Читать книгу The Finance Curse - Nicholas Shaxson - Страница 9

Sometime in the mid-1950s a disagreement took place in the cafeteria of Northwestern University, in Chicago’s northern suburbs, between Meyer Burstein, a conservative economist, and his colleague Charles Tiebout, a high-spirited left-winger who was teaching microeconomics on the faculty there. The argument, when it started, was simply about high rents, but by the end it had developed into something bigger: a grand and influential new theory about how states and nations “compete” with each other. The two colleagues got on well enough as friends, but Tiebout was irritated that Burstein had become one of the fast-growing band of what he called Friedmaniacs, a group that blindly followed Milton Friedman, the Chicago School economist who was then on his way to becoming America’s financial godfather of the Right.

Tiebout was “one of the funniest guys I have ever known,” said Lee Hansen, one of his only surviving close friends. Tiebout would imitate academic bigwigs in his classes, give them silly nicknames, and turn up to meetings in dungarees despite the university’s traditional suit-and-tie uniform. When a student’s father complained about a “socialist” book Tiebout had assigned as part of his course, Tiebout impishly got the dean to send a letter back stating, “This is to inform you that Professor Tiebout is not a socialist; he is a communist.”¹

Tiebout was not in fact a communist; he was just a mischief-maker. Back then, though, communism was a risky thing to even joke about: Senator Joseph McCarthy had been conducting anticommunist witch hunts in Hollywood, government, academia, and other parts of American society. He had even accused George Marshall—originator of the Marshall Plan to block global communist expansion by providing aid to Europe after World War II—of having communist leanings.²

Behind the fun, though, Tiebout did believe that government could do good. And at that lunch in the Northwestern cafeteria he felt the need to defend this belief when Burstein started griping about the high rents in the part of Chicago where he lived, which reflected high property taxes that paid for public services he didn’t use.

“Why should I pay for good schools when I have no children?” Burstein asked.

“But Meyer,” Tiebout said, “you don’t have to pay those high rents! Why don’t you just move to Rogers Park?”³

Later that day Tiebout was chatting with an undergraduate student, Charles Leven. “You know, Chas,” Tiebout said, “I was absolutely right. People do have a choice over their local public goods and a way of showing it through their revealed preference simply by moving. In fact, that’s a damn good idea. I should stick to my guns and write it up!” In less than a week he had written a first draft, and he submitted it to the conservative Journal of Political Economy, which published it in October 1956 under the dull title “A Pure Theory of Local Expenditures.” Tiebout could not know it then, but his hastily drafted article would become, a few decades later, one of the most widely cited articles in economics.⁴

A phrase in that conversation with Leven—“revealed preference”—ought to twitch the antennae of any mainstream economist. Tiebout was referring to Revealed Preference Theory, a concept the US economist Paul Samuelson had put forward in 1938. The basic idea was that while you can’t insert psychological probes directly into people’s minds to figure out their consumer preferences, you can do the next best thing: if you study their buying habits you can reveal their preferences and plug this data into the Chicago School’s elegant mathematical models and graphs. This data will allow you to study the effects of government policies and subject them all to the penetrating analyses of market economics.

By the 1950s Revealed Preference 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 global safety mechanism was, as US Treasury secretary Henry Morgenthau famously declared, to “drive the usurious moneylenders from the temple of international finance.” Another related goal was to keep Europe growing and keep communist influences out. Curbing finance was then—and should be today—treated as a matter of national security.

The Bretton Woods system was leaky and troublesome, but it held together for roughly a quarter century after World War II. With finance bottled up in its national compartments, governments felt free to act in their countries’ best interests, without fear that all the money would flee overseas. Taxes for the wealthy were high, sometimes very high: average top income tax rates fluctuated around 70–80 percent in the United States between the 1950s and 1970s (and in Britain, having reached 99.25 percent during the war, stood at 97.5 percent for most of the 1950s, falling to 80 percent only in 1959). Domestic financial regulations were amazingly robust too: the New Deal in the United States, combined with vibrant anti-monopoly laws, split up mega-banks and hedged bankers with all kinds of restrictions. Massive government-led technological developments during the war were also unleashing waves of industrialization, and governments continued to invest aggressively in research considered too risky for the private sector.¹⁰ Health services and government-funded welfare provision blossomed across the Western world; labor unions were mighty; and developing countries successfully nurtured infant industries behind trade barriers. It is hard to imagine now, but investment bankers weren’t paid outrageously more than teachers.¹¹

Amid all this massive, coordinated government intervention and in some cases astonishingly high tax rates, economic growth in both rich and poor countries was collectively higher—much higher—during this period than in any other age of human history, before or since. Western economies grew at an average 5.5 percent a year during 1950–73: astonishing by modern standards. Trade flourished, even as speculative capital flows were repressed. The era is now often known as the Golden Age of Capitalism.¹² As growth powered ahead, economic inequalities fell, inflation was tamed, debts shrank, and financial crises were small and infrequent. The history books are full of references to France’s trente glorieuses (glorious thirty), Italy’s miracolo economico (economic miracle), Germany’s and Austria’s Wirtschaftswunder (economic wonder), and plenty of others. “Most of our people have never had it so good,” purred British prime minister Harold Macmillan in 1957. “Go round the country, go to the industrial towns, go to the farms and you will see a state of prosperity such as we have never had in my lifetime—nor indeed in the history of this country.”¹³ Growth in developing countries picked up too. This was the American dream on a global scale. Rebuilding after the destruction of war was a part of the story, to be sure, as was a large shift of women out of unpaid work at home into the paid workforce, but controlling global financial flows was an essential ingredient, preventing crises and speculative attacks on countries that tried to put in place progressive economic policies. The Bretton Woods system was a vast, explicit, brassy administrative and political antidote to the curse of overweening finance and to the freewheeling policies of the earlier robber-baron age. Finance would be society’s servant, not its master. Keynes never got to see his ideas so thoroughly vindicated—he died in 1946. But Keynes’s ideas would not go uncontested for long. A counterrevolution determined to shackle governments and unleash the full power of money and finance again was already well under way.

This pushback from the banks was organized around a simple idea that had come in a “sudden illumination” in 1936 to an Austrian economist called Friedrich Hayek. Within a couple of years this idea had a name: neoliberalism. For many people, “neoliberalism” isn’t a serious term but a political swear word brandished by people on the Left against anyone to their right whom they don’t like. (It’s also not to be confused with the term “liberal,” which some in the United States seem to wield as a term of abuse against anyone to their left whom they don’t like.) The word “neoliberalism” has a particular history and meaning, which in terms of its practical effects has meant financial deregulation, privatization, and globalization actively promoted and protected by governments that have fallen under the sway of these ideas.

Neoliberalism is an outgrowth of classical liberalism, which dates back a couple of centuries. There’s political liberalism, which is all about citizens having equal democratic rights in a system of sovereign law, and there’s economic liberalism, which starts from Adam Smith’s “invisible hand,” by which free exchanges or trade in properly functioning—that is, unsabotaged—markets are supposed to make society better off overall. The more liberal (or free) the exchange, in this view, the better for society as a whole; government’s role is to provide basic functions like defense, to enforce property rights, and to keep a watchful eye out for monopolies, but otherwise to get out of the way. Political and economic liberalism are fairly separate realms, but in each case freedom is foremost.

Neoliberalism put these ideas on steroids and gave them a rather large twist. Its starting point was the theory that government inevitably amasses ever more power and heads toward tyranny. At the time Hayek had his sudden illumination, this fear was understandable. The Nazis loomed over Europe, and Soviet totalitarianism was just over the hill. The Thought Police from George Orwell’s hit novel Nineteen Eighty-Four, published in 1949, also hung like a leering specter over Western culture. Hayek began with the idea that competition in markets delivered efficiency and collective benefits for all. Then he took a giant leap of faith and argued that this conclusion could be, and even should be, true not just of markets and commercial exchange but of other aspects of life. What if you could reengineer society and laws into a giant market or set of markets, he wondered, using government scissors to cut the social fabric into separate fragments, then pitching these fragments into competition with one another? The simplest example of this is privatization, where governments sell off state assets to the private sector in the hope that they will compete and become more efficient. If you can achieve this, Hayek argued, then the market can become a tool for finally taming government, the handmaiden of tyranny.

Hayek’s most famous book, The Road to Serfdom, laid this all out. Competition and the price system were the only legitimate arbiters of what was good and true, he said. And this soon became a neoliberal mantra. Cut taxes, deregulate, privatize, and launch all these pieces into competition with one another, then let it all rip. Not just banks or companies, but also health services, universities, school playing fields, environmental protection bodies, prisons, military capabilities, regulators, lawyers, shell companies, and the kitchen sink—all of it could be, should be, must be, shoehorned into the same competitive framework, to be sorted and judged by the only true test of virtue: the test of the market. In this framework, explained the writer Stephen Metcalf, humans are transformed from being “bearers of grace, or of inalienable rights and duties,” into ruthless profit-and-loss calculators, sorted into winners and losers. Society is no longer a space for political debate or collective action but a universal market that harnesses the benefits of competition to work as a giant, all-knowing mind, a sort of organically emerging intelligence in which the market constantly figures out the best way to distribute scarce resources among competing priorities to deliver the greatest good for all. Government is, in this view, not necessarily weakened but instead reengineered as an agent for making markets penetrate as deeply into society as possible. Things like citizenship and traditional notions of justice and even the rule of law are swept aside and replaced with technocratic measures like productivity, risk, and returns on capital. Neoliberalism is “the disenchantment of politics by economics,” as the British political thinker Will Davies put it: “an attempt to replace political judgement with economic evaluation.… [T]hrough processes of competition it becomes possible to discern who and what is valuable.” By doing so, he concludes, “competition, competitiveness and, ultimately, inequality, are rendered justifiable and acceptable.”¹⁴ This was a wholly new notion of justice. A more revolutionary idea is hard to imagine.

The neoliberal revolution was born in earnest at a historic meeting of American and European intellectuals at Mont Pèlerin near Geneva in 1947, just a few years after the Bretton Woods summit. The meeting was attended by Hayek and many other famous economists and thinkers, including Milton Friedman, Ludwig von Mises, George Stigler, Frank Knight, Karl Popper, and Lionel Robbins. The meeting was financed by Switzerland’s three largest banks, its two largest insurance companies, the Swiss central bank, the Bank of England, and City of London interests.¹⁵ Hayek himself, after leaving the London School of Economics in 1950, “never held a permanent appointment that was not paid for by corporate sponsors.”

The ambition of the Mont Pelerin Society (MPS), born at that meeting, was utopian, even messianic, envisaging private-sector heroes overturning the dark forces of authoritarian state control. “We must raise and train an army of fighters for freedom,” declared Hayek, “to work out, in continuous effort, a philosophy of freedom.” Economic freedom would deliver political freedom. A tide of corporate money began to flow into a new network of radical think tanks, which pushed these ideas. This began as a trickle with the MPS in Switzerland but soon spread to London, with the launch of the Institute for Economic Affairs, which became immensely influential there, and then shifted rapidly further afield and offshore, buoyed by financial and corporate donations in each place. The MPS’s intellectual momentum morphed and branched into an international chain of think tanks and supporters, which in the United States would be guided by the ideas of extreme antigovernment thinkers like James McGill Buchanan and heavily funded by billionaire members of the family that founded the commodity trading firm Koch Industries. Globally, they would become the backbone of the Atlas Network, a syndicate of nearly five hundred think tanks and institutions promoting libertarian, anti-state ideas, also funded by myriad billionaires, millionaires, and financial and large corporate institutions. This loosely connected coalition would form the engine of neoliberalism and the pushback against the Keynesian consensus.¹⁶

In terms of raw power, neoliberalism takes authority away from politicians and hands it to economists and to moneyed interests. At the apex of this new form of authority sit the financial players who buy and sell global companies, exerting a kind of veto power over governments that have drunk the neoliberal elixir. Perhaps the most pervasive and insidious outcome of this ideology is the broad-based phenomenon I mentioned in the introduction, financialization, a central element of the finance curse, which involves not just the growth in size of the financial sector but also the injection of financial techniques and competition into pretty much anything that can’t be nailed down—and a lot that can be.

These ideas enraptured growing numbers of people, including a British woman called Margaret Roberts, the president of the Oxford University Conservative Association. Half a century later, long after she had married, taken the surname Thatcher, and become Britain’s first female prime minister, she would call Hayek’s Road to Serfdom the book “to which I have returned so often.” The ideas would also percolate through to Ronald Reagan, who famously declared that “government is not the solution to our problem; government is the problem.” As the historian Nancy MacLean and the journalist Jane Mayer have documented, these ideas were carefully networked, targeted, and funded in the United States and beyond, to help produce the money-tainted political systems we have today.¹⁷

But the ideas’ influence went far beyond money. Many politicians love neoliberalism because the “verdict of the market” absolves them of responsibility for making hard choices, helping them sidestep troublesome notions like fairness or justice. Having dislodged all those prisons, crime laboratories, or fragments of the education system from the grasping arms of government and into competition with one another, the politicians can lean back with their feet on their desks and eat popcorn, while they watch the laissez-faire machinery of “the market” sort out all that noisy, sweaty, difficult kerfuffle. And this hasn’t been so hard to sell to the public either; after all, who doesn’t like competition? To borrow a few words from Keynes, “nothing except copulation is so enthralling.” When television presenters on CNBC or Fox take the government policies of the day and say, “Let’s see if Wall Street thinks this is a good idea,” they aren’t just promoting what Veblen sneeringly called business sagacity. They’re embracing neoliberalism and its political judgments about what is good.

Yet the ambition of neoliberals did not stop at shoehorning people, companies, and parts of our societies into the great sausage machine of the price system; they wanted to shovel in whole countries. And Tiebout opened up this wonderland for them. Like two powerful magnets brought into close proximity, the two bodies of thought—the neoliberals arguing that parts of society should be made to compete (efficiently) with one another, and Tiebout arguing that states and jurisdictions could compete efficiently with one another—were inevitably going to come together.

The full merger happened when a Princeton economist called Wallace Oates wrote a paper in 1969 with some measurements that seemed to confirm Tiebout’s thesis.¹⁸ Oates looked at fifty-three communities in New Jersey and studied their property taxes, along with local authority spending on schools. Then he looked at how this related to local house prices. And his results were just as Tiebout had predicted: higher local property taxes seemed to mean lower house prices, while more school spending meant higher house prices. People did “vote with their feet” after all, moving in and out of communities in response to taxation and spending packages. Tiebout, it seemed, was right!

Oates’s results may not seem so surprising today, but this idea was radically new then. As the scholar William Fischel put it, “everyone knew that Americans were mobile, but no economist had previously connected mobility with demand for the services of local government.” The model grew and grew in stature and has now become, according to Fischel, “pretty much the touchstone for local public economics in the United States … its influence has expanded beyond economics and beyond the public sector.”¹⁹ Those arguing for greater tax and spending powers for local governments around the world draw support from this model born out of Tiebout’s and Oates’s work. Behind the scenes, Tiebout’s big idea is everywhere.

For the neoliberals, the idea of states “efficiently sorting” was thrilling: a mechanism for shoveling districts, states, and even whole countries into their competitive models at last, enabling them to declare the whole process a good thing. Even better, it could justify the view that public services and tax systems and even laws were just another commodity to be bought and sold in the marketplace. “Law became one of many ‘assets’ through which a nation can compete,” wrote Will Davies; tax “becomes nothing but a ‘cost’ for the [company-nation] to minimize.”²⁰

It’s not hard to see how subversive all this was. The rule of law has a monetary price, and so does your corporate tax rate and regulatory environment. Once this awesome intellectual land grab by corporate and financial interests began to enter mainstream politics in the late 1970s, it would lead inevitably to corruption, oligarchy, bank bailouts, and the growth of international organized crime.

As these changes unfolded, a series of events was starting to play out on the ground in the United States that would expose Tiebout’s ideas in ways he would never have intended. Rather than local governments competing with one another and thus increasing efficiency, as he had once thought, the emerging “competition” among the states was revealing itself to be a powerful tool for big financial and corporate interests to get what they wanted from states by playing them against one another in a vicious race to the bottom. (For the rest of this book, I will call this latter form “competition”—with scare quotes—as opposed to competition between private actors in markets.)

In 1973, just four years after Oates published his paper, Idaho’s Democratic governor Cecil Andrus had a meeting with David Packard, the boss of the fast-growing computer company Hewlett-Packard. The company was looking to build a major new computer plant and had narrowed its options down to Idaho or Oregon. Andrus described in his autobiography how he pitched his state’s attractions in the face of an attractive counteroffer from Oregon. “Packard listened politely,” Andrus remembered, “then asked in a level voice, ‘What type of tax concessions is the state willing to give?’” Andrus’s answer would seem quaint today.

I took a deep breath and set out to sell him on a difficult argument. “We don’t believe in existing businesses subsidizing new businesses,” I told him. “When you come to Idaho you become a citizen, and we all play by the same rules. A few years down the line and you’ll be an old-timer. Do you want to subsidize the next guy who comes along?” It was a nervous moment. After a brief pause, Packard grunted: “Makes sense. That’s the way to go.” He moved on to other questions. We captured the computer plant and gained a top-notch corporate citizen.

At that time the old consensus was still alive, which held that corporations were not just machines for creating profit but had a wider purpose: they were stable social institutions that created useful goods and services, well-paying jobs, tax revenue, and, ultimately, thriving communities.

That consensus was about to come under threat and eventually change beyond all recognition. One of the least well-known instruments of change was a new industry that was already stirring in America by the time Andrus spoke. This industry had first emerged in 1934 when a businessman called Leonard Yaseen created the Fantus Factory Locating Service in New York. The company set out to provide expert local guidance for companies that wanted to relocate or expand into unfamiliar parts of the country. This was in itself a perfectly reasonable idea. The problems soon began, however, when companies went beyond looking for the good stuff that benefits everyone in a locality, such as strong infrastructure or a healthy and educated workforce, and into searching for wealth-extracting free rides such as special tax treatment, exemptions from pro-union laws, lax environmental standards, or outright financial inducements from politicians at the expense of local taxpayers.

By the time Oates popularized Tiebout’s paper in the late 1960s, the relocation industry was already maturing, with secretive consultants playing local areas off against one another and constantly pushing states to get the “business climate” right—which meant extracting maximum subsidies from local taxpayers. In the words of Greg LeRoy of the US nonprofit group Good Jobs First, a veteran observer of these changes, these consultants are now “the rock stars in expensive suits at economic development conferences,” or “the speaker-bait that brings in hundreds of public officials who hang on their every word”; they are the “shock troops of the corporate-orchestrated ‘economic war among the states’ that is slashing corporate tax rates and manipulating state and local governments everywhere.” While “cities and states are ‘whipsawed’ against each other to maximize subsidies,” they “have played our state-eat-state system like a fiddle.”²¹

LeRoy outlines fourteen free-riding scams the site consultants deploy, including job blackmail, creating a “bogus competitor,” receiving “payoffs for layoffs” in the form of subsidies while firing workers, and paying poverty wages while sticking taxpayers with hidden costs. A presentation by Ernst & Young, one of the players in this game, was entitled “Turning Your State Government Relations Department from a Money Pit into a Cash Cow.” Since the 1970s this race among US states has been getting faster and faster, and today the system has run amok.

One of the best petri dishes for studying this at close quarters is Kansas City, where the state border between Kansas and Missouri runs through the middle of town. Companies here can relocate across the state line simply by crossing the street, and this has sparked especially fierce local border wars on incentives, even calls for “cease-fires.” On a visit to the Kansas City area one icy December morning in late 2016, I met Blake Schreck, president of the Chamber of Commerce in Lenexa, a prosperous municipality in Johnson County on the Kansas side of the border. Soft-spoken and genial, Schreck reminded me of Apple’s founder, Steve Jobs: tall and silver-haired, wearing a turtleneck and wire-framed glasses. He operates out of an office in a beautiful white-painted former farmhouse with Harrods-green shutters and set among lush clipped lawns, and his job is to persuade businesses to move to the area: first Lenexa, then Johnson County, then Kansas State. He seems to have been effective. Lenexa is a haven of high-end business parks, sprawling low-rise office buildings, and industrial centers, nestled among pretty suburban developments chock-full of architects, engineers, and bioscientists living comfortably behind white picket fences. Employment in Johnson County has been growing by over 4,000 jobs on average a year, and its median income is 40 percent above the national average.²²

When I met him Schreck outlined a number of traditional reasons so many businesses come to the area. “We have had good elected officials who are not afraid to get infrastructure out ahead of growth: streets and roads and sewers and all these kinds of non-sexy things. Over the years it has paid off,” he told me. But the excellent local public school system is key, he said. “The hard Right come here and say all that matters is the lowest possible taxes. But here in Johnson County we are the antithesis of that. It is about total community development. Here they are paying for excellence in a safe neighborhood. We have proven that that is the model that works. Honestly and truly,” he continued, “in thirty years of doing this I have never had anyone telling me the taxes in Kansas are too high. It has never been an issue. When I started here, we looked down our noses at anyone who even dared ask for an abatement or incentive: we thought, ‘If you want to be in our community you pay your way and join the community.’” Idaho’s governor Cecil Andrus would have approved.

But the conversation then turned darker. Certainly by the 1990s, Schreck said, he had noticed direct contact with potential businesses being replaced by a more aggressive brand of consultant, who rudely and ruthlessly changed the calculations. “Instead of ‘Hey, come on in and have a beer and a steak, and let’s get to know each other and see if you like our community,’ the whole process is more cold and clinical now. You’re put in a matrix on some consultant’s spreadsheet, and you want to get into their top ten. You have to be ready to respond to these data-heavy requests: they want information overnight on a five- and ten-mile demographic slice and study. Everything is now driven by the consultants. That is the big change in the industry. Incentives coalesced around and became part of this whole culture when the consultants started driving the relocation train.”

A culture of secrecy has crept in along with the consultants, and in their hands it is a deadly weapon for jimmying more corporate subsidies from the public purse. Secrecy helps the consultants exaggerate and lie about what rival places are offering while preventing you from checking, so they can squeeze the last drops out of your desperate state or city. Schreck pulled out some files and riffled through them, reading out project names like Bigfoot, Redwood, and Maple, each with ironclad confidentiality clauses attached. “We’ve had big deals here where six to ten people come in from a company, and we’re not even allowed to know their first names,” he said. Schreck and his colleagues gave them names from the Quentin Tarantino movie Reservoir Dogs: Mr. Pink, Mr. Orange, and so on. “These are the extremes we’ve been driven to.”

In LeRoy’s long experience, companies nearly always decide where they want to relocate to before they start playing the states against one another, but with consultants earning up to 30 percent of the value of the subsidy package, they have every incentive to deceive and exert undue pressure, and around 90 percent of the value of incentives gets gobbled up by big businesses; small businesses hardly get such opportunities.²³ Not only that, but the tax incentive game is notorious for corruption, with public officials being paid off or receiving campaign “donations” for rubber-stamping juicy deals. There are many revolving doors.²⁴ The Missouri-controlled part of Kansas City, for instance, has set up an arm’s-length economic development corporation (EDC) whose avowed goal is “a competitive, vibrant and self-sustaining economy,” but its staff members rotate in and out of the big law firms negotiating the handouts. The EDC also gets a cut of each deal, while tax abatements come out of someone else’s budget: the classic free-rider problem.

Johnson County, Schreck said, now typically gives a 50–55 percent property tax abatement for incoming businesses, but aggressive companies have squeezed out more: the restaurant chain Applebee’s got 90 percent for ten years by playing the we’ll-move-to-Missouri card. The Missouri Port Authority gives up to 100 percent. Even more remarkably, the Promoting Employment Across Kansas (PEAK) program peels off—get this—as much as 95 percent of the withholding taxes levied on employees’ payrolls and, instead of handing those taxes over to the hard-pressed state, funnels these sums back to the companies employing them for up to ten years. Other deals allow companies to get their sales taxes paid in their projects. Such deals are becoming increasingly common across the United States, and they’ve got a nickname: “paying taxes to the boss.” There are other goodies, such as zero-interest loans or outright grants from states. “We are now at a point where there is an expectation pretty much from every company that comes along that there is going to be some financing,” Schreck said. “There are other states that blatantly pay you—we aren’t close to that point.” Yet the race seems to be speeding up, and different tax jurisdictions are increasingly at each other’s throats. “We’ve traditionally been great partners, but it’s put us at odds with each other. Put a bunch of rats in a box and if there’s plenty of cheese, no problem. But take away the cheese, and they start biting each other.”

Just a few miles east of Schreck’s offices, immediately across the state line, is Jackson County, Missouri, where I met Bruce Eddy, executive director of the Community Mental Health Fund. This is a public sub-fund that channels a little over $10 million per year into charities serving some fifteen thousand victims of domestic and sexual violence and people with mental health needs.²⁵ Most of its revenues come from a single stream, local property taxes. This is different from most tax systems around the world, where various taxes flow into the maw of a general public budget, then get mixed up and spat out in different spending allocations, so you can’t see the direct effects of any given tax cut. But here property taxes railroad straight through to particular spending lines, such as this fund. So competitive tax abatements have direct victims.

Eddy’s work is intensely political, and he reports to elected officials, so he was guarded talking to me, but it was soon clear how badly the property tax abatements slice into his budget. “It’s like a hydra,” he said. “There are many tax abatements, and I have to fight for revenue to serve mentally ill people. This is not a sport.” “Competitive” tax cutting has become like a mania. “There’s a circular discussion going on here. Cutting taxes is good. Why? Because it’s ‘competitive.’ Why is ‘competitive’ good? Because it means lower taxes! That plays into the neoliberal agenda that doesn’t like the common good. The notion of being a human that merits some reasonable standard has been totally dismantled. And it’s getting worse.”

This game has spread across the United States and the world. One of the bleakest recent tales concerns Amazon, which in 2017 announced plans to build a second headquarters, dubbed HQ2, and asked cities to submit secret bids stuffed with incentive packages. Amazon knew where it wanted to set up all along—somewhere that offered deep pools of educated workers and executive expertise and maximum access to political power.

Yet it deliberately kicked off a ferocious beehive of bidding, as 238 cities scrambled to offer ever-bigger packages. Much of the bidding was shrouded in secrecy to maximize the anxiety, but of the details that emerged we know that Newark, New Jersey, offered a $7 billion package, and Chicago offered to let Amazon receive up to 100 percent of all income taxes paid by its employees. St. Louis, Missouri, offered $7.3 billion, and Montgomery County, Maryland, offered $8.5 billion for the $5 billion project. (Jamie Dimon, the CEO of JPMorgan Chase, said he would watch to see who won the bidding, then call up their lawmakers and demand the same.) In the end, though, Amazon didn’t go with any of the high-bidding places. In November 2018 it announced that it had split the bid between Long Island City in Queens, New York, and Crystal City in Arlington, Virginia, just seven minutes’ drive from the Pentagon, probably its most profitable client, and fifteen minutes from the White House. The combined bid came to a measurable $4.6 billion in subsidies to Amazon, plus a range of unmeasurable or hidden costs, including a potentially very large tax break for high net worth individuals with long-term investments in Amazon stock—people like Amazon’s CEO, Jeff Bezos. (Amazon’s three headquarters will also be an average of just 6.4 miles from Bezos’s three main residences.) “Just as Amazon has crawlers and algorithms to find the lowest price on any brand, they have created an offline algorithm pitting cities against each other,” said Amazon expert Professor Scott Galloway of the NYU Stern School of Business, ahead of the awards. “Amazon already knows where they want to be, and they are creating this kind of Hunger Games environment to mature the best term sheet possible—then give it to the city’s mayor where they want to be.”²⁶

The Amazon example highlights two more crucial points about the race to the bottom that happens when states “compete” by offering tax cuts, deregulation, and subsidies to mobile businesses. First, the race does not stop at zero. Once corporate tax payments are down to nothing, it keeps going: you start getting into grants, peeled-off sales and payroll taxes, and other financial chicanery—an ever-growing pile of wealth extracted from taxpayers and handed to ever-larger corporations. There is literally no limit to the extent to which corporate players and the wealthy wish to free-ride off the taxes paid by the rest of us. Cut their taxes, give them subsidies, appease them, and they will demand more, like the playground bully. Why wouldn’t they?

A second point is the winner’s curse, an idea well understood by economists. This is a common phenomenon in auctions, where the winning bidder is often the one who overpays substantially, because he doesn’t understand the value of what he is bidding for or what he is giving away; because he’s cajoled, bullied, or bribed into overpaying; or because he wants to be seen as catching the big fish—and he doesn’t care about the cost because he’s using other people’s money. A detailed 2016 study found that the pursuit of corporate megadeals (such as Amazon’s HQ2)—known as “buffalo hunting” in economic development circles—was costing US states an average of $658,000 per job directly created: a massive overall loss for these states. For technology data centers, the average cost was $2 million per job. When President Trump in July 2018 broke ground on a new manufacturing plant for Foxconn, the company claimed it would create between 3,000 and 13,000 jobs, which generated a range of positive headlines in Wisconsin. Yet the subsidy package was worth an estimated $4.8 billion—up to $1.6 million per job. And Foxconn has a long history of backing out of promised investments like this and of replacing workers with robots—what the company itself calls “Foxbots.” The cost per job could be higher still. By contrast, US states spent less than $600 per worker on training schemes, which are known to be vastly more effective than tax incentives in creating jobs.²⁷

This chapter poses three big questions for policy makers. The first is: Will tax cuts and other goodies attract out-of-town business investment to my area? The answer is pretty clear and obvious: yes, sometimes. Since Oates’s 1969 paper came out, this question has been measured and confirmed over and again.²⁸ It doesn’t just happen with US states; it happens with whole countries too.

The second question is: When states or countries “compete” to attract businesses or citizens, is this efficiency good for the world at large, or is it a harmful race to the bottom among the participating states?²⁹ As I’ve explained, the neoliberals used Tiebout’s big idea combined with ivory-tower Chicago School mathematics to argue that such “competition” is healthy and efficient. And if you’re a nerd like me who looks for this argument, you’ll find it all over. For example, in 2013 Switzerland’s president, Ueli Maurer, told the World Economic Forum at Davos, “Locational competition exists within our own borders. Diversity stimulates competition: that is not only the case in business, but also in politics. This leads to good infrastructure, to restraint in creating red tape and to low taxes.” This idea can be boiled down to an appealing sound bite: competition is good; if it works for companies, then it works for countries. Tiebout, Oates, and the Chicago School lent academic credibility to the idea that states and countries can compete as if they were businesses, generating prosperity. This idea has been massively, world-changingly influential.

But there is one small snag with Tiebout’s argument: it’s hogwash. Utter nonsense. Even Tiebout said his model was unrealistic. Indeed, people who were at the seminar where Tiebout first presented his theory to the academic community said he offered it as an inside joke on the conservative economics establishment. He certainly found it delicious to have his paper accepted by the right-wing Journal of Political Economy. Tiebout reportedly said, “I don’t think those fuckers know I’m a liberal and they’ll feel compelled to publish it!”³⁰

And the paper itself is clear about its limits. “Those who are tempted to compare this model with the competitive private model,” wrote Tiebout “may be disappointed.”³¹ It turns out that each of the major flaws in the model is fatal; collectively they are a catastrophe. For starters, a moment’s thought reveals that “competition” between countries or tax systems bears no resemblance whatsoever to competition between companies in a market. To get a taste of this, ponder the difference between a failed company like Toys ‘R’ Us (which filed for bankruptcy in 2017, partly due to competition from the market-hogging Amazon) and a failed state like, say, war-shattered Syria. When a company fails it is sad, but hopefully its employees will get new jobs, and the “creative destruction” involved when companies compete in markets can be a source of dynamism for capitalism. But a failed state, a place of warlords and murder and nuclear trafficking, is an utterly different and more dangerous beast, which never disappears, only festers. The only thing the two kinds of competitive failure really have in common is a shared word in the English language. Even if you believe, as I do, that competition between private actors in unsabotaged markets can be a great thing, this says nothing at all about the state-versus-state kind.

Not only that, but the Tiebout model requires eye-watering assumptions to make its “efficient sorting” work. In fact, Tiebout himself laid most of these out in black and white. For one thing, it assumes that hordes of citizen-consumers will flit back and forth from state to state or country to country at the drop of a tax inspector’s hat, selling and buying their homes costlessly and tearing their kids into and out of local schools at the latest tweak to tax rates. Second, it assumes that tax havens don’t exist, that corporations don’t use them to shift profits around the world or even threaten to shift them in order to terrify politicians into giving them unwarranted tax cuts and other goodies. In Tiebout’s model rich people don’t dodge tax or free-ride off public services. Crime, pollution, and other bad things don’t spill across borders. There is only one kind of tax—property taxes—and everyone lives off dividend income alone, while infinitely wise community leaders, in harmony with all other political forces, guide infinitely wise citizens. Company executives pondering where to relocate are never swayed in their decisions by free hookers sent up to their hotel rooms or cash-filled brown envelopes stuffed under doors on their location scouting trips, and corruption is absent from local politics.

To avoid the free-rider problem, everyone must go to school and college or university in one place, then work, live, pay taxes, and grow old in the same locality, exclusively, for their whole life; otherwise jurisdictions will free-ride off each other’s education or pensions systems—and people can’t vote with their feet after all. So there’s no room in this model for people like the technology billionaire Peter Thiel, who has railed against high taxes and encouraged the United States to “compete” aggressively on its tax rates for big businesses and rich people like him—then in 2011 went and became a citizen of New Zealand, likely as a backup plan if politics ends up making life at home unbearable.³²

Tiebout’s assumptions, in turn, rest on a whole archaeology of other rickety assumptions required to make the general “efficient markets” theories work. In a nutshell, humans must be rational, wise, and self-interested, and markets are infallible.

None of this makes any sense, outside of a professor’s blackboard. In a world of rising inequality this kind of “competition” is always generically harmful, for it rewards the big multinationals, global banks, wealthy individuals, and owners of flighty capital, who can easily shift profits or themselves across borders, shopping for the best deal, the lowest taxes, the weakest worker protections, the greatest secrecy for their financial affairs, or the most lax financial regulations, and then threaten to go elsewhere if they don’t get state handouts. Your local car wash, your barber, your last surviving mom-and-pop fruit and vegetables merchant, or your average worker can’t jump (or credibly threaten to jump) to London or Hong Kong if they don’t like their tax rates or their hygiene regulations. So the big players get the handouts, and the small fry are forced to pay the full price of civilization—plus a surcharge to cover the costs of catering to the roaming members of the billionaire classes who are too important to contribute. This “competition” systematically shifts wealth upward from poor to rich, distorting our economies and undermining our communities and democracies. The free-rider problem is “one of those things you hear about in your first term of economics, then never hear about it again,” says John Christensen, who cocreated the finance curse concept with me. “It is one of the biggest dark continents in economics.”

The answer to the second of my three questions for policy makers then is clear: “competition” among states on corporate taxes is indeed a race to the bottom that increases inequality and harms the world at large. It is not efficient, and it benefits a few rich folk at the expense of much larger, poorer communities.

The third question is bigger and thornier. In fact, it is one of the thorniest economic questions of all time. It is this: Whether or not “competition” is a harmful race to the bottom that hurts the world at large, does it make sense for my country or state to “compete,” from the perspective of local self-interest?

Schreck used to think not, at least for his area, but now he seems less certain. “In Lenexa we used to just say no,” he said. “But you have to get in the game, and once you’re in the game, it’s hard to get back out, the argument being that half of something is better than all of nothing. There are states, especially in the Deep South, which are much more aggressive, with amazing incentive packages. It’s a little whirlpool sucking on all of us. If you tried to swim out of it, you know, could you make it?”

There is a deep and pervasive belief that holds firm to the idea that yes, the giveaways are sadly necessary from a local perspective and we should play beggar-my-neighbor. The notion that countries have no choice but to be “competitive” in areas such as corporate tax or financial regulation has been the basis of some of the main national economic strategies of Britain and the United States for the past few decades. As Bill Clinton once put it, each nation is “like a big corporation competing in the global marketplace.” Donald Trump has repeatedly touted plans to “make America more competitive, to reduce taxes, to roll back regulations.” David Cameron, a former British prime minister, put it in even starker terms: “We are in a global race today. And that means an hour of reckoning for countries like ours. Sink or swim. Do or decline.”³³

This belief system is, however, flatly wrong. Like Tiebout’s theory, it is underpinned by elementary economic fallacies. In general terms countries can opt out of this race unilaterally, with no economic penalty—in fact with a net national benefit. Beggar-my-neighbor is in reality beggar-myself. The only good move is not to play.

To see why this is so, it is necessary to leave the relatively calm waters of individual US states and venture into rougher, wilder, more perilous global seas. Here we will find that of the two major players in the global economy, Britain and the United States, Britain decided to play this game harder, faster, and more ruthlessly. In the process it has caused devastating damage to the international economy, and it has also beggared itself.