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January 1999
Volume 17, Number 1

A History of Privilege
by William L. Anderson

In what can only be termed as truly bizarre, an Alabama local of the steelworkers union demanded that Alabama Governor Fob James close the international port at Mobile to all steel imports. Besides the fact that it would be clearly a violation of the U.S. Constitution for the governor to grant the union's demands, it would illegally abrogate existing contracts between suppliers and purchasers. It would also be bad economics.

That being said, nothing that comes from advocates of protection for the American steel industry is surprising, including demands that the Constitution be trashed. Steel and its protectionist allies recently have put on a full-court press to convince us that our country will benefit if foreign producers are prohibited from selling their products in U.S. markets. Such claims require further examination.

Henry Hazlitt's classic, Economics in One Lesson, provides us with a good analysis of government-protected industries. Writes Hazlitt: "The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die . . . depression will spread in ever-widening circles."

So it is with the U.S. steel industry, tariff backers say, unless the Commerce Department blocks imports from Brazil, Russia and Japan. But Hazlitt also points out that government-inspired measures to keep a sick or dying industry on life-support also brings on its own set of consequences.

For example, he cites the Guffey Act which required mine owners not to sell coal below a minimum price. The original single fixed price envisioned by Congress soon exploded into more than 350,000 separate coal prices. As a result, fuel users began to turn to oil, natural gas, and hydroelectric power, further weakening coal's position in the fuels market and exacerbating the very problems the government said it was solving.

Today, steel interests seek more of the same kind of protection. According to Pat Buchanan, the steel industry is an image of American strength and industry. Because U.S. steelworkers (both union and non-union) are among the highest-paid workers in the world, Buchanan and others argue that if the prices charged by domestic steel companies are undercut by foreign producers, overall purchasing power in this country will fall. To keep this country from losing the industrial equivalent of the bald eagle, protectionists tell us that Congress must "level the playing field" by limiting steel imports through tariffs and quotas.

To hear protection advocates tell us, virtual free trade exists for U.S. steel. Nothing could be farther from the truth. Throughout the entire history of this country, Congress and various administrations have showered the domestic iron and steel industry with benefits from tariffs to government-sponsored cartels, all aimed at keeping steel prices far above competitive levels. Few industries have received such benefits, all of which have come from the pockets of American consumers. It is more accurate to say that free trade has never existed for U.S. steel producers.

The first U.S. tariff, the Tariff of 1789, levied a 15 percent duty on imported nails, which was triple the 5 percent level set for most goods. Subsequent tariffs, including the Tariff of Abominations (1828), the Tariff of 1832, and the Morrill Tariff (1861) all had provisions to protect iron and steel products, including rails to carry the developing railroad industry.

Following the triumph of the federal government in the invasion and conquest of the South, the steel industry grew both in scope and scale, along with the power and political influence of the heads of iron and steel firms, and their related railroads and bankers. Writes David G. McCullough, "They were an early-rising, healthy, hard-working, no-nonsense lot. . . . They believed in the sanctity of private property and the protective tariff."

Steel executives sought not only to keep prices up through exorbitant tariffs, but also with government-sponsored cartels. When their own attempts to cartelize failed in the marketplace, they turned toward the government. During World War I, federal agencies directed large areas of the economy in a venture aptly named "war socialism." Politicians, bureaucrats, and executives liked the taste of centralized planning and looked for opportunities to further organize America's politically-favored producers.

Their golden opportunity came with the onset of the Great Depression. First, steel executives firmly supported the passage of the 1930 Smoot-Hawley Tariff, which pushed duties to nearly 60 percent for a number of iron and steel products. (More than 1,000 economists signed a letter pleading with President Herbert Hoover not to sign Smoot-Hawley, but Hoover ignored their sound advice.) After the U.S. economy was further depressed and President Franklin Roosevelt continued Hoover's "New Deal," the steel industry lobbied for the internal protection of a cartel.

Roosevelt responded by giving business executives the National Industrial Recovery Act, which after the Smoot-Hawley Tariff was probably the worst single piece of economic legislation in U.S. history. The NIRA divided the economy into more than 600 cartels, each industry from automobiles to dog food to zippers having their own set prices, wages, lists of working conditions, and special industry practices.

Companies which either refused to join the "voluntary" associations or resisted government intervention were branded as outlaws by the National Recovery Administration, which urged consumers to boycott the non-cooperative firms.

While many other industries floundered under this interventionist straitjacket, the steel industry did better relatively speaking. Even after the U.S. Supreme Court declared the NIRA unconstitutional in May 1935, steel executives appealed to Congress and FDR for a similar program for their industry.

However, by then the government had different plans for steel. First, FDR turned away from the cartel approach to vigorous enforcement of antitrust laws. Second, Congress passed the Fair Labor Standards Act, which firmly placed the U.S. government on the side of labor unions. Steel firms were quickly unionized, especially during World War II when to win government contracts, they had to recognize labor unions.

Following the war, many steel firms failed to modernize their plants, depending instead on a new government policy, the "trigger price mechanism." This legislative device "triggers" steel import quotas whenever the price of imported steel falls below a certain threshold price. However, because the steel firms depended upon protectionism to remain competitive, they failed to become more economically efficient. By the recession of 1982, many older plants closed for good.

The moral of this story is that because the government has sheltered iron and steel manufacturers for more than 200 years, these companies have lacked the incentives to become more innovative and productive. Granted, there are many productive U.S. iron and steel companies making competitive products, but economic history teaches us that those industries that have been most protected will be least able to withstand new waves of competition. Steel, as experience has demonstrated, is no exception.

* * * * *

William L. Anderson, a fellow of the Ludwig von Mises Institute, is a Ph.D. candidate in economics at Auburn University.


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