Henry George 2015: TPP or Free Trade?

Last week, I ran across former Dallas Fed president Bob McTeer’s defense of the Trans-Pacific Partnership (TPP) on Forbes. Interestingly, McTeer opens with quotes by Henry George on international trade. In 1886 George wrote a book on the subject, titled, “Protection or Free Trade,” in which he attacked tariffs and protectionism. More than once I’ve seen trade advocates cite his position on the subject without reference to his analyses of production factors (which ineluctably leads to his advocacy for land-value taxation) or technological unemployment. It’s one of George’s other hats as an economist.

McTeer believes George would probably favor the TPP, which I think misreads George and the times in which he was writing. Throughout the 19th century the U.S. government’s primary source of revenue was tariffs. The persuasiveness of the Hamiltonian bases for them is debatable. I happen to think the U.S. prospered in the 1800s despite the tariffs, not thanks to them. Read an example here.

However, aside from the income tax that was enacted during the Civil War (and which was later found unconstitutional), the only alternatives for funding the federal government were asset sales and direct taxes, which the constitution requires to be apportioned among the states by population. Consequently, although the government wasn’t nearly as expansive as it became in the 20th century, George’s writings on free trade were inextricably connected to his demand for public recovery of land rents. He criticized income taxes as a tax on honesty, which they are.

So, to a large degree, George’s attack on tariffs wasn’t simply Ricardian comparative advantage. Additionally, there’s the problem of McTeer’s characterization of the TPP as the kind of free trade agreement George would probably support. George’s animating virtue was fairness, operationalized against monopoly power. He attacked Western Union for its control over the telegraphs just as he did landowners, for example.

I’m not going to put words in George’s zombified mouth, but there are two weaknesses with the TPP that anti-monopolists should be aware of that McTeer doesn’t specify. One, much of the TPP is concerned with protecting intellectual property rights, e.g., drug patents and Microsoft software copyrights. I forget George’s position on copyrights, patents, and trademarks, but those are monopolies, and these days they’re quite abused. Two, the TPP is not going to increase trade by much. It might reduce tariffs in other countries, but if we believe in free trade then that’s the other countries’ problem, not ours. I’ve heard other criticisms of the TPP as secretive and anti-democratic, which McTeer doesn’t discuss. Nor am I convinced it will somehow contain China as the Obama administration has maintained. Why would it?

McTeer’s argument is weak in other respects. He’s correct when he says that jobs lost to imports are substituted by jobs gained by exports, even though the former is more evident that the latter. What I haven’t seen is a discussion of how easily those who lose jobs find commensurate jobs in other fields. Are former coal miners easily retrained for jobs in coastal cities marketing American products overseas? Labor isn’t infinitely fungible, and I’ve never seen this point addressed.

McTeer then dismisses the trade deficit claiming its only been around for several years and is “fairly stable.” The U.S. has had a net trade deficit for just about my entire life with only a small break in the early 1990s. A lot of it is due to foreign oil imports that are wasted on commuting, which again is a land use problem. (It’s amazing how shortsighted people are about energy.) Another chunk of it is due to chronic currency manipulation by trading partners, notably China in recent years. China “sterilized” dollars flowing into it to keep them away from its people—like the Social Security trust fund without the Social Security part. Free trade for us, not China.

McTeer then waves these concerns away by explaining that the surplus in the U.S. capital account compensates for losses in trade. (Technically, the trade deficit and the current account deficit aren’t identical.) In other words, the paper or electronic money we export comes back as investment. There are reasons to be dubious. As I would hope George would have recognized, foreign investment is just as likely to go to fixed factors as productive ones. If foreigners gobble up real estate, and we don’t tax it, that just transfers our productivity to them. Secondly, if foreign governments buy up our public debt, our interest rates fall, which might contribute to land bubbles. It also doesn’t help our developing trade partners when they’re exporting their capital to us. The flow should go the other way.

[UPDATE: An intriguing article on VoxEU discusses excessive capital inflows that accompany current account deficits, leading to production shifts from manufacturing to non-tradable sectors, i.e. construction. The authors refer to the phenomenon as the “financial resource curse.”]

For these reasons, I doubt the TPP is as much of a test of Americans’ economic literacy as McTeer claims it to be. It isn’t an obvious conflict between domestic monopolies and foreign competition.

2 comments

  1. George never advocated a free trade treaty of any kind. His analysis was that tariffs were far more punitive to the domestic consumer than to the foreign producer, and that the country that kept foreign products out was hurting itself more than the countries whose products it refused. Hence, no treaty is necessary.

    He also made it clear that trade is between people, not countries, and that people within a country should also be free to trade without being taxed for it. Finally, he made it clear that true free trade had to be free of privilege, and that the monopolization of land and natural resources was the largest privilege of all.

    I would add the privilege of creating money out of thin air and lending it, and George agreed with that assessment, although he downplayed its importance.

    There can be no such thing as a free-trade treaty, any more than there can be such a thing as a spontaneity plan. True free trade is a condition under which government says to its own people, “As far as we are concerned, you are free to trade.”

    Dan Sullivan, president
    Council of Georgist Organizations

  2. George’s position on Patents is that they were always unjust and should be abolished.

    He had a more nuanced view of Copyright protections, accepting their validity so long as there was a lot of leeway for fair use and derivative works.

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