pierce and James Buchanan. Yes, they failed to abolish slavery or to prevent the onset of the Civil War, and their enemies wrote their history. However, the embryonic Republicans notably also failed to produce any proposal for compensated abolition of slavery, as Britain had adopted in 1833. It would have cost about $1 billion, 30% of GDP but only a fifth the cost of the Civil War and could have been financed by issuing long-term bonds to plantation owners, as was done in Britain and with the abolition of serfdom in Russia. Without such a plan, the Republicans when elected were a direct threat to the property and livelihood of Southern planters – in 1860, from the planters’ viewpoint, the North had elected Lenin. Secession was thus inevitable.

Pierce and Buchanan financed the government through a tariff, as would McKinley, but their government was much smaller and their tariff much more modest – the Tariff of 1857, signed into law on the last day of Pierce’s presidency, imposed an average tariff of 18%, barely a third of the McKinley Tariff rates. Pierce and Buchanan were also opposed to internal improvements, thus opposing the Whig/Republican schemes of public spending on railroads and canals – this kept government spending at its smallest possible level. Finally, as good Jacksonians they were strong believers in “states’ rights” so conditions and regulations were atomized, differing from state to state.

Doughface policies made the 1850s the most entrepreneurial decade in U.S. history. It was also almost certainly the decade with the highest gains in productivity and living standards (albeit from a low base). It differed from previous decades because of the California gold discoveries of 1848 (and similar Australian discoveries in 1851). Those discoveries removed the constraint of lack of specie that had bedeviled the U.S. monetary system, benefiting rich people and large companies with better access to credit. With the California gold flow, credit was ample and economic expansion encouraged with only the fairly modest Panic of 1857 checking it.

There was no possibility of “robber baron” agglomeration in the 1850s. U.S. population was only 31 million in 1860 (with almost all today’s land area except Alaska) and modest tariffs allowed imports to keep U.S. manufacturers competitive. Taxes were very low and government regulation almost non-existent. Thus, the economic playing field was more balanced between small and large competitors than ever before or since. The result was a massive surge in innovation and entrepreneurial activity. Notably, many of the era’s most successful men were serial entrepreneurs, founding one company after another often in different fields, sometimes as with Jay Cooke even “making it big” going bankrupt and then starting again. Some examples:

• Samuel Colt. Began manufacturing fireworks and had two gun ventures go bankrupt before eventual success, in which he pioneered interchangeable parts manufacturing
• Henry Wells. Founded schools to cure stuttering, then a succession of freight forwarding companies with different partners. In 1850, some of his companies became consolidated into American Express. Since American Express would not deliver freight beyond the railroad network, he then founded Wells Fargo in 1852, to serve the difficult but burgeoning California market. Both those companies are now major banks.
• Cyrus McCormick. Son of another serial entrepreneur farmer/blacksmith/inventor, patented his father’s reaper in 1834, and worked till 1840 to sell the first product. Started again in Chicago in 1847 with two brothers; the reaper company became International Harvester, the family became prominent and included Robert R. McCormick of Chicago Tribune fame.
• Isaac Singer. Itinerant actor, founded two companies of players, patented rock drilling bit and then patented sewing machine with straight rather than circular shuttle. Became first U.S. multinational, then had to sell out, move to Europe and re-found company because of scandals in his private life. Singer had 26 children by two wives and several mistresses before his death at age 64 – Elon Musk will have to hurry to catch him!
• Leland Stanford. Moved to California and set up general store for miners, which made his fortune. Founder of Central Pacific Railroad, which joined with Union Pacific for Transcontinental Railroad in 1869. Founded steamship company and California wine industry. Governor and Senator. Founded Leland Stanford Junior University, named after his son.

A true Doughface Economy will run moderate tariffs which will fund much of a drastically cut back Federal government. It will devolve education, Social Security and Medicare and the great bulk of regulation to the states. Infrastructure projects will be undertaken by the states or the private sector, without Federal subsidy. By this means, the entrepreneurial spirit and innovation of the 1850s will be restored, at least in red states. The result will be far preferable to the big-company sludge of the 1890s or the globalist corruption of Reaganomics.

In summary, Mr. President: Make America Doughface Again (at least economically)!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)