The Finance Curse. Nicholas Shaxson

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СКАЧАТЬ Theory was already quite widely used for understanding consumer behavior. But when you switched away from consumers and markets and tried to apply the model to public services like schools, roads, or hospitals, there was a problem, which Samuelson himself had laid out in a paper in 1954. And it was a big one: the so-called free-rider problem. People will happily consume public services, Samuelson explained, but they like to dodge the taxes that pay for these things. The free-rider problem means that you can’t get people to reveal their preferences regarding taxes and public services, so you can’t shoehorn this stuff into the Chicago School’s elegant mathematical models to determine optimal levels of taxes and public spending. Government and democratic politics had to step in and deal with this one, and the economists wouldn’t get a shot at it. Ouch.

      Tiebout’s 1956 paper claimed to have found the riposte. There was a way to envisage a market for public services and taxes after all, he explained. Samuelson might be right that you couldn’t apply market analysis to the US federal government, Tiebout reasoned, but you could do so with local governments. After all, each state or local government zone offers a different package combining a particular bundle of taxes with a particular bundle of public services, and people can move among these jurisdictions according to which mix of taxes and public goods works best for them. (Burstein, as it happens, did move to Rogers Park. He paid less rent and “was happy as a clam and stayed there.”) Shopping for better public services like this was, Tiebout wrote, like shopping in a mall: public services are analogous to consumer goods, while taxes are akin to the prices of those consumer goods. Communities will “compete” to provide the best mixes of tax and public services, just as in a private market.⁵

      If people can vote with their feet, he went on, then not only could economists reveal Americans’ preferences for the right mix of public goods and taxes and fit this data into their mathematical models, but you’d also get a “competitive sorting” of people into optimal communities, thus bringing the efficiency of private markets into the government sphere. With a little mathematics, governments could discover the ideal equilibrium, balancing taxes against public services. Countering the rising tide of antigovernment Friedmaniacs, Tiebout felt he had shown how government could be efficient after all. Tax cuts weren’t the magic elixir to entice productive companies and people to move across borders; those firms and people needed good tax-financed public services too. It was a trade-off, and when people moved across borders to make this trade-off work best for them, this improved overall welfare. All this amounted to a rather progressive agenda—or so he thought.⁶

      Tiebout himself never really pursued his idea; for him it was “just another paper,” technically elegant but hardly rooted in the real world.⁷ And for a long time it didn’t take off. Political centralization was in vogue, so nobody cared much for theories about local politics, and the media usually brought up local government only in the context of desegregation, incompetence, or corruption. The story might well have ended there—and for Tiebout it did: he died of a heart attack in January 1968, aged forty-three.

      When the world finally started to wake up to Tiebout’s paper, the year after his death, it would kick off a debate about one of the most important questions in the modern global economy: What happens when rich people, banks, multinational firms, or profits shift across borders in response to different incentives like corporate tax cuts, financial deregulation, and so on? When states “compete” by offering incentives like corporate tax cuts, is this a good thing, or the recipe for an unhealthy race to the bottom, as states scramble to offer ever-bigger incentives? In this debate, Tiebout’s ideas would be magnified and distorted, then wielded to support arguments that this kind of “competition” is a good thing. And these arguments, in turn, would serve as the ideological underpinning for a wide range of harmful policies that generate the finance curse. Which is not what the leftist Charles Tiebout would have wanted at all.

      History shows that inequality usually gets properly upended only after large, violent shocks.⁸ For Tiebout’s generation, it was World War II that provided the shock. The financial crisis and Great Depression of the 1930s had discredited the old certainties of free trade, financial deregulation, and laissez-faire economics that had given the market saboteurs like Rockefeller and the Vesteys such freedom to operate. Workers who had spilled their blood on the battlefields of France were in no mood to pander to moneyed elites anymore; they wanted their countries to give something back to them. The end of the war in 1945 provided a unique political opening to put into practice the progressive, revolutionary ideas of the British economist and polymath John Maynard Keynes.

      Keynes knew that finance had its uses, but he knew that it could also be dangerous, especially when it was allowed to slosh around the world at will, unchecked by democratic controls. If your economy is open to tides of global hot money—rootless money not tied to any particular real project or nation, that is—then it is harder to pursue desirable policies like full employment. This is because if you try, for instance, to boost industry by lowering interest rates in a country that is open to flows of financial capital, then money will simply sluice out, looking for better returns elsewhere. Capital will become scarcer; the value of the currency will tend to fall; and interest rates will be forced up again. If governments wanted to act in the interests of their citizens, Keynes knew, there was no alternative but to curb those wild, speculative flows. “Let goods be homespun whenever it is reasonably and conveniently possible,” he famously said. “Above all, let finance be primarily national.” Keynes carefully distinguished between cross-border trade, which was often beneficial, and speculative cross-border finance, which he knew was far more dangerous. It wasn’t just governments at risk; the great crash of 1929 had exposed how cross-border speculative flows could wreak havoc with the private sector too. “Experience is accumulating,” he added, “that remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.” If distant foreign financiers control your business, he was saying, the damage is likely to outweigh whatever profits might emerge.

      Keynes’s ideas about the dangers of cross-border finance carried such intellectual force that by the time World War II got under way they had become mainstream wisdom. Governments and general public opinion accepted that if countries were to avoid a repeat of the economic and military horrors that had occurred in recent years, they were going to have to transform the global financial system. So in 1944, under the intellectual guidance of Keynes and in the dominating presence of his US counterpart Harry Dexter White, the world’s most advanced countries got together at Bretton Woods in New Hampshire and hammered out an agreement to set up a global system of negotiated cooperation, to curb flows of financial capital across borders and to protect countries from these destabilizing tides of hot money. The system had a shaky start: from 1945 to 1947 Wall Street interests forced through a brief financial liberalization, which caused huge waves of capital flight from war-shattered Europe, as rich Europeans sent their wealth overseas to escape having to pay for reconstruction. But fears of a communist takeover in Europe soon focused policy makers’ minds, and the system was at last given teeth.

      Bretton Woods was a remarkable arrangement and almost unimaginable today. Cross-border finance was heavily constrained, while trade remained fairly free. So cross-border financial flows were permitted if they were to finance trade, real investment, or other accepted priorities, but cross-border speculation was discouraged. A vast administrative cooperative machinery was set up to make the system work, to prevent destabilizing flows of hot money, and to open space for war-shattered democratic societies to put in place progressive policies. In his book Moneyland, the British writer Oliver Bullough uses the image of an oil tanker as a metaphor for the system. If it has just one huge tank, the oil may sluice back and forth in ever-greater waves until it knocks the vessel over. But if divided into many smaller, separate compartments—each compartment being analogous to a country in the Bretton Woods system—the oil could shift about a bit inside each compartment “but would not be able to achieve enough momentum to damage the integrity of the entire vessel.”⁹

      One of the overall aims of this giant СКАЧАТЬ