Forbes: December 2, 1996
Cyberpower
By Peter Huber
James Carville once wisecracked that he wanted to be reincarnated as the
bond market. What did he mean by that? He meant that modern,
electronically connected markets are more powerful than any politician.
To
put it another way: The modem is redefining democracy.
British Telecom timed its announcement perfectly--on the eve of the
election.
Think of BT's $20 billion merger with MCI as an antidote to bad
government. By providing efficient, integrated global data connections,
telecommunication companies now offer voters the ultimate shopping
experience: shopping for better government.
Travel the wires and see what I mean. To a degree that may astound you,
your computer and your telephone enable you to choose what you like in
the
way of Federal Reserve, FDIC, SEC, FDA, OSHA, EEOC, NLRB or
other cans in the alphabet soup aisles of modern regulation.
The idea of choosing government is not, of course, new. If you don't like
California law on the subject, you drive to Reno for marriage, divorce or
gambling. To Mexico to buy cut-rate medicines unapproved in the U.S. To
Florida to go bankrupt or to die. The urge to take a political hike has
been
there all along. What has changed is the ease and convenience.
In the past you had to vote with your feet. Now you can vote with your
modem, too. The Web supplies an instant global storefront. While the U.S.
market still dominates the Internet, 36% of servers are now outside this
country. Virtual establishments on the Web already offer incorporation in
Belize, bank accounts in Switzerland, currency trading in Germany,
brokerage accounts in New Zealand. International 800 numbers are
proliferating.
Money, the most liquid of assets, has become the hardest to regulate.
Rich
people have always parked their money abroad when they didn't trust the
political climate at home. Today millions of ordinary investors can move
their
wealth between currencies and countries as fast as they can click icons
on a
screen.
For some this is just an opportunity to cheat on their taxes. A Hamburg
currency trader promises "tax-free profits." A Swiss on-line banker
emphasizes "banking secrecy" and "protecting the privacy of bank
clients."
Swiss safe deposit boxes, the bank assures you, "cannot be sealed by
foreign
authorities in case of civil offenses." Other on-line offshore entities
brazenly
tout "tax-free" advantages for U.S. depositors.
But evading tax collectors remains a sideshow in the vast business of
international, wired finance. The center of the action involves the
completely
legal evasion of inept central bankers. More than $1 trillion in foreign
exchange changes hands each day around the world. (By comparison,
turnover of all stocks on the New York Stock Exchange for an entire year
is
only around $4 trillion.) One in seven equity trades in today's world
involves
a foreigner as a counterparty. And even illiquid assets--real estate, for
example--are increasingly being securitized and then traded on global
markets.
As Walter Wriston, former Citicorp chief executive and author of The
Twilight of Sovereignty (Charles Scribner's Sons, 1992), says:
"Governments
have lost control of the international value of their currency." A single
integrated world market for tradable financial assets is taking shape.
Lowell
Bryan and Diana Farrell of McKinsey & Co. describe this evolution in
Market Unbound: Unleashing Global Capitalism (John Wiley & Sons, 1996).
The upshot? The prudent investor can now select investments based on the
central bankers standing behind them, just as he now chooses a stock
based
on his appraisal of the chief executive officer. Do you think the German
central bank is wavering? Try Alan Greenspan. If you think he is on the
wrong track, try New Zealand. Global mutual funds have limitless ability
to
move capital among local, state, national and international
portfolios--equity,
debt, currencies, futures, the lot. By far the most effective way to vote
against
new government spending is to buy some other government's bonds. This
kind of balloting is in fact conducted continually--by banks, pension
funds
and mutual funds. These are the new, private treasuries.
By dispatching its capital elsewhere, the electorate can almost instantly
depress the economy and thus the government's tax revenues. For any
government that's seriously in debt, the globalization of financial
markets puts
a double squeeze on new discretionary spending. If global capitalists
lose
faith and drive up interest rates, it isn't just new spending that costs
more,
it's
also the refinancing of old debt. The modemization of finance explains
the
federal government's mass conversion to more balanced budgets.
As Bryan and Farrell discuss in their book, the tremendous new mobility
of
private capital sharply curtails government power over macroeconomic
policy. Budget planners and central bankers become little more than fancy
bookkeepers. They don't orchestrate economic forces, they react to them.
Whether they talk left or right, governments worldwide have little choice
but
to abandon fiscally suicidal policies, most notably the practice of
issuing
long-term debt to finance current entitlements. Improvident governments
that
don't believe this end up like Mexico in 1995, with a collapsing peso and
an
overnight flight of capital. Even Washington's wisest understand the new
reality. "I used to think if there was reincarnation I wanted to come
back as
the President, the Pope or a .400 baseball hitter," Clinton adviser James
Carville quipped two years ago. "But now I want to come back as the bond
market. You can intimidate everybody."
Including, of course, government regulators. Wires are imposing a strict
new
discipline on the regulators of private banks, too. At a recent Cato
Institute
conference on the future of money, University of Georgia economist
Lawrence H. White described how new payment technologies have lowered
the cost of wiring money from $20 to 2 cents per transaction. This opens
up
the world of offshore banking to small investors--and it's all perfectly
legal,
so
long as you keep paying your income taxes. Offshore banks pay higher
interest on deposits and charge lower rates on loans because they aren't
subject to the wide array of bank taxes, mandatory insurance premiums and
antiredlining decrees imposed by U.S. regulators. For the first time,
small
depositors can decide for themselves whether the Federal Deposit
Insurance
Corp. is really worth the price they pay in less favorable interest
rates.
Securities regulation can now easily be circumvented in much the same
way.
With stock exchanges and brokerage accounts moving on-line, you can hold
and trade U.S. equities completely outside U.S. jurisdiction. If the
Securities
& Exchange Commission goes over the edge of the regulatory Laffer
Curve--by passing rules that stifle rather than protect--investors will
easily
be
able to move to a Swiss broker, a London exchange or a Canadian
commodities trader. The value of regulation, positive or negative,
becomes
something you shop around for, just as you shop for a trusty broker or
low
trading fees.
Labor will never be as fluid as capital, but does follow it. The 1980s
taught
us that manufacturing jobs could escape U.S. unions, labor laws, tort
lawyers
and environmental regulators much more easily than we had realized. The
aluminum still comes from an Alcoa mill in the U.S., but some 20% of the
Boeing 777 airframe structure is built by Japanese workers at a
Kawasaki/Mitsubishi/Fuji consortium. The wings and the cockpit of
McDonnell Douglas' MD-95 are being built in South Korea.
To be sure, most U.S. jobs, particularly the services that account for
54% of
the U.S. economy, are still in nontradable sectors. If you live in
Fresno, you
can't easily get a haircut from a coiffeur in France. But services do
already
make up over 20% of global trade, and they represent the fastest-growing
component of both trade and foreign direct investment worldwide. American
companies outsource data entry to countries in the Caribbean.
Manufacturers
outsource product design, logistics management, R&D and customer service
across national borders, too. U.S. insurance, tax consulting and
accounting
companies send claims and forms overseas for processing. Software, films,
music, finance, advertising, and even health care and education all move
as
well. Haircuts? Not yet, but there's already serious talk of
telemedicine.
The Boeing way of choosing labor is now embedded in the structure of some
39,000 large, transnational corporations, which collectively hold over
$2.7
trillion of assets outside their home-base countries. New foreign direct
investment in the 26 nations in the Organization for Economic Cooperation
&
Development rose by 53% in 1995, while outflows from these countries
increased by 42%. (For cross-border holdings of tradable securities, see
chart, p. 146.) "The very phrase `international trade' has begun to sound
obsolete," Wriston says in an interview.
Again, information and communications technologies are the critical new
lubricant. Many services, especially financial and anything involving
software,
consist of nothing but information and can be moved by wire alone. Moving
solid goods still requires cheap transportation, too, but the cost of
hauling
things around keeps dropping, energy costs notwithstanding. And many of
the products being hauled--everything from cameras to cars--keep getting
smaller and lighter as they get electronically smarter.
Once a manager in Detroit learns how to use the telecosm to outsource to
Toledo, Ohio, she can outsource to Toledo, Spain; with cyber power all
physical distances are roughly the same. And with this kind of global
production system in place, a manufacturing company can move jobs and
capital around like pieces on a chessboard, shopping continually for the
best-priced labor--and the best labor laws. As Norman Macrae, former
deputy editor of the Economist, foresaw some years ago, corporations of
the
future are not going to be nationally based, and they "aren't going to
have
long-lasting lines of production in settled places." Their managers will
be able
to move jobs almost as fast as governments can rewrite employment laws.
At
the margin, the managers of these transnational companies will adjust
their
portfolios of labor in much the same way as the manager of the Templeton
Growth Fund trades stocks.
So where does the globalization of labor markets leave the countless
national
regulators of employment and work? Whatever they address-- parental
leave, handicaps or the minimum wage--laws that deny economic reality
cannot be enforced if the jobs can pick up and leave. Much as they hate
the
fact, government bureaucrats are beginning to accept it. Yes, Washington
did
recently raise the minimum wage, but the real story there was how little
and
how late. The long-term global political trend is away from all such
dictates,
not toward them.
When she thinks of herself as "labor" the average American citizen may
not
like this at all. But as a consumer she's collaborating enthusiastically.
She
buys Nikes and Nintendos made in Asian factories. She demands profit from
her mutual fund and pension plan, not patriotic loss. Before long, she'll
shop
for life insurance in London and health insurance in Geneva, and the
offshore
actuaries will discriminate fiercely in favor of the healthy. In the
1980s the
chief executive of Chrysler might have decided to buy a few million car
engines from Korea. Today millions of individual Americans are gaining
the
power to shop anywhere they please. No longer can consumers, any more
than investors or corporate managers, be economically quarantined.
This means that consumer protection regulators face serious competition.
An
abortion now comes in a pill; there's little to stop you from buying that
from
an on-line pharmacy in Monaco if you have to. For years the FDA blocked
sales of kits that allowed home testing for the AIDS virus. So a South
African
company peddled a $100 kit on the Internet, with delivery by mail. And
the
owner boasted openly that he was in business to thwart the regulators
overseas.
The daughter of a magazine editor I know needed a special asthma drug
that
the Food & Drug Administration hasn't yet seen fit to approve. Her dad
E-mailed a contact in Paris, and the medicine arrived by air several days
later. He would not have bought a drug from China or Belize, but he was
willing to trust France. The world's drug regulators, in short, compete
for his
custom. A wide range of routine diagnostic services could easily be
offered
to U.S. citizens from laboratories in Bermuda. The Web would handle
marketing and payment. Federal Express would deliver.
What holds for lab tests holds for morals and culture, too. Nevada can
dispatch strip shows and blackjack tables to any computer in Utah. If we
shut down Nevada, gaming houses farther afield will quickly fill the
electronic
void. A two-minute Web search turns up the Aruba Palms, off the coast of
Venezuela. Download free software and link into the hotel's casino for
real-time blackjack, poker and slots, as well as full sports-book action.
Or
try out any of a dozen on-line gambling alternatives in Argentina,
Belize,
Antigua or the U.K. Or play the national lottery of Liechtenstein. Use
your
credit card, or use E-cash if you want to make both gains and losses
completely anonymous.
When it comes to pure content regulation--pornography the most vivid
example--government authorities have lost their grip completely. If you
don't
like Utah's censors, three clicks of a mouse will put you under the
unbuttoned
authority of Utrecht. Canada has instructed its citizens not to watch too
much
U.S. television. But it's laughably easy now for Canadians to buy a small
satellite dish and get subscription fees billed to a nominally U.S.
address.
Technology has rendered completely obsolete the very idea that government
authorities can control morality and culture. Politicians may still give
speeches
about these things, but everyone knows the talk is just reactionary
twaddle.
All of this should be very reassuring. Most of us won't leave the
country, not
in person and not by wire. We won't have to. Competition improves the
quality of everything else; it will improve the quality of government,
too. Most
politicians are pragmatists. They'll grasp that they have to deliver a
good
service at an attractive price--or lose market share to the competition.
Bill
Clinton understands this. Like James Carville, he learned that the bond
market runs the most powerful polls of all. Clinton ran as a budget
conservative.
The trend is already clear in monetary and fiscal matters, where the
competition for good government is the fiercest. Many of the abrupt
currency
swings of yesteryear--overnight devaluations, for example--just don't
happen
as much anymore. Wired financial markets are less volatile and much more
honest. Nearly all industrial countries have brought their annual
inflation
rates
under 3%. In The Death of Inflation: Surviving & Thriving in the Zero Era
(Nicholas Brealey Publishing, 1996), Roger Bootle argues that the
globalization of financial and labor markets left them no choice.
Within this country, large states like California seem to be learning the
same
lesson. They have to stay in line on tax rates, investment climate and so
forth--or lose jobs, investment and residents to their better-governed
neighbors. And while rigorous comparisons are difficult, it does appear
that
industrialized nations are gradually converging toward quite similar
regulatory
structures in monetary policy, banking, insurance and securities trading.
The
overall price that competing governments charge citizens for service--the
tax
rate--seems to be converging, too. Take away health insurance, which some
countries book as "private" rather than "public," and you find that the
tax
rates in industrialized countries are all quite close--much more so than
they
were in the 1960s.
Governments that don't keep up with the competition can lose market share
fast. Years ago Delaware developed a well-designed service called
corporate law. Most big U.S. companies are Delaware corporations now.
Other states tried to protect their consumers from high interest rates.
So
Citibank set up operations in South Dakota to issue credit cards
nationally. In
June the Supreme Court ruled that California residents may not challenge
Citibank's late-payment fees as usurious under California law: The fees
on
Citibank cards are South Dakota's legal responsibility. The usury police
in
other states can all take a permanent vacation.
We, the people, are all shipping tycoons now, with mobile wealth and
mobile
labor. We can choose Liberia's flag, for its unmeddlesome bureaucracy, or
London's insurance, for its trustworthy courts. As managers, workers and
consumers, we buy government in much the same way we buy shoes. Not
through bribes or political action committees or anything like that--we
buy it
by paying taxes and complying with the laws. But when shopping in one
government's mall gets too expensive or inconvenient, we shop in
another's.
So the old political carnival, filled as it was with freaks and geeks, is
over.
The old game of big promises on election day, soon forgotten in the
enjoyment of power, is over. Citizens now vote continually, with London,
Bonn and Tokyo on the ballot, too.
