Taxes, growth and right-wing ideology

No one would ever accuse Jacob Rees-Mogg of being up to date. But that applies as much to the Tory backbencher's politics as his Edwardian dress sense.

Polling evidence suggests the British public are unambiguously ready, for the first time in a decade, to pay more tax to fund better public services. The most recent British Social Attitudes survey shows a larger proportion of the public now favour an increase in taxes to pay for better services than the proportion who feel that taxes and spending should be kept where they are.

A specific YouGov poll on the NHS suggested that 66 per cent of the public would be prepared to pay more in income tax to ease the pressure on health. And that even apparently includes a majority of Conservative voters. But Rees-Mogg seemed unaware of all that evidence yesterday, as he preached from the traditional right-wing gospel of tax cuts.

"This country is as highly taxed as a percentage of GDP as it has been since the early 1970s, late 1960s," he told LBC. "I don't think the Conservative party is here to increase taxes. Philip Hammond seems to think otherwise but he hasn't yet presented a budget and he may find there is not a lot of support for tax increases."

And then came some economic theorising.

"I think you make money available to the NHS by growing the economy and I think you grow the economy by lower tax rates. I think you stifle the economy by higher tax rates."

Let's unpack this. Is Rees-Mogg right that taxes are now very high by historical standards? Not really. The share of national income collected in tax receipts will be around 37 per cent this year. Back in 1981 when a 12-year-old Rees-Mogg was threatening to sue the Today programme the tax share was up at 41 per cent.

A larger share of national income was also being taken in the "early 1970s, late 1960s".

It's true that the tax share is considerably higher today than the trough of 31 per cent it scraped in 1994 under John Major. But that was a previous time when public services were almost universally considered to be grossly underfunded. Right-wingers like Rees-Mogg are fond of claiming that taxes can be unsustainably high. But they can also be unsustainably low.

The tax take today as a share of GDP is higher than it was a decade ago, before the financial crisis. But that's largely driven by demographic factors. Health spending is up as the age profile of the population has matured and more people inevitably require care. State pension pay outs have also increased as the pensioner population has grown. The rest of the public sector has suffered an enormous squeeze under the coalition and now the Conservatives.

What about boosting growth through lower taxes? Well, we have some evidence to refer to here. The main rate of corporation tax has been slashed from 28 per cent to 19 per cent over the past eight years. Yet the recovery of business investment has been abnormally weak relative to the wake of other recessions.

The income tax threshold has also been steadily raised. While consumer spending has been reasonably robust, it has certainly not been sufficient to deliver strong wage or GDP per capita growth. This has been the weakest recovery from a recession on modern record.

As for growing the economy in future, there is not a single credible economic forecast showing that Brexit - of which Rees-Mogg is a fervent supporter - will do anything but damage the UK economy. Slower growth will hit the public finances, making less money available from tax receipts for the NHS, not more.

Finally, do higher tax rates stifle growth? The latest data from the International Monetary Fund shows that of 39 advanced economies 25 had higher tax shares than the UK in 2017, among them France (54 per cent), Norway (54 per cent), Finland (52 per cent), Sweden (49 per cent), Germany (45 per cent) and Canada (39 per cent).

Did these relatively high tax countries grow far more slowly than the UK since the millennium? Not at all.

And average annual GDP growth rates in Canada (2 per cent) and Sweden (2.2 per cent) have actually been higher than in the UK (1.7 per cent). Serious economists who have looked at even larger historical datasets find no clear association between lower taxes and higher growth.

There are many reasons why a country can fail to deliver for its people economically. Excessive taxation is probably one of them. But the obsession with which the likes of Rees-Mogg make the case for lower taxes - lower at all costs - reflects more about their own ideological preferences than anything in the available economic evidence.

The new US car factory exposing the contradictions and perils of Trump’s trade war

"Yeah, it was all pretty much just woods around here," says a Berkeley County police officer. Then Volvo came.

The Swedish-Chinese car manufacturer last Wednesday officially opened a new assembly plant near Ridgeville, some 30 miles north of Charleston, South Carolina.

With some help from the state government, a 6,800 acre space in the tall pine forest in Berkeley County was cleared and the shiny new factory was erected.

The plant, Volvo's first manufacturing facility in the US, has created around 900 jobs so far, many of them for locals. The number of employees is due to rise to around 1,500 by the end of the year as it ramps up production of the S60 sedan; and then possibly to 4,000 if, as hoped, Volvo starts manufacturing its popular XC90 SUV there too.

The estimated $ 1.1bn (£ 831m) investment constitutes a major economic boost for the rural community of Ridgeville - and also for the state, which already boasts a major BMW assembly plant further north in Spartanburg.

"The south will one day be the ground zero for US auto manufacturing," predicts Kevin Graham, the Volvo plant's director of assembly, in a cheeky warning to the "motor city" of Detroit.

Yet Ridgeville could also be ground zero for collateral damage from Donald Trump's kamikaze trade war.

The US president fired up Twitter last Friday by going public with a new threat to impose 20 per cent tariffs on European Union cars and car part imports to the US.

Volvo imports around half of its parts for Ridgeville, including engines from Sweden and batteries from China. A 20 per cent tariff would inflict serious economic damage on the new Ridgeville plant.

But that's not all. Volvo intends to export around half of the cars it manufactures in South Carolina. If the EU or China hike tariffs in response to Trump's, this European-Chinese company could get doubly walloped.

"Good thing they built it before the threats, because they may not have come otherwise" says Frank Hefner, an economist at the College of Charleston.

Volvo's CEO Hakan Samuelsson tried to be upbeat at the factory's inauguration last week, saying he was hopeful that sense would prevail in the trade dispute and citing Trump's leftfield suggestion at the recent G7 meeting in Canada that he would ultimately be in favour of eliminating all tariffs.

Yet the underlying message from Samuelsson and his team was clear. New tariffs on auto imports could well mean the full planned investment in Ridgeville not proceeding - and that this would be bad news for jobs in places like South Carolina.

"If we go back to the 19th century when everyone wanted to protect their own market, that is definitely not good for the wealth of nations. That would really be bad - not just for Volvo," Samuelsson told The Independent. The Swedish ambassador to the US, Karin Olofsdotter, who was also at the launch, was even more direct.

"We are extremely worried when it comes to possible car tariffs - a plant like this does not need that. We are all part of global value chains and that's what creates the jobs we have today and that's how the economy works," she said.

And, looking in the direction Nikki Haley, the former South Carolina governor who has been appointed as Donald Trump's UN ambassador, who was sitting on the front row, Olofsdotter implored: "Those of you who have possibly a little influence, I really hope you can bring this message forward." Two days later Trump took to Twitter to threaten the EU with auto tariffs.

Buy American Volvos?

One of Donald Trump's preferred slogans is "America First", and he has urged households to "buy American and hire American". Hardly auspicious sentiments for a foreign car company like Volvo.

But Claire Gibbons, director of global marketing and communications at the Charleston Regional Development Alliance (CRDA), says there need be no contradiction.

"Is it less American when they're made in America, and they employ hundreds and thousands of Americans?" she asks. "BMW has been in upstate South Carolina for 30 years. We live in a global economy and I would be proud to buy a car made in my community by neighbours. The fact that it may be owned by somebody in Sweden or China is irrelevant to me."

Davd Ginn, the CRDA's director, also insists that buying Volvo can be a patriotic choice, even in Trump's America. "When Volvo announced they were going to add the XC90 to their line here, my wife and I went out and bought one. As I host guests here, they say 'this is a nice car' and I will be able to respond in about two years' time that 'it is made in Charleston'."

Volvo was bought from Ford by Hangzhou's Geely group, controlled by the tycoon Li Shufu, in 2010.

"We were in pretty rough shape," admits Lex Kerssemakers, Volvo's chief of Europe, Middle East and Africa. "We were making fewer than 400,000 cars, Ford had said we couldn't use their engines and platforms because they wanted to cut all connections with us, our models were getting old. [Geely] brought a sense of entrepreneurship. We launched new factories, new cars on new platforms, decided to go for electrified cars. Nobody ever does so many things together in the automotive industry, it's just too dangerous. We had no choice and Geely trusted us."

But though Volvo executives are willing to acknowledge their debt, others seem less keen to publicise the Chinese connection. Henry McMaster succeeded Ms Haley as South Carolina's governor last year and was the first statewide elected official to endorse Trump in 2016.

Speaking at the Volvo factory launch, he declared that "the combination of Sweden and America and South Carolina is as strong as it gets". There was no mention of China, the country that President Trump regularly accuses of "raping" the US on trade and purloining American corporate intellectual property.

On Monday Trump appeared at a rally in support of Governor McMaster, who is facing a tough primary run-off election challenge.

Pineapple town

Pineapples are everywhere in Charleston, or at least carvings of them are. They represent Charleston's trading history. In the era when the Carolinas were British colonies, sailors brought them back from their voyages and skewered the tropical fruit on fence posts to signify to neighbours that they had returned safely.

A statue of a giant pineapple squats in a fountain in the city's waterfront park. Last week, it was full of children trying to keep cool in the 35C heat and 80 per cent humidity.

In the shadow of the fountain, three Charleston municipal gardeners were taking a well-earned break from trimming the palm trees. They knew about the new Volvo plant - everyone in Charleston seemingly does.

But not the threat posed to it by Trump's tariffs.

"I've seen the [trade story] on the news, but tariffs won't affect this plant if the cars all made here will it?" one asked. They were all also surprised to learn Volvo is Chinese owned.

South Carolina, like almost all the southern states, voted overwhelmingly Republican in the 2016 presidential election.

"This is a state where if you're a walking Republican you will get the election. Now you can be a walking Republican but if you're not a Trump supporter, we're not too sure what's going to happen to you," says Professor Hefner of Charleston College.

So how do people feel when a major new local employer says the president's trade policy is dangerous? Workers at the Volvo plant clam up when talk of tariffs comes up. "That's part of politics that we don't engage in," says Mr Graham, the director of assembly.

Claire Gibbons of the CRDA explains that people tend to focus on their jobs, rather than the news. "The global implications don't necessarily trickle down immediately. Once the negotiations [on trade] happen and things are put in place, then you start to see the ramifications and the cost implications. It's too soon to know [at the moment]".

Charleston is certainly not some hollowed-out ex-steel town. And across South Carolina one does not see the "rusted-out factories scattered like tombstones across the landscape of our nation" referred to by Trump in his almost apocalyptic inaugural address last year.

"For Charleston things are booming and for South Carolina things are going well," says Professor Hefner.

The state's unemployment rate is 4 per cent, barely higher with the national average of 3.8 per cent.

Hefner says locals are not suffering economically but they still buy the zero-sum Trump logic on trade.

"The typical reason that people would vote for Trump would be non-economic issues - immigration, abortion, conservative lifestyle kinds of things," he says. "They like his conservatives views on social issues and they swallow the views on trade hook, line and sinker. But it's not because they're afraid for their jobs but because they think what he's saying is right! It seems logical."

Lessons from history

The word is that Trump himself was invited to the launch of the new Volvo factory. And why not? On one level, its existence ticks the major boxes of the Trump economic doctrine.

It is a new factory on US soil, creating new jobs. And old-fashioned manufacturing jobs at that. The decision by Volvo to invest in Ridgeville was taken before Trump launched his White House run, but that need not have stopped him at least trying to take credit.

Yet all the evidence suggests the president's tariffs would be as welcome as a slug of petroleum in a dish of traditional Charleston she-crab soup to Volvo's global operations and to Ridgeville in particular. They might well end up destroying some of the jobs in the state that have been created, or cancelling those that have been promised.

Volvo in South Carolina is a microcosm of the US economy’s vulnerability to an automotive trade war that fractures global supply chains and discourages foreign investment.

US tariffs could conceivably encourage Volvo to source more parts in the US, which is presumably what the Trump team would want. But that would not help the company if wants to export its vehicles in the midst of a global trade war. The more likely result is less US investment, not more.

EU-owned car companies  - firms including BMW, Renault, Volkswagen - account for more than a quarter of US car production, supporting an estimated 120,000 jobs. As well as in South Carolina, there are production facilities in Alabama, Mississippi and Tennessee - all Republican states.

Recent work by the Peterson Institute for International Economics, a respected Washington think tank, estimates Trump's auto tariffs could cause 195,000 US workers to lose their jobs in total over three years and that this cost could rise to 624,000 if other countries retaliate.

The plight of Volvo also demonstrates some wider ironies and contradictions of Trumpism.

Volvo was a dying brand under the ownership of the all-American auto giant Ford. It was rescued by Chinese ownership. With no Geely rescue there would have been no Volvo investment in the US. With no Volvo investment there would have been no new jobs for Trump voters in this part of rural South Carolina

Frank Hefner says South Carolina's own history demonstrates why trade barriers will only end up harming those they are supposed to protect.

"When I first moved here in 1988 the general sentiment was [concern] over textiles and apparel manufacture moving offshore. The buzzword then was to keep textiles in the state," he recalls.

"Looking backward 30 years you'd have to say thank goodness we didn't have trade barriers that stopped international trade to protect an old, outdated industry."

The global implications don't necessarily trickle down immediately. Once the negotiations on trade happen and things are put in place, then you start to see the ramifications and the cost implications

Serious questions are being asked about what we want from central banks – and not before time

What numbers should central bankers like Mark Carney, Mario Draghi and Jerome Powell go to bed thinking about? Inflation? The rate of unemployment? GDP growth? Productivity? In other words, what should the target of an independent central bank be? After several years of lying dormant, this old question has, if not quite exploded in a volcanic eruption of debate, at least begun to rumble again.

Labour broached the issue last week with its publication of a report for the party by GFC Economics which suggests the Bank of England's mandate ought to be modified to include a target of 3 per cent annual productivity growth. This follows a paper earlier this month from Lawrence Summers (the veteran US economist who came close to being appointed by Barack Obama as the chair of the US Federal Reserve a few years ago) suggesting the Fed ought to move to a "nominal GDP" target.

Although droves of politicians in the UK, the US and across the EU have moaned and even raged about the decisions of central banks in recent years - including Theresa May - virtually none have called for decisions on interest rates to be put back into the hands of politicians. Indeed, scarcely any have even called for the mandate of those banks to be changed. Like Stanley Baldwin's 1920s press barons, they seem to prefer the power of the bully pulpit without the tedious responsibility of actually having to do any thinking about the sensitive trade-offs inherent in their simplistic demands.

So, in this depressing context, this flicker of fresh thinking about central bank mandates is welcome.

Such a debate can help to clarify that central banks, despite the impression given by the populist agitators, are not a law unto themselves. Policymakers do not arbitrarily decide what is good for the public and what is to be avoided, who should be subsidised and who should be penalised, who should be made richer and who should be made poorer.

The banks are operationally independent only - they work to achieve broad goals set for them by elected governments. That's true of the Bank of England, the Federal Reserve, the European Central Bank and indeed all of the independent monetary authorities across the Western world, from Sweden, to Canada, to New Zealand.

But what should the democratically selected target of those institutions be? They have all traditionally been given (roughly) the same target of 2 per cent annual inflation, and told to aim to hit it over the medium term. However, there is no macroeconomic reason why 2 per cent inflation, as opposed to, say, 4 per cent, should be the magic number consistent with full employment, steady GDP growth and macroeconomic stability.

And indeed the Summers argument is that this old framework, which seemed to work reasonably well before the global financial crash, is now breaking down. In an era when both interest rates and inflation are apparently being chained down by powerful secular economic forces, monetary policy is left potentially impotent to restore growth in the event of a downturn. Summers wants a nominal GDP target (inflation and real growth added together) of 6 per cent.

For similar reasons, Simon Wren-Lewis of Oxford University prefers a primary target of maximising GDP growth, with an inflation target transformed into a backstop. Others have previously suggested simply raising the inflation target from 2 per cent to 4 per cent.

The objection of Bank of England policymakers and officials to GDP targets is that growth data from statistics agencies, unlike inflation data, is often revised over time, sometimes dramatically, and that setting this metric as the target could result in wild and damaging policy swings.

Advocates see this as an exaggerated technical quibble. It also fails to engage with the central objective of the reform, which is to shift the mindset of central banks so that policymakers and staff will no longer consider miserable productivity and weak GDP growth acceptable merely because inflation has been quiescent.

The usual response of institutional conservatives to the idea of raising the inflation target to 4 per cent is that it would shatter the central bank's credibility and befuddle the public although, in truth, there's not much real evidence to believe this. Reasonable people can differ about the relative strength of these mandate proposals and the various objections. Yet all sensible people should welcome the rumbling of a radical debate here.

It's true that it's unhealthy to expect central banks to solve all of a society's economic problems. These institutions cannot please all the people all the time. Yet it is healthy to talk seriously and constructively about what it is we want our central banks to do.

The myth of the ‘wasteful and inefficient’ NHS

NHS "efficiency savings" have been the lodestar of politicians for the best part of three decades.

Kenneth Clarke introduced the "internal market" in 1990. Tony Blair launched a crusade for "foundation hospitals". David Cameron and Andrew Lansley rammed through GP commissioning.

The objective of all these organisational shakeups was, to a large extent, to bear down on inefficiencies within the health service.

And now we have the demand from Theresa May in her speech yesterday that the pretty modest increase in resources for the NHS over the next five years must be accompanied by a new clampdown on waste.

It's taken as a given in Westminster - particularly in the Treasury, who probably insisted that this section be included in May's speech - that there are enormous inefficiencies in the health service.

And, in one sense, this view is almost certainly correct. Total UK public health spending is around £155bn a year. Any budget that size will have myriad expenditure lines where more is being spent than strictly necessary.

Around 1.7 million people work for the NHS, making it the world's fifth largest single employer, behind the US and Chinese militaries, McDonalds and Walmart. That vast workforce all but guarantees that there will be inefficiencies in how many of these human resources are deployed. And all those inefficiencies will add up to a large-sounding number.

A review of NHS productivity by Lord Carter in 2016 duly identified £5bn of possible savings in acute hospitals in England. This included savings from better staff rostering practices and sourcing medical supplies more cheaply.

Yet note that this was in the context of the NHS being forced to make an estimated £22bn of efficiency savings due to ministers deliberately holding funding supply below rising demand. So there would still be a huge gap even if all Carter's identified savings were achieved.

One newspaper yesterday wheeled out the familiar diatribe that the NHS is "a wasteful, inefficient and largely unreconstructed behemoth". Yet the facts show that by international standards the NHS is not, actually, distinguished by its wastefulness.

Those convinced that the NHS is byword for inefficiency should consider the US health system, where total health sucks up more than 16 per cent of GDP (compared with 10 per cent in the UK) but where health outcomes in a host of areas are no better and in some cases worse than in peer economies.

What does distinguish the NHS internationally is its relative lack of resources. In 2015, the UK had just 2.8 doctors per 1,000 people, compared to 4.1 in Germany and 3.3 in France. The UK also had just 2.6 hospital beds per 1,000 people, compared to the OECD average of 4.8. The fact that we get broadly comparable health outcomes despite this shortfall, points to the NHS's relative efficiency, not the opposite.

NHS managers should, of course, be required to continually identify savings, minimise waste and stamp out needless inefficiencies. Any manager, whether in the public or private sector, has the same responsibility.

But we should banish the myth that efficiency savings can be anything more than a relatively minor offset to the secular spending pressures of rising longevity and the development of expensive new health technologies.

So how to pay for the extra resources that the NHS needs? Higher taxes are the obvious answer, picked up by the older population who will, initially at least, benefit from the higher spending.

Yet there is concern among ministers about the ability of Theresa May's fragile administration to get the necessary tax hikes through the Commons, especially in light of the fiasco last year when the chancellor tried to remove a tax loophole benefiting the self-employed.

So the suggestion in Westminster is that extra borrowing might take at least some of the strain. This wouldn't be a disaster, but the silence from the usual suspects in response to this idea is palpable. The denunciations of unfunded spending by the right-wing media and Tory backbenchers have mysteriously gone missing. The righteous yearning for an absolute balancing of the government's books at the earliest opportunity has seemingly evaporated.

The fact that the NHS spending has been (quite ludicrously) presented as a triumphant delivery of the Brexiteers' red bus promise to spend £350m a week more on the health service no doubt has something to do with it. The cult of Brexit has eclipsed the cult of the budget surplus on the right.

There are parallels here with the US Republicans, who screamed blue murder about the sustainability of the public finances when there was a Democrat in the White House, but who cheerfully voted for large tax cuts last year, despite the fact that official projections show these are set to blow up the US budget deficit.

How easily the austerity fetish is forgotten. One could be forgiven for wondering how genuine it was in the first place.

Lenders shouldn't always get back what they're owed

What should happen to people who can't repay their debts? In the ancient world it was common to enter "debt bondage", a form of slavery. More recently we had the debtor's prison, of the sort with which Charles Dickens' unfortunate father found himself acquainted.

Personal bankruptcy acts over the 19th century phased out such severities. And for people who formed companies, funded by borrowing, the major legal innovation was modern "limited liability" in 1855. This restricted the claims of creditors to the funds you had invested in the company - in other words, aggrieved lenders couldn't move onto your other savings after they'd exhausted the assets of the firm.

The perennial objection to such protections is what economists call "moral hazard": the idea that they give people an incentive to take excessive risks, knowing that they can walk away from the financial consequences if they go wrong, while others have to pick up the tab.

"The directors of such companies - being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own," griped Adam Smith in The Wealth of Nations back in 1776. "Negligence and profusion," predicted the Scottish father of economics, "must always prevail, more or less, in the management of the affairs of such a company."

We're hearing an echo of that moral hazard argument today, with the swell of complaints about Company Voluntary Agreements (CVA) on the British high street. The House of Fraser department store chain, struggling like much of the rest of the retail sector, entered a form of insolvency last week. But instead of opting to wind up the company and liquidate its assets to pay creditors, it is instead attempting a CVA.

This means the historic retail name (now Chinese-owned) is asking all its creditors, including its landlords, to agree to a reduction in their claims so the company can continue trading.

Landlords say CVAs have become a form of shakedown for them. A CVA requires only 75 per cent of support of all creditors to be approved. But the creditors who take the biggest financial hit are them, in the form of lower rents than previously agreed. House of Fraser is looking for a 25 per cent rent cut on the stores it will keep open. It's suggested that CVAs are being instigated cynically by firms, not as a last ditch bid for survival, but as a way of simply cutting their costs.

Some other retail firms who don't enter CVAs also detect unfair competition. Why should they, successful businesses, continue paying their agreed level of rent, while a competitor who has overextended themselves gets a rent cut to help finance a turnaround? Isn't this moral hazard in blazing neon? Only up to a point. A government review of the CVA regime, something the British Property Federation wants, seems warranted. Yet some of the claims of abuse are overblown. Entering a CVA is not a cost-free option for any firm, just as declaring personal bankruptcy is not cost-free for the over-indebted individual.

Both will find it more difficult to borrow again for their next venture. And if they can borrow it will be at a penal interest rate.

There's reputational damage for a retailer, too. For a store with a higher-end reputation, such as House of Fraser, last week's headlines are not exactly desirable PR. Similarly, when it comes to personal bankruptcy, we are a still, here in the UK, a long way from the American culture of wearing them as a badge of pride for the serial entrepreneur. The days of the debtor's prison may be gone, but bankruptcy is not the subject of loud dinner party boasts.

It's also important to think about incentives on all sides when it comes to a CVA proposal. Landlords would certainly take a financial hit if a tenant went into liquidation, as they would have to re-let the property, possibly after a long and costly vacancy period. And the new rental agreement with a fresh tenant might be at a lower rate anyway. If the troubled tenant genuinely signed up to a rent that was economically unsustainable for any firm, a CVA can be regarded as a useful institutional solution which allows market forces to operate while also minimising wasteful adjustment costs.

This leads to a related point: moral hazard is also not a one-way street. For every irresponsible borrower, there is usually an irresponsible lender. We saw this vividly in the eurozone crisis with Greece. German and French banks lobbied for full protection for their unwise investments in Greek sovereign bonds and the European Commission and the International Monetary Fund strove, for far too long and at great social cost in Greece and the wider eurozone, to give it to them.

As Ashoka Mody, a former IMF economist argues compellingly in his new book EuroTragedy, it would have been better for the inevitable default to have been allowed to happen much earlier.

It's impossible to entirely divorce morality from the repayment of debt, whether personal or corporate.

And we shouldn't try to: moral hazard exists. But, by the same token, it behoves us to also recognise that, sometimes, we're all better off if creditors don't ultimately get back what they might have once expected.

Protectionism: The lessons of history

It's 1929 and two Republican politicians, Reed Smoot of Utah and Willis Hawley of Oregon, are cosponsoring legislation to keep foreign goods out of the United States. This act of protectionism, the pair promise, will boost domestic employment and protect the living standards of the ordinary American working man.

The Smoot-Hawley Tariff is met with a thunderous wave of condemnation from the economics profession.

More than a thousand academics and practitioners petition President Herbert Hoover to veto the legislation.

But to no avail. Hoover, who campaigned on a protectionist ticket, signs the bill into law and import levies on some 20,000 items are jacked up to an average of 40 per cent. America's great industrial tariff wall goes up - and it will not fall again until after the smoke and chaos of the Second World War clears some 15 years later.

Who says history doesn't repeat itself? Skip forward 88 years and Donald Trump is being sworn in as US president in front of the same Congress building that witnessed the passage of Smoot-Hawley. "Protection will bring great prosperity," the real estate tycoon and reality TV star declares before the relatively meagre crowd on the National Mall.

Economist jaws, once again, fall in horror. A poll earlier this year shows that virtually everyone in the profession believes tariffs will be damaging rather than beneficial for the US economy. It's a conviction that spans the political spectrum. Economists who virulently disagree about over deficits, tax cuts and regulation find themselves united on this single point about the merits of free trade. But, once again, the academic consensus does no good. The massed ranks of pointy-heads are disregarded. Trump's bite is matching his bark.

First he went after China, hitting imports of robots and high-speed trains. Then, last week, he crossed a fateful threshold. The Trump administration imposed 25 per cent levies on steel from Europe, Canada and Mexico. And, in what felt like a grave insult to these historic US allies, this was justified on "national security" grounds.

Nor is this the end. Next in Trump's sites are imports of foreign cars. And after that - who knows? Meanwhile, Europe and Canada, knowing that a man like Trump will mistake patience for weakness, are already hitting back with countervailing tariffs against American goods, from blue jeans to bourbon.

Beijing seems to be halting its massive purchases of American soybeans, striking at the agricultural heartland of Trump support. And so the 1930s cycle of retaliation, economic pain, popular anger and evaporating trust seems to emerge from the darkness, like the ghost of trade wars past.

The US will cut an isolated, even reviled, presence at the G7 meeting of the leaders of top economies in Quebec this weekend. Some even question whether the multilateral framework governing global trade can survive a lurch into naked protectionism from the world's largest economy and the post-war driving force behind liberalisation and openness.

Comparatively speaking

Ever since a British thinker and politician called David Ricardo outlined a revolutionary idea of "comparative advantage" in 1817, using an example of Portuguese wine and English cloth, economists have been convinced of the theoretical merits of free trade.

Ricardo argued that productive efficiency in every nation is maximised when people focus on producing what they are best at producing and exchange the results. The intellectual revolution lay in the word "comparative". Ricardo demonstrated that any given country could drive up its prosperity, not necessarily by being a world beater in any particular category of export, but simply by focusing on its resources on what it could produce most efficiently (whether because of the natural fertility of its land, or its abundant supplies of cheap labour or its technological resources).

The theoretical implication was that every nation could benefit from trade. Ricardo thus demolished the credibility of rival theories of "autarky", the idea that a nation should consume only what it can itself produce, and "mercantilism", the theory that one nation's export represents another nation's economic loss.

Economic historians have tended to present a united front on free trade's merits in practice too. They disagree over how much economic damage Smoot-Hawley actually did on top of the monetary and fiscal policymaking blunders of the Great Depression of the early 1930s, but virtually none argue that protectionism and tariffs made things any better.

And, for the period since the Second World War, views are even more categorical. It's widely agreed that the US Marshall Plan, which lent generously to the bombed-out economies of Europe and dismantled trade barriers, helped to lay the foundation for Germany's Wirtschaftswunder (economic miracle) and France's Trente Glorieuses (30 glorious years). China's assimilation into the global economy after the death of Mao Zedong in the late 1970s, and its emergence as a global export powerhouse, has helped to yank hundreds of millions of Chinese out of destitution.

"The world trading system has been fundamental to the post-war success of the world economy which has seen large increases in incomes and, for the first time in history, an absolute fall in world poverty," states L Alan Winters of Sussex University, neatly encapsulating the contemporary consensus of the profession.

Leaning by doing

Yet there are wrinkles in this story of all-conquering trade liberalisation as a driver of prosperity. Not everything fits neatly into the parable of comparative advantage. During their rapid industrialisation phases of the second half of the 19th century, countries such as Germany and the United States erected lofty tariff walls to protect their domestic manufacturers from intense competition from the industrial superpower of the day, Great Britain.

The Cambridge economist Ha-Joon Chang notes that most of today's rich countries actually "practised significant degrees of protectionism for substantial periods" during the 19th and 20th centuries. Free trade advocates can say things might have been even better for these states, but there is little reason to conclude that protectionism held back Bismarck's Germany or Ulysses Grant's United States, at least to any significant extent.

And there are examples from the post-war era too. South Korea's industrial takeoff in the 1960s happened behind high tariff walls. Japan protected its nascent domestic car industry from foreign competition for 40 years after the Second World War. It was a similar story in Taiwan. Again, there is little evidence that protectionism did major damage to these states; their growth rates were some of the highest in human history.

Indeed, a combination of trade barriers and industrial subsidies actually seemed to help these Asian nations reach their economic potential. Protecting industries like steel manufacturing and shipbuilding, this argument goes, builds industrial capacity, which can then be the basis for other higher-value added technological development. Protectionism enables "learning by doing" for domestic managers and the bureaucrats who set policy - opportunities that would not be available in a world of totally open trade.

As Ha-Joon Chang points out, South Korea's apparent "comparative advantage" back in in the 1950s was in fishing and low-grade wig-making, not shipbuilding or consumer electronics. If South Korea had merely stuck to what it was good at 60 years ago and waited, would we today have Samsung? Would we have Toyota? Or Taiwan's Acer? Many are sceptical of any general applicability of such lessons for poor countries. And there are plenty of countervailing examples of developing states where protectionism has resulted in waste and corruption.

Yet there is a powerful weight of historical evidence that a degree of protectionism can, under certain conditions and alongside certain other policies such as export promotion, play a positive role in development.

Breaking bargains

That is not the only wrinkle. We are not merely economic animals. The Harvard economist Dani Rodrik argues that it's important to think about social fairness when it comes to trade, not just pure Ricardian efficiency effects.

Overproduction of steel in China, dumped in world markets at prices below the true cost of production for the past decade, might have meant cheaper inputs for Western manufacturing firms and thus more productive industry, extra aggregate jobs and higher incomes in rich countries. But when it undermines intangible but crucial "social bargains" between a Western government and its domestic steel workers, who risk losing their jobs because of cheap steel dumping, people quite reasonably feel aggrieved.

Similarly, if corporate offshoring occurs not because production is more efficient overseas but because companies take advantage of laxer health and safety regulations, that too can represent a breach of the broader public's sense of fairness.

It was this sense of a broken social contract that Trump's "American carnage" inaugural address touched on when he raged that "one by one, the factories shuttered and left our shores, with not even a thought about the millions upon millions of American workers left behind".

The wrong lessons

So are these wrinkles enough to salvage some respectability for Trump's protectionist crusade? Alas, no.

America is on the technological frontier. Those "learning by doing" development effects are hardly relevant for the most productive economy in the world.

The social bargain argument does make a strong case for facing up to and tackling Chinese overproduction and other forms of industrial dumping - more than many economists and politicians accept. And this blind spot among the policymaking establishment is probably one of the reasons why populists like Trump have won an audience.

Yet the fact remains that tackling this evil can only be done sustainably through multilateral organisations like the World Trade Organisation. A free for all threatens the whole system, at huge potential economic cost.

Moreover, Trump's anger over trade extends far beyond unfair dumping. He and his advisers want to keep out imports in general, under the primitive mercantilist believe that the raw size of the US's goods trade deficit represents a measure of the extent to which America is being taken advantage of by swindling foreigners. Ricardo must be turning in his grave.

Back in 1929, the industrialist Henry Ford was one of those who pleaded with President Hoover not to impose Smoot-Hawley. But, when it comes to trade, the current White House incumbent seems to have absorbed a separate and simpler view expressed by Ford many years earlier: "History is bunk."

You can have Wall Street and Donald Trump after all

Last week another banker had his collar felt. Goldman Sachs employee Woojae Jung was arrested and charged in the US with insider trading. Jung is accused of using confidential information on planned corporate merger activity, gathered from within Goldman's investment banking department, to make secret trades in the companies involved. Jung, allegedly, knew which way the market was going to move when the information became public and personally positioned himself to profit from that.

Just another unremarkable tale of alleged corruption on Wall Street? Perhaps the significance is greater than that. For, by coincidence, last week also saw the Federal Reserve, America's lead financial sector regulator, propose to water down the "Volcker Rule", a centrepiece of the legislation enacted by the US in the wake of the global financial crisis a decade ago. The Fed, led by recent Trump appointee Jerome Powell, is giving the banking lobby what it has been hollering for ever since the rule was devised by the Barack Obama administration back in 2010.

What does the Volcker Rule, named after the former Federal Reserve chair Paul Volcker who designed it, do? It prevents Wall Street banks, such as Goldman, from "proprietary trading", that is to say directly making bets on the movement of financial markets using their own money. This might sound a bit odd to many people. Because isn't this precisely what these financial institutions do to generate their profits and bonuses? The answer is no, at least in theory. These banks' traders are supposed to facilitate foreign exchange and bond buying orders etc on behalf of their corporate clients.

While they can legitimately make a profit from such market making - pocketing the difference between what they buy the various assets for and what they sell them for - they are not supposed to nakedly speculate for their own institution's profit. There's inevitably a grey area here: one traders' speculation is another's simple pre-emptive buying of assets to facilitate an expected future client transaction. Yet what Volcker did was to shrink the grey area considerably and make the speculation element considerably more onerous and expensive.

And rightly so given the catastrophic hidden risks banks turned out to have been running in the years before the financial crisis. Rightly, too, given the fact that these banks still benefit from a de facto taxpayer guarantee. There's no case for publicly subsidised gambling - certainly not for underwriting gamblers with trillion dollar balance sheets.

The Jung allegations remind us why this functional separation is not only appropriate for banks but ethically necessary too. Wall Street banks have a hugely privileged position in the flow of financial information. Their investment banking divisions find out early about possible market moving mergers.

Their share dealing and asset management divisions register big buy or sell order from clients which are likely to move markets simply due to their size. The opportunities for banks to profit from such information are vast. It's a testament to the degree to which banks like Goldman effectively wrote their own rules before the global financial crisis that regulators sat back and allowed them to gamble in such patently conflicted ways, even to the extent of having in-house highly-leveraged hedge funds.

This is not just a tale of American folly. Where Wall Street treads in financial markets, history shows us that the City of London ultimately tends to rush in too

The primary argument of the banking lobbyists is that the Volcker rule now constrains "liquidity" in financial markets, specifically because it limits banks' ability to take positions in the assets they trade. But the benefits of liquidity in financial markets for the wider economy are grossly exaggerated. Ordinary people do not turnover their pension share portfolios multiple times a day. Even large multinational corporations, which do need to buy and sell currencies and hedge themselves against rising interest rates regularly, really do not require the kind of hyper-liquidity that the banks are talking about.

As Denis Kelleher, the head of the Better Markets pressure group in Washington, puts it: "There is no evidence that the Volcker Rule has had any negative effect on financial activities related to the real economy."

The real beneficiaries of hyper-liquidity in financial markets are speculators. And, of course, dealers, such as the large banks. The watering-down of Volcker is not about benefiting the US economy, but further boosting the profits of the large banks and the bonuses of their employees. And as we saw happen with the tight financial regulations that prevailed after the Second World War, such as the strict separation of investment and retail banking, Wall Street tends to play a long game of suffocation: breach the spirit of the law and then hollow it out gradually until there's nothing left.

This is not just a tale of American folly. Where Wall Street treads in financial markets, history shows us that the City of London ultimately tends to rush in too.

Trump, readers might remember, campaigned as a champion of Main Street, accusing Wall Street of "getting away with murder". He pilloried his opponent Hillary Clinton for once making a speech to Goldman for which she received $225,000. So effective was this anti-finance shtick that the whistleblower Edward Snowden even tweeted in February 2016 that the presidential election represented a dismal "choice between Donald Trump and Goldman Sachs".

As the assault on the Volcker Rule confirms, this was one of the worst pieces of analysis of recent history.

You can indeed have the nightmare combination of Donald Trump and Wall Street - and America is now getting it good and hard.