Gaps between countries have always existed, but as late as 1700, per capita income in the wealthiest part of the world (Western Europe) was only 2.5x that of the poorest reason at the time (Africa). In this sixth lecture in INET’s “Economics For People” series, Ha-Joon Chang looks at international inequality.
About “Economics for People”:
“It is extremely important for our democracy to function that ordinary citizens understand the key issues and basic theories of economics.” – Ha-Joon Chang
Economics has long been the domain of the ivory tower, where specialized language and opaque theorems make it inaccessible to most people. That’s a problem.
In the new series “Economics For People” from the Institute for New Economic Thinking (INET), University of Cambridge economist and bestselling author Ha-Joon Chang explains key concepts in economics, empowering anyone to hold their government, society, and economy accountable.
It’s always good to know your roots, to know what you’re up against, to know what to keep and what to change.
The saying was, land speculators “produce more poverty than potatoes and consume more midnight oil in playing poker than of God’s sunshine in the game of raising wheat and corn.” —Prof. Benjamin Hibbard, the earliest land scholar, 1924 (or even earlier).
Ever wonder where those names for towns and downtown streets come from? The names of US universities? Even the names of some military bases?
“The successful land dealer of one generation became the banker, the local political oracle and office holder, or the county squire of the next. Scarcely a city or country town in the West but had its first family whose fortune had been made by shrewd selection of lands and their subsequent sale or rental to later comers.”— 1942, Historian Paul W. Gates (1901–1999), widely considered to be the foremost authority on US land policy who wrote 10 books and 75 academic articles.
“America has always been a nation of real estate speculators… Real estate speculation was an integral part of the winning of the west, the construction of our cities, and the transformation of American home life, from tenements to mini-mansions.” — 2013, Economist Edward L. Glaeser of Harvard University and NBER
The original US Constitution, the Articles of Confederation, funded the new, federal US Government with a tax on land. About a decade later, some Founding Fathers met again, yet without Congressional authority and in secret, to replace the land tax with tariffs, at the behest of land speculators, which most of them were. Ben Franklin lost a bundle speculating in land— which may be what motivated him later in life to support the physiocrats, the thinkers who advocated a single tax on land value instead of on people’s labor or capital goods, like houses. (Daniel Friedenberg’s Life, Liberty, and the Pursuit of Land, 1992)
Soon after the colonies protested the taxes that the British levied on them, the farmers of western Pennsylvania protested the tax on their product — whiskey. As a replacement tax, the frontier sodbusters advocated a levy on land. Back then, people clearly saw that a tax on the value of land would collect much more revenue in cities like Philadelphia, where locations were very spendy (still are), than in the countryside like backwoods Pennsy, where land is dirt cheap. To quell the Whiskey Rebellion, president George Washington — the nation’s richest man and biggest landowner — put into the field four times as many soldiers as he ever led against the British (Nathan Miller’s Stealing From America, 1992).
For the first decades of its existence, the young US government supported itself not only with tariffs but also by selling western lands. Most of the sales of prime land were not to settlers but to speculators who eventually sold the fertile land to settlers. If the US had cut out the middle man, it could have directed all those sale proceeds into the public treasury. However, most often the employees of the government’s land office were in cahoots with the speculators; everybody knew what was going on (Everett Dick, The Lure of the Land, 1970). Further, the government did not have to sell the land but could have leased it, just as the modern state of Israel does today. Or, if selling, government could tax or otherwise levy land at its annual rental value (functionally, no different from leasing it).
One of the favorite places to found a city is by the mouth of a river: London on the Thames. New York on the Hudson. New Orleans on the Mississippi. On the Pacific Coast, the major river that drains the western half of North America is the Columbia. Near it’s mouth sits Portland, yet that city is not the region’s premier city. That title belongs to rival Seattle. How did that happen? Recognizing their natural advantage, the founders of Portland kept their prices for land high. The city fathers of Seattle undercut them—and soon outgrew the city to their south, by leaps and bounds. It’d be as if Philadelphia outgrew New York (which did not happen).
The hierarchy of cities was flipped again elsewhere by speculator greed. The natural pass thru the Rocky Mountains is by Cheyenne Wyoming. When railroads started extending westward, speculators figured the iron horse had no choice but to pass through Cheyenne so they kept the price for land high. To their south, the city fathers of Denver undercut them, attracted the railroad, and outgrew their rival to the north. Today, Cheyenne remains a town while Denver is a major American city.
Such is the counterproductive power of land speculation. Conversely, there is a potent, productive stimulant: the public recovery of land value. When Johannesburg South Africa was dying after the nearby mines played out, the city fathers shifted their property tax to fall only on land, not on buildings. So owners developed vacant lots and kept their parcels at highest and best use. Johannesburg grew to become the financial capital of Africa. Its rival city to the south, Cape Town, situated on one of the most strategic ports on the planet, lagged behind. It was as if Albany New York had eclipsed New York City—unfathomable.
“History is bunk,” Henry Ford said. Many Americans have expressed anti-intellectual sentiments. Yet it is good to know one’s roots, what one is up against, and what to keep and what to change. To his credit. Ford also said,“We ought to tax all idle land the way Henry George said—tax it heavily, so that its owners would have to make it productive.”
Will academia tell this tale? One of the major business schools in the US is Wharton’s at the University of Pennsylvania in Philadelphia. The Whartons were one of the early major land speculators. So were the Roosevelts. Later, so was Leland Stanford. And more recently James Irvine (University of California at Irvine). So don’t hold your breath. Instead, for more on the link between speculators and universities, see Dr. Mason Gaffney’s Corruption of Economics. Information such as this won’t be fed to you, You have to look for it.
Speculators Are Us. This is a brief, partial History of the United States from the POV of those who benefited the most from it.
The rollout of speedy new cellular networks is a geopolitical turning point, but neither Trump nor the public yet recognizes this.
The rollout of fifth-generation cellular networks around the world will likely be a defining geopolitical dilemma of 2020. But American and European consumers could easily mistake 5G for just another marketing ploy for early adopters—to the detriment of democracies worldwide.
When the number in the corner of our smartphone screens changed from 3G to 4G, few of us even noticed. Ditto when LTE, another step in the evolution of cellular networks, appeared as an alternative to 4G. Still, for the better part of the past two years, wireless carriers on both sides of the Atlantic have been hyping 5G—which, they promise, will offer data speeds of up to 100 times faster than current connections. Tech futurists say fifth-generation networks will support a plethora of internet-connected sensors, vehicles, appliances, and other devices that will perform functions yet unimagined.
In Europe, the walls of nearly every major airport from Stockholm and Brussels to Lisbon and Madrid have been plastered with 5G-related ads. In the United States, network providers such as AT&T have even rolled out what they’re calling “5GE” networks—a pre-5G deployment that capitalizes on the vaguely futuristic branding of fifth-generation networks even before all the requisite new radios and chipsets have been installed. Still, 7 of 10 Americans tell PricewaterhouseCoopers they’ll wait patiently to receive a 5G device until they are eligible for an upgrade from their current provider.
Amid this much public indifference, 5G may seem like an unlikely battleground between China and the West. Yet the transition to 5G may mark the point, after decades of Chinese integration into a globalized economy, when Beijing’s interests diverge irreconcilably from those of the United States, the European Union, and their democratic peers. Because of a failure of imagination, Western powers risk capitulating in what has become a critical geopolitical arena. Simply put, neither the American nor the European public seems to view the networks that supply Snapchat clips and Uber cars as anything close to a security threat.
Some of the world’s leading telecom-equipment manufacturers, including Huawei and ZTE, are Chinese companies with murky ownership structures and close ties to China’s authoritarian one-party government. Many in the U.S. national-security establishment rightly fear that equipment made by these companies could allow Beijing to siphon off sensitive personal or corporate data. Or it could use well-concealed kill switches to cripple Western telecom systems during an active war. The mere threat of this activity would endow China’s leadership with geopolitical leverage at all times.
This is why Secretary of State Mike Pompeo recently exhorted EU allies not to “trust Chinese firms with critical networks.” China has fought back, threatening to scuttle a trade deal with Denmark’s Faroe Islands and, more recently, to retaliate against the German auto industry should European officials bar the use of Huawei equipment in 5G networks.
The framing of 5G primarily as a consumer-technology matter works to China’s benefit. “Choose 5G,” proclaimed one ad in the Brussels airport—part of a campaign that presents a false choice between Huawei and the 4G status quo. A focus on tech alone would also suit U.S. and EU telecom operators eager to deliver faster speeds while minimizing their own costs. The Huawei equipment they buy is typically cheaper than the gear produced by the three suppliers based in democratic countries—the European firms Ericsson and Nokia and South Korea’s Samsung.
Meanwhile, policymakers on both sides of the Atlantic, from European economics ministers to President Donald Trump, have viewed the 5G dispute first as a trade issue. Even as the Trump administration has taken steps, as The New York Times has described it, to “block China’s national telecommunications champion, Huawei, from operating in the United States and starve it of American technology as it builds networks around the globe,” the president has also hinted at a willingness to waive restrictions in exchange for economic concessions from China. In 2018, Trump backed down from national-security sanctions against ZTE as a sweetener in his trade negotiations with Xi Jinping.
Against these attitudes, Pompeo and others sounding alarms about Huawei can be perfunctorily dismissed as protectionists, xenophobes, or military hawks. The American secretary of state has become a particular target of criticism in China, where government officials and the media have described him as a font of “lies and fallacies” and a “Cold War warrior.”
Yet the West has ample reason for caution about Chinese 5G suppliers. For one, the recent Chinese National Intelligence Law requires these companies to comply with Communist Party demands to turn over data or otherwise engage in snooping or network-disruption activities. Party-backed actors in China’s public and private sectors also have a long record of cyberattacks on the West, including stealing intellectual property from companies and sensitive personal information on citizens.
The case against Huawei isn’t just guilt by association. The company itself is suspected of committing blatant corporate espionage: A Justice Department indictment from early 2019 cited highly specific demands by Huawei headquarters in China for information from engineers embedded in T-Mobile’s facility in Bellevue, Washington. An email exchange exposed Huawei’s pressure on employees in the field to steal even guarded equipment and trade secrets; according to the Justice Department, a bonus program offered rewards for the most valuable information stolen. One Huawei employee, the U.S. government alleges, literally walked out the door with a proprietary robotic arm in his bag.
And recent revelations about how China’s ruling party exploits the full panoply of personal information it has amassed about its citizens—facial-recognition images, mandatory DNA samples, 24-hour GPS coordinates, and search-history and online-activity tracking, as well as plain old eavesdropping—to quash religious freedom and basic rights should give major pause to Western governments and wireless carriers alike.
While Pompeo’s State Department has been pressing its case at one international forum to the next, his message has been met with some skepticism in Europe. Simply to acknowledge 5G as a security threat invites headaches that EU governments and telecom carriers would rather not contemplate. Ripping out Chinese gear would be a massive financial and logistical undertaking.
European regulators are used to viewing the American tech industry as a rival, and they bristle today at taking direction from Washington. And despite the fact that two 5G suppliers are European, and EU officials have argued for “technological sovereignty”—a term most reasonably construed to mean technological independence from the United States—member nations have not yet settled on a joint policy.
On top of that, the EU single market prides itself on principles of fair competition and an unwillingness to favor or reject a company because of its national origin, especially when its products are competitive, as Huawei’s are, on metrics such as price. The irony in this approach, of course, is that the Chinese state has subsidized efforts by Huawei to undercut its European and South Korean competitors, not least because of the possibility of obtaining geopolitical leverage. The Wall Street Journal estimated recently that as much as $75 billion in state support fueled Huawei’s rise. The failure to see 5G beyond the consumer lens is also a failure to understand Chinese companies as implements of state power as much as private entities in their own right.
The dispute over 5G isn’t the first time in recent history that economic infrastructure matters have overlapped with geopolitics in unhealthy ways. Nor is it the first time that overlap has caused problems for the transatlantic relationship. The European energy sector has long relied on cheap natural gas piped in from Russia, and deregulation has allowed Russia’s state-owned gas company, Gazprom, to buy or build a large share of the infrastructure used to transport and distribute it. American policymakers have implored European leaders to diversify their energy sources, for fear of increased dependence on an authoritarian Russia. These warnings are often dismissed as self-serving, since American energy firms compete with Gazprom for European business.
The Trump administration’s mixed messaging on 5G lends credence to the cynical view that the United States is not serious about China as a national-security threat but regards it mostly as an economic competitor. (Never mind that U.S. telecom firms do not compete with Huawei on 5G equipment.) And the president’s trade threats against Europe—targeting products as varied as cheese, whiskey, and airplane fuselages—are not helping. Such positions prioritize trade conflicts over common security interests and alienate allies that the United States needs.
Even as Pompeo and others in the Trump administration warn against Huawei, European policymakers don’t know if Trump is serious about 5G as a national-security problem or planning to trade away the issue in exchange for the reduction in Chinese tariffs against U.S. farm products. But they do think he is serious about tariffs on them. They see trade as the one issue on which Trump has been consistent from the start of his presidential campaign.
The United States can work with its European partners to reduce geopolitical dependence on China and protect privacy and human rights in a data-centered age. But that will require Western policymakers and the public alike to conceive of 5G as something more than a consumer issue or a trade issue and devise a shared solution to protect the networks whose importance in our lives will only grow.
Seth takes a closer look at the president lying about his poll numbers after a speech in Iowa, where farmers are hurting from his trade policies.
Are tariffs popular? Donald Trump seems to think so and, after nearly 18 months of imposing the border taxes willy-nilly, many Republicans seem to agree. They may soon get a political test of that proposition as Joe Biden, the Democratic leader in the 2020 race against Mr. Trump, took direct aim at the cost of tariffs in Iowa on Tuesday.
He added: “And how about manufacturing? Trump’s tariffs and trade wars are hitting a lot of American manufacturing—especially the American automobile industry—choking it to within an inch of its life.”
.. “America’s farmers have been crushed by his tariff war with China,” Mr. Biden said in remarks Tuesday evening in Davenport. “He thinks he’s being tough. Well, it’s easy to be tough when someone else is feeling the pain. How many farmers across this state and across this nation have had to face the prospect of losing their business, of losing their farm because of Trump’s tariffs?”
For one thing the tariff issue gives Mr. Biden a way to attack Mr. Trump on jobs despite the strong economy. Talking tough about alleged foreign cheaters is popular in the abstract. But when the costs become visible, in higher prices and lost markets from foreign retaliation, public support may drop. Talking about the pain of tariffs lets Mr. Biden focus on specific damage rather than having to dispute the health of the national economy.
.. Mr. Biden was also shrewd Tuesday to walk back his claim in May that China isn’t competition for the U.S. “We are in a competition with China,” he said. “They are a serious challenge to us, and in some areas a real threat.” But he added that “while Trump is pursuing a damaging and erratic trade war,” China is investing in “technologies of the future.” He then took the appealing line that the U.S. “can out-compete anyone.”
The Democratic front-runner is hardly pure on tariffs, having suggested only last week that they can be a tool to enforce carbon-fuel limits on other countries. He also favors much higher taxes, and his climate agenda is a Big Government fantasy. But in attacking Mr. Trump’s tariffs, he is setting himself apart from protectionist Democrats Bernie Sanders and Elizabeth Warren and reaching out to free-trading farmers and other American exporters.
All of which ought to be a warning to Mr. Trump. Farmers and business CEOs have been willing to give the President some political leeway on his tariffs because he says they are leverage for better trade deals. But if the deals don’t materialize, and the only tangible result is the pain, the politics of tariffs might not look so appealing in 2020.
Mr. Trump won Iowa in 2016 by 9.4 percentage points. In the most recent Iowa poll for 2020, in March, he trailed Mr. Biden by six.
In return for having the tariff “indefinitely suspended,” Mexico has agreed to militarize the country using Mr. López Obrador’s newly created National Guard, which is under military command. The effort will start at the southern border, though where it will end is anybody’s guess.
Mr. Trump has claimed victory in his tariff gambit. But it’s unclear how effective the promised troops will be at stopping migrants. The main causes of the crisis are liberal U.S. laws and procedures for claiming asylum, which attract migrants from Central America and other places. Congress has refused to pass reform. But markets work, as more than a half-century of a failed war on drugs proves, and the wild Guatemalan border will not be easily sealed.
.. Meanwhile, AMLO, as the Mexican president is popularly known, also won, though insidiously. The career politician with an authoritarian bent is a backer of Venezuelan dictator Nicolás Maduro. Since taking office in December, he has been cozying up to the military. Now he pockets more power, and with the blessing of Washington. This is a setback for the rule of law.
President López Obrador initially had very high approval ratings. But they began falling when Mexico’s economy slumped in the first quarter, and his attacks on the press alienated even some of his most ideologically sympathetic constituents. Mexicans who were worried about the strongman instincts of their socialist president gained hope that the slowdown would force him to exercise greater restraint.
Then came Mr. Trump’s May 30 threat, and Mexicans rallied behind their president. A poll by the Mexican daily El Financiero last week found that “84% of Mexicans believe that, faced with pressure” from Mr. Trump, “the country should remain united and support” AMLO.
Mr. López Obrador knows how to play politics. In the earliest months of his presidency he encouraged the migrants before taking a more practical stance. In the face of standard Trump hyperbole about Mexico, he calmly sent a delegation to Washington to negotiate. His base is praising the deal, though had it been sealed by an AMLO opponent they would have vigorously denounced it. His opposition is happy because free trade is saved.
An AMLO rally Saturday in Tijuana was originally billed as “an act of unity to defend the dignity of Mexico and in favor of the friendship with the people of the United States.” After the two sides came to agreement, it was changed to a “celebration” of the deal—and of the new life that Mr. Trump breathed into AMLO’s presidency.
The president appears to view tariffs as the solution to a wide range of foreign policy problems. It isn’t working.
So we’re going to tax Americans until Mexico stops allowing people from Central America to exercise their legal right to seek admission to the United States?
Seems pretty foolproof.
President Trump announced Thursday evening on Twitter, his preferred medium for policymaking, that he plans to impose a new tariff on all imports from Mexico, “until the illegal immigration problem is remedied.”
The tariff would begin at 5 percent on June 10 and gradually rise to 25 percent by October.
Mr. Trump persists in the falsehood that tariffs are paid by America’s trading partners. The truth is that Mexico would no more pay this tariff than it is paying for the construction of a border wall. The evidence is clear: Mr. Trump’s tariffs are taxes being paid by Americans.
This new tax would sit atop Mr. Trump’s tariffs on aluminum and steel imports, and Mr. Trump’s tariffs on Chinese imports, and the bill is adding up. The United States so far has collected about $19 billion in Trump tariffs. A full 25 percent tariff on Mexican goods could add as much as $87 billion a year to that total.
Mexico would most likely respond by imposing retaliatory tariffs, which is especially bad news for the probable targets: American farmers. About two weeks ago Mr. Trump ended a tariff on Mexican aluminum and steel, and Mexico ended a tariff on American farm goods. So much for that false dawn. Farmers may need to resume the search for new markets.
Taxation is always painful, and always the question is whether the benefits outweigh the pain. In this case, Mr. Trump is using a tariff as a cudgel to induce Mexico’s cooperation in keeping immigrants from America’s southern border. While the cost of the tariff would be paid by Americans, the Mexican economy most likely also would suffer a loss of sales to the United States.
Mr. Trump might succeed in pressuring Mexico to take stronger steps on immigration. Tariffs, however, are a very crude tool. Most of the immigrants seeking to cross the southern border are fleeing problems in Central America that are beyond the control of the Mexican government. Moreover, while Mr. Trump tends to refer to all of the immigrants as illegal, many are exercising a legal right to seek asylum.
Past administrations have sought cooperation from Mexico on immigration issues without disrupting economic relations between the two countries. Mr. Trump’s decision to mix the two issues threatens to disrupt both economies because the manufacturing sectors in Mexico and the United States are tightly intertwined. About two-thirds of trade between the countries is between factories owned by the same company, according to Deutsche Bank.
Other American trading partners with whom Mr. Trump is trying to negotiate new trade deals, including Japan and the European Union, presumably are having the same thought.
Last but not least, messing with Mexico weakens the Trump administration’s hand in its dealings with China. Mr. Trump’s tariffs on Chinese goods have persuaded some American companies to relocate production to Mexico from China. Those companies now face a more difficult choice. Mr. Trump and his advisers also may find it more difficult to rally international support for their efforts to persuade China to make changes in its economic policies.
Mr. Trump’s apparent determination to fight with all of America’s trading partners at once makes it harder to make progress on any particular front.
Once again, Mr. Trump is lashing out rather than acting strategically — and Americans will feel the pain.