Global Markets: America’s Fourth Branch of Government

It is almost as if today is a replay of the late 1990s, when the stock market crashed and the power of global markets challenged the power of nations such as Indonesia, Mexico, Russia, Malaysia, Thailand and Korea. Using the marketplace and financial flows as a de facto voting mechanism to assess the validity of a country’s fiscal condition, during that time globalization became the arbiter of a nation’s economic wherewithal. And in the process, it usurped political power from the countries’ elected leadership. However, somewhat unbelievably, today it is not emerging economies that are being buffeted by the forces of the markets. Rather, it is the United States, the world’s largest economy and most successful economic democracy, that is being judged by a global marketplace that it once dominated. How strange and even difficult to comprehend that the global markets are forcing the hand of President Obama and the U.S. Congress. Witness how announcements from the President and the Speaker of the House of Representatives are timed to the opening or closing of world markets. Looking back to the late 1990s, one of the main demands of the marketplace was a change in political culture. These countries had to get their financial houses in order by breaking up their traditional “old boy networks” and freeing their industries from corruptive relationships with government. Obviously, some of these countries still have not acquiesced to these demands — and consequently are benefiting far less from the global economy than some of their competitors. The global market is now demanding a political/cultural shift within the United States. Traditionally, the country has had what one could term a “bipolar” political and economic system based on two dissimilar philosophies: a business philosophy where companies’ decisions are based on where they will reap the biggest rewards, and a governing system that is more plodding and dramatically more ideological. Globalization is now demanding that if the United States wants to stay in its leadership position, its governing system of elaborate checks and balances must be reformed and must rapidly evolve to a more business-like mode of operating. The U.S. governing system, which is based on concepts that were developed to handle a particular set of 18th century problems, must be updated. Essentially, the market is saying that the black-and-white Thoreauian concept “that government is best which governs least” simply is no longer relevant as an operating principle for the United States in a globalized world. This narrow and very myopic 18th century view of government, which is held by many elected officials in the United States today, has blinded them to the realities of history. There is no better example of this than in the power to tax as it relates to a strong, dynamic democracy. Francis Fukuyama, senior fellow at the Center on Democracy, Development and the Rule of Law at Stanford University, points out in his brilliant new book “The Origins of Political Order” that one of the keys to a successful democracy is a strong state that, within the rule of law, has the freedom to act for the common good. Fukuyama looks at how Britain evolved in the 16th and 17th centuries, and he compares it to autocratic France and Spain. He writes that during the early parts of British global expansion and the beginning of the country’s Industrial Revolution, government spending went up from 11% of GDP in 1689 to 17% in 1741 to almost 24% in 1778. During the 18th century, while Britain was moving well ahead of other European countries, it collected as much as 30% in taxes. However, that rather significant amount did not appear to at all hurt Britain’s investments in the Industrial Revolution. In fact, quite the opposite — a strong centralized democracy agreed to tax itself for the benefit of the country and the future. France, on the other hand, soon fell into chaos and was never able to collect more than 12-15% of its GDP in taxes. What makes today’s situation more difficult is that the problem of outdated governance structures is confronting every major industrial country in the world at the same time. Globalization and economic integration has evolved much quicker and with more force than anyone could have imagined. It has created local versus international internal conflicts that major governments have no familiarity with. Whether it is the European sovereign debt crisis and Chancellor Merkel’s problems in getting her German voters to understand the importance of contributing to a European bailout, or the domestic and international consequences of China’s currency manipulation, the speed and force of financial integration is leading to a questioning of governmental decision-making structures. A new governing paradox has occurred. The old rules of political leadership and coalition-building are changing and are becoming much more complex. The same technology that is driving market integration and demanding more-centralized political leadership is also giving individuals and groups much greater power to question leadership. For the United States, two interlinked problems seriously hinder its ability to reform its governing system: the primary system by which political parties choose their nominees, and the Supreme Court’s rulings on political funding. Both have diverted power from the center, from the presidency, to powerful minority factions that are now able to seize power in a way the framers could never have imagined. They now have absolute control over the majority. Whether it is on issues of taxes, energy, investments, or education, at a time when globalization is calling for immediate action, the U.S. government has become almost catatonic, trapped between the need for leadership and the empowerment of narrow factions. However, like the emerging nations of the late 1990s, if America does not find the will to reform its democracy, then a new fourth branch of government — the globalized marketplace — will do so without the consent of the governed.