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9/21/2004

Free Trade as a Taking

Steve Clemons has a post up on jobs & outsourcing, calling for a debate on the important things confronting the country. Here's my contribtion.

Free trade and the attendant economic dislocations should be viewed through the same prism as takings law. The just compensation clause of the 5th amendment to the constitution reads: "nor shall private property be taken for public use, without just compensation." At its heart, it attempts to resolve some of the contradictions of liberal democracy: liberalism - the majority should not be able to trammel the rights of discrete minorities; democracy - small minorities should not be able to hold the majority's vision of the public good hostage. It's resolution to this tension is to allow the majority to act, provided that it indemnify the aggrieved minority.

The application of this principle to economic dislocations caused by changes in trade regimes seems simple. Trade produces a consumer surplus, a public good, but on the backs of workers who lose their livelihoods to new competition. Displaced workers pay the costs of increased trade, but the benefit accrues to all. The constitutional principle embodied by the just compensation clause demands that those workers be recompensed for their injuries.

There are three common objections to this argument. First, a person's interest in their employment is not a private property interest, so it doesn't deserve constitutional protection. Second, the increased value of a job dependent on current trade practices is not taken by the alteration of those trade practices - workers' reliance on those trade practices is unreasonable because they are a license, not an enforceable expectation. Third, we already compensate displaced workers.

The first objection is true to an extent, but it is overly formalist to simply assume that the compensation principle doesn't apply because workers' expectations aren't "private property." Moreover, conservatives led by Richard Epstein have radically reconfigured the conception of the interest protected by the clause, moving it further and further away from any recognizable understanding of "private property." Is removing from the person's bundle of property interests the right to fill in wetlands more or less an injury to a property interest than creating incentives that move someone's job overseas? Is a "temporary taking" that results from a development moratorium more or less of a violation of a property interest than changing rules that result in temporary unemployment? If one is going to radically revise the conception of property at the heart of the compensation clause, there has to be an actual argument for excluding the seizure of the human and social capital at the heart of good employment.

The second argument is equally problematic. There is again the reinjection of formalism, in the determination that one regulatory change is gratuitous, uncompensable (damnun absque injuria), while another is serious, and a violation of rights. In an area where conservatives have wholeheartedly embraced functionalism and realism, the kneejerk reversion to formalism to deny compensation to a particular tribe is unseemely and unsupportable. The moral case for the protection of property is primarily based on the reliance interest, a fact embedded in takings law in the form of the "investment backed expectations" prong of the legal analysis. The reliance interest is more visible and reasonable in the case of employment than in, say, the case of a developer purchasing a land interest on the assumption that no easement of access to waterfront will be needed. If the argument is that one should try to foresee changes in regulatory regimes, the entire edifice of modern takings jurisprudence crumbles. Is it more reasonable to assume that unfettered development will be allowed to continue in wetlands than that particular legal trade regimes will remain in place? Not obviously. If the argument is that the removal of trade barriers is the elimination of government subsidy, a return to a natural economic state, rather than a change in policy (i.e., no policy rather than a different policy), then whoever's making it is simply putting the rabbit into the hat. There is no legally cognizable natural regime of interstate economic relations, just as there is no natural state of environmental regulations.

The final argument is also true, to an extent. We do compensate some people displaced by changes in trade policy. There are two problems with these compensation regimes, though: 1. they are viewed as a gift, rather than a constitutional entitlement; 2. they are woefully inadequate. We don't view compensation to those who have their houses seized as a gift, but as them being indemnified for injuries. This might seem like a semantic difference, but it has enormous political and moral implications. As for the adequacy of the compensation, it is as though the government compensated someone who had their house seized by hooking them up with a realtor. Job training and minimal income support is fine, but there is no compensation for the human and social capital destroyed by the altered regulatory structure. [Update, 9/22: The GAO produced a report today on the impact of the Trade Adjustment Assistance Reform Act. It provides a timely look at the programs to aid displaced workers.]

I am a free trader - the increased consumer surplus and new job development created by a shift to a more fluid trade environment is worth the costs born by displaced workers. It is not a morally easy position to take, though, and it is not one that should be blithely assumed to be obviously correct. The costs born by displaced workers are real, and deserve compensation.

As a potential policy suggestion, each significant shift toward liberalization of trade laws should be accompanied by a tax on the increased consumer surplus. Whether it's a sales tax, a value-added tax, or an income tax, a portion of the consumer surplus should be given to those that paid the price for it (maybe a social security-like trust fund?).

* In the course of googling for this post, I came across this interesting Am. L. Rev. article by Kaimipono David Wenger, Slavery as a Takings Clause Violation.

 

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