The Price of Inequality: How Today's Divided Society Endangers Our Future (23 page)

Paul Krugman put it forcefully when he wrote, “[E]xtreme concentration of income is incompatible with real democracy. Can anyone seriously deny that our political system is being warped by the influence of big money, and that the warping is getting worse as the wealth of a few grows ever larger?”
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In the Gettysburg Address, President Abraham Lincoln said that America was fighting a Great Civil War so that “Government of the people, by the people, and for the people shall not perish from this earth.” But if what has been happening continues, that dream is in peril.
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We began this chapter with a discussion of the puzzle of the median voter—why our democracy seems not to reflect the views of those in the middle as much as the views of those at the top. This chapter has provided a partial explanation: the median voter (the voter such that half the voters have an income higher than his, half lower) is richer than the median American. We have a
biased
electorate, tilted toward the top.

But this doesn’t fully explain what’s been going on in American politics. The bias in the outcomes—the extent to which the political system favors those at the top—is greater than can be explained by the bias in the electorate. Another part of this puzzle is explained by the bias in perceptions and beliefs—that the top has persuaded those in the middle to see the world in a distorted way, leading them to perceive policies that advance the interests of those at the top as consonant with their own interests. How the top does this is the subject of the next chapter.
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But first I want to discuss globalization, how it has been mismanaged by our elites in ways that have benefited them at the expense of most Americans, but, even more importantly, how the way it has been managed in the United States, and even more so elsewhere, has undermined democracy. Moreover, the weakening and distortion of our democracy that I’ve just described is undermining our role in global leadership, and thus our ability to create a world that is more in accord with our values and our interests, more broadly understood.

G
LOBALIZATION,
I
NEQUALITY,
AND
D
EMOCRACY

These outcomes should not be surprising: globalization, if managed for the 1 percent, provides a mechanism that simultaneously facilitates tax avoidance and imposes pressures that give the 1 percent the upper hand not just in bargaining within a firm (as we saw in chapter 3) but also in politics. Increasingly, not only have jobs been offshored but so, in a sense, has politics. This trend is not limited to the United States; it is a global phenomenon, and in some countries matters are far worse than in the United States.

The most vivid examples have arisen in countries that have become overindebted.
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The loss of “control” by debtor countries of their own destiny—turning over power to creditors—dates back to the earlier days of globalization. In the nineteenth century, poor countries that owed money to banks in the rich nations were confronted with a military takeover, or bombardment: Mexico, Egypt, and Venezuela were all victims. This continued through the twentieth century: in the 1930s Newfoundland gave up its democracy as it went into receivership and became administered by its creditors.
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In the post–World War II era, the IMF was the instrument of choice: countries turned over, in effect, their economic sovereignty to an agency that represented the international creditors.

It was one thing for these events to occur in poor developing countries; it’s another for them to occur in advanced industrial economies. That’s what has been happening lately in Europe, as first Greece and then Italy allowed the IMF, together with the European Central Bank and the European Commission (all unelected), to dictate parameters of policy and then appoint technocratic governments to oversee the implementation of the program.
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When Greece proposed to submit the tough austerity program that had been prepared to a popular referendum, there arose a shout of horror from European officials and the bankers:
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Greek citizens might reject the proposal, and that might mean that the creditors would not be repaid.

The surrender to the dictates of financial markets is broader and more subtle. It applies not only to those countries on the brink of disaster but also to any country that has to raise money from capital markets. If the country doesn’t do what the financial markets like, they threaten to downgrade the ratings, to pull out their money, to raise interest rates; the threats are usually effective. The financial markets get what they want. There may be free elections, but, as presented to the voters, there are no real choices in the matters that they care most about—the issues of economics.

Twice in the 1990s Luiz Inácio Lula da Silva was on the verge of being elected president of Brazil, and twice Wall Street objected, exercising what amounted to a veto. It signaled that if he were elected, it would pull money out of the country, the interest rates that the country would have to pay would soar, the country would be shunned by investors, and its growth would collapse. The third time, in 2002, the Brazilians said, in effect, that they would not be dictated to by international financiers.
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And President Lula made an excellent president, maintaining economic stability, promoting growth, and attacking his country’s extreme inequality. He was one of the few presidents around the world who, after eight years, still enjoyed the popular support that he had in the beginning.

This is just one of many instances in which the judgments of the financial markets were badly flawed. Proponents of financial markets like to claim that one of the virtues of open capital markets is that they provide “discipline.” But the markets are a fickle disciplinarian, giving an A rating one moment and turning around with an F rating the next. Even worse, the financial markets’ interests frequently do not coincide with those of the country. The markets are shortsighted and have a political and economic agenda that seeks the advancement of the well-being of financiers rather than that of the country as a whole.

It doesn’t have to be this way. Financial markets can threaten to pull money out of a country overnight largely because of their total openness, especially to short-term capital flows. But in spite of the financial market’s ideological commitment to what is called capital market liberalization (allowing capital to move freely in and out of a country)—an ideology consistent with the markets’ self-interest—in fact such liberalization doesn’t promote economic growth; it does, however, lead to increased instability and inequality.
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The problems that I’ve outlined run deeper and are in fact more widespread. As one of the world’s experts on globalization, the Harvard University professor Dani Rodrik has pointed out, one cannot simultaneously have democracy, national self-determination, and full and unfettered globalization.
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Often, international companies have attempted to obtain in the international arena what they cannot get at home. The Financial Services Agreement of the World Trade Organization (WTO) has tried to force financial market liberalization, requiring governments to allow foreign banks into their countries and restraining the ability to impose regulations that would ensure that the financial system is stable and actually serves the economy and society in the way it should. The Uruguay Round Trade Agreement has successfully forced upon countries around the world a version of intellectual property rights that is bad for American science, bad for global science, bad for developing countries, and bad for access to health. Designed by corporate interests to prevent the free flow of knowledge, the agreement strengthens monopoly power—helping create rents, and, as we saw in chapter 2, rents are the source of so much of today’s inequality.
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Whether one agrees or not with this assessment of this particular international agreement, it is clear that it has imposed severe—unnecessarily severe—strictures on the design of each country’s intellectual property regime. It has undermined the countries’ self-determination and the power of their democracies. They cannot choose an intellectual property regime that reflects their view of what will best promote the advance of knowledge in their country, balancing concerns about access to knowledge and to life-saving medicines with the necessity of providing incentives for research and innovation; they have to choose a regime that conforms with the dictates of the WTO.
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Other examples abound. The United States, in its bilateral trade agreement with Singapore, attempted to restrict that country’s regulations concerning chewing gum: it was worried that they might discourage U.S. exports of one of our “major” export commodities, chewing gum. In its bilateral agreement with Chile, the United States attempted to prevent the imposition of capital controls, rules that the country had used successfully to stabilize its economy. Other agreements have tried to prevent countries from discouraging the purchase of gasoline-guzzling vehicles, because those are the kinds of cars in which America specializes. Chapter 11 of the North American Free Trade Agreement and other bilateral investment agreements (and other economic agreements that the United States and Europe have signed with developing countries) arguably provides compensation to firms for loss of profits incurred as a result of a regulatory change, something that both Congress and the U.S. courts have refused to do. It is a provision designed to discourage environmental regulations by making the imposition of such regulations costly to the government’s budget.
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For many developing countries—and, more recently, even for European countries—that are indebted and have to turn to the IMF, the consequences of their loss of economic sovereignty have been serious. At least within the United States and most European countries, the 1 percent normally doesn’t get its way without a fight. But finance ministries often use the IMF to enforce their perspectives, to adopt the institutional arrangements and the regulatory and macroeconomic frameworks that are in the interests of the 1 percent. Even Greece, to secure its 2011 bailout by the European Union, was forced to pass laws affecting not only the budget but also the health sector, the rights of unions in collective bargaining, and the minimum wage.

Even when globalization doesn’t circumscribe democracy through global agreements or as part of an international “rescue,” it circumscribes democracy through competition. One of the reasons, we were told, that we
had
to have weak financial regulations was that if we didn’t, financial firms would move overseas. In response to a proposal to tax bank bonuses, London firms threatened to leave the country. In these cases, one might argue: good riddance. The cost to society—the bailouts, the economic disruption, the inequality—of the financial sector’s excesses far outweighs the few jobs that companies in the sector create. The speculators will leave; but those engaged in the kind of finance that really matters—lending to local firms—will stay. These
have
to be here.

The arena in which democracy is most circumscribed is in taxation, especially in the design of tax systems that reduce inequality. What is called tax competition—the race between different polities to have the lowest taxes around—limits the scope for progressive taxation. Firms threaten to leave if taxes are too high. So do wealthy individuals. Here the United States has at least one advantage over other countries: we are taxed on our worldwide income. A Greek citizen, having benefited from that country’s public schools and universities, and having enjoyed the benefit of its hospitals and health care system, can take up residence in Luxembourg, do business in all of Europe freely, and avoid any responsibility of paying taxes—even to repay the costs of her education.

We are often told that this is the way it has to be, that globalization gives us no choice. This fatalism, which serves those benefiting from the current system, obscures reality: the predicament is a choice. The governments of our democracies have chosen an economic framework for globalization that has actually tied the hands of those democracies. The 1 percent was always worried that democracies would be tempted to enact “excessively” progressive taxation under the influence, say, of a populist leader. Now citizens are told they can’t do so, not if they want to partake of globalization.

In short, globalization, as it’s been managed, is narrowing the choices facing our democracies, making it more difficult for them to undertake the tax and expenditure policies that are necessary if we are to create societies with more equality and more opportunity. But tying the hands of our democracies is exactly what those at the top wanted: we can have a democracy with one person one vote, and still get outcomes that are more in accord with what we might expect in a system with one dollar one vote.
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Diminishing America’s influence

America’s global strength is its soft power, the power of its ideas, an educational system that educates leaders from all over the world, the model that it provides for others to follow. Iraq and Afghanistan have shown the limits of military power; not even a large country spending as much on the military as all of the rest of the world combined can truly pacify or conquer a country with one-tenth its population and 0.1 percent of its GDP. The country has long exerted its influence by the strength of its economy and the attractiveness of its democracy.

But the American model is losing some of its luster. It’s not just that the American model of capitalism didn’t provide sustained growth. It’s more that others are beginning to realize that most citizens have not benefited from that growth, and such a model is not very politically attractive. And they are sensing, too, the corruption (American style) of our political system, rife with the influence of special interests.

Of course, there’s more than a little schadenfreude here. We lectured countries all around the world about how to run their economy, about good institutions, about democracy, about fiscal rectitude and balanced budgets. We even lectured them about their excessive inequality and rent seeking. Now our creditability is gone: we are seen to have a political system in which one party tries to disenfranchise the poor, in which money buys politicians and policies that reinforce the inequalities.