Howard Wachtel is a former TNI fellow and an expert on the financialisation of the global economy who foresaw the financial crisis long before it struck in autumn 2008. His book in 2003 Street of Dreams. Boulevard of Broken Hearts: Wall Street's First Century (London: Pluto Press) is a widely respected history of the infamous New York street. Howard was the first co-ordinator of TNI's Global Economy Programme and currently a Professor Emeritus of Economics at American University in Washington DC.
Tax Distortion in the Global Economy
July 2005
Tax Distortion in the Global Economy (*) As globalization challenges national borders, governments are discovering that their tax base is eroding, especially their ability to tax corporate profits. The share of total taxes from labor has been increasing while the share on capital has been declining, after social security taxes are removed from the calculation. In the European Union half of all tax receipts were derived from capital in 1980; by the mid-1990s it had fallen to 35%, while the share of taxes collected from labor rose from 35% to over 40%.The gap between higher tax proportions from capital in 1980 and those from labor steadily eroded, as the former fell and the latter rose, until 1991 when they became equal, and subsequently reversed course with the tax proportions from labor exceeding capital. In the United States, which has historically had a lower capital share, there is a similar pattern; from a capital share of 27% in 1965 it has fallen to only 15% in 1999, this minimal corporate share occurring at a moment of historic peaks in corporate profits. (1) To a considerable extent, the source of this change can be explained by globalization. Capital is more mobile than labor and can escape taxes by moving to low tax third world countries. By manipulating their books through transfer pricing (to be defined later), corporations are able to show high profits in low tax jurisdictions in the third world and avoid the high tax jurisdictions of Europe and the United States. In developed countries (DCs), financial and tangible forms of capital roam the globe, rendering it difficult either to define profits for tax purposes or decide in which country the taxable profit is earned. Less-developed-countries (LDCs) find themselves under such pressure to grant tax holidays, tax abatements, and generous land giveaways that they cede their tax base in an obsessive competition for foreign investment. Corporations have then used these concessions from LDCs to leverage tax reductions in their home countries in what is by now a well-tuned orchestration of political pressure. "Tax degradation", is the way the IMF's former Director of its Fiscal Affairs Department characterizes this general phenomenon, "whereby some countries change their tax systems to raid the world tax base and export their tax burden". (2) A different spatial alignment defines the new global era. Capital operates both within and beyond states; labor is rooted in the specific space of nation states. A tension arises, therefore, between the unbounded global reach of commerce and a bounded national government. The economic concept of elasticity is relevant here; a higher elasticity of response of capital to taxes, as compared to labor, affords corporations greater power in leveraging their influence against governments. Tax capital, it moves and tax receipts from corporations decline, a high response elasticity. The contrary is true for labor. Simply put, companies can challenge government tax policy by threatening to move to lower taxed jurisdictions, a tactic that is not credible for labor. The technical economic concept of elasticity translates into political power in a global era that venerates the mobile and denigrates the stationary. The French social critic, Susan George, describes this distinction between the mobile and the stationary as the "fast castes, ... the owners of capital and skilled professionals, [who] are at the top of the global pyramid", echoing Jacques Attali's apt characterization of them as "elite nomads". "Below them", she continues, "is a vast pool of stationary, 'slow people,' whose chief common characteristic is their substitutability, whether the substitution takes place North-North, North-South or South-South". This has changed relative bargaining power and the arena within which negotiations over a social contract once took place. George argues that previously the "negotiating table was geographically grounded. People had to negotiate because they were going to have to go on living with each other in ... the same space". Not so any longer because of the spacial alterations associated with globalization, in which the "key words are speed and mobility", says George.(3) Power relations now slice through capital and labor to forge a new division between the fast, mobile people and the slow, stationary ones. The fast and the mobile stay a step ahead of the tax collector, something the slow and the rooted cannot do. Existing tax policy was designed for defined borders and tax jurisdictions that coincided with nation states. Indeed, that was one of the raison d'etre for states in the first instance when they were formed a half millennium ago. The global era has changed this. Differing mobilities and elasticities of capital and labor reconfigure power relations in the US and Europe and expose third world economies to a competitive race to the bottom. The route to an analysis of tax distortion and its consequences runs through a discussion of the conceptualization of globalization and the confusions surrounding that buzz word. Defining Globalization Globalization began as an economic phenomenon in the mid-1970s following on the collapse of the international regulation of international money in what was known as the Bretton Woods system. Following this event, the profusion of definitions that attempts to describe globalization has focused for the most part on the purely quantitative, especially in conventional economic circles, international organizations, and governments. It is conventionally defined as more money moving around the world, more trade, more investment, more people, more information and all at a dizzying faster pace. Interdependence is the catchword that encapsulates these phenomena. To this is added the observation that some activities, such as trade and the movement of people, were as large or larger before World War I than they were at any time up to the 1990s. David Hale, a journalist, is representative of this group when he points out that the "process called globalization was well under way in the closing decades of the nineteenth century", but then was halted "in much of the world for nearly eight decades because of World War I" and, one could add, the Great Depression and World War II. British overseas assets rivaled those of the United States today (adjusted for inflation), and the movement of people from the mid-nineteenth century until World War I was not dissimilar from today, as well. (4) In an otherwise sharply etched report on how the new globalism has exposed the challenges to European social democracy, the OECD (Organization for Economic Co-operation and Development) offers this numbingly tepid definition, typical of this international organization genre:
Few academic economists go beyond these characterizations of globalization, especially in international economics' textbooks. An exception is the textbook of two Canadian economists, Brown and Hogendorn, who have attempted a synthesis between traditional international economics and the economics of globalization. They acknowledge that "globalization is the increasing economic integration of the world [which] began a century and a half ago", and then go on to point out that it "reduces the power of governments to control their economies".(6) More typical is the definition that appears in the most comprehensive and interdisciplinary anthology as of this writing, published in the US, where the new global economy is represented simply as the first epoch in which the "international economic system has become truly interdependent. A web of interconnections between, within, and above states has tied together formerly disparate forces".(7) By way of contrast, an earlier anthology with a distinctly European perspective highlights the "rapid expansion of financial markets worldwide, the competitive struggle of nations for exports, the radical uncertainty of future investment opportunities and the failure of existing government strategies ..". to address globalization and its tensions. (8) There is no mistaking the fact that quantitative changes and their pace are an important defining characteristic of globalization.(9) What is missing from these definitions, however, is the qualitative dimension of globalization. At some point quantitative change translates into qualitative change. And the single most important aspect of the qualitative change wrought by globalization is the challenge to the sovereignty of the nation state, its independence in making policy through democratic parliamentary procedures, and the emergence of policy as a "tradeable commodity" - its export and import and convergence toward uniformity, the "single price" associated with the trajectory of all tradeable commodities. Nowhere is this clearer than in the contrast between the World Trade Organization (WTO) and its predecessor, the General Agreement on Tariff and Trade (GATT). The birth of the WTO in the mid-1990s distinguished itself from the GATT, which had been in existence since 1948, precisely along globalizing lines. GATT was a regulatory regime that stopped at the borders of countries. It encouraged countries to lower tariff and non-tariff barriers to trade, allowing outside products to enter countries on equal terms with those produced inside. The WTO inserted itself inside borders to open up trade, challenging policies that interfered with the commercial principle of the free movement of goods and services, whether it be intellectual property statutes, environmental regulations, or standards that controlled such services as insurance or banking safeguards. It set up mechanisms for changing internal policies within countries that interfered with the entry of products and services, thereby establishing itself as a regulator of domestic policies that affect trade. This has been most clearly identified with patents, trademarks, and copyrights - aspects of intellectual property - that countries such as India have been required to alter to conform to WTO requirements. But the uni-dimensional commercial principle has also been applied to environmental regulations in the US and Europe. The WTO received vastly enhanced rule-making authority over an extended jurisdiction, superceding national government policy. At the core of the conflict between the WTO , as representative of the new globalism, and the nation state is the monochromatic quality of the WTO commercial principle, its pensee unique, as the French call it, as against the multiple prisms of the state, where the commercial principle is juggled against health and safety objectives, environmental standards, rights of labor, and so on. The imagery that had been erected in the half millennium since the advent of the nation state was one of verticality, a series of vertical borders that figuratively separated one country from another in which a blend of free access across borders and national regulation of borders co-existed. The essence of globalization is a set of horizontal functional intrusions that cut swaths through borders in a regime where free access trumps national regulation. First financial markets penetrated "vertical" borders, then increased trade fostered by a radical reduction in transportation costs, then foreign investment. Outside of the economic realm, culture was next, environmental and ecological overlaps, crime, the movement of larger numbers of people through legal and illegal immigration, information and telecommunications. In each of these realms the assault on national borders was nothing new. As Fernand Braudel and the Annales school argues all of this had been going on since the beginning of history. But what was new was the scale, the scope, the rapidity of movement, the shrinkage of time and space. It is as if a block of Swiss cheese stood in for the nation state and small holes previously had permeated its mass. The functional incursion of globalization makes the holes ever bigger so that at the end they are much larger than the mass, threatening the stability and structural soundness of the mass itself, a metaphorical way of describing the translation of quantitative change into qualitative transformation. When that happens a threat of collapse and implosion is imminent. This is the fear that has motivated an ill-formed language of dissent. A different conceptual premise from the conventional views capital as a "constantly revolutionizing" process. Because capital needs an "expanding market for its products [it] chases over the whole surface of the globe ... settle[s] everywhere, establish[es] connections everywhere ... give[s] a cosmopolitan character to production and consumption in every country. ... In place of the old local and national seclusion, ... we have intercourse in every direction, a universal interdependence of nations [and] ... a world after its own image". (10) This contemporary-sounding language is actually a prescient piece of writing from The Communist Manifesto. To bring this forward to the present, globalization alters the space in which individuals, institutions, and governments comport themselves. It both expands and contracts space. Vistas are enlarged through modern telecommunications, information delivery, travel, and institutional changes that allow corporations to produce and market instantaneously across the globe. Space, however, also constricts. Corporate space encroaches upon private space. Individual privacy contracts and the room for the fabrication of spontaneous space is crowded out by corporate constructions, in which individuals follow a "script" for their behavior within a public space written by corporate planners. One need only compare the spontaneous space in the café culture of the typical French café with that of corporate constructed space in a Starbucks, not withstanding the positive accomplishment of that company in bringing better coffee to the United States. This connects with taxes in that government space for the collection of taxes has been shrunk at the same time as the corporate universe has broadened for the deployment of accounting devices to select where it wants to pay taxes. Corporations are able to globalize their tax burdens, to minimize these obligations, and allocate them so as to enhance their worldwide profits while government is constrained to a more restricted territorial boundary. Pulling all these observations together points to a definition of globalization that captures both the quantitative and the qualitative, its spatial transformation, and power structures. One example is from The Economist: "a minimum definition would include a diminishing role for national borders and a gradual fusing of separate national markets into a single global market". (11) To this should be added the import and export not only of tangibles, but intangibles such as policy ideas, culminating in the single policy formula, the pensee unique, replacing a matrix of varying policies in varying settings. Broadening this, my colleague at American University, Colin Bradford, has delved into literature and art to find a means to capture the essence of globalization. Inspired by the work of the Mexican Nobel Prize winner, Octavio Paz, he borrows his literary symbolism of "roots and wings", the tension between national identity (roots) and universality (wings), between the concrete space where life is lived and the abstract space of the cyberworld, the stationary and the mobile, the slow and the fast, or in Paz's words the separation of writers into those "air-borne and those deeply rooted".(12) Taxation and Factor Mobility "The heart of the problem", of tax distortion according to The Economist, derives from the fact that "modern tax systems were developed after the second world war when cross-border movements in goods, capital and labor were relatively small. Now, firms and people are more mobile - and can exploit tax differences between countries". (13) To firms and people, a third is added: land. Historically, tax systems were developed along with the creation of the nation state. Indeed, one of the motivations for state creation and defined geographical jurisdiction was the desire of authorities to capture the tax base which was originally land, the most reliable and predictable tax base, because it cannot be moved to another tax entity. Land's tax base is virtually inelastic with respect to any tax rate. Governments can more effectively tax factors of production if there is a high degree of inelasticity with respect to the tax base following on an increase in tax rates. Factor mobility erodes this. The taxed factor cannot escape by fleeing the tax jurisdiction if there is immobility and inelasticity. As the most mobile factor of production capital can more readily jettison an unfavorable tax jurisdiction and seek refuge in a third world tax haven. A government can raise the tax rate on capital but discover its tax receipts have declined because the base on which the tax is calculated drops proportionally more than the rate has risen. Profits are a moving target; labor is stationary and more readily targeted for taxation. Even if labor wanted to move to another tax entity, it cannot do so easily. Immigration laws restrict labor mobility, but fewer restrictions are placed on capital movements and recent proposals for a new Multilateral Agreement on Investment (MAI) aim to increase further the ease of fixed and financial capital movements. There are also other reasons: language, culture, cost of moving and reversing the move, and risk. Picking up and relocating half way around the world is not as easy for humans as it is for stateless and root-less capital, which is specifically aided by the modern marvels of information technology. The difference in opportunities for movement of capital as opposed to labor, therefore, accounts for the shifting of taxes onto labor and away from capital, with consequences for unemployment, equity, and efficiency. A corporate "underground economy" avoids taxes but absorbs benefits from other's tax payments. The OECD seemed to surrender to this reality in 1994 when in a staff paper it observed that "with growing international mobility of both fixed investment and financial investment there may be a need to reduce taxes on income from capital. Thus, most of the tax burden will have to fall on labor as this is the less mobile factor.(14) Four years later, however, the same OECD had reversed itself and now found what it calls "tax competition" to be harmful when countries can develop tax policies "aimed at diverting financial and other geographically mobile capital ... shifting part of the tax burden from mobile to relatively immobile factors and from income to consumption, ... [creating] 'free riders' who benefit from public spending in their home country and yet avoid contributing to its financing". (15) Competing for foreign direct investment (FDI) by a third world country that offers low taxes on profits may appear to be wise policy. However, it can be a trap, a cul de sac that pits one poor country against another in an inevitable race to the bottom, a "prisoner's dilemma" in which each third world government would prosper by not giving away its tax collecting potential but cannot do so without a collaboration that is precluded by the character of competition for FDI. Through the prism of neutral parties in the advanced countries, it becomes a form of poaching on taxes from profits, shifting internal tax burdens, and producing free riders in the most productive sectors. Foreign direct investment to third world economies stood at $190 billion in 2000, the same as it was in 1999. This represents a trend reversal following on the 1997 Asian financial crisis and its attendant spread to Latin America. Before 1997, FDI had been growing rapidly in the third world, its share of total FDI growing from around 17% in 1990 to a peak of 40% by 1994. (16) Transfer Pricing and Tax Distortion Transfer pricing is the device corporations use to locate their profits worldwide so as to minimize their global tax payments. It was first discovered by analysts in the early 1970s, applicable to only a slice of corporate activity that had become multinationalized. (17) Today, however, transfer pricing is so widespread that it has caused the erosion of the profits tax base.(18) A corporation operating globally has considerable transactions internal to the company, where the cost and price of those transactions is not set on an external market but established by the corporation itself. A company can, therefore, manipulate these internal prices so as to show high profits in low tax jurisdictions and low profits in high tax jurisdictions. The typical template yields high prices for headquarter activities, normally conducted in high tax jurisdictions, such as marketing, research and development, production and inventory management, legal, intellectual property, accounting and financial services, some of which is used to manage the internal transfer pricing mechanism. Low market prices are placed on those direct production activities conducted in low tax third world countries. External markets will dictate these basic price differentials. However, when a multinational corporation (MNC) "imports and exports" products and services within its worldwide affiliates, it flips these differentials. It charges a lower internal price than that on the external market for headquarter activity "exports", in order to show high profits in low taxed third world countries. Higher internal "import" prices are charged than those in the external market for the direct production undertaken in third world affiliates to show lower profits in the high taxed country. By pricing this way for its imports and exports internal to the company, under-invoicing headquarter prices and over-invoicing foreign costs, the multinational establishes transfer prices that allows it to conduct a profit location strategy, minimizing its global tax liability. Transfer prices for exports and imports internal to the company permit the multinational to optimize its placement of profits with the goal of minimizing tax payments, constrained by a band of price differentials that does not invite the suspicion of the tax collector in the high tax country. (19) The problem for taxing authorities arises from the nature of profits, the base on which taxes are levied on corporations and financial institutions. Profits represent the difference between revenues and costs, but the question raised by transfer pricing in a global theater is what are costs and which institution defines them: the external and tax-neutral market or the biased internal transfer pricing "market" of the tax-paying entity itself? Moreover, in which country, taxing jurisdiction do profits originate? Although governments attempt to audit the transfer pricing mechanism of tax avoidance, the problems are acute and the costs of enforcement high. In theory MNCs are supposed to use the external market price test, called "arms length" pricing, when they price internally for tax purposes, but disputes inevitably arise and the ability of tax auditors to challenge prices is constrained by enforcement costs.(20) When the profits tax was introduced as a major revenue source for national governments, during and after World War II, the corporate entity was more or less geographically bounded and coincident with the nation state. Globalization, by definition, changes this. Although legally based in a nation state, corporate economic activities are now so globalized that pursuing a moving profit target becomes an almost impossible task for the state. This is revealed by the statistics on intra-firm trade in international markets, exports and imports among affiliates within a multinational. Of the nearly $700 billion in imports of products and services in 1994, 43% were "sales" within a company, intra-firm trade that reflects worldwide production and the movements of products and services internal to companies from activity elsewhere that is imported back to the US(21) Intra-firm exports from the US MNCs to their affiliates around the world amounted to 36% of total US exports, around $272 billion in 1994. The $301 billion in intra-firm imports and $272 billion in exports represent the magnitude of what the multinationals have to play with when they establish costs and the location of profits. Based on 1992 data, 43% of intra-firm exports went to LDCs and 49% of imports were intra-firm from LDCs.(22) The problem arises from a uni-dimensional and dated definition of profits. This was an effective tax base for several decades after World War II, and corporate taxes on profits produced a fair share of revenues for governments. Globalization, however, has rendered profit taxes increasingly difficult for governments to capture because of the mobility of capital and the ability of MNCs to escape high tax jurisdictions through transfer pricing, buying and selling to itself with more or less fictive prices. What results is tax arbitrage, an opportunity which no rational company should pass up, playing one country's tax rate against another to minimize tax responsibilities worldwide. A body of literature starting in 1971 affirms the successful use of transfer pricing in allocating profits so as to minimize tax responsibilities. In a 1998 econometric study, that builds on earlier research, Clausing concludes that "intrafirm trade may be different from international trade conducted at arms-length. Intrafirm trade flows are influenced by the tax minimization strategy of multinational firms".(23) In another cross-section study of 33 countries, using 1982 data, Grubert and Mutti find that a reduction in the profit tax rate from 20% to 10% increases the net capital stock of a US foreign affiliate by 65% and more than doubles after-tax profits on sales.(24) In another review of empirical literature on taxes and transfer pricing, Hines concludes that the "econometric work of the last 15 years provides ample evidence of the sensitivity of the level and location of FDI to its tax treatment", with a typical estimate indicating that a lower tax rate of 10% results in an increase of FDI of 6%, after controlling for other influences on the location of FDI.(25) Other research focuses on the impact of lower taxes on expanded internal trade within a MNC, affirming the appeal of transfer pricing for a global tax strategy. A tax differential of 10% is associated with an increase of net internal trade of 4.4%.(26) Evidence that FDI shifts investment from the home country to the foreign country comes from a summary of several empirical studies, in which Hines concludes that for each dollar of FDI there is a transfer of investment from the domestic economy to the foreign economy of from 20 to 40 cents.(27) In another study he conducted on shifting of foreign FDI from high to low tax foreign countries, Hines found that the 41 identified tax havens account for about one-fifth of all FDI and 30% of foreign source income.(28) The fundamental problem, concludes one of the principal researchers in this field, is that the "basic structure of federal income taxation was in place before the American economy acquired the kind of international position it has in the last few decades; as a consequence, international considerations are afterthoughts in its design".(29) Fixing Tax Distortion What are governments to do in the face of a globalization that has sundered their profits tax base? The answer is found in a variant of unitary taxes that has been used in some dozen states in the United States, where each state has attempted to define profits originating in its taxing jurisdiction based on a formula that apportions total company profits by sales occurring in the state. Elevated to a global arena, here is how it works. The unitary tax starts with accounting categories that are known and cannot easily be fudged: aggregate worldwide profits, total global revenues received, and revenues earned in a particular tax jurisdiction.(30) To discover the profit base for tax purposes, this calculation would be made: Divide revenues acquired through sales in a country by total worldwide revenues. To identify profits earned in the country's tax jurisdiction, apply this percentage to global profits. This becomes the profits base on which a national tax is levied.(31) For example, assume Nike makes worldwide profits of $500 million. It receives 40% of its worldwide revenues from sales in the United States. The profit earned in the US is then $200 million and the corporate profit tax rate is applied to that base. The advantage of this unitary tax is that the problem of transfer pricing disappears. The three statistics - profits and sales revenue worldwide and sales revenues in the country tax jurisdiction - are known or can readily be obtained by tax authorities. Opportunities for evasion are few. The unitary tax system is an option for the headquarters country and a third world recipient of FDI can continue to tax local profits as it has been doing. Tax collections, therefore, need not change in the third world producing country. For a successful tax reform, this one has multiple merit. It is easy to administer and clear as to its purposes. A political constituency could be mobilized on the grounds of tax fairness, especially after examples of transfer pricing fiddles were publicly exposed. It collects large sums of money which today escape taxation by any government, either the headquarter where foreign direct investment originates or the third world tax haven. It does not involve any new tax, only a new way to identify and administer an old tax. It engages the North and the South and reduces the pressures on third world countries to offer tax havens, because there are no longer ways to avoid profit taxes. As to the argument that this will discourage foreign investment and tax collections in third world countries, this may happen to some extent in the short run. Companies, however, will continue to engage in direct foreign investment to third world countries but now based on organic comparative advantages that reflect market-based variances in wages and regulatory differentials. This promotes a "high road" form of competition among third world recipients of investment to provide the most educated labor force, the most efficient governmental institutions, and reliable receptacles for production. The unintended consequences of removing tax abatements from the table may be salutary for poor countries in a way not presently capable of being understood because of the way tax competition now works. It will encourage them to create comparative advantages that are growth enhancing and elevating of life for their poorest rather than engage in an unproductive competition over which country can be poorest.(32) For the headquarters countries, the EU and the United States, the unitary global tax will restore a modicum of fairness to tax proportions between capital and labor, one that prevailed for nearly half a century before globalization magnified and transformed a wedge into a large chasm. It corrects a distortion so widely accepted in the economics' literature that one of the principal empirical studies concludes by lamenting the fact that the "international mobility of economic activity now looms over any attempt to tax domestic income-producing activity too heavily. Indeed, the importance of this consideration raises the very real question of whether there any longer exists such a thing as purely domestic tax policy".(33) By removing costs and their ambiguity from the taxing equation, transfer pricing is rendered ineffective in siting profits by the unitary tax There are precedents for the unitary tax. California introduced it in the 1970s.(34) At the national level, the unitary tax was seriously considered in the form presented here in 1962 and supported by the Kennedy administration but ultimately failed to gain approval.(35) Today a corner of the corporate tax system partially uses the unitary tax principle. Since the tax changes of 1986, a portion of research and development costs must be allocated in a complicated formula that uses fractions of sales and assets located in the US(36) Concluding Remarks: The Long Cycle in Ideas That there has been tax distortion directly derived from the essence of globalization is not in doubt. The only question is what can be done to restore a degree of tax proportionality between the mobile and immobile, capital and labor, the fast and the slow, the winged and the rooted. The solution is more political and ideological than technical. For the past quarter century, with increasing intensity, the fundamentalism of the market has overtaken the secular appeals of regulation, re-ordering, and restoration through political economy. Market fundamentalism is an evangelical faith that has been sold to its converts as a doctrine from which straying is as close to a mortal sin as we have in life today. But ideologies and belief systems do not endure forever. A 25-year run of hegemony is about its limit before a new period of testing and challenge begins, followed by political tensions, and a new policy envelope.(37) Looking back historically, there are long cycles in the development of ideas that typically lag technological and structural changes by perhaps as much as a quarter century. Technological and organization changes that emerged in the second half of the nineteenth century, for example, only found their ideological construction at the turn of the century. Economies became dominated by large scale enterprises that organized capital markets on a national basis when they had previously been limited to localities and regions of a country. The railroad, telephone, and telegraph integrated markets - both financial and product - border to border, stretching to the limits of the territory enclosed by a nation state. Institutionally, a new corporate form, the trust in the United States and the cartel in Europe, was created to organize the technology and the capital accumulation process. The very word trust is interesting in what it connotes: a private profit-seeking enterprise, acting as trustee over national assets that travel over largely unoccupied space belonging to the state, as was the case with the US land over which the railroads, telephone, and telegraph moved information and products. There was an ideological, political, and policy lag in catching up with these transformations. It took about a half century, in roughly 25-year intervals, for the evolution of the twentieth century's economic and social theory to be framed and subsequently challenged. The last quarter of the nineteenth century saw the preeminence of the trust and the cartel as the organizing entity, receiving accolades not unlike those emanating from today's celebrants of the Washington Consensus. From the turn of the century onward about another quarter century was dominated by these ideas until effective contention appeared, one that began to establish political and policy strategies to address the tensions emanating from capital organized on a national plane. The period of the 1920s and 1930s produced sharp debates as between socialists of all shadings, reformers, and defenders of the existing systems. This period began to produce the development of the social contract that accommodated and absorbed the fin de siecle's transformations, attaining its apogee from around 1950 to 1975, a half century after the structural changes occurred that brought on the tensions in the first instance. After 1975 the social contract of the mid-20th century began to atrophy in the face of a contest from a new set of organizing principles and ideas following on a globalization that began about that time. In approximately 25-year intervals, we are witnessing another evolution of ideas. Presently they are in the earliest phase of challenge and response. It would be a mistake to misread this moment as one of market fundamentalist hegemony just at a time when its tensions have produced an opening for a new debate about globalization and its discontents. * Many of the ideas for this paper were developed at the American Academy in Berlin, where I was a Distinguished Visiting Scholar in Fall 1999. I am grateful for comments from the members of American University's Inter-Disciplinary Council on the Global Economy, where this paper was presented in Fall 2000. References 1. "Taxing Matters", The Economist, April 5, 1997, p.33 and U. S. Council of Economic Advisers, Economic Report of the President 2001 (Washington: Government Printing Office, 2001), p. 369. |
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