One Sure Way to Hurt the U.S. Economy? Cut Immigration

What caused the Great Depression? Most people would probably say that the trigger was the stock market crash of 1929. From peak to trough, the Dow Jones Industrial Average lost about 88 percent of its value, and the index didn’t regain that peak until the mid-1950s:

25 Years to Recover
Dow Jones Industrial Average

There was also a housing boom and bust in the 1920s, which was probably a contributor as well. At this point, there’s little doubt that financial crises and large asset bubbles cause economic slowdowns, even if economists don’t know the precise reason that this happens.

But why did stocks and housing crash in the first place? Irrational exuberance, and the natural dynamics of asset bubbles, undoubtedly played a part. But it’s also possible that government policies contributed to or triggered the crash, by slowing economic growth below what investors in the 1920s had expected.

One possible culprit is the Smoot-Hawley tariff, a version of which was passed by the House of Representatives in May 1929 — a few months before the stock market crash. Smoot-Hawley provoked some retaliation from U.S. trading partners, and was eventually followed by a general wave of protectionism during the 1930s. Some of those restrictions probably were a misguided response to the Depression itself, but some might have been retaliation for Smoot-Hawley. The stock-market crash may well have been touched off by investors realizing that a global trade war would hurt the earnings of U.S. companies. A 1928 tightening of global monetary policy also could have served as a trigger.

But the crash also might have been influenced by another policy enacted in the 1920s — immigration restriction.

In the late 19th and early 20th centuries, immigration to the U.S. boomed. Huge numbers of legal permanent residencies were granted every year, increasingly to immigrants from Southern and Eastern Europe. But the size and speed of the influx, and the perceived cultural differences of the new arrivals, provoked a nativist backlash with racist overtones. In 1924, the Johnson-Reed Act severely curtailed immigration, banning immigration from Japan and dramatically limiting Southern and Eastern European influxes. The law had the expected result, and immigration plummeted:

By Noah Smith for BLOOMBERG
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