Of course, inflation is a potential problem, but even inflation is no longer the government revenue engine that it once was. The power of "bracket creep" has been muted by indexing and the collapse of the tax schedule. Furthermore, bond markets can be expected to rapidly convert higher inflationary expectations into higher interest rates the federal government pays. One of the unheralded legacies of the buildup of federal debt during the 1980s is that federal interest payments loom large in the budget (accounting for about a fifth of it). Any increase in interest payments spawned by higher inflation rates car quickly soak up any additional real tax revenue garnered from higher rates of inflation. Besides, Alan Greenspan will head the Federal Reserve for almost all of Clinton’s first term. Fourth, if Clinton persists with his plans for mandated benefits, economists will learn that the perverse effects of labor
market mandates will not be as severe as many have envisioned. Employers will work diligently to soften the impact of such mandates. Workers will learn that it is they, not their employers, who must foot the bills, and that lesson is likely to muffle their enthusiasm for mandates.
Employers who face competitors not covered by the mandates, both domestic and foreign, will be forced to pass on the cost of mandates to their employees in the form of lower wages and other fringe benefits and greater work demands. Some employees will undoubtedly be replaced by robots unburdened by the cost of mandates, or by foreign workers who obtain the jobs driven off shore by costly mandates. These employees will see the mandates as bad deals, festooned with political goodies not worth their personal economic costs. The higher cost of employing workers who will likely take advantage of the mandates will reduce the market demand for such workers and the wages they can secure.
Finally, the Clinton presidency will be severely checked by global market forces that have been acknowledged, albeit reluctantly and belatedly, by even his most liberal advisers. For example, in the early ‘80s Robert Reich, one of Clinton’s top economic advisers, wrote a book that was full of venturesome proposals to tax, regulate, protect, and subsidize American corporations. To Reich, making American firms more competitive by way of federal aid (and a variety of other industrial policies) was then crucial if our industries were to meet the challenges of "the next American frontier."
More recently, Reich has acknowledged (without really saying so) that many of his earlier proposals will not work. He has written, quite effectively, in The Work of Nations about the emergence of the global economy in which capital can move around the world with ease. As a consequence, he now believes the focus of federal policies should not be "industries," because it is too easy for companies to transfer the benefits of government largess abroad. He has corrected his belief and now recognizes that the true wealth of a country is its people, who should be the object of any future government largess.
However, he succumbs to the faulty reasoning that largess for the many who are not so wealthy should be financed by taxes on the few who are wealthy. What he and others in the Clinton camp do not seem to realize yet is that the human capital at the disposal of the wealthy is more fugitive on aglobal scale and less subject to government expropriation than the physical capital of corporations. Physical capital can only be shipped across the globe at the slow pace of boat travel. Human capital in the form of brainpower can travel to any point on the globe at close to the speed of light through the world’s interconnected network of computers and satellites.
International money markets and integrated world stock and bond markets will teach on a daily basis our country’s leaders lessons that they now seem to resist. National elections conducted every four years will remain important. But votes of confidence and approval will be taken daily in the world markets, which because of the country’s ties to them can be ignored only at great peril. Clinton has already sought to assure markets that he intends to make markets work better. If he doesn’t hold to that promise, the next four years will prove interesting, a test of the relative power of domestic politics and global markets in shaping national policies.
An undeniable fact of the modern global economy is that capital has been transformed. Over recent decades, capital has become smaller and lighter, less physical, more transportable. Capital, in the form of brainpower and information (which is no more tangible than electronic impulses on computer disks), can be sent around the globe at the speed of light and for the cost of a telephone call. Capital has become as slippery as quicksilver, as difficult for governments to tax as it is for them to define and harness it, and this quicksilver capital is primed to move to more cost-effective venues at the slightest government provocation. To shape and constrain government policies, quicksilver capital need not move; it need only threaten to move.
Governments around the world have had to start competing for the world’s capital base. And in spite of their ideological inclination to do otherwise, governments have done so over the last two decades by easing the burden of their taxes and regulation–by capping the growth in government expenditures relative to their economies, by lowering their marginal tax rates, by freeing their industries, and by privatizing their services.
Walter Wriston, former CEO at Citicorp, could not have chosen a more apt title for a book concerned with the policy consequences of modern technology than The Twilight of Sovereignty. Governments, including that of the United States, have lost a measure of their sovereignty. Norman Macrae, former editor of The Economist, explained prophetically several years ago, "In the future, we will vote more frequently with our feet. If politicians try to boss us, brainworkers will go away and telecommunicate from Tahiti. Countries that choose to have too high a level of government expenditure or too fussy regulations, will be residually inhabited mainly by dummies." That future is upon us, and Bill Clinton.
Bill Clinton’s election is, in part, a reflection of the global forces at work. The Democrats were forced, kicking and screaming, to choose someone far more moderate than were the candidates of just a few years back. At this juncture, we can still hope that Clinton will respond more effectively to the market forces afoot in the world than George Bush would have.
Without a doubt, Clinton will have an impact on this country. Some of that impact will be positive. He is obviously not the total dummy and liberal ideologue whom some would like to imagine he is, and all can take some solace in that. The country needs a quick learner in the White House. The country probably needs to spend more on basic research, and most likely there are some worthy infrastructure projects that have been left unattended. More importantly, Clinton probably will pass a reduction in the capital gains tax on long-term investments something George Bush was unable to do.
Just as certainly, some of Clinton’s impact is likely to be negative. The country doesn’t need a parental leave mandate but it will probably get one anyway. We can expect, however that more constraint and guidance will process in the United States and elsewhere than ever before, not by the visible hands of politics but by the invisible hands of market forces that span the globe. Probably the worst Clinton can do is create expectations among his followers (and opponents) that cannot be realized. In his first post-election news conference, Clinton fully acknowledged, albeit indirectly, the power of world markets: He announced his intention to lower taxes on highly mobile capital in the form of equipment by way of a new investment tax credit, and he talked earnestly of the need to reduce in a measured way the federal budget deficit to calm the jitters evident in world markets.
Those on both sides of the political spectrum who believe that politics control policies should wager that government, on balance, will loom larger in the economy in 1996 than it did under George Bush in 1992. Those who believe that markets constrain politics should probably wager that government, on balance, will be no greater a presence in the economy in 1996 than it was under George Bush.
We prefer the latter wager. If we are proven wrong, there is every reason to believe that Bill Clinton will be the next one-term president.
Richard McKenzie and Dwight Lee are authors of Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World (Free Press). They are adjunct fellows at the Center for the Study of American Business at Washington University in St. Louis. McKenzie is the Walter B. Gerken Professor of Enterprise and Society in the Graduate School of Management at the University of California at Irvine. Lee is the Eugenia A. and Bernard B. Ramsey Professor of Free Enterprise in the economics department at the University of Georgia.
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