Cooking up trouble?

Most economists will tell you that 2 particular factors significantly helped create the recipe that is now known as The Great Depression: (1) raising taxes; and (2) imposing tariffs on foreign imports.

(1) Raising Taxes

Now this one is pretty intuitive. People need money in hard times, especially in an economy as consumer dependent as ours. Therefore, higher taxes = less money = less spending = less corporate profitability = cost-cutting measures = lost jobs = vicious cycle.

Same with businesses really... the higher the corporate tax rate, the less money the business has to invest in itself and the lower the profitability of the company, which means less money = cost-cutting measures = lost employee jobs = vicious cycle.

But someone has to pay for the huge debt burden our country has incurred over the past 10 years. Its an unfortunate and unavoidable price to pay for having lived so lavishly.

(2) Import Tariffs

So to be truthful (although I'm not sure why I'd have any incentive to lie here), this didn't seem as intuitive to me. I mean, tariffs = domestic protection for an industry. And when things aren't good, it doesn't sound crazy to want to keep US dollars in the US and going to US producers of goods, as opposed to China for imports, right?

Well, wrong. While import tariffs DO have that effect -- they also have costs and studies have shown that these costly almost always outweigh the aforementioned benefits. Ironically, and in short, helping domestic producers in one industry ends up costing domestic producers in all other industries, as consumer spending is impacted and hurt. I can't imagine a much worse time to put further strain on consumer spending! Check out the link below...

HERE'S THE LINK TO A GREAT ARTICLE ON WHY IMPOSING TARIFFS ON THE CHINESE IS A BAD IDEA.

The relevance here is that we just imposed a tariff on Chinese imported automobile tires... maybe this seemed logical and was in response to the fact that our Cash for Clunkers program produced such great sales - but that over 50% of them were to Chinese companies! Sure this one instance doesn't a trend make, but its important to note early on - and worth considering any potential implications such squabbles might have on our overall relationship with China considering that China is a significant buyer of our government debt/treasuries (and thus funding our stimulus package and bank re-stabilization efforts). Either way, actions like these appear to the start of a recipe of a Worst-Seller. Who says you cant tell an economic outcome by its recipe cover?