WELFARE

 

The revolution in modern communications that began with the telegraph changed warfare and virtually ensured the emergence of the nation-state.* Ultimately, developments in communications technology also were decisive in the Long War. It has been argued, by Mary Fulbrook among others, that it was the manifest incompetence of the East European regimes, as reflected in the implicit contrasts made available by West European television to the publics of those regimes, that ultimately delegitimated the governments of the Warsaw Pact.12 Eric Helleiner's book, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s, 13 convincingly argues that the government policies of nation-states have played a decisive role in the stunning globalization of commodity pricing, interest rates, and the availability and pricing of credit.14 I should like to connect these works of scholarship by suggesting that it was the change in the nature of the states fighting the Long War, a change brought about in part by communications technology, that moved those states gradually and then rapidly to shift away from controls on the private movement of capital and ultimately to permit the virtually uninhibited flow of capital among developed states. Very simply, the victorious Western nation-states of the Long War, plus West Germany and Japan, by relying on the market to allocate resources efficiently within their domestic economies effectively extrapolated this approach to all the states of their alliance. What had been true within a single state proved true among states. The attempt to control currencies and investment in the socialist states turned out to be a crippling mistake, draining away investment that might have been indifferent to the human rights shortcomings of such regimes, and walling those states off from international trade that required convertible currency. The nation-state, which had established its reputation as a provider of welfare to the nation by guaranteeing a unified national market and providing protection against foreign competition and access to foreign markets, was supercharged when the liberal democracies applied the same principles to their interstate trade and finance. The effect of the reduction on direct controls and taxes on capital movements, the liberalization of long-standing regulatory constraints on financial services, the expansion of relationships with offshore financial harbors, and the disintermediation that accompanied these steps made states much wealthier. At a price.*

The price these states were compelled to pay is a world market that is no longer structured along national lines but rather in a way that is transnational and thus in many ways operates independently of states. At the micro level, this is true of the multinational firm, which moves its location to optimize conditions for its operation, taking into account the nation-state only as a source of tax breaks and incentives to be sought, or as a nettle of regulations to be avoided. Far from being dependent on the local government, these corporations are seen as providing desperately needed jobs and economic activity, so that the state is evaluated on whether its workforce has the necessary skills, and whether its infrastructure has been suitably configured to attract the corporation. At the macro level, this development applies to capital flows, in the face of which every country appears powerless to manage its monetary policy. Walter Wriston, the former chairman of Citibank, described and defended the process of capital decontrol as follows:

The gold standard [of the nineteenth century], replaced by the gold exchange standard, which was replaced by the Bretton Woods arrangements, has now been replaced by the information standard. Unlike the other standards, the information standard is in place, operating, will never go away and has substantially changed the world. What it means, very simply, is that bad monetary and fiscal policies anywhere in the world are reflected within minutes on the Reuters screens in the trading rooms of the world. Money only goes where it's wanted, and only stays where it's well treated, and once you tie the world together with telecommunications and information, the ball game is over. It's a new world, and the fact is, the information standard is more draconian than any gold standard… For the first time in history the politicians of the world can't stop it.15

 

Approximately four trillion dollars—a figure greater than the entire annual GDP of the United States—is traded every day in currency markets. The consequences of these trades for the economic well-being of any particular nation-state can be decisive. There is a grotesque disparity between the rapid movement of international capital and the ponderous and territorially circumscribed responses of the nation-state, as clumsy as a bear chained to a stake, trying to chase a shifting beam of light.

Finally, communications—in the broadest sense of that term, encompassing all human logistics—have increased the dangers posed by transnational threats (like those of new diseases once confined to remote incubators, or wounds to the global environment that once took centuries to materialize, or abrupt population shifts and migrations that were once locally confined, to take but three examples). Moreover, the global communications network itself presents a new and fraught fragility as to which merely national protection is pathetically inadequate.

The most important consequence of these developments is that the State seems less and less credible as the means by which a continuous improvement in the welfare of its people can be achieved. Many states, including most notably the United States, have experienced considerable difficulty in achieving stability even regarding their own budgets. Their difficulties with chronic deficits and ever-mounting debt are instructive. Of course there is nothing wrong with a state taking on debt. Every corporation does this. If taxes can be analogized to equity contributions, then it can properly be said that a state should maintain the balance of debt and equity it thinks appropriate at any given time. During the development of the American West, and during the Second World War, the U.S. government acquired debt as an even greater proportion of its national wealth than today. What marks the current period as different is the way in which the funds thus acquired have been used: the proceeds of this borrowing have been returned as consumption—that is, to improve the immediate welfare of the people—rather than to fund investment in infrastructure; and much of that consumption has been expatriated as earnings to foreign firms. A nation-state government simply finds itself unable to either balance its budget (because it cannot reduce welfare outlays to all sectors) or redirect the proceeds of its borrowing, because only by borrowing money can it continue plausibly to claim that it is bettering the welfare of its people, much as the manager of a Ponzi scheme, by distributing to investors the proceeds of fresh participants, can continue to claim that his stock portfolio is thriving. Such policies have an inevitable end, as everyone recognizes. There is no reason why a state cannot grow out of its deficit, but to do so, however, it will have to increasingly abandon the objective of the government's maintaining the ever-improving welfare of its citizens.* That is, it will have to change the crucial element of the basis for its legitimacy as a nation-state. As we will see in a later discussion, this is precisely what the Bush administration in the United States and the Blair government in Great Britain were in the midst of doing at the beginning of the twenty-first century.16 From this perspective President Reagan and Prime Minister Thatcher were among the last nation-state leaders. Although they offered radically new policies, they appealed to the same basis on which to judge those policies—whether they improved the welfare of the people—as did their great welfare-state predecessors. Bush and Blair, however, are among the first market-state political leaders. They appeal to a new standard—whether their policies improve and expand the opportunities offered to the public—because this new standard reflects the basis for a new form of the State.

Although it may surprise many readers, the corporation was a nation-state vehicle to improve the welfare of its citizens. Replacing the great trusts and partnerships of the state-nation, the corporation bureaucratized the management of business, making it feasible for the State, through regulation, to temper the profit motive with concern for the public welfare, replacing the enterprising if ruthless entrepreneur with the modern manager. This varied in degree from nation-state to nation-state, but through-out the First World the corporation was the legal structure by which the political objective of improving welfare was grafted onto the market.

The revolution in debt financing of the 1980s dramatically changed this. By mobilizing hitherto uninvolved shareholders and drawing on capital raised by high-yield (junk) bonds that promised—and delivered—excellent rates of return, wave after wave of mergers and takeovers transformed the management of large corporations. The “fat” that new managers were able to squeeze out of the companies they took over in order to pay the interest on the debt by means of which they had bought a controlling percentage of shares, in some measure came from the nonprofit, public welfare role of the corporation. Huge savings did not accrue through shutting down private dining rooms, whatever the corporate raiders said. Savings on this scale came from downsizing and layoffs. The productivity gains made possible by the computer chip and the immediacy of information brought about by the revolution in communications combined to replace corporate managerial control (which tended to favor stability over enhanced competitiveness) with control by the capital markets. The corporation had failed to maximize the opportunities of its shareholders because it insulated business decisions from competition. Indeed there was really no way that even the most enlightened managers could both protect the welfare of the community and create the lean, nimble enterprises capable of prevailing in the global marketplace.