The Price of Civilization

by Jeffrey D. Sachs

  Figure 6.2: Effective Average Tax Rate in High-Income Countries, 1979–2005

  Source: Data from Alexander Klemm, “Corporate Tax Rate Data,” Institute for Fiscal Studies, August 2005.

  Figure 6.3: U.S. Corporate Taxes, 1950–2010

  Source: Data from U.S. Bureau of Economic Analysis.

  The race to the bottom exists not only in falling corporate tax rates but in many other aspects as well, such as the weakening of labor standards, financial sector deregulation, and lack of enforcement of environmental standards. As one consequential example, New York and London were in a dramatic race to the bottom regarding financial deregulation during the past twenty years, to the delight of the financial firms on Wall Street and in the City of London. The end result was to feed the massive financial bubble that finally exploded in 2008. Dozens more places, ranging from Dublin to Dubai, have been slashing corporate tax rates and converting themselves into destinations for tax evasion.

  There is one overarching solution to the race to the bottom: international cooperation. All countries are suffering from the decline in corporate tax rates and the downward pressures on financial, environmental, and other regulatory standards. By banding together to set minimum international norms, such as a common approach to eliminating tax havens and a common standard of financial and environmental regulation, all countries can gain. Of course, with their overweening power, corporate lobbies routinely short-circuit such attempts at global cooperation by successfully playing off one government against another.

  The Depletion of Natural Resources

  The new globalization poses one more enormous problem: the depletion of vital primary commodities such as freshwater and fossil fuels, and long-term damage to the earth’s ecosystems under the tremendous stresses of worldwide economic development. For a long time, economists ignored the problems of finite natural resources and fragile ecosystems. This is no longer possible. The world economy is pressing hard against various environmental limits, and there is still much more economic growth—and therefore environmental destruction and depletion—in the development pipeline. The explosive growth of production in China, India, and other emerging economies is already pushing world prices of food and feed grains, coal, oil, and countless other primary commodities sky-high, indicating an era of much greater scarcity and resource depletion. The surge in primary commodity prices in recent years, including fuels (oil, gas, and coal), minerals (copper, aluminum, iron ore, and others), and cereal grains (wheat, maize, rice, and others), is shown in Figure 6.4. The commodity price indexes are divided by the U.S. GDP price deflator to obtain inflation-adjusted indexes for each commodity group. It was only the steep economic downturn in 2009 that brought commodity prices down from their 2008 peaks.

  The scarcity problems may be even more serious in areas where market prices are not available to warn us of impending environmental crises. This is the case of climate change, deforestation, loss of biodiversity, land erosion, and many kinds of large-scale pollution. In all those cases, unprecedented environmental destruction is under way and getting worse, but without market signals in place to guide us back to sustainable technologies and business practices.

  Figure 6.4: Primary Commodity Prices (Inflation-Adjusted), 1992–2010

  Source: Data from International Monetary Fund World Economic Outlook, 2011.

  The issue of environmental sustainability is a huge one that could take us too far afield here. I earlier tried to provide an overview of the interconnected and complex challenges in my book Common Wealth. In the current context, though, I would like to emphasize that America’s sustained prosperity will require solutions to the rapidly encroaching resource pressures.

  There are two main obstacles to a sustainable trajectory. First, the scientific and technological know-how to deploy more sustainable technologies (such as massive supplies of low-carbon energy from solar power) still needs large-scale research and development. Second, we need to overcome the power of corporate lobbies in order to impose regulations and market incentives that will steer markets toward sustainable solutions. So far, the corporate lobbies of the polluting industries have blocked such measures.

  Free-market economists, once again including Hayek and Friedman, have recognized the need for public action to protect the natural environment. And Americans have consistently agreed, expressing strong environmental sentiments on a wide range of environmental challenges.14 Yet this basic truth has not yet found political expression in the United States because of the power of Big Oil and Big Coal. In chapter 10, I’ll suggest some possible policies to break the hammerlock of these special interests.

  America’s Failed Response to the New Globalization

  To sum up the findings of this chapter, America has failed to respond effectively to the challenges of the new globalization. The manufacturing sector has shrunk as factories and employment have been shifted overseas. The working class, especially, has been squeezed. Economic policies did not exactly stand still but in fact responded perversely: taxes on the rich were cut; the manufacturing sector was allowed to decline in the face of growing foreign competition; employment in construction was temporarily spurred by easy money from the Fed and subprime lending, but that expedient lasted only until 2007, when the subprime bubble burst. The 2008 financial crisis was therefore a crisis of utterly mismanaged globalization. The United States had responded to the long-term loss of manufacturing competitiveness by the temporary expedient of a housing boom. When the boom was followed by a collapse, U.S. unemployment soared and the emptiness of U.S. short-termism was exposed for all to see. What is remarkable is that even after the collapse of the bubble, Washington was still unable to come up with any long-term, serious responses to America’s waning competitiveness, instead turning again to the very same policy mix that had failed previously: easy money, tax cuts, large budget deficits, and, starting in 2011, cuts in government outlays on education, infrastructure, science, and technology, the very areas in which the United States needs to invest to regain its long-term competitiveness.

  CHAPTER 7.

  The Rigged Game

  Here’s the conundrum: A healthy economy is a mixed economy, in which government and the marketplace both play their role. Yet the federal government has neglected its role for three decades. Just when the government was needed to chart a course through the twists and turns of globalization, it went AWOL. Or, more accurately, it turned the levers of power over to the corporate lobbies. America’s economic failures are therefore at least as much political as economic. This chapter examines the politics of America’s corporatocracy, a political system in which powerful corporate interest groups dominate the policy agenda.

  We can see how the corporatocracy arose as the confluence of four big trends. First, the American political system has weak national parties and strong political representation of individual districts. This allows special interests to have a great say in politics through local representatives. Second, the large U.S. military establishment after World War II created the first of the megalobbies, the military-industrial complex. Third, big corporate money finances America’s election campaigns. And fourth, globalization and the race to the bottom have tilted the balance of power toward corporations and away from workers. Add up these trends, and we have the perfect political storm, in which Washington has been overrun, and overtaken, by the lobbies. The wealth/power spiral has continued to amplify the political disaster.

  The main aim of this chapter is to explain how America’s money-drenched political system works today. Another is to shake us from a lazy habit: the unexamined notion that decisions made in Washington reflect the will of the American people and the public’s underlying values. The public has its main say on one day every two years: election day. The choice is between two political parties that cynically ignore their constituencies the very next day in order to carry out policies aimed at the rich and powerful rather than the voters.

  The voters have a significant unmet respo
nsibility, to be sure, in pulling Washington back to a true democracy. Yet most voters are poorly informed, and many are easily swayed by the intense corporate propaganda thrown their way in the few months leading to the elections. We have therefore been stuck in a low-level political trap: cynicism breeds public disengagement from politics; the public disengagement from politics opens the floodgates of corporate abuse; and corporate abuse deepens the cynicism.

  America’s Weak Party System

  Political scientists distinguish between majoritarian and consensus electoral systems. Majoritarian systems tend to have just two or three major parties, and elections generally produce a clear winning party at the polls. The winning party (or perhaps a two-party coalition) governs while the losing party is out of government. Consensus systems have electoral rules that produce a large number of parties, and several parties generally govern as part of a broad coalition.1

  The main reason for America’s majoritarian character is the electoral system for Congress. Members of Congress are elected in single-member districts according to the “first-past-the-post” (FPTP) principle, meaning that the candidate with the plurality of votes is the winner of the congressional seat. The losing party or parties win no representation at all. The first-past-the-post election tends to produce a small number of major parties, perhaps just two, a principle known in political science as Duverger’s Law.2 Smaller parties are trampled in first-past-the-post elections.

  There are two major implications of America’s FPTP system. First, in a two-party system, the swing votes are near the center of the income distribution and political ideology. Both parties attempt to woo the middle class and independent (nonparty) voters. The poor are typically not wooed and are often not even mentioned in the campaigns, since they are rarely the swing votes. During the three presidential debates in 2008, the words “poor” and “poverty” were not uttered a single time (neither by the candidates nor by the questioners). The opinions and needs of the poor are represented only in districts that have a high rate of poverty.

  In European proportional systems, on the other hand, winning more national votes among the poor means winning more parliamentary seats overall. The poor may be represented by their own party or may have a strong hold on a center-left labor party. Even if the poor are disbursed throughout the country, they still form a powerful voting group.3

  These basic differences show up in systematic differences in social spending according to the voting system. Proportional systems are likely to support higher social spending and more redistribution toward the poor. Consider, for example, the share of public-sector social outlays in GDP in 2007 across three electoral systems (first-past-the-post, proportional, and a mix of the two) in a sample of fourteen high-income countries. The FPTP countries (the United States, the United Kingdom, and Canada) have an average social outlay of 19.9 percent of GDP. The proportional countries rank at the top of the list, with an average outlay of 28.1 percent. The mixed voting systems are in the middle, with an average social outlay of 24.6 percent. This correlation is not proof that the FPTP voting system causes the lower level of social outlays, and even within the group of FPTP countries, U.S. social spending is very low, but the pattern certainly suggests that FPTP systems tend to neglect the needs of the poor.

  The second implication of America’s FPTP system is the lack of strong party discipline within the two national parties. In proportional systems, the national parties almost always stick together in parliamentary votes. In parliamentary FPTP systems such as those in the United Kingdom and Canada, the governing party or parties also stick together on major votes, since a failure on a major policy vote usually triggers a new national election or at least the fall of the government.

  In America’s FPTP system, by contrast, in which Congress and government are separate branches and the government does not fall when it loses a legislative vote, national party discipline is limited and fragile. Members of Congress prioritize local interests over national interests, since Congress is elected locally. A strong national party leader may occasionally achieve party discipline in Congress, but party ranks are easily broken when interests conflict across districts.

  A stable national majority coalition in Congress is therefore hard to achieve and sustain.4 Moreover, congressional procedures give tremendous leeway to individual members to delay legislation and block appointments to executive departments and regulatory agencies. In the Senate, a minority of forty-one senators is usually enough to stop legislation favored by the majority, via the filibuster. Congressional power is fragmented, veto power is rife, and special interests are very well represented and able to penetrate the legislative process.

  To pass economic legislation, the president must inevitably run a minefield of local interests. Though the president wields considerable power over the executive departments and agencies and limited influence over regulatory processes, the White House cannot be assured of passing a program or budget through Congress. Each major budget vote is an adventure on its own, with the president winning some and losing many.

  With weak national parties and with elections to Congress in single-member districts, the main local industries and wealthy constituents in each district are likely to have great sway over each representative. In a coal-mining district, the representative is likely to vote in support of coal interests (and against anti–climate change legislation) irrespective of party or overall ideology. Military bases, mines, major factories, financial markets, and other major industries in the district are all likely to define the voting behavior of members of Congress. Congress is therefore a maze of special interests. Passing national legislation means forming coalitions of local interest groups and trading off favors across these groups. This kind of politics naturally gives enormous weight to narrow interest groups.

  The power of special interests is exacerbated by yet another unusual feature of American politics: nonstop campaigning. Due to an outdated choice made in the 1789 Constitution, the United States has a national election every two years, which is by far the shortest election cycle of any high-income democracy. Between 1960 and 2009, Sweden had fifteen national elections; the United Kingdom had twelve; the United States had twenty-five.5 The two-year cycle between congressional elections means that the United States is always in campaign mode and members of Congress are consumed by the need to fund-raise for the next election. Special interests are always at the ready to trade campaign financing for votes on crucial issues.

  The Rising Power of Big Money

  The large and growing role of big money in politics is the grim political reality of our times. It is the key to understanding the expanding tentacles of the corporatocracy. Campaign costs, especially to cover expensive media spending, have soared, as we see in Figure 7.1, which shows the estimated total campaign spending on each federal election since 1998, as estimated by the Center for Responsive Politics. These costs include direct spending by the candidates, spending by the political parties, and direct spending by third-party groups for media and marketing. The overall upward trend is a rise in campaign spending of around $450 million per each two-year election cycle.6 Even a nonpresidential federal election cycle now costs around $4 billion. Though this amount is not huge relative to the size of the country, about $50 per household, the rich are the predominant funders and thereby win the predominant political influence as a result. Public funds could easily replace the private contributions (and would account for a mere 0.13 percent of the federal budget), but the rich certainly don’t want to lose their leverage, and therefore they aggressively block any greater role of public financing.

  Figure 7.1: Total Federal Spending by Election Cycle (in Constant 2008 Dollars), 1998–2010

  Source: Data from Center for Responsive Politics.

  Lobbying outlays, as shown in Figure 7.2, are also soaring by roughly $200 million per year, at levels comparable to the campaign spending, also above $5 billion during the election cycle of 2009–2010 (the annual lobbying out
lays should be added across the two years of the election cycle to compare them with campaign contributions). Some of these outlays are essentially campaign contributions disguised as spending on lobbyists. Corporations pay the lobbying firms, which then channel the funds to campaigns through their staffs’ contributions to the campaigns and through the funding of issue campaigns linked to candidates. Lobbyists also earn kudos by hiring the family members of politicians and by keeping lucrative jobs in wait for politicians, military brass, and regulators, to be taken up once they leave office.

  Figure 7.2: Total Lobbying Outlays (in Constant 2008 Dollars), 1998–2010

  Source: Data from Center for Responsive Politics.

  In his excellent recent book on corporate lobbying, So Damn Much Money, Robert Kaiser summarizes the record this way:

  By 2007, everyone in the system took it for granted that a high percentage of members and staff would eventually pass through the revolving door, because so many already had. A 2007 directory of Washington lobbyists listed 188 former members of the House and Senate who were registered to lobby. A study done by Public Citizen, an advocacy group, found that half the senators and 42 percent of House members who left Congress between 1998 and 2004 became lobbyists. Another study found that 3,600 former Congressional aides had passed through the revolving door. Appointees from the executive branch followed the same path. In early 2008 the Center for Responsive Politics, a watchdog group, identified 310 former appointees of George W. Bush who had become lobbyists or Washington representatives. The center identified 283 former Clinton administration officials who had done the same.7