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.