A Theory of History, Pt. 1: The Role of the State

Global Networks and State Power

In previous posts, I’ve considered the economic and political decentering of the nation-state, the unraveling of free-market orthodoxy in the face of the economic crisis of 2008, and my opinion that our political disarray of recent years emerged from these two factors.

You might fairly ask how I can talk about the decentering of the nation-state after a massive financial bailout and stimulus package, and in the face of major health care legislation. Not to mention the assertive international policy of the Bush years.

I’ll begin my answer by considering a characteristic that all of these phenomena share: That is, they all involve responses to the increasing ability of networked groups of non-state actors to cause disruption on a global scale.

We well understand how 9/11 depended on the ability of a non-state actor to take advantage of networking opportunities provided by new communications and transportation technologies. The neoconservative response, rightly or wrongly (and I still hold, rightly) constituted a serious response to this new reality: the reorganization of hostile societies, they argued, served as a means of policing wayward elements that the US could not control from a distance. Iraqi social patterns would benefit us if they enhanced the relative authority of the moderate, and hopefully growing, middle class: The neoconservative project ultimately depended on a very socially-oriented view of national defense. (Some, obviously, will disagree with the premise that we can alter foreign societies socially. Nonetheless, one would have difficulty disagreeing with the idea that the social constitution of foreign societies bears increasing relevance in an age of weapons of mass destruction, improved communications and transportation, etc.)

The financial crisis of 2008 bears strikingly similar traits to the “terrorism crisis of 2001” in that the networking of housing-purchase decisions across the country created a heretofore unknown interconnection between national housing values. Here again, enhanced communications technologies played a central role: Namely, they allowed financiers to organize nation-wide housing derivatives into unified products and allowed massive pools of capital, from international sources, to overwhelm traditional patterns of home financing. In finance, as in the case of international terrorism, the state confronts a vast web of transactions that it cannot successfully monitor or police. In the case of TARP, as in that of Iraq, middle class wealth and habits reveal themselves as the ballast of a volatile political economy: Specifically in the US case, the middle-class funded bailout of high-stakes financiers, after a crisis created by those same financiers as well as by uneducated homebuyers, suggests that ultimate financial stability does not derive from New York but from the well-being, and education, of the mass of American society.

The US government acted aggressively in Iraq and with regard to the financial crisis. In each case, however, the logic of the events precipitating these actions indicates that state power faces a lasting, and growing, challenge from the power of networks unattended until the moment of crisis. The nature of such networks should fascinate us even more than the loud words and deeds of a superpower.

The True Story of the GOP's Dissipation

Rapid global development and economic/financial change undermine the relevance of strict rightists and leftists: The need to adapt quickly to new technologies and new economic realities will reward adaptable, rather than orthodox, parties and regimes.

Edward Golberg of Baruch College, in today's Friedman column diagnoses the malaise of the Republican Party accordingly:

Globalization has neutered the Republican Party, leaving it to represent not the have-nots of the recession but the have-nots of globalized America, the people who have been left behind either in reality or in their fears . . . The need to compete in a globalized world has forced the meritocracy, the multinational corporate manager, the eastern financier and the technology entrepreneur to reconsider what the Republican Party has to offer.

Health care is one example of an area where government can play a productive role in supporting economic growth and human capital development.

Government intervention is only justified in the Right's worldview when the capitalist system is under threat (e.g. during ideological struggles with the Soviets, radical Islamists, etc.). They have no ideological context for coming to terms with the pressing national-economic needs of globalization.

Some on the left have a similar problem coming to terms with globalization but the left's solutions happen to be more pertinent at the moment. And, the anti-WTO, anti-trade wing of the Democratic party has receded, for the time being.

Why is the Health Care Debate Happening Now?

Because a Democrat is in the White House?

Because health care costs have skyrocketed?

Because free marketed ideologies have been discredited by the financial crisis?

Because Obama is especially charming?

The principal reason these debates are happening now is none of these things. The sea change in public opinion on health care over the past few decades is a result of the international predominance of capitalism and democracy.

Sound crazy?

During the Cold War, for instance, Americans were much more sensitive about socialist reforms. Now, a minority of Americans expresses such concerns.

At the same time, the idea of taking a huge economic risk in the midst of a focus on international political competition with, say, the Soviet Union or Islamic fundamentalists, was extremely frightening.

Finally, of course, the focus on human development has grown with the increase in the value of human capital in the global economy.

So, the global triumph of capitalism and democracy has (1) reduced ideological sensitivity, (2) shifted our focus away from international political competition, and (3) created the conditions for international economic competition, based on human capital investment, to take on increasing importance.

Health Care: A Right or A Privilege?

"I think health care is a privilege. I wouldn't call it a right." So says Senator Jim DeMint (R-SC) in a recent interview.

This comment is disturbing some liberal commentators. See here and here.

And, yes, the questions raised are essential.

But liberals should pause and realize that the abundant economic wealth that surrounds them makes much more practicable the very idea of "health care as a right." The individualism/individual responsibility that DeMint advocates is an essential element in the growth of wealth that we have witnessed over the past several hundred years. Wealth matters. Individual responsibility matters.

Conservatives should equally consider how mores can evolve, and redound to society's benefit, with new economic and social circumstances. Protections help to make society more stable and help to make less privileged members more productive. Rights matter. Both socially and economically.

One lens for considering the balance between economic growth and civil rights is the historical one:

Namely, rights and protections extended in economically advantageous fashion at one point in economic development might have undermined general economic growth at an earlier time. Had Roman slaves been protected from forced dislocation, as were feudal serfs, the Roman Empire might have been economically undermined in dramatic fashion. Had feudal serfs been extended universal K-12 education as is the common citizen of our time, agricultural output of the period would likely have declined precipitously. By the same token, a commitment to the universal health in our own times may be compatible with strong (more on this adjective later) economic growth even though the costs of such a commitment would have been overwhelming in an earlier time.

Food for Thought

From an article by Carlos Lozada:

With all the despair over the American economy's disappearing jobs and plummeting growth, here's mind bender for you: There is no U.S. economy. The national economy, as we traditionally think of it, is a myth. A fake. Over.

So contend Bruce Katz, Mark Muro and Jennifer Bradley in the latest issue of the journal "Democracy." The United States is not a single unified economy, they say, nor even a breakdown of 50 state economies. Instead, the country's 100 largest metropolitan regions are the real drivers of economic activity, generating two-thirds of the nation's jobs and three-quarters of its output. The sooner we reorient federal economic policies to support this "MetroNation," the quicker we can fix the mess we're in.

Reasons to Worry

David Smick in the Washington Post:

Pity Barack Obama's economic advisers. The blogs are now demanding their scalps, and Treasury Secretary Tim Geithner and his colleagues face a nasty dilemma: There are no solutions to the banking crisis without extraordinary political and financial risks. Thus, they have adopted a three-pronged approach, delay, delay, delay, in the hope that somebody comes up with a breakthrough.

David Ignatius in the Post:

We're still in the Neville Chamberlain phase when it comes to the economic crisis. The government is talking about sacrifice and solutions, but it hasn't yet made the tough decisions that will put the economy back together.

Letter to NYT: A Theoretical Basis for Moderate Political Thought

Dear Editor:

David Brooks (“A Moderate Manifesto,” 3/3/09) offers an appealing vision of a capitalism aware of its social underpinnings, and of a humanism aware of the decentralization required for economic growth. He could go further by explaining the global context that justifies his thinking.

Increasing global competition belies the idea that government can desist from making the social investments necessary to build new generations of engineers, entrepreneurs, and technicians. It also, however, reminds us of the perils of chasing capital away from our shores. The central challenge that faces us today is that of balancing these two aims.

Many Democrats and Republicans prefer to live in a simpler world in which, respectively, state action is the fundamental palliative, or the fundamental poison. The requisite wake-up call can come from a cold-eyed gaze at the growing power of international markets. A depression might make us do just that.


Sincerely,
Barak Epstein

Letter to WSJ: Protectionism, Globalization, and the Recession

To Whom It May Concern:

New economic realities demand new agreements and regulatory regimes and Jeffrey E. Garten (“The Dangers of Turning Inward, 3/1/09) is correct to identify the source of our current economic woes in an unbalanced global financial system that included an Asian savings glut, distorted currency exchange rates and, consequently, as we know well, inflated asset prices in developed countries.

Professor Garten proposes some lucid solutions to these problems but cannot do much to identify the political force that will call for careful international regulation and social investment. This is no fault of his own. Republican nativist and Democratic labor protectionist sentiment are well-entrenched and a sufficient reorganization of international institutions would necessitate compromises in national sovereignty that neither political party could support.

Garten hopes that “short-lived recession” would teach the body politic enough about the new global order to make possible needed reforms. Count me among those who think that the learning curve will be too steep for that.

Sincerely,
Barak Epstein

International, International, International

The most fundamental aspect of the current crisis is its international nature. Essentially, huge seas of capital are sloshing around the world and creating great instability in the process. Trust in financial markets is hurt by the general instability and the particular abuses.

Carefully designed international regulations could increase transparency and accountability without squelching capital movement dramatically. The problem is that, when one country imposes such controls, capital can move to another country with great speed. International coordination is clearly desirable. Unfortunately, there is not enough trust for that either.

Robert Samuelson identifies the three layers of the crisis (consumer, finance, and international trade) that must be solved simultaneously. The current US government responses focus on the first two problems. On the third, there is little intelligent government response. In fact, we are likely to see increased protectionism, such as through the "Buy America" steel provision in the recent stimulus package.

The Obama interest in infrastructure development is a good first step towards addressing the need to be internationally competitive but we will not have addressed the challenges, and opportunities, of our economic moment until we look more seriously at international financial and economic structures.

Dear Dr. Krugman

I may not be a Nobel Laureate but I think that I can explain Obama's speech to Paul Krugman.

Krugman writes:

Thus, in his speech Mr. Obama attributed the economic crisis in part to “our collective failure to make hard choices and prepare the nation for a new age” — but I have no idea what he meant. This is, first and foremost, a crisis brought on by a runaway financial industry. And if we failed to rein in that industry, it wasn’t because Americans “collectively” refused to make hard choices; the American public had no idea what was going on, and the people who did know what was going on mostly thought deregulation was a great idea.

Obama's perspective entails:
1) holding the purchasers of subprime mortgages to account for their decision-making
2) at the same time, implying that such debacles of overleveraging are bound to happen in an unequal society, i.e. the poor are likely to overspend to try to keep up, at least, with the middle class
3) supporting the poor in their ambitions by developing new opportunities for them make economic contributions
4) recognizing that such 'opportunity development' is especially crucial when economic structures change (viz. globalization, the decline of American industry, the growth of the information economy)

It's a complex view that makes room for both individual responsibility and acknowledgment of social tendencies. Or, like others, I have simply divined in Obama's spacious words the perspective that I, myself, hold.

The Nation-State and Global Integration

A few questions about strains on the power and efficacy of the nation-state:

(a) Does the global financial crisis call for international management of, say, currency exchange rates?

(b) Do globalization and the near-global triumph of capitalism undermine the greatest incentive (namely, international competition, respectively, among capitalist powers and between capitalist and non-capitalist powers) for leading capitalists to attend to the well-being of those who are not succeeding?

(c) Do global warming and other environmental strains demand an internationally-coordinated response that cannot entirely be managed by one nation-state?

My answer to all of these questions is 'yes' and points to the growing importance of international cooperation to solve many of our most pressing problems. I am not arguing that states are not strong. Neither am I am arguing necessarily for inter-governmental cooperation to solve these problems (although, such will sometimes be vital). Rather, I am arguing that a global perspective is becoming of greater importance. In due time, I believe that such a perspective will become the dominant paradigm, superseding the nation-state paradigm.

It is no coincidence that this pattern of integration presents itself as we find ourselves in a world in which everyone can be lifted out of poverty and in which universal education can be imagined. These goals can be achieved because (a) the global economy is sufficiently integrated to distribute basic goods, services, and skills to those in need of them, (b) globalization and the near-triumph of capitalism have led to a global economy in which human capital is of ever-greater economic value, and (c) environmental challenges force us to focus on how we can develop wealth without solely relying on materials. The best answers to this question are the development of technology and of human capital.

An Ironic Aspect of the Economic Crisis

One of the perceived causes of the crisis is that Americans do not save enough. Interestingly, many stimulus packages are designed to work only if Americans spend the money that they save.

American Competitiveness

Brooks on Michael Porter, of Harvard Business School, and his suggested response to the economic crisis:

Porter wrote that the U.S. economy has historically benefited from several great assets: an unparalleled environment for entrepreneurialism, a tremendous infrastructure for scientific research, the world’s best universities, a strong commitment to competition and free markets, decentralized regional economies, and efficient capital markets.

But, Porter continued, these advantages are starting to erode. The U.S. has an inadequate rate of reinvestment in science and technology. America’s confidence in free markets is waning. Lack of regulatory oversight has undermined capital markets. Universities have not sufficiently increased graduation rates. American workers do not have a credible safety net. Regulations and litigation have inflated the cost of business. Most important, there is no long-term economic strategy to organize responses to these problems.

GM, New Deal, Etc.

My apologies for my short-term hiatus.

This clip from "This Week with George Stephanpolous" presents interesting discussion about the role of the government vis-a-vis GM and infrastructure projects. The most intriguing idea, though perhaps not presented in the most substantive way possible during this particular interview, is David Brooks discussion of the importance of supporting social networks in the era of an economy dependent on human capital.

A Dollop of Buyer's Remorse

I'm not feeling too happy about Obama's advocacy of a GM bailout, especially since it's one of his first economic moves. I don't like the trends it symbolizes.

From newser.com (which reports on Krauthammer and Brooks):

American prosperity relies on creative destruction—the failure of nonviable companies and their replacement by defter rivals. The government endeavors to protect the worker in periods of transition, writes David Brooks in the New York Times, but not the firms themselves. That’s why the auto-industry bailout is a bad idea: Extending the life of the Big Three means preserving their unworkable business models.

The financial bailout ensured that the system itself continued to function, Brooks writes, but “a federal cash infusion will not infuse wisdom into management” at GM, Chrysler and Ford. Charles Krauthammer, in the Washington Post, agrees, writing that the Detroit bailout underlines philosophical differences between Republicans and Democrats: “In this crisis, we agree to suspend the invisible hand of Adam Smith— but not in order to be crushed by the heavy hand of government.

GEOPOLITICS, FINANCE, AND EDUCATION

In the upcoming weeks, world leaders will meet to begin to consider a new financial architecture for the world.

If they fail to found a cooperative framework, the threat of protectionism, economic decline, and the associated political challenges (which would not be small, and could be frightening) will be our biggest challenges.

If they succeed (as I suspect that they will), we will have taken a noticeable step to a more integrated world in which conflict between large nations becomes somewhat less likely. Challenges would still remain in that regard, to be sure, not least the endurance of petrodictatorships. Still, new issues will, after such a success, begin to come to the fore. I believe that one of the boldest dividing lines in a more stable (I take small group terrorism into account here.), integrated world will be the divide between the information technologically-able and the informational technologically-challenged. The would increase the importance of education, relative to international relations, as a defining issue for geopolitical stability.

What do you think?

"Spread the Wealth Around"

A propos of Obama's comment to a voter that he intends to 'spread the wealth around,' I would suggest that that comment will not prove as incendiary as it may have in an earlier age. For the time being (at least) the federal bailout has broken the US taboo of respect for individual responsibility. In a financial climate that reminds us of our interdependence, the concept that helping those in modest circumstances may be (even financially) beneficial to us all (expressed by Obama, though not as widely reported as his less politic, and less rigorous, statement, above) is not as seditious as it once might have seemed.

Intimations of a New Global Order

David Ignatius:

The new interventionism isn't so much socialist as it is Confucian -- a belief that a public-private partnership of the wise ones will get us out of the mess. And if it's any consolation, the Chinese are becoming more like us, even as we are becoming more like them. . . .

One hopeful sign last week was that the Chinese were moving toward private ownership, even as America and Europe were moving away from it. The Chinese government announced a new rural policy aimed at allowing millions of farmers to own the land they have been working. This would create a huge new reserve of private wealth in China, which could power domestic spending and growth. [Read more.]

A focal point of this new order, which I will explain further later, will be the development of the economic potential of the mass of producers. The innovation will be that such focus will be justified in terms of the promotion of prosperity, not just through appeals to social justice.

A few suggested conversation topics:
What positive effects can you imagine coming out of the crisis?
Can democratic institutions respond to crisis with coherence?
What aspect of the financial crisis would you focus on if you were Paulson?

Iceland and China

. . . the government of Iceland is presiding over a massive default by all the country's major banks. This troubling development points not only to an even more painful recession than anticipated, but also to the urgent need for international coordination to avoid something worse: all-out financial warfare.

. . . Iceland's promise to guarantee domestic depositors while reneging on guarantees to foreigners may be just a first step. British Prime Minister Gordon Brown's decision last week to sue Iceland over this issue may escalate the crisis. The use of counterterrorist legislation to take over Icelandic bank assets and operations in the United Kingdom also has a potentially dramatic symbolic effect. (Peter Boone and Simon Johnson, "The Next World War? It Could Be Financial." The Washington Post, 10/12/08.)

There's a reason that the gestures by the US government have not sufficed to reassure financial markets: the US is no longer the unquestioned command and control center of the global economy. We have to take the imaginative leap that integrates rising developing nations into our paradigm of economic management.

Peter Boone and Simon Johnson, in today's Washington Post, point to the depth of the financial crisis in bracing detail but, unsurprisingly, fall back on nostrums about the power of the "the world's leading financial powers -- at a minimum, the United States, the United Kingdom, France and Germany" to reassure markets. Am I naive, or does US to China (between $1.5 and $2 trillion, I believe) qualify China as an important financier? How can anyone be sure that the Chinese, given their own fragile politics, will support any plan that comes from the West in a time of financial crisis?