Governments now increasingly "share" authority with many other types of entities: corporations that carry out governmental functions from garbage collection to intelligence collection; nonprofits that provide publicly-funded social service; supranational organizations that set and enforce global standards; criminal and terrorist organizations that control territory and operate de facto "states." But perhaps the most important and problematic is the extent to which, as discussed in my prior post, even the most powerful democracies are necessarily subject to judgment and discipline by financial markets.
The usual critique of financial demands in the public realm is that they, by definition, drive a "race to the bottom": that if governments become beholden to bottom-line logic, they must necessarily cut public spending, taxes and regulation, resulting in a denuded public sector, exploited workers and windfalls for the wealthy – eventually leading to a nation's collapse into a permanent Third World status in which the privileged few rule over the impoverished masses. But that's not the real problem.
There are, of course, plenty of financiers who think that way – the Republicans' last presidential nominee, in fact, made a fortune from such an approach. But not everyone with money thinks that that's the only way to make more: Capital doesn't necessarily seek the lowest cost – it seeks the highest return.
The financial markets aren't automatically interested in backing governments that spend, tax and regulate as little as possible (although they may be interested in those that spend, tax and regulate as little as necessary, which is different). Global financial markets are hardly rushing to divert money from the alleged socialist welfare state of Barack Obama into the tea party paradise of Somalia, where government doesn't exist at all.
As the current issue of BusinessWeek shows, corporate tax rates have little to do with economic growth. In 2012, the U.S. had higher average corporate tax rates than two-thirds of the countries it outpaced in growth; among the lowest corporate tax rates: Greece. Governments also attract taxpayers with high-quality services, not just low tax rates, contrary to conventional wisdom. The right-wing shibboleth that slashing the public sector is the best way to create economic value is simply wrong – which makes the left-wing fear that finance capitalism will lead inexorably to the right-wing model of public disinvestment equally unfounded.
The flip side of this is that governments could go out and actively attract investment based on their economic policies. As they get more adept at doing so, they need to start insisting on a different kind of "public/private partnership." To date, such "partnership" has generally meant providing private companies with the opportunity to make money off public ventures with little gain for the public. In several U.S. states, the profits from such toll-road "partnerships" have turned out to be much lower than expected – in some cases, negative – leading the private investors who made the bad deals to demand (and get) new deals with guaranteed returns. In short, the public traditionally bears the risk, and the investors get the profit – some partnership!
Largely the same phenomenon prevails in traditional public finance: If the government wants to make a long-term investment, it borrows money from the private bond market with a guarantee of repayment; if the public expenditure is a really bad idea, hey, that's not the investor's problem. But as Yale economist Robert Shiller, who won the 2013 Nobel Prize, wrote several years ago, "Corporations raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits" – and, I would add, the risks. "Governments should do something like this, too, and not just rely on debt." Shiller argued that "governments could sell a new type of security that commits them to paying shares in national ‘profit,' as measured by gross domestic product." I hesitate to tweak a proposal by a Nobel laureate, but I'd tie bondholder returns to a specific revenue source, at specific rates, giving bondholders a direct stake in the wisdom and success of their investment – and that means an economy and revenue structure that pays off without a down-the-road tax hike.
Either way, this would create a market for good economic policies – a world where, in any event, governments must convince, not command, compete not control. As I noted in the post that opened this New Year trilogy, scholar Phillip Bobbitt has argued we're passing to the age of the "market state" from that of the nation-state. In Bobbitt's vision, "Whereas the nation state justified itself as an instrument to serve the welfare of the people (the nation), the market state exists to maximize the opportunities [of its citizens]," largely through its ability to leverage capital for its people's purposes. It's worth noting that this vision of the "market state" doesn't necessarily mean a replacement of government with markets, or public purposes with private, but it does mean a change in the nature and purpose of government.
It also means that "government" is something that nongovernmental actors increasingly "do." The problem with private-sector actors becoming more like "governments" is not that they, any more than bad governments, will produce a race to the bottom. Rather, it is the question of legitimacy in the exercise of power. The Lords Financial may relish their growing global power, but they should recognize what this meant eventually for their predecessors, the Lords Temporal and, before them, the Lords Spiritual whose reign the nation-state was intended to curb. Eventually, all authority, even private-sector actors, will face rising demands for democratization, just as states have over the last 300 years. The question for 21st century politics is how quickly, wisely and bloodlessly we recognize the need for, and achieve, such broader forms of political legitimacy in this brave new world.