After 12 debates, 15 caucuses, and 21 primaries, we can say at least one thing for sure: Ted Cruz isn't an economist or a logician.
Consider this: during the last debate, he—incorrectly—blamed tariffs for causing the Great Depression, but then 10 seconds later he—also incorrectly—said his tax plan includes a tariff that would boost the economy. I guess he was against them before he was for them? It's not clear. What is, though, is that Cruz's rhetoric makes it sound like he doesn't understand how the economy works, how his own tax plan does, or even that you shouldn't do the things you think were responsible for the worst economic crisis in history.
Like almost everything else in the Republican campaign, this all goes back to a certain celebrity billionaire. Cruz, you see, was just trying to attack Donald Trump's anti-trade message at the same time that he adopted parts of it. "We've seen prior presidential candidates who proposed massive tariffs," Cruz said about Trump's plan to slap a 45 percent tax on Chinese imports, and, "you know, [the] Smoot-Hawley [tariff] led to the Great Depression."
Well, except for the fact that it didn't. The idea that that the 1930 tariff, which raised import duties on thousands of products, did cause the Depression is one of those things that is simple, intuitive, and wrong. It's simple because it casts the Depression as the result of the government's mistakes, rather than capitalism's flaws. It's intuitive because trade really did contract a lot after the crash. But it's wrong because, first off, trade collapsed before the tariff was even put in place, and, second, a collapse in trade wouldn't by itself have even put many people out of work. Sure, tariffs would subtract jobs by cutting down on exports, but, as Paul Krugman points out, they'd also add jobs by doing the same to imports. On net, this might be a negative, but not that big of one. The bigger problem is that the people who were still working wouldn't be able to get as much work done without trade. Specializing in what we're better at and trading for what we're not is like a technology that lets us produce more for the same amount of effort.
So the Smoot-Hawlely tariff couldn't have been the reason unemployment got up to 25 percent in the 1930s. The most you can say is that it might have added a couple of percentage points to that, but nowhere near as much as what really did cause the Depression. And what was that? Three things: a debt bubble, a banking crisis, and the gold standard. The simple story is that people borrowed a lot of money during the Roaring Twenties to buy houses, cars, furniture, sewing machines, and, by the end, stocks. So when the music stopped, which it did when the market crashed, everyone tried to pay back what they owed all at once. But that's impossible. If too many people are trying to pay back their debts, then not enough people are buying stuff, and that can hurt the economy so much that people don't even have the money to pay back their debts in the first place. That's because, as Krugman puts it, my spending is your income and your spending is my income. Lower interest rates would normally keep this from getting out of hand by making paying back debts, aka saving, less attractive, but—sound familiar?—even near-zero rates weren't enough to do that in the 1930s.
Bank runs only made this worse. It wasn't just that people lost their money. Or that the economy lost its ability to channel money towards its most productive purposes. It was also that this scared people into trying to save even more money—just in their mattresses now—and, in the process, sucked even more spending out of the economy. And if all this wasn't bad enough, the gold standard, which pegged the dollar and every other currency to the price of the shiny rock, spread this from one country to the next, and prevented any of them from doing anything about it. Why is that? Well, central banks couldn't print money and governments couldn't borrow much of it as long as their currencies had to be worth a certain amount of gold. That meant they couldn't do a lot to fight recessions, which, in turn, made it a lot easier for them to turn into depressions—and in this case it did. Not only that, but countries that got into trouble ended up exporting it to others by forcing them to slash their own wages if they wanted to stay competitive. It's no accident, then, that the countries that left the gold standard first were the ones that started to recover first. (That's something Cruz might want to pay attention to, since, against the advice of pretty much every top economist, he wants to bring the gold standard back).
Cruz, though, may be just as confused about his own tax plan as he does about economic history. Once again, he's fallen for something that is simple, intuitive, and wrong. The Cliff notes version of Cruz's plan is that it would get rid of every tax we have—individual and corporate—and instead put in place a 10 percent flat tax and what's basically a 16 percent national sales tax. This last part would apply to everything we buy, but not to what we sell other countries. And this, Cruz tells us, "would enable our exports to be tax-free, would tax our imports, would not raise prices for Americans, and would not result in reciprocal tariffs." In other words, Cruz thinks he's made protectionism great again.
Now, it's true that Cruz's sales tax looks like a tariff—we'll get to why it's not in a second—since it would hit imports but not exports. And it's also true that it would boost exports for a little while, since companies wouldn't have to pay any tax on their foreign earnings anymore when they owe corporate taxes on them now. The tricky thing, though, is that this increase in exports today is why exports wouldn't increase tomorrow. Think about it like this. More exports by U.S. companies means more demand for dollars—so their price rises. And, of course, a stronger dollar would make our goods more expensive in the rest of the world. The result, as Alan Viard of the American Enterprise Institute points out, is that this one-time increase in the dollar would offset the one-time increase in exports, leaving the trade balance back where it started from.
That leaves one final point. Even though Cruz's sales tax would temporarily boost exports, it is not really a tariff. And the easiest way to think about this is to think about what it would mean if it were one. A tariff, you see, would only apply to foreign-made goods. It'd put things made outside the country at a competitive disadvantage to the ones made inside it. But Cruz's proposal wouldn't do that. Instead, it would tax everything we buy regardless of where we buy it from. Cars from Berlin would be taxed just as much as cars from Detroit. And that'd be true for people in Germany, too. Sure, we wouldn't be taxing the things we sell to them, but they still would. It'd be a level playing field there and everywhere else for that matter. And that's why a sales tax wouldn't change our trade balance in the long-term. There's no import penalty or export subsidy.
But wait a minute. Cruz would probably say that we've proved his point. That it doesn't matter if his tax plan only pushes up exports in the short-term, since that's better than not pushing them up at all. And that, sure, tariffs might not have caused the Great Depression, but they did make it worse. Besides, what's a little dramatic license when it comes to the "Noble Lie" that protectionism will destroy the economy?
Well, here's the problem. The stories we tell ourselves matter. That's how we figure out what went wrong, and what we need to do to fix it. So if we tell ourselves the wrong story, then we'll come up with the wrong answers. If you think tariffs were to blame for the Great Depression, then your only lesson is not to do that. There was no need for fiscal stimulus or unconventional monetary policies or a bank rescue. And that means you'll criticize those things the next time there's a crisis like there was in the 1930s—I mean, don't you know that we'll be fine as long as we don't tax imports? Bad history leads to bad thinking, and bad thinking leads to bad policy.
The good news is that we don't really have to worry about any of this. Cruz's tariff isn't going to cause a Depression, because it's not a real tariff and tariffs don't even cause Depressions. But the bad news is that someone who does think tariffs were to blame for a complete economic collapse also thinks that a tariff is what we need now.