Addressing inequality is foreign policy, not domestic

The scholarship on inequality has been producing a wealth of empirical findings about how inequality is created, expanded and perpetuated, building on the work of Thomas Piketty in tracing capital flows.

In a short memo for "a workshop on a left-liberal financial foreign policy," Henry Farrell describes how addressing inequality in a globalized world requires foreign — not (just) domestic — policy intervention.

In some ways, Farrell is just restating a frequent objection to proposals like a 70% tax on income over $10m and an annual wealth tax on massive fortunes: that the rich will simply figure out how to move (even more of) their wealth offshore, out of reach of the USA.

This is both a) true and b) surmountable (and c) urgent — because the flows of capital into offshore havens is a corrosive force on other countries and they spread the rot back to the USA by laundering their money here).

Farrell starts with the way that global legal structures shift capital flows: international IP treaties pave the way for profit-shifting, where companies create the fiction that all the profit from their national subsidiaries is exhausted in licensing fees paid to related companies in offshore tax-havens); international state dispute settlement systems let companies overrule democratic laws on environment, pollution, worker safety, health, and other matters to preserve their profits.

More visibly, countries are lobbied to create tax regimes with interlocking loopholes: a company registered in country a realizes its profits in country b through a shell company in country c, with the net result being little or no tax owed, anywhere.

The specifics of money-laundering involves webs of banks, shell companies, foreign real-estate and golden passports sold to "investors" by countries that make pennies for laundering billions. Respectable law firms, banks and other procurers help kleptocrats hide billions in looted treasure by snapping up huge swathes of property in cities and towns in "advanced democracies," creating housing crises as they go.

This challenges the traditional model of "relatively honest rich countries, and relatively corrupt poor ones" — instead, you have transnational webs of corruption that use the stability of one country to hide the funds stolen from another, but with the effect of weakening both.

One intriguing observation from Farrell is that the US has built out an extensive set of (arm-twisted) agreements with other countries "to prevent actors from engaging in various forms of behavior that the US disapproves of," and that these same tools could be turned to prevent corrupt financial arrangements that the US has (thus far) tolerated.

First, and most obviously, it indicates that the problem of US wealth inequality is an international as well as a domestic one. If the left increases taxes on personal income, investment income or wealth in the US, it will surely lead to much greater efforts by those affected to minimize their tax burden. The existence of global networks – and of institutional arrangements in the US that greatly facilitate these networks, such as shell corporations – will help them do this. Therefore, reforming international networks is an urgent domestic challenge.

Second, such networks have wide implications for global democracy outside the US too. Before the Trump administration, the US made great noises about its commitment to spreading democracy. However, the US 'liberal order' also involved the massive expansion of global financial arrangements that have very plausibly undermined democracy and the rule of law in developing countries (by allowing political elites to expatriate their wealth to jurisdictions where they can enjoy security, rather than developing such institutions in their own home countries). In short, elements of this order were mutually contradictory – extensive global financial exchange aided oligarchs to stash money overseas, undermining their commitment to the rule of law. A new left that is genuinely committed to supporting and spreading democracy worldwide must necessarily also be committed to the root and branch reform of the international financial system that the US has done so much to support.

Third – the left has options – especially in the US and Europe. The US has developed a very extensive set of tools intended to gather information from global economic networks and to use them to prevent actors from engaging in various forms of behavior that the US disapproves of. There is no reason in principle that such tools cannot be employed e.g. to gather information on global tax evasion and to punish financial actors that engage in it. Such tools have been used in limited ways to prevent US tax evasion (e.g. by punishing Swiss banks), but could be employed at scale in pursuit of a broader agenda of shoring up democracy. As Nicholas Mulder notes in a recent article for The Nation, there are enormous problems associated with economics sanctions. However, as he also says, the world would be quite different if the US went after international tax cheats with even a little of the fervor it has dedicated to pursuing businesses selling microchips to Iran. At a minimum, stronger data gathering could provide a much better sense of the extent of the problem – and its particular characteristics than is currently available, allowing better crafted policy measures. More ambitiously, they could be the seeds of a different and more politically robust international financial architecture. Obviously, such powers could be overused, provoking their own counter-reactions – they should be viewed as the building blocks of a different international order, based unlike the current one on liberal democracy rather than free market liberalism.

Democracy and inequality as a global foreign policy agenda [Henry Farrell/Crooked Timber]

(Image: Steve Jurvetson, CC-BY)