While Donald Trump and his Congressional majority continue to push a harsh, hard-right ideology, so far they’ve been a legislative failure. And for good reason: For years, all they did was oppose Barack Obama and the Democrats, without bothering to develop an actual governing agenda of their own. Democrats must not make the same mistake. Playing defense is necessary, but it is not sufficient.
In fact, under the surface tension, a robust, highly progressive agenda has been coming together in recent months, one with the potential to unite both the Hillary and Bernie wings of the party, to go beyond both Clintonomics and Obamanomics.
These ideas come from the left wing of the party, but I’ve noticed more and more centrist Democrats, along with establishment donors, who increasingly recognize the need, in both substantive economic and electoral terms, to get outside the old boxes and go bold.
One of the boldest ideas coming down the pike is a universal child allowance: a monthly stipend for all families with children. International data show that child poverty in America remains at 20 percent — twice the rate in Germany and seven times the rate in Denmark.
Those countries, and most other advanced economies, provide regular payments to families with children based on the recognition that investing in children is an essential public good. Yet here in the United States, though we have a patchwork of programs, the lowest-income children often get no income support, while children in wealthy families benefit from generous tax deductions.
A child allowance of $250 a month per child would cost about $190 billion a year, though half of those costs could be offset by consolidating existing, less-efficient policies. It would cut child poverty by 40 percent and deep child poverty by half, while providing middle-income families raising children with a baseline level of stable income.
Next, even as we close in on full employment, there are parts of America where job growth and labor force participation are well below the national average. Historically, public policy tries to help such left-behind areas through place-based tax credits, but their track record is dismal. If we want to help places with too little labor demand, we must implement direct job creation policies, meaning either jobs created by the government or publicly subsidized private employment.
Infrastructure build-outs can help, but what’s really needed is a permanent, scaled-up version of a subsidized jobs program that worked well in the last recession. The program helped create about 250,000 jobs, many of which were in the private sector, by subsidizing wages for a fixed time period. One careful study from Florida’s version of the program found that, relative to a control group, participants’ work and earnings went up not just during the program, but after it as well.
While direct job creation will help achieve the necessary job quantity, we also must boost job quality. A strong idea in that regard is an expansion of the earned-income tax credit into the working class. The tax credit is both broadly popular and very successful: In 2015, it lifted 6.5 million people, including 3.3 million children, out of poverty.
A recent analysis asked: What would it take for the earned-income tax credit to offset the damage done to low- and moderate-wage earners by the forces of inequality that have steered growth away from them in recent decades? The answer is a $1 trillion expansion in the wage subsidy over the next decade. A family of four making $40,000 would get a tax credit of about $6,000 instead of its current benefit of about $2,000.
Even in Washington, $1 trillion is real money, but I like the way one tax expert, Chuck Marr, put it: “For less than one-fifth of the cost of the Trump tax plan, we could improve the lives of millions of working-class people.”
A higher minimum wage is yet another idea drawing broad liberal support.
Remarkably, the federal minimum wage is still $7.25, though most states and many localities have their own higher version of it. Still, 21 states remain on the federal level, and the “fight for $15” has been an important and successful movement by and on behalf of low-wage workers. One new estimate finds that 41 million workers would get a boost from this policy. More of them have college degrees than are teenagers. In other words, the devolution of low-wage work in America means that families often depend on a minimum-wage earner.
Some job displacement is possible given an ambitious increase like this, but a new proposal from congressional Democrats doesn’t get to $15 until 2024, giving employers time to adjust.
Though Democrats have written bills for most of these ideas, no one expects them to go anywhere in this Congress. What’s important is that such ideas, once the domain of the party’s left wing, now face a diminished resistance from centrists, who once viewed them as too expensive and too interventionist. The bold minimum wage increase has 152 supporters in the House and 31 in the Senate.
Progressives will be playing defense for many years to come. But let’s also make sure we’re ready to roll with a true progressive agenda when our time comes.
Chicago cabdrivers struggling to survive in the Uber era are fighting a losing battle, with 40 percent of all medallions “inactive” and hundreds more either in foreclosure or headed there, a new study shows.
The American Federation of State, County and Municipal Employees Local 2500 represents hundreds of cabdrivers and is continuing to organize the others.
To bolster its case, the union asked statistician James Bradach of Nonprofit Data and Applications to analyze countless pieces of information disjointedly made available in on the city’s data portal.
His report, “Run Off the Road: Chicago’s Taxi Medallion Foreclosure Crisis,” shows a surge in medallion foreclosures and a precipitous drop in both taxicab trips and driver income in the three years since City Hall created an unlevel regulatory playing field between taxis and ride-hailing.
The study’s findings include:
227,033 ride-hailing vehicles registered with the city as of April competing with 6,999 taxi medallions.
The number of “monthly taxi trips” on the streets of Chicago has dropped by 52 percent over the last three years — from 2.3 million to 1.1 million.
774 medallions have been “surrendered to the city at some point,” with 579 more receiving foreclosure notices and 107 lawsuits filed since October.
2,940 taxis or 42 percent of the city’s 6,999 taxi medallions were classified as “inactive” in March after having failed to pick up a single passenger in the previous month. That means those licenses face “imminent foreclosure in the coming months,” the study says. In March, 2014, 16 percent of medallions were inactive.
Average monthly gross income for every one of the city’s active taxicab medallions has fallen over the last three years — from $5,276 to $3,206.
Cabdrivers who were eking out a $19,000 annual living after expenses in 2013 are now operating $4,000 in the red. That’s because their $44,000 in annual expenses have remained the same while business has plummeted.
39 percent of the city’s taxicab medallions are owned by small business with four or fewer licenses.
To keep a shrinking taxicab industry from disappearing altogether, AFSCME Local 2500 is demanding what it calls “comprehensive reform.”
Specifically, the union wants the City Council to: Eliminate the vehicle age limit so long as the cab can pass inspection; waive the ground transportation tax for struggling drivers; and eliminate the medallion license renewal fee.
The union is further demanding that City Hall: “Enact protections for lease drivers in the event of a fleet bankruptcy; reinstate the lottery for city-owned medallions to reduce operating costs for lease drivers; strengthen foreclosure protections in the city medallion owner rules; and eliminate “regulatory barriers” standing in the way of a “driver-to-passenger taxi ehail app” that competes with Uber and Lyft.
Ald. Anthony Beale (9th), chairman of the City Council’s Transportation Committee, said the AFSCME study underscores his biggest fears.
“I’ve said all along that the system was stacked against the cab industry and that allowing Uber and Lyft to come in unregulated put the entire cab industry at a disadvantage,” Beale said.
“In five to seven years, you’re gonna have autonomous vehicles and no people working. All you’re gonna have left is driverless vehicles,” he said. “We need to fight for jobs and keep people employed. If we allow technology to put people out of work while the fat cats at the top make millions, the whole economy as we know it is gonna collapse. The road we’re going down is going to eliminate hundreds of thousands of jobs that people are out here trying to make a living. You see it happening.”
John Aikins is one of those people.
He and his wife own two medallions, one of them purchased for $330,000 just five years ago, when cab licenses were still a “hot commodity.”
When the bubble burst, they couldn’t find a dependable driver for the second medallion and fell behind on their loans. After failing in their attempts to seek a loan modification, the lender filed suit to foreclose against them. With three children, the couple had no choice but to file for bankruptcy.
“Things are really bad. If you don’t go to the airport and wait three hours to get a fare, it’s very difficult to find fares in the city because there are so many ride-share cars. I’ve driven all the way from Belmont to Chestnut downtown and nobody flags me down,” Aikins said Thursday.
“I have three college-age children. One is thinking of moving from the dorm next semester,” he said. “Once the bankruptcy goes through, it’s going to be very hard to get any student loans for him. Fortunately, his school is not too far from where he live. So he can commute until things stabilize.”
He added, “I don’t blame Uber or Lyft for coming in. But the city has been so unfair, it’s beyond belief. Ride-sharing companies come in and the city didn’t do anything [while] we are following the same stringent rules and regulations and taxes.”
Veteran cabdriver Gilbert Uranta purchased his medallion in 2006 and still owes more than $260,000. But he hasn’t been able to make a payment on the loan for six months.
While waiting for the ax to fall in the form of a foreclosure lawsuit, the father of three has finally scheduled the knee replacement surgery he has been putting off because it will sideline him for three months.
“I’m not saying they shouldn’t have Uber. But there are too many of Uber. When you have more than 200,000 Ubers competing with 7,000 cabs, it’s difficult to make money. I start work at 4 a.m. By 7 p.m, I’m still on the street. I can’t can’t make enough money if I work 10 hours,” Uranta said.
“Things are not like what they used to be. I can’t take my kids on vacation like I used to,” he said. “I just have to make sure we survive by working extra hours. My own self with my wife — there are so many things we cannot do. We have to put the kids first.”
Earlier this year, the U.S. Supreme Court dealt the struggling taxicab industry what appeared to be a final blow.
By refusing to hear the taxi industry’s appeal, the nation’s highest court let stand a federal appeals court ruling last fall that snuffed out an attempt by the cab companies to level what they called an uneven playing field that favors Uber, whose investors include Mayor Rahm Emanuel’s brother.
The appeals court ruling essentially said that the business models between taxis and ride-hailing services are different and, therefore, they can continue to operate under different sets of rules in Chicago.
That decision validated a 2014 City Council ordinance that let Uber and Lyft operate in the city without taxi medallions, city-regulated fares, fingerprinting or other standards cab companies and their drivers must follow.
The Cold War has been followed by the class war. A transatlantic class war has broken out simultaneously in many countries between elites based in the corporate, financial, and professional sectors and working-class populists. Already this transnational class conflict has produced Brexit and the election of Donald Trump to the American presidency. Other shocks are likely in store.
None of the dominant political ideologies of the West can explain the new class war, because all of them pretend that persisting social classes no longer exist in the West. Neoliberalism—the hegemonic ideology of the transatlantic elite—pretends that class has disappeared in societies that are purely meritocratic, with the exception of barriers to individual upward mobility that still exist because of racism, misogyny, and homophobia. Unable to acknowledge the existence of social class, much less to candidly discuss class conflicts, neoliberals can only attribute populism to bigotry or irrationality.
Like neoliberalism, mainstream conservatism denies the existence of classes in the West. Along with neoliberals and libertarians, conservatives assume that the economic elite is not a semi-hereditary class but merely an ever-changing, kaleidoscopic aggregate of talented and hard-working individuals. Meritocratic capitalism is threatened from within by a “new class” consisting of progressive intellectuals—professors, journalists, and nonprofit activists—who are said to be vastly more powerful than CEOs and investment bankers.
Marxism at least takes classes and class conflict seriously. But classical Marxism, with its secularized, providential theory of history and its view of industrial workers as the cosmopolitan agents of global revolution, has always been deluded.
Fortunately, there exists a body of thought that can explain the current upheavals in the West and the world very well. It is James Burnham’s theory of the managerial revolution, supplemented by the economic sociology of John Kenneth Galbraith. Burnham’s thought has recently enjoyed a revival among thinkers of the center and center-right, including Matthew Continetti, Daniel McCarthy, and Julius Krein. Unfortunately, Galbraith’s sociology, along with his economics, remains out of fashion.
In their politics, Burnham and Galbraith could hardly have been more different, despite their shared friendship with William F. Buckley Jr. The patrician Burnham was a leader in the international Trotskyist movement before becoming zealously anticommunist and helping to found the post–World War II conservative movement. Galbraith, in contrast, was a passionate liberal throughout his life.
Yet both believed that a new ruling elite had displaced the old bourgeois and aristocratic estates. Burnham, following Adolf Berle and Gardiner Means’s The Modern Corporation and Private Property (1932), coined the term “the managerial elite” in his worldwide bestseller The Managerial Revolution (1941). Later, in The New Industrial State (1967), Galbraith called the same group the “technostructure.” In his memoir A Life in Our Times (1981), Galbraith wrote: “James Burnham, partly because he was a stalwart right-winger well out of the political mainstream and partly because he was not a certified academician, never got full credit for his contribution. In early editions of The New Industrial State I was among those in default.”
In his essay “Second Thoughts on James Burnham,” George Orwell provided a succinct summary of Burnham’s thesis:
Capitalism is disappearing, but Socialism is not replacing it. What is now arising is a new kind of planned, centralized society which will be neither capitalist nor, in any accepted sense of the word, democratic. The rulers of this new society will be the people who effectively control the means of production: that is, business executives, technicians, bureaucrats and soldiers, lumped together by Burnham, under the name of “managers.” These people will eliminate the old capitalist class, crush the working class, and so organize society that all power and economic privilege remain in their own hands. . . . The new “managerial” societies will not consist of a patchwork of small, independent states, but of great super-states grouped round the main industrial centers in Europe, Asia and America. These super-states will fight among themselves for possession of the remaining uncaptured portions of the earth, but will probably be unable to conquer one another completely. Internally, each society will be hierarchical, with an aristocracy of talent at the top and a mass of semi-slaves at the bottom.
The thesis of this essay is that the theory of the managerial elite explains the present transatlantic social and political crisis. Following World War II, the democracies of the United States and Europe, along with Japan—determined to avoid a return to depression and committed to undercutting communist anti-capitalist propaganda—adopted variants of cross-class settlements, brokered by national governments between national managerial elites and national labor. Following the Cold War, the global business revolution shattered these social compacts. Through the empowerment of multinational corporations and the creation of transnational supply chains, managerial elites disempowered national labor and national governments and transferred political power from national legislatures to executive agencies, transnational bureaucracies, and treaty organizations. Freed from older constraints, the managerial minorities of Western nations have predictably run amok, using their near-monopoly of power and influence in all sectors—private, public, and nonprofit—to enact policies that advantage their members to the detriment of their fellow citizens. Derided and disempowered, large elements of the native working classes in Western democracies have turned to charismatic tribunes of anti-system populism in electoral rebellions against the selfishness and arrogance of managerial elites.
This essay will conclude with speculation about the possibility of new cross-class settlements among dominant managerial minorities and subordinate working-class majorities in developed nations. These new settlements, if they emerge, will have two characteristics. Like the older settlements, they will be negotiated at the nation-state level, not at the transnational level. And just as the older social settlements were influenced by the world wars and the Cold War, so future cross-class settlements among managers and workers will be influenced by whether the geopolitical context is one of great-power peace or great-power rivalry.
The Managerial Elite: Past and Present
While Burnham and Galbraith included engineers and scientists in the new elite, they were not describing a technocracy run by PhDs. The most important managers are private and public bureaucrats who run large national and global corporations and exercise disproportionate influence in politics and society. Some are independently wealthy, but most are salaried employees or fee-earning professionals. Most of today’s billionaires were born into this upper-middle class, and their descendants tend to disappear back into it in a generation or two. Actual hereditary aristocrats who survive in the modern West are anachronisms who, for the most, part avoid ridicule by disguising themselves as hard-working professionals and managers.
To many in the 1940s and since, Burnham’s description of New Deal America, Nazi Germany, Imperial Japan, and the Soviet Union as variants of the managerial society seemed outlandish. But since the collapse of Communism, in democratic and authoritarian states alike, the global norm in both developed and developing countries has been some version of the mixed economy with substantial private and government sectors.
How big is the managerial elite? A rough surrogate is higher education. Only around a third of Americans have bachelor’s degrees. But many of these are degrees from low-ranked colleges whose holders are best understood as belonging to the upper strata of the working class. Using professional and graduate degrees as a surrogate for membership in the managerial elite would make it no more than ten or fifteen percent of the population.
Are the managers a class as well as an elite? In a purely meritocratic society, the ranks of the managerial elite might be refilled completely by upwardly mobile individuals in each generation. In the United States, however, the majority of American college students come from the minority of families in which one or both parents have college degrees. In other Western democracies as well, membership in the managerial class appears to be mostly hereditary, though partly open to talent from below.
Whatever you call this post-bourgeois elite—the managers or the technostructure—its power base is in the core of what Galbraith called “the bimodal economy”—capital-intensive, science-based, high-tech industries like manufacturing and the business and financial services which they rely on. Increasing returns to scale produce a tendency for immense size in these industries, which tend therefore to be dominated by efficient oligopolies or monopolies. Galbraith called this “the planning system,” referring to the private planning done within huge corporations that partly replaces markets with internal administration. Something like the older economy of small, owner-operated businesses and competitive local markets continues to exist around the managerial-industrial core, in what Galbraith called “the market system.” The economic historian Alfred D. Chandler Jr. confirmed Galbraith’s analysis, using the terms “core” and “periphery” for Galbraith’s planning and market systems. For Galbraith and Chandler as well as for Burnham, industrialization changes the landscape forever, like the eruption of a volcano in the middle of a plain filled with small villages.
The managerial theory of society is an elitist theory, not a pluralist one. In Burnham’s words:
From the point of view of the theory of the ruling class, a society is the society of its ruling class. . . . Political history and political science are thus predominantly the history and science of ruling classes, their origin, development, composition, structure and changes.
The private, public, and nonprofit sectors in modern developed nations do not have separate and distinct elites that can be counted upon to check each other. Instead, the private sector tends to dominate the public sector through campaign finance, and the nonprofit sector through donations. Even in the absence of these methods of elite coordination, the fact that almost all of the personnel of elite institutions of all kinds belong to the managerial-professional class and have similar educations and shared outlooks produces a common mentality, tending toward Orwellian groupthink among corporate executives, investment bankers, elected politicians, civil servants, and nonprofit leaders. Managerial dominance is reinforced by lateral mobility at the top levels of society. Diplomats become investment bankers, investment bankers become ambassadors, generals sit on corporate boards, and corporate executives sit on nonprofit boards.
Neither Burnham nor Galbraith believed that the managerial elite was innately evil or illegitimate. Indeed, both thought that dynamic, large corporations and competent bureaucracies were necessary for technological innovation and economic growth. And they did not believe that managers formed a single global ruling class, any more than capitalists and feudal landlords had in the past. Both Burnham’s managerial elite and Galbraith’s technostructure were rooted in particular nation-states, even if those acted merely as springboards for the geopolitical and economic ambitions of particular groups of managers.
While neither sought to reverse the managerial revolution, both Burnham and Galbraith worried about the concentration of wealth, power, and prestige in the new elite. As realists, they believed that the power of the managerial class could only be checked by what Galbraith called “countervailing power” and what Burnham, following the Italian theorist Gaetano Mosca, called “the juridical defense.” Both phrases refer to actual social balances of power, not merely the paper checks and balances of written constitutions.
National Industrial Consolidation
The replacement of entrepreneurial capitalism by large-scale modern managerial capitalism took place relatively rapidly in North America and Western Europe around the turn of the twentieth century. In the United States, the prohibition of cartels combined with a permissive attitude toward mergers and acquisitions produced what historian Naomi Lamoreaux has called the first great merger movement of 1895 to 1904. In a single decade, 1,800 enterprises—most of them in the manufacturing industry—were consolidated into only 157 firms.
Following the wave of consolidation, the structure of the American economy was remarkably stable between World War I and the late twentieth century. In both 1917 and 1973, 22 of the largest 200 firms were in the petroleum industry, and many of them were the same firms. Likewise, in both 1917 and 1973, 5 of the biggest 200 corporations were in the rubber industry, and 4 were the same (Goodyear, Goodrich, Firestone, and Uniroyal). Machinery companies—many of them the same—accounted for 20 of the 200 biggest firms in 1917 and 18 in 1973. In transportation equipment and food products there were similar continuities. Even John D. Rockefeller’s Standard Oil lived on, in the guise of various “baby Standards” created from the court-ordered breakup of the company in 1911, including some like ExxonMobil that grew into global Leviathans.
A 1972 study showed that the level of industrial competition was still similar in all mature industrial economies. In Britain, for example, between 1909 and 1970 the share of all net manufacturing output of the hundred largest firms grew from 16 percent to 45 percent.
This global pattern cannot be explained in terms of the peculiarities of American corporate law or politics. When Chandler studied 379 manufacturing companies with more than twenty thousand employees in 1973, which were then divided roughly equally between the United States and abroad, he discovered that the ratios were amazingly similar: 22 transportation equipment companies in the United States and 22 abroad; 20 electrical machinery companies in the United States compared to 25 abroad; 24 chemical companies in the United States compared to 28 abroad; and 14 petroleum companies in the United States compared to 12 abroad. All of this demonstrates that, in every modern economy, firms in Chandler’s “center” and Galbraith’s “planning system” that are characterized by increasing returns to scale tend to be both large and, if successful, long-lasting, compared to the smaller firms in Chandler’s “periphery” and Galbraith’s “market system,” in which size produces few or no competitive advantages.
National Political Settlements during the Cold War
From the emergence of managerial capitalism through World War I and the Great Depression, the societies of the North Atlantic were rocked by clashes among corporate elites on the one hand and angry workers and family farmers on the other. The bloodiest labor violence was in the United States, where the armed forces repeatedly crushed strikers. In the 1921 Battle of Blair Mountain in Logan County, West Virginia, state officials used planes to bomb armed strikers from the air.
To obtain social peace and mobilize national populations during World War II, the United States and its allies like Britain brokered business-labor pacts and promised welfare benefits to veterans. In the ensuing Cold War, every major industrial democracy devised some kind of “settlement” or compromise among business and labor interests within the nation.
The postwar settlements were a combination of employer-specific welfare capitalism and universal or means-tested, social-democratic welfare states. In West Germany, welfare capitalism took the form of “codetermination,” or union membership on corporate boards. Japan, following intense labor conflict after 1945, developed a system of corporate paternalism and lifetime employment for many workers. Organized labor was weak in the postwar United States, but the “Treaty of Detroit” negotiated among automobile companies and unions was a successful example of informal business-labor corporatism. Low levels of legal and illegal immigration, and social pressure on married mothers to exit the work force to become homemakers, strengthened the bargaining power of mostly male workers by creating tight labor markets.
These corporatist systems of welfare capitalism made the welfare states of the period from the 1940s to the 1970s much smaller than they would have been otherwise. Wage compression brought about by unions in the welfare-capitalist system made it easier for payroll taxes to fund entitlements like public pensions, which in turn were smaller than they might have been because of the widespread existence of private employer pensions.
The post-1945 settlements in the West and Japan demonstrate countervailing power and juridical defense in action. The result was the golden age of capitalism from the 1940s to the 1970s, combining high growth with a more equal distribution of its rewards than has ever existed before or since.
Multinational Corporate Consolidation
Following the fall of the Berlin Wall in 1989, the national settlements brokered by government among managers and labor in Western nation-states were shattered by the emergence of a new pattern of global industrial production and corporate organization.
What the economist Peter Nolan has called “the global business revolution” of the 1990s and 2000s, producing oligopolistic transnational corporations, was the equivalent of the great merger wave of the 1900s that produced oligopolistic national firms. In Capitalism and Freedom(Anthem, 2008), Nolan observes:
By the early 2000s, within the high value-added, high technology, and/or strongly branded segments of world markets, which serve mainly the middle and upper income earners who control the bulk of the world’s purchasing power, a veritable “law” had come into play: a handful of giant firms, the “systems integrators,” occupied upwards of 50 per cent of the whole global market. The top two firms accounted for 100 per cent of the entire global market for large commercial aircraft and 70 per cent of the carbonated soft drinks market; the top three firms accounted for over 80 per cent of the gas turbine market and for 70 per cent of the farm equipment market, for over 60 per cent of the mobile phone market, and over 50 per cent of the market for LCD TVs; the top four firms accounted for over 60 per cent of the elevator market; the top five firms accounted for over 80 per cent of the digital camera market; the top six firms accounted for over 70 per cent of the auto industry market and the top ten firms accounted for over 50 per cent of the pharmaceutical market.
By the time the Great Recession began with the financial crash of 2008, many global industries were dominated by a few large corporations. Ninety-five percent of microprocessors (chips) were manufactured by four companies: Intel, Advanced Micro Devices, NEC, and Motorola. Two-thirds of the glass bottles in the world were made by only two firms, Owens-Illinois and Saint-Gobin. Half of the world’s cars were made by four companies: GM, Ford, Toyota-Daihatsu, and DaimlerChrysler. In business services, Microsoft dominated 90 percent of the market for personal computer operating systems. In 2007, the top two firms controlled 86 percent of the global market in the financial information industry and 77 percent in electronic games, while three firms dominated 71 percent of legal publishing and 62 percent of the global market for artificial joints.
Below the level of transnational corporations, now called “original equipment manufacturers” (OEMs) or “systems integrators,” a similar process of consolidation took place at the level of suppliers. On the verge of the Great Recession in 2008, three firms—GE, Pratt and Whitney, and Rolls-Royce—dominated the world market for jet engines. Sixty percent of tires were made by three multinational corporations: Bridgestone, Goodyear, and Michelin.
The emergence of global oligopolies as a result of expansion, mergers, and alliances corresponded to a trend toward transnational production. From one-third to one-half of trade was intrafirm trade or transnational production by a multinational enterprise with suppliers in multiple nations. The Apple iPhone became an iconic product with components from all over the world. Apple iPhone 5S and iPhone 6 models included components from China, the United States, Japan, South Korea, Taiwan, Germany, France, Italy, the Netherlands, and Singapore.
While supply chains were regional or global, most major multinationals continued to be rooted in a single nation-state—most often the three largest developed industrial nations, the United States, Japan, and Germany. In the developing world, most weak nations were assigned low-value-added production on the terms imposed by North American, European, and littoral Asian firms and investors. China, India, Brazil, and other populous developing countries, however, were able to use control of corporate access to their large internal labor forces and consumer markets to pressure foreign capital into promoting projects of national industrial development, by means including local content requirements and technology transfer agreements.
The Economics of Global Arbitrage
It is widely assumed that globalization since the 1990s is responsible for unprecedented productivity growth. In fact, productivity growth has been much lower in the era of post-1989 globalization than it was in the post-1945 era characterized by less integrated national economies and far lower levels of immigration. One reason may be that, in the era of globalization, the new transnational oligopolies have pursued profits by methods other than technology-driven productivity growth. The most important of these corporate strategies have been selective arbitrage and selective harmonization.
Global arbitrage has come in two forms: labor arbitrage and tax-and-subsidy arbitrage. Labor arbitrage includes both relocation of industrial production from high-wage developed nations to low-wage developing countries, and large-scale immigration of both unskilled and skilled workers to the global North. Such labor arbitrage does not encourage, and may even retard, technological progress, which involves the substitution of new technologies or new techniques for expensive labor or natural resource inputs. There is no incentive to make production technology more efficient when profits can be increased merely by closing factories in high-wage areas and locating them in low-wage areas, be they poor, anti-union Southern states in the United States or foreign nations like Mexico and China.
Tax-and-subsidy arbitrage is the practice whereby firms take advantage of differences in tax rates and subsidies in different countries in order to similarly boost profits without boosting productivity. Companies that evade taxation by incorporating in tax havens like the Cayman Islands, Panama, or Ireland do nothing to increase productivity. Neither do transnational companies that relocate to China to enjoy not only low-wage, unfree labor but also ample subsidies of various kinds, including subsidized electricity and tailor-made infrastructure and worker education programs.
Perhaps the iconic product of the era of globalization is the Apple iPhone. According to Konstantine Kakaes in MIT’s Technology Review, producing every single component of the iPhone in the United States, in addition to assembling it in the United States, would at most add $100 to the cost of the device. But Apple’s profit margin would be much smaller than is the case with its present production of the iPhone in six factories using unfree, low-wage labor in China (plus a factory in Brazil, a concession to Brazilian import substitution policy).
In addition to illustrating global labor arbitrage, Apple has mastered the arcane art of tax-and-subsidy arbitrage as well. According to the European Union, the government of Ireland allowed Apple to channel profits from several-dozen nations through two Irish companies, one of which was a “head office” with no employees. As a result, according to the European Commission, Apple recorded profits of around €16 billion, of which only €50 million were taxable in Ireland, giving the company €15.95 billion of untaxed profit.
The Politics of Global Arbitrage
Even as they have exploited opportunities for international labor and tax-and-subsidy arbitrage, firms in the post–Cold War era of globalization have promoted selective harmonization of laws and rules, when it has been in their interest to do so. In the second half of the twentieth century, successive rounds of negotiation under the auspices of the General Agreement on Tariffs and Trade (GATT) and, more recently, the World Trade Organization (WTO) effectively reduced most traditional tariff barriers. By 2016, when the WTO effectively terminated the failed Doha Development Round of global trade talks, the United States and other leading industrial nations had shifted the emphasis from removing barriers restricting the cross-border flow of goods to harmonizing laws and regulations through “multiregional trade pacts” like the North American Free Trade Agreement (NAFTA), the Trans-Pacific Partnership (TPP), and the Transatlantic Trade and Investment Partnership (TTIP), in the interests of transnational investors and corporations reliant on transnational supply chains.
The areas chosen for arbitrage and harmonization reflect the interests not of national working-class majorities but of the managerial elites that dominate western governments. Harmonizing labor standards or wages would undercut the labor arbitrage strategy, while transnational crackdowns on tax avoidance would thwart the strategy of tax arbitrage by transnational firms. Instead, the emphasis in harmonization policy has been on common industrial standards, the liberalization of financial systems, and intellectual property rights, including pharmaceutical patents. These kinds of harmonization benefit transnational firms, investors on Wall Street or in the City of London, and the holders of intellectual property rights in Silicon Valley and the pharmaceutical industry.
In many cases, this kind of regulatory harmonization makes sense—standardizing product safety measures, for example. But the new regulatory harmonization agreements produce a “democratic deficit” in two ways.
First, they remove whole areas of regulation from the realm of ordinary legislation, replacing it with “legislation by treaty.” Favorable laws and regulations that corporate lobbyists are unable to persuade national democratic legislatures to enact can be repackaged and hidden in harmonization agreements masked as “trade” treaties. These treaties, often thousands of pages long, tend to be drafted in secret by committees involving corporate lobbyists and may be ratified by legislatures without careful scrutiny.
Worse, most of these contemporary regulatory harmonization agreements include “investor-state dispute settlement” (ISDS) provisions that allow individual corporations to sue national governments that change the rules in their countries after the passage of the treaty in private tribunals, dominated by corporate lawyers, with no appeal mechanism. If Congress enacts a statute that adversely affects the interests of Acme Inc., then Acme has few options, other than paying lobbyists and making campaign donations. But if Congress ratifies a treaty, and later changes a provision by passing a new law, Acme can sue the federal government for financial damages. The United States has yet to lose a case to ISDS, but other countries have, and some believe that the prospect of corporate lawsuits has a chilling effect on new laws and regulations of which particular corporations disapprove.
None of this is to imply that the transnational managers of the West and littoral East Asia who control the new global oligopolies are more selfish or less public-spirited than the managers of national corporations during the Second Industrial Era. On the contrary, in personal terms, today’s managerial elite is for the most part less bigoted and often quite philanthropic. The point is simply that the American, German, and Japanese corporations of half a century ago were constrained by kinds of Galbraithian countervailing power and Burnhamite/Moscian juridical defenses that have crumbled. Thanks to globalization, itself a voluntary policy choice enabled but not required by new technology, today’s transnational firms have much more bargaining power in their dealings with workers and democratic nation-states.
Globalization: Hobson’s Imperialism?
That the post–Cold War pattern of globalization has been chiefly motivated by opportunities for international arbitrage and tax-and-subsidy manipulation—rather than compelled by the logic of modern technology or the pressure of free-market forces—is suggested by the fact that a strikingly similar pattern of globalization was envisioned by the British social philosopher John A. Hobson more than a century ago, when technology was quite different. In Imperialism: A Study (1902), Hobson speculated that, if the Western industrial nations refrained from military conflict with one another, they might collaborate on the common project of the economic development of Asia in general, and China in particular.
Western capitalists, Hobson suggested in the racialist language of his time, might buy the acquiescence of Western working classes in the transfer of manufacturing from Europe and America to Asia by allowing them to share in the rents obtained by the exploitation of impoverished Chinese labor:
In a word, the investors and business managers of the West appear to have struck in China a mine of labour power richer by far than any of the gold and other mineral deposits which have directed imperial enterprise in Africa and elsewhere; it seems so enormous and so expansible as to open up the possibility of raising whole white populations of the West to the position of “independent gentlemen,” living, as do the small white settlements in India or South Africa, upon the manual toil of these laborious inferiors. . . . Such an experiment may revolutionise the methods of Imperialism; the pressure of working-class movements in politics and industry in the West can be met by a flood of China goods, so as to keep down wages and compel industry [of Western workers], or, where the power of the imperialist oligarchy is well set, by menaces of yellow workmen or of yellow mercenary troops, while collaboration in this huge Eastern development may involve an understanding between the groups of business politicians in the Western States close enough and strong enough to secure international peace in Europe and some relaxation of militarism.
Hobson’s lurid prediction of “yellow mercenary troops” being used to suppress Western workforces, like similar turn-of-the-century Yellow Peril prophecies, has not materialized. But his other predictions, translated into modern language, have come to pass. The claim of neoliberal ideologues that Western industrial workers who lose their jobs to offshoring in China and other low-wage countries would obtain new and better jobs in the “knowledge economy” was precisely a promise that, in the postindustrial West, most workers would share the intellectual property rents of the knowledge economy, rather like “independent gentlemen,” while Asian proles and peasants labored in factories. In the pages of the Economist and other propaganda organs of the managerial oligarchy, the claim that the lower prices of Chinese consumer goods outweigh the harm done to the Western working class by partial deindustrialization is routinely repeated, more than a century after Hobson’s prediction.
Hobson envisioned a dystopian future for a deindustrialized West ruled by a class of transnational managers and investors:
We have foreshadowed the possibility of an even larger alliance of Western States, a European federation of great Powers which, so far from forwarding the cause of world-civilisation, might introduce the gigantic peril of a Western parasitism, a group of advanced industrial nations, whose upper classes drew vast tribute from Asia and Africa, with which they supported great tame masses of retainers, no longer engaged in the staple industries of agriculture and manufacture, but kept in the performance of personal or minor industrial services under the control of a new financial aristocracy.
Hobson further warned: “The greater part of Western Europe might then assume the appearance and character already exhibited by tracts of country in the South of England, in the Riviera, and in the tourist-ridden or residential parts of Italy and Switzerland, little clusters of wealthy aristocrats drawing dividends and pensions from the Far East, with a somewhat larger group of professional retainers and tradesmen and a large body of personal servants.” The “little clusters” of rich rentiers and their professional retainers and menial servants bring to mind today’s increasingly stratified “global cities” like London, New York, and San Francisco, embedded in nation-states with large tracts of derelict, former industrial zones.
Immigrants and Oligarchs
As we have seen, in the late twentieth century, Western managerial elites, by means of transnational corporations, were able to escape from their mid-twentieth-century social contract with national workers by offshoring production, or threatening to do so. Purely domestic companies, like hotels, restaurants, and construction companies, did not have this option. But they could benefit from immigration, because loose labor markets weaken the bargaining power of workers, just as tight labor markets weaken the bargaining power of employers. That is why, throughout most of history in the United States and other countries, organized labor has usually opposed large-scale immigration of any kind, while capitalists and corporate managers have often welcomed it.
Some Western countries have had formal policies of encouraging unskilled, low-wage immigration, like West Germany with its Turkish Gastarbeiter (guest workers). But for the most part, unskilled immigration has been the incidental result of other policies in particular nations. In the United States, most legal, unskilled immigrants have been low-income Mexicans and Central Americans who come on the basis of U.S. family reunification laws, in addition to the twelve million or so illegal immigrants, mostly from the same nearby countries. In Europe, asylum laws and refugee policies are the chief source of unskilled immigration. And some European countries have privileged immigration from former colonies. Whatever the particular regime, in every Western country the immigration issue pits the managerial elite against the working-class, native majority.
Scholars debate the economic effects of immigration to the United States. A recent National Academies of Sciences, Engineering and Medicine report tried to put a positive spin on its findings, but they were sobering: lower wages “for immigrants or native-born workers who have not completed high school—who are often the closest substitutes for immigrant workers with low skills,” and the reminder that “first-generation immigrants are more costly to governments, mainly at the state and local levels, than are the native-born.” The benefits of low-wage immigration, according to the report, go chiefly to the affluent consumers of labor-intensive services, while the costs fall on low-wage workers and taxpayers. The American media reflect the interests of managerial and professional elites in low-wage employees and cheap domestic servants, so the bad news was buried in mainstream reporting. “Immigrants Aren’t Taking Americans’ Jobs, New Study Finds,” declared the New York Times on September 21, 2016.
The real but limited negative impact of immigration on low-income workers and stressed government budgets might have been a minor issue in politics, but for two other factors. One is the combination of relatively high birth rates among some immigrant groups, like Latin Americans in the United States and Muslims in Europe, with low and declining native birth rates, which means that relatively small amounts of immigration can dramatically change the ethnic composition of a country in a few generations. Even if, in the long run, immigrants assimilate and merge with the native population, rapid ethnic change is disruptive and frequently viewed as a threat by natives.
The other factor is the modern welfare state. On both sides of the Atlantic, it was created in a period of low immigration and high native fertility after World War II. National welfare states take different forms, but they are all based on the principle of solidarity among members of the nation, who agree to work and be taxed to help their fellow citizens in order to be eligible for that same help in sickness or old age.
The incompatibility of the welfare state and mass immigration was noted by the libertarian economist Milton Friedman: “If you have a welfare state, if you have a state in which every resident is promised a certain minimum level of income, or a minimum level of subsistence, regardless of whether he works or not, produces it or not. Then [free immigration] really is an impossible thing.” His ideological opposite, Paul Krugman, agrees. Because “modern America is a welfare state” and “low-skill immigrants don’t pay enough taxes to cover the cost of the benefits they receive,” Krugman concluded that the “political threat that low-skill immigration poses to the welfare state is more serious” than its other consequences. For his part, Friedman welcomed illegal immigration as a good thing because illegal immigrants are ineligible for welfare: “But it’s only good so long as it’s illegal. . . . Make it legal and it’s no good. Why? Because as long as it’s illegal the people who come in do not qualify for welfare, they don’t qualify for social security, they don’t qualify for the other myriad of benefits.”
While using legal and illegal means to promote mass immigration, in order to discourage unions, suppress wages, avert inflation caused by tight labor markets, and to provide a buyer’s market in nannies and gardeners, the managerial elites of North America and Europe also champion “diversity,” which reduces the likelihood that workers of different ethnicities will unite in a common front against economic elites. In a letter in 1870, Marx wrote:
Owing to the constantly increasing concentration of leaseholds, Ireland constantly sends her own surplus to the English labor market, and thus forces down wages and lowers the material and moral position of the English working class.
And most important of all! Every industrial and commercial centre in England now possesses a working class divided into two hostilecamps, English proletarians and Irish proletarians. The ordinary English worker hates the Irish worker as a competitor who lowers his standard of life. . . . His attitude towards him is much the same as that of the “poor whites” to the Negroes in the former slave states of the U.S.A. . . . This antagonism is the secret of the impotence of the English working class, despite its organization. It is the secret by which the capitalist class maintains its power. And the latter is quite aware of this. (Italics in the original.)
Similarly, Hobson (with his characteristic racist rhetoric) speculated that the economic elite might engineer mass immigration:
Lastly, it is conceivable that the powerful industrial and financial classes of the West, in order better to keep the economic and political mastery at home, may combine to reverse the policy which has hitherto been gaining ground in the United States and in our white colonies, and may insist upon the free importation of yellow labour for domestic and industrial service in the West. This is a weapon which they hold in reserve, should they need to use it in order to keep the populace in safe subjection.
Because Hobson envisioned something very similar to the post–Cold War pattern of offshoring, transnational production, and mass low-wage immigration in the age of railroads, steamships, and telegraphs, today’s pattern cannot be viewed as the predetermined result of new technologies like the Internet, global wireless telephony, and container ships. A number of different global economic orders are compatible with modern technology, just as numerous alternatives were compatible with the technology of Hobson’s era. The technology needed for something like present-day globalization existed in the 1900s. But between 1914 and 1989, a necessary but not sufficient condition for this kind of managerial globalism was lacking: great-power peace.
From Super-Imperialism to Bloc Wars
Hobson’s vision of a pan-Western syndicate of industrialists and investors exploiting the industrialization of China and the rest of the non-Western world was similar to Karl Kautsky’s idea of a “super-imperialist bloc” of capitalist nations that would set aside military rivalries in the interest of shared profits from investments in developing countries. Whether sovereign great powers, absent the pressure of military compulsion, would ever volunteer to merge to that degree may be doubted. Today’s transnational blocs emerged only in the shadow of two world wars and the Cold War.
In The Managerial Revolution, Burnham predicted the division of the postwar world among three “superstates” based on the United States, Germany, and Japan—inspiring Orwell’s Oceania, Eurasia, and Eastasia in his novel 1984. Instead, following World War II, West Germany and Japan became semi-sovereign protectorates of the United States, while Britain and France, shorn of their colonial empires, became American dependencies as well. Bipolarity rather than tripolarity structured world politics from the 1940s to the 1990s.
Neoliberal globalization was possible only in the decades immediately following the Cold War, when the United States was the “sole superpower” and no credible “peer competitor” had yet emerged. In the 1990s, the United States and its European allies, along with Japan, South Korea, and Taiwan, functioned like the pan-capitalist blocs of Hobson and Kautsky, right down to the offshoring of much of their manufacturing to China. However, the rise of China is bringing that ephemeral moment to a close—and with it, almost certainly, an end to the present structure of global industry.
Hobson, in his bigoted style, acknowledged the possibility of the rise of a powerful industrial China and a consequent protectionist backlash in the West:
Again, China, passing more quickly than other “lower races” through the period of dependence on Western science and Western capital, and quickly assimilating what they have to give, may re-establish her own economic independence, finding out of her own resources the capital and organising skill required for the machine industries, and . . . may quickly launch herself upon the world-market as the biggest and most effective competitor, taking to herself first the trade of Asia and the Pacific, and then swamping the free markets of the West and driving the closed markets of the West to an ever more rigorous Protection with its corollary of diminished production.
Populist Rebellions and Their Limitations
If I am correct, the post–Cold War period has come to a close, and the industrial democracies of North America and Europe have entered a new and turbulent era. The managerial class has destroyed the social settlements that constrained it temporarily in the second half of the twentieth century and created a new kind of politics, largely insulated from popular participation and electoral democracy, based on large donors and shifting coalitions within a highly homogeneous coalition of allied Western elites. Following two decades of increasing consolidation of the power of the managerial class, the populist and nationalist wave on both sides of the Atlantic is a predictable rebellion by working-class outsiders against managerial-class insiders and their domestic allies, who are often recruited from native minorities or immigrant diasporas.
Will the result of the contemporary class war among managers and workers on both sides of the Atlantic be a revival of fascism? In some countries in Europe, populist nationalist parties have emerged from tiny fringe fascist parties, or have attracted their supporters. But talk about Weimar America or Weimar Europe is based on a misunderstanding of history, which blames fascism on populism. In reality, despite their populist trappings, most interwar fascist movements were favored by military and economic elites as a way to block social democracy and communism.
It is not the Weimar republic but the banana republic that provides the most likely negative model. In many Latin American countries, politics has traditionally pitted oligarchs versus populists. A similar pattern existed in many Southern states in the United States between the Civil War and the civil rights revolution.
When populist outsiders challenge oligarchic insiders, the oligarchs almost always win. How could they lose? They may not have numbers, but they control most of the wealth, expertise, and political influence and dominate the media, universities, and nonprofit sectors. Most populist waves break and disperse on the concrete seawalls of elite privilege.
In the American South, most populist politicians gave up or sold out. In some cases, like that of Texas governor and senator W. Lee “Pappy” O’Daniel, a country music singer, they were simply folksy fronts for corporate and upper-class interests all along. The few populists who maintained some independence were those who could finance themselves, usually by corrupt means. Louisiana governor Huey Long could battle the ruling families and the powerful corporations because he skimmed money from state employee checks and kept it in a locked “deduct box.” In Texas, anti-Klan populist governor James “Pa” Ferguson, along with his wife Miriam “Ma” Ferguson, who was elected governor after her husband was impeached on the slogan “Two Governors for the price of one,” sold pardons to the relatives of convicted criminals. As billionaires who could finance their own campaigns, Ross Perot and Donald Trump could claim, with some justification, to be free to run against the national establishment.
Those who believe in liberal democracy can look on this kind of political order only with dismay. Most of the time, coteries within a nepotistic elite run things for the benefit of their class. Now and then, a charismatic populist arises, only to fail, sell out to the establishment, or establish a personal or dynastic political-economic racket. Formal democracy may survive, but its spirit has fled. No matter who wins, the insiders or outsiders, the majority will lose.
Alternatives to Populism
Is there an alternative to a Latin American or Southern future for the West, an endless clash of oligarchs and populists? If there is, it will take the form of a settlement like that of the post-1945 social contract in its spirit, though not in its details.
One possible new cross-class compromise between the managerial elite and the working-class majority in Western nations would take the form of the radical renationalization of industry. This seems to be what many populists on both right and left have in mind when they want politicians to “bring the jobs back”—that is, well-paid manufacturing jobs. But this would sacrifice benefits from supra-national economies of scale, which are real in industries like manufacturing, even if the recent pattern of offshoring has been driven by manipulative policies like labor arbitrage rather than a focus on productivity.
Because of the multiplier effect on the larger economy in which manufacturing is embedded, it is important for countries to acquire or maintain high-value-added manufacturing, even if only a minority of the workforce is formally employed in the sector. But most American workers are already employed in the nontraded domestic service sector. Their jobs and wages can be threatened by mass immigration but not by offshoring.
Radical de-globalization and the restoration of something like the largely autarkic national economies based on vertically integrated national firms of the 1950s and 1960s, then, would not be desirable, even if it were possible. At the other extreme is the fantasy of a new global settlement, with global labor unions and global government (or “governance”) checking global corporate and financial oligopolies. Post-national global governance that promotes the shared interests of a transnational working class is even less likely to happen than radical renationalization.
This leaves two options for a new settlement, which might be called “neoliberalism plus” and a new developmentalism.
Neoliberalism plus, also called “inclusive capitalism,” is the preferred response of the transatlantic managerial class to the populist revolts in Europe and America. Essentially, neoliberalism plus is Reagan-Thatcher-Clinton-Blair neoliberalism with more subsidies to the “losers” of globalization. The disempowerment of non-elite citizens by the oligarchic capture of politics and the destruction of unions would not be altered. But the masses would be bribed into acquiescence by means of higher wage subsidies, like the Earned Income Tax Credit (EITC) in the United States, or perhaps a universal basic income providing every citizen a poverty wage.
While something like this will undoubtedly be tried in many Western countries, the economics do not work. Bribing workers who have stagnant or declining incomes with new welfare subsidies requires an economically dynamic sector of the economy to make the bribes affordable. The neoliberal donor class, concentrated in elite rentier enclaves, assumes the permanent existence of high intellectual-property rents flowing from the rest of the world to tech tycoons, along with global financial rents flowing to money managers. These rents, it is assumed, will be so high and sustainable that the tycoons and money managers will gladly share them with the rest of the population in the nation-states in which they happen to reside.
But global innovation rents quickly disappear, as a result of lapsing patents, intellectual property theft, foreign success in indigenous innovation, and the commoditization of former cutting-edge industries. As for taxing financiers to subsidize far larger welfare states, this may work in cities like New York and London, but it cannot possibly work on the scale of nation-states, including continental nation-states like the United States, with a third of a billion inhabitants.
Nor can advanced manufacturing pay for the massive redistribution from the few to the many required by the neoliberalism plus strategy. High productivity in manufacturing and services is incompatible with neoliberal trade policies that allow the offshoring of both high-value-added production as well as low-value-added activities by corporations and tolerate the devastation of domestic high-value-added industries by subsidized imports from mercantilist countries like China. Even worse, in the nontraded domestic service sector, flooding the low-end labor market with poorly paid and poorly educated immigrants reduces the incentive of service industries to boost their productivity by investing in labor-saving technology or reorganizing their business models to minimize labor.
In other words, neoliberal economic strategy itself, because of its bias in favor of business models relying on cheap labor at home and abroad, tends to undermine the productivity growth needed to pay for the massive redistribution that, it is hoped, would align the interests of workers and managerial elites.
It is no coincidence that Reaganism-Clintonism and Thatcherism-Blairism coincided with prolonged asset bubbles, or that their most ardent proponents tend to be located in the City of London, Wall Street, and Silicon Valley. For a time, it is possible for stock-market booms, real estate frothiness, and other bubbles to fund redistributive taxation. But overbuilt welfare states that assume perpetual booms instead of slow, steady, and difficult productivity growth are destined to become insolvent.
Unlike the ephemeral innovation rents of the so-called knowledge economy, financial, property, and resource rents actually can become permanent. In earlier generations, successful merchants and industrialists often became bankers or aristocrats. If the children and grandchildren of today’s IPO billionaires become landlords and moneylenders, they could transform into a new aristocracy in a kind of high-tech Western feudalism.
David Ricardo believed that in a three-way struggle among landlords earning rent, capitalists earning profits, and workers earning wages, landlords might eventually prevail. In an economy with low or no productivity growth, landlords, bankers, and other rentiers might displace the managers of the industrial sector as the dominant class. Just as managerialism succeeded bourgeois capitalism and feudalism, so managerialism in an age of technological and economic stagnation might give way in turn to what Peter Frase in Four Futures: Life after Capitalism (Verso, 2016) has called “rentism.”
The term “developmental state” was first used by scholars like Chalmers Johnson and Alice Amsden to describe the post-1945 regimes of Japan, South Korea, Taiwan, and Singapore, which relied on export-oriented strategies as part of programs to industrialize and catch up with the West. But the concept of the developmental state deserves a far broader definition.
As the economists Erik Reinert, Ha-Joon Chang, and Michael Hudson, among others, have demonstrated, the mercantilism of Renaissance and early modern Western city-states, kingdoms, and empires was a version of the developmental state. From the Tudor era until the adoption of economic liberalism in the 1840s, England (the United Kingdom after 1707) was a classic mercantilist state, seeking to help its industries by providing them with a seller’s market in high-value-added manufactured goods and a buyer’s market in industrial inputs like commodities and labor. The British empire promoted this industrial strategy by forcing its Irish, North American, and Indian subjects to specialize in exports of raw materials to British manufacturers, who in turn enjoyed monopolies on the sale of finished goods to the colonies.
After Britain pioneered the Industrial Revolution, the United States and Germany successfully caught up with and surpassed the UK by means of import-substitution policies that protected their national markets for national firms. Not until the aftermath of World War II, when the United States briefly enjoyed industrial hegemony in a shattered world and lacked foreign competition, did Washington abandon its policy of infant industry protectionism.
A third variant of developmentalism was devised by Japan and “the Little Tigers” (South Korea, Taiwan, and Singapore) during the Cold War. Prevented from using tariffs by “unequal treaties” with Western nations before World War II and by the General Agreement on Tariffs and Trade (GATT) after 1945, these East Asian mercantilist nations used various nontariff barriers to preserve domestic markets for their national champions, while reaping the benefits of scale by exporting to far more open Western consumer markets. The catch-up strategy of post-Mao China is a version of this East Asian pattern.
Developmentalism has taken quite different forms, in Colbert’s France and Walpole’s Britain, Hamilton’s and Lincoln’s America, Bismarck’s Germany, and contemporary East Asia. While methods vary, a constant has been the understanding of global trade not as a rule-governed arena in which firms should compete for customers with no regard for borders but as a zero-sum competition for global market share in high-value-added industries among rival states.
In liberal economic ideology, questions of trade and questions of national security are unrelated. But from the perspective of developmentalism, relative industrial capacity is the most important basis of relative military power. Great powers, if not lesser states, must constantly worry that the augmentation of the industrial strength of other blocs will also increase their relative military power. Even in periods of peace among great powers and the blocs they lead, each power must prepare for the possibility, however remote, of conflict with the others. Within a tightly integrated bloc of allied nations, transnational liberalization may be the order of the day. But relations between blocs are likely to be guided by the zero-sum logic of cautious, suspicious, military-inflected developmentalism.
With these dynamics in mind, we can speculate about the future of the world economy and its implications for new domestic settlements among managers and workers.
First, the rise of China, followed perhaps by the rise of India, is likely to produce a world order by 2050 in which most of the global GDP is produced inside the borders of China, India, the United States, and Europe—three colossal nation-states and one politically divided region. To update Orwell, the future blocs may be Eastasia, Southasia, Oceania, and perhaps Europa. The world will be truly multipolar.
In a world of competitive great powers and great-power blocs, the most familiar version of developmentalism (the East Asian export-oriented industrial strategy) will be impossible for political reasons. The United States tolerated one-sided trade with its East Asian satellites and Germany (whose mercantilism is real but more subtle) only because it needed their support in the Cold War and their economies were much smaller than America’s. It will make no sense for the United States to tolerate similar mercantilist trade policies at the expense of American industries, particularly those relevant to defense, carried out by China—the only “peer competitor” the United States will face in the foreseeable future in the military realm.
Even before the election of Donald Trump, the United States was already acting as a declining post-hegemonic power with a reawakened sense of strategic economic nationalism. The failed TPP was sold to the American public as a way to defeat China in competition for markets in Asia, the counterpart to the Obama administration’s “pivot” toward de facto military containment of China. The TTIP, which would have deepened Euro-American integration without Chinese participation, was motivated in part by a desire to balance the rising geoeconomic influence of China.
If the United States is growing less willing to act as “the patsy” (Martin Wolf’s term), offering unreciprocated access to its markets for the goods of mercantilist states at the expense of its own producers, and if no other major nation or bloc is willing to be a similar “patsy,” then the kind of parasitic export-oriented strategy pursued by Japan, the Little Tigers, China, and Germany cannot succeed. At the same time, classic import substitution strategies, like the radical renationalization strategy discussed above, are also rejected by the major economic powers, because they seek markets for goods and services beyond their borders to reap the benefits of scale in increasing-returns industries. By default, then, the economic system in a world of multiple great-power blocs is likely to resemble that of the European colonial empires.
There are differences, to be sure. The old colonial hierarchy, with industry monopolized by the metropoles and commodity production in the colonies, would be replaced by a new hierarchy, in which the metropoles reserve the higher links of transnational value chains for themselves while lesser allies and protectorates are ceded lower-value-added production.
Within the dominant nation in a military-economic bloc, it would be wise to design a new cross-class social settlement to reinforce rather than undercut the long-term productivity growth both of the nation and the bloc it leads. There would need to be two strategies, one for traded-sector industries like manufacturing with potential foreign markets, and one for nontraded domestic industries that can only be performed in situ, like nursing care and other personal services.
A new developmentalist strategy for traded-sector industries, by means of a mix of incentives and compulsion, should discourage corporations from seeking to boost profits by labor arbitrage, tax arbitrage, and financial machinations like stock buy-backs and corporate inversions. In times of great-power peace, a considerable amount of trade among the great powers might be permitted, but each great power would intervene rather than permit market forces or foreign industrial policy from eliminating critical industries, particularly those relevant to the military.
In the nontraded domestic-service sector, a new developmental state, in the spirit of Hippocrates, would emphasize doing no harm—no harm, that is, to the all-important high-value national traded sector. Tight labor markets for domestic service workers, achieved by immigration restriction, work-sharing, shorter workweeks, or other means, should be looked on favorably by policymakers, for several reasons. Higher market wages for service workers would mean a larger domestic market, a true mass market capable of supporting large-scale industries at home as a base for foreign expansion. At the same time, higher market wages in the domestic service sector would encourage automation and other kinds of labor-saving strategies, boosting service-sector productivity and perhaps increasing domestic demand for labor-saving machinery and software that can be produced in the nation or the bloc. If high wages lead to the replacement of fast-food workers by kiosks, the manufacture of the kiosks could become a new, capital-intensive, high-technology industry.
Competition and Countervailing Power
The decline of the liberal globalism that flourished briefly in the passing phase of post–Cold War American hegemony, as a result of the inevitable transition to multipolarity, may be dreaded by managerial elites, but the working classes of the West and the world may benefit.
History demonstrates that ruling classes of any kind are reluctant to share power with the ruled unless they are afraid of the ruled or afraid of rival ruling classes. The former—fear of the ruled—is a weak motive. Popular revolts seldom turn into revolutions, without the support of dissident members of a ruling class or of a foreign elite, like the French monarchy that bankrolled and supported U.S. independence for its own purposes.
The need to mobilize the population for war, or at least the need to obtain social peace in wartime, has been far more important as a source of democratizing reforms. From the Greek city-states to the Swiss cantons, citizen-soldiers have been able to use their contribution to defense to demand rights and representation. In the United States, the Emancipation Proclamation and the GI Bill were both wartime measures.
Following the end of the Cold War, the abolition in most Western countries of conscription and the shift by the United States and other countries to professional soldiers, mercenaries (contractors), and foreign proxies has reduced the importance of the citizen-soldier, even as offshoring and mass immigration reduced the bargaining power of the citizen-worker. Mass conscript armies are as unlikely to be restored in the United States and similar countries as mass-production assembly lines that can be crippled by strikes. And the kind of low-level warfare that the United States has engaged in since 9/11 requires little sacrifice on the part of most Americans, who conversely cannot use their sacrifice to demand a greater share of power and wealth.
Nevertheless, great-power competition, even in the form of limited cold wars, is likely to reward nations whose economic model is based on developing productive technology and raising the incomes of domestic worker-consumers, rather than engaging in labor and tax arbitrage, regulatory harmonization, and other schemes that boost profits without increasing productivity. In cold wars and trade wars, even if no blood is shed by the contenders, countries and blocs with empowered and patriotic workers are likely to do better than rival nations crippled by immiserated workforces and selfish, nepotistic, oligarchic elites.
In a geopolitical contest between the developmental model represented in different ways by Japan and China, minus their current “export-über-alles” mercantilism, on the one hand, and, on the other hand, the rentier-dominated oligarchic model represented by Brazil and Mexico, it would be foolish to wager on the latter. North American and European democracies cannot and should not emulate modern East Asian developmental states in every detail. Still, it should be a cause for concern that, since the Cold War, the United States and Western Europe have been moving along the spectrum, as it were, away from Asia toward Latin America.
Managerial elites are bound to dominate the economy and society of every modern nation. But if they are not checked, they will overreach and produce a populist backlash in proportion to their excess. By a misguided policy of suppressing wages and thus throttling mass consumption, unchecked managerial elites may inadvertently cripple the technology-driven productivity growth responsible for their rise and accidentally cause the replacement of managerial society itself by a kind of high-tech rentier feudalism.
Managerial society works best when there are not only concessions to national working-class economic interests—the bribes to the “losers” of neoliberalism—but also genuine economic bargaining power and political power wielded by the many. Far from undermining managerial regimes, Burnham’s “juridical check” and Galbraith’s “countervailing power” make them more legitimate and sustainable.
And as long as geopolitical conflict does not escalate into the horrors of world wars, restrained rivalry among great-power blocs is a price worth paying to preserve a politically diverse world. In the words of Hobson in 1902: “The hope of a coming internationalism enjoins above all else the maintenance and natural growth of independent nationalities, for without such there could be no gradual evolution of internationalism, but only a series of unsuccessful attempts at a chaotic and unstable cosmopolitanism.”
This article originally appeared in American Affairs Volume I, Number 2 (Summer 2017): 19–44.
So far, the year 2014 has been a tumultuous one, as geopolitical rivalries have stormed back to center stage. Whether it is Russian forces seizing Crimea, China making aggressive claims in its coastal waters, Japan responding with an increasingly assertive strategy of its own, or Iran trying to use its alliances with Syria and Hezbollah to dominate the Middle East, old-fashioned power plays are back in international relations.
The United States and the EU, at least, find such trends disturbing. Both would rather move past geopolitical questions of territory and military power and focus instead on ones of world order and global governance: trade liberalization, nuclear nonproliferation, human rights, the rule of law, climate change, and so on. Indeed, since the end of the Cold War, the most important objective of U.S. and EU foreign policy has been to shift international relations away from zero-sum issues toward win-win ones. To be dragged back into old-school contests such as that in Ukraine doesn’t just divert time and energy away from those important questions; it also changes the character of international politics. As the atmosphere turns dark, the task of promoting and maintaining world order grows more daunting.
But Westerners should never have expected old-fashioned geopolitics to go away. They did so only because they fundamentally misread what the collapse of the Soviet Union meant: the ideological triumph of liberal capitalist democracy over communism, not the obsolescence of hard power. China, Iran, and Russia never bought into the geopolitical settlement that followed the Cold War, and they are making increasingly forceful attempts to overturn it. That process will not be peaceful, and whether or not the revisionists succeed, their efforts have already shaken the balance of power and changed the dynamics of international politics.
A FALSE SENSE OF SECURITY
When the Cold War ended, many Americans and Europeans seemed to think that the most vexing geopolitical questions had largely been settled. With the exception of a handful of relatively minor problems, such as the woes of the former Yugoslavia and the Israeli-Palestinian dispute, the biggest issues in world politics, they assumed, would no longer concern boundaries, military bases, national self-determination, or spheres of influence.
One can’t blame people for hoping. The West’s approach to the realities of the post–Cold War world has made a great deal of sense, and it is hard to see how world peace can ever be achieved without replacing geopolitical competition with the construction of a liberal world order. Still, Westerners often forget that this project rests on the particular geopolitical foundations laid in the early 1990s.
In Europe, the post–Cold War settlement involved the unification of Germany, the dismemberment of the Soviet Union, and the integration of the former Warsaw Pact states and the Baltic republics into NATO and the EU. In the Middle East, it entailed the dominance of Sunni powers that were allied with the United States (Saudi Arabia, its Gulf allies, Egypt, and Turkey) and the double containment of Iran and Iraq. In Asia, it meant the uncontested dominance of the United States, embedded in a series of security relationships with Japan, South Korea, Australia, Indonesia, and other allies.
This settlement reflected the power realities of the day, and it was only as stable as the relationships that held it up. Unfortunately, many observers conflated the temporary geopolitical conditions of the post–Cold War world with the presumably more final outcome of the ideological struggle between liberal democracy and Soviet communism. The political scientist Francis Fukuyama’s famous formulation that the end of the Cold War meant “the end of history” was a statement about ideology. But for many people, the collapse of the Soviet Union didn’t just mean that humanity’s ideological struggle was over for good; they thought geopolitics itself had also come to a permanent end.
At first glance, this conclusion looks like an extrapolation of Fukuyama’s argument rather than a distortion of it. After all, the idea of the end of history has rested on the geopolitical consequences of ideological struggles ever since the German philosopher Georg Wilhelm Friedrich Hegel first expressed it at the beginning of the nineteenth century. For Hegel, it was the Battle of Jena, in 1806, that rang the curtain down on the war of ideas. In Hegel’s eyes, Napoleon Bonaparte’s utter destruction of the Prussian army in that brief campaign represented the triumph of the French Revolution over the best army that prerevolutionary Europe could produce. This spelled an end to history, Hegel argued, because in the future, only states that adopted the principles and techniques of revolutionary France would be able to compete and survive.
Adapted to the post–Cold War world, this argument was taken to mean that in the future, states would have to adopt the principles of liberal capitalism to keep up. Closed, communist societies, such as the Soviet Union, had shown themselves to be too uncreative and unproductive to compete economically and militarily with liberal states. Their political regimes were also shaky, since no social form other than liberal democracy provided enough freedom and dignity for a contemporary society to remain stable.
To fight the West successfully, you would have to become like the West, and if that happened, you would become the kind of wishy-washy, pacifistic milquetoast society that didn’t want to fight about anything at all. The only remaining dangers to world peace would come from rogue states such as North Korea, and although such countries might have the will to challenge the West, they would be too crippled by their obsolete political and social structures to rise above the nuisance level (unless they developed nuclear weapons, of course). And thus former communist states, such as Russia, faced a choice. They could jump on the modernization bandwagon and become liberal, open, and pacifistic, or they could cling bitterly to their guns and their culture as the world passed them by.
At first, it all seemed to work. With history over, the focus shifted from geopolitics to development economics and nonproliferation, and the bulk of foreign policy came to center on questions such as climate change and trade. The conflation of the end of geopolitics and the end of history offered an especially enticing prospect to the United States: the idea that the country could start putting less into the international system and taking out more. It could shrink its defense spending, cut the State Department’s appropriations, lower its profile in foreign hotspots — and the world would just go on becoming more prosperous and more free.
This vision appealed to both liberals and conservatives in the United States. The administration of President Bill Clinton, for example, cut both the Defense Department’s and the State Department’s budgets and was barely able to persuade Congress to keep paying U.S. dues to the UN. At the same time, policymakers assumed that the international system would become stronger and wider-reaching while continuing to be conducive to U.S. interests. Republican neo-isolationists, such as former Representative Ron Paul of Texas, argued that given the absence of serious geopolitical challenges, the United States could dramatically cut both military spending and foreign aid while continuing to benefit from the global economic system.
After 9/11, President George W. Bush based his foreign policy on the belief that Middle Eastern terrorists constituted a uniquely dangerous opponent, and he launched what he said would be a long war against them. In some respects, it appeared that the world was back in the realm of history. But the Bush administration’s belief that democracy could be implanted quickly in the Arab Middle East, starting with Iraq, testified to a deep conviction that the overall tide of events was running in America’s favor.
President Barack Obama built his foreign policy on the conviction that the “war on terror” was overblown, that history really was over, and that, as in the Clinton years, the United States’ most important priorities involved promoting the liberal world order, not playing classical geopolitics. The administration articulated an extremely ambitious agenda in support of that order: blocking Iran’s drive for nuclear weapons, solving the Israeli-Palestinian conflict, negotiating a global climate change treaty, striking Pacific and Atlantic trade deals, signing arms control treaties with Russia, repairing U.S. relations with the Muslim world, promoting gay rights, restoring trust with European allies, and ending the war in Afghanistan. At the same time, however, Obama planned to cut defense spending dramatically and reduced U.S. engagement in key world theaters, such as Europe and the Middle East.
AN AXIS OF WEEVILS?
All these happy convictions are about to be tested. Twenty-five years after the fall of the Berlin Wall, whether one focuses on the rivalry between the EU and Russia over Ukraine, which led Moscow to seize Crimea; the intensifying competition between China and Japan in East Asia; or the subsuming of sectarian conflict into international rivalries and civil wars in the Middle East, the world is looking less post-historical by the day. In very different ways, with very different objectives, China, Iran, and Russia are all pushing back against the political settlement of the Cold War.
The relationships among those three revisionist powers are complex. In the long run, Russia fears the rise of China. Tehran’s worldview has little in common with that of either Beijing or Moscow. Iran and Russia are oil-exporting countries and like the price of oil to be high; China is a net consumer and wants prices low. Political instability in the Middle East can work to Iran’s and Russia’s advantage but poses large risks for China. One should not speak of a strategic alliance among them, and over time, particularly if they succeed in undermining U.S. influence in Eurasia, the tensions among them are more likely to grow than shrink.
What binds these powers together, however, is their agreement that the status quo must be revised. Russia wants to reassemble as much of the Soviet Union as it can. China has no intention of contenting itself with a secondary role in global affairs, nor will it accept the current degree of U.S. influence in Asia and the territorial status quo there. Iran wishes to replace the current order in the Middle East — led by Saudi Arabia and dominated by Sunni Arab states — with one centered on Tehran.
Leaders in all three countries also agree that U.S. power is the chief obstacle to achieving their revisionist goals. Their hostility toward Washington and its order is both offensive and defensive: not only do they hope that the decline of U.S. power will make it easier to reorder their regions, but they also worry that Washington might try to overthrow them should discord within their countries grow. Yet the revisionists want to avoid direct confrontations with the United States, except in rare circumstances when the odds are strongly in their favor (as in Russia’s 2008 invasion of Georgia and its occupation and annexation of Crimea this year). Rather than challenge the status quo head on, they seek to chip away at the norms and relationships that sustain it.
Since Obama has been president, each of these powers has pursued a distinct strategy in light of its own strengths and weaknesses. China, which has the greatest capabilities of the three, has paradoxically been the most frustrated. Its efforts to assert itself in its region have only tightened the links between the United States and its Asian allies and intensified nationalism in Japan. As Beijing’s capabilities grow, so will its sense of frustration. China’s surge in power will be matched by a surge in Japan’s resolve, and tensions in Asia will be more likely to spill over into global economics and politics.
Iran, by many measures the weakest of the three states, has had the most successful record. The combination of the United States’ invasion of Iraq and then its premature withdrawal has enabled Tehran to cement deep and enduring ties with significant power centers across the Iraqi border, a development that has changed both the sectarian and the political balance of power in the region. In Syria, Iran, with the help of its longtime ally Hezbollah, has been able to reverse the military tide and prop up the government of Bashar al-Assad in the face of strong opposition from the U.S. government. This triumph of realpolitik has added considerably to Iran’s power and prestige. Across the region, the Arab Spring has weakened Sunni regimes, further tilting the balance in Iran’s favor. So has the growing split among Sunni governments over what to do about the Muslim Brotherhood and its offshoots and adherents.
Russia, meanwhile, has emerged as the middling revisionist: more powerful than Iran but weaker than China, more successful than China at geopolitics but less successful than Iran. Russia has been moderately effective at driving wedges between Germany and the United States, but Russian President Vladimir Putin’s preoccupation with rebuilding the Soviet Union has been hobbled by the sharp limits of his country’s economic power. To build a real Eurasian bloc, as Putin dreams of doing, Russia would have to underwrite the bills of the former Soviet republics — something it cannot afford to do.
Nevertheless, Putin, despite his weak hand, has been remarkably successful at frustrating Western projects on former Soviet territory. He has stopped NATO expansion dead in its tracks. He has dismembered Georgia, brought Armenia into his orbit, tightened his hold on Crimea, and, with his Ukrainian adventure, dealt the West an unpleasant and humiliating surprise. From the Western point of view, Putin appears to be condemning his country to an ever-darker future of poverty and marginalization. But Putin doesn’t believe that history has ended, and from his perspective, he has solidified his power at home and reminded hostile foreign powers that the Russian bear still has sharp claws.
THE POWERS THAT BE
The revisionist powers have such varied agendas and capabilities that none can provide the kind of systematic and global opposition that the Soviet Union did. As a result, Americans have been slow to realize that these states have undermined the Eurasian geopolitical order in ways that complicate U.S. and European efforts to construct a post-historical, win-win world.
Still, one can see the effects of this revisionist activity in many places. In East Asia, China’s increasingly assertive stance has yet to yield much concrete geopolitical progress, but it has fundamentally altered the political dynamic in the region with the fastest-growing economies on earth. Asian politics today revolve around national rivalries, conflicting territorial claims, naval buildups, and similar historical issues. The nationalist revival in Japan, a direct response to China’s agenda, has set up a process in which rising nationalism in one country feeds off the same in the other. China and Japan are escalating their rhetoric, increasing their military budgets, starting bilateral crises with greater frequency, and fixating more and more on zero-sum competition.
Although the EU remains in a post-historical moment, the non-EU republics of the former Soviet Union are living in a very different age. In the last few years, hopes of transforming the former Soviet Union into a post-historical region have faded. The Russian occupation of Ukraine is only the latest in a series of steps that have turned eastern Europe into a zone of sharp geopolitical conflict and made stable and effective democratic governance impossible outside the Baltic states and Poland.
In the Middle East, the situation is even more acute. Dreams that the Arab world was approaching a democratic tipping point — dreams that informed U.S. policy under both the Bush and the Obama administrations — have faded. Rather than building a liberal order in the region, U.S. policymakers are grappling with the unraveling of the state system that dates back to the 1916 Sykes-Picot agreement, which divided up the Middle Eastern provinces of the Ottoman Empire, as governance erodes in Iraq, Lebanon, and Syria. Obama has done his best to separate the geopolitical issue of Iran’s surging power across the region from the question of its compliance with the Nuclear Nonproliferation Treaty, but Israeli and Saudi fears about Iran’s regional ambitions are making that harder to do. Another obstacle to striking agreements with Iran is Russia, which has used its seat on the UN Security Council and support for Assad to set back U.S. goals in Syria.
Russia sees its influence in the Middle East as an important asset in its competition with the United States. This does not mean that Moscow will reflexively oppose U.S. goals on every occasion, but it does mean that the win-win outcomes that Americans so eagerly seek will sometimes be held hostage to Russian geopolitical interests. In deciding how hard to press Russia over Ukraine, for example, the White House cannot avoid calculating the impact on Russia’s stance on the Syrian war or Iran’s nuclear program. Russia cannot make itself a richer country or a much larger one, but it has made itself a more important factor in U.S. strategic thinking, and it can use that leverage to extract concessions that matter to it.
If these revisionist powers have gained ground, the status quo powers have been undermined. The deterioration is sharpest in Europe, where the unmitigated disaster of the common currency has divided public opinion and turned the EU’s attention in on itself. The EU may have avoided the worst possible consequences of the euro crisis, but both its will and its capacity for effective action beyond its frontiers have been significantly impaired.
The United States has not suffered anything like the economic pain much of Europe has gone through, but with the country facing the foreign policy hangover induced by the Bush-era wars, an increasingly intrusive surveillance state, a slow economic recovery, and an unpopular health-care law, the public mood has soured. On both the left and the right, Americans are questioning the benefits of the current world order and the competence of its architects. Additionally, the public shares the elite consensus that in a post–Cold War world, the United States ought to be able to pay less into the system and get more out. When that doesn’t happen, people blame their leaders. In any case, there is little public appetite for large new initiatives at home or abroad, and a cynical public is turning away from a polarized Washington with a mix of boredom and disdain.
Obama came into office planning to cut military spending and reduce the importance of foreign policy in American politics while strengthening the liberal world order. A little more than halfway through his presidency, he finds himself increasingly bogged down in exactly the kinds of geopolitical rivalries he had hoped to transcend. Chinese, Iranian, and Russian revanchism haven’t overturned the post–Cold War settlement in Eurasia yet, and may never do so, but they have converted an uncontested status quo into a contested one. U.S. presidents no longer have a free hand as they seek to deepen the liberal system; they are increasingly concerned with shoring up its geopolitical foundations.
THE TWILIGHT OF HISTORY
It was 22 years ago that Fukuyama published The End of History and the Last Man, and it is tempting to see the return of geopolitics as a definitive refutation of his thesis. The reality is more complicated. The end of history, as Fukuyama reminded readers, was Hegel’s idea, and even though the revolutionary state had triumphed over the old type of regimes for good, Hegel argued, competition and conflict would continue. He predicted that there would be disturbances in the provinces, even as the heartlands of European civilization moved into a post-historical time. Given that Hegel’s provinces included China, India, Japan, and Russia, it should hardly be surprising that more than two centuries later, the disturbances haven’t ceased. We are living in the twilight of history rather than at its actual end.
A Hegelian view of the historical process today would hold that substantively little has changed since the beginning of the nineteenth century. To be powerful, states must develop the ideas and institutions that allow them to harness the titanic forces of industrial and informational capitalism. There is no alternative; societies unable or unwilling to embrace this route will end up the subjects of history rather than the makers of it.
But the road to postmodernity remains rocky. In order to increase its power, China, for example, will clearly have to go through a process of economic and political development that will require the country to master the problems that modern Western societies have confronted. There is no assurance, however, that China’s path to stable liberal modernity will be any less tumultuous than, say, the one that Germany trod. The twilight of history is not a quiet time.
The second part of Fukuyama’s book has received less attention, perhaps because it is less flattering to the West. As Fukuyama investigated what a post-historical society would look like, he made a disturbing discovery. In a world where the great questions have been solved and geopolitics has been subordinated to economics, humanity will look a lot like the nihilistic “last man” described by the philosopher Friedrich Nietzsche: a narcissistic consumer with no greater aspirations beyond the next trip to the mall.
In other words, these people would closely resemble today’s European bureaucrats and Washington lobbyists. They are competent enough at managing their affairs among post-historical people, but understanding the motives and countering the strategies of old-fashioned power politicians is hard for them. Unlike their less productive and less stable rivals, post-historical people are unwilling to make sacrifices, focused on the short term, easily distracted, and lacking in courage.
The realities of personal and political life in post-historical societies are very different from those in such countries as China, Iran, and Russia, where the sun of history still shines. It is not just that those different societies bring different personalities and values to the fore; it is also that their institutions work differently and their publics are shaped by different ideas.
Societies filled with Nietzsche’s last men (and women) characteristically misunderstand and underestimate their supposedly primitive opponents in supposedly backward societies — a blind spot that could, at least temporarily, offset their countries’ other advantages. The tide of history may be flowing inexorably in the direction of liberal capitalist democracy, and the sun of history may indeed be sinking behind the hills. But even as the shadows lengthen and the first of the stars appears, such figures as Putin still stride the world stage. They will not go gentle into that good night, and they will rage, rage against the dying of the light.
The borrowers owe more on their loans than their properties are worth.
Homeowners in financial trouble?
This time, it is not homes that are losing their value but the taxicab licenses, commonly called medallions, that are required for companies to operate within Chicago. Disruption in the industry, in the form of increased competition from Uber and other ride-sharing companies, has caused medallion values to plunge. Also caught in the fallout: banks extending credit to taxi companies.
Since April 28 alone, a New York credit union has filed five lawsuits over a total of six medallions owned by five Chicago taxi owner-operators, alleging they’re in default on their loans and seeking about $1.4 million. That brings to 28 the number of lawsuits that Lomto Federal Credit Union has brought against cab companies so far this year in Cook County Circuit Court.
The lender, in its lawsuits, acknowledges that tech startups have burst a bubble in the transportation industry.
Chicago taxi medallions now are worth about one-sixth of what they were four years ago, down to about $60,000 from a peak of $370,000, according to one estimate by another bank. Unlike rideshare companies, which allow people to use a smartphone app to order and pay for rides from drivers using personal vehicles, cab companies are required to have a city-issued medallion affixed to the hood of each of their vehicles.
Uber, which entered the Chicago market in 2011 with 40 drivers, has built a rapidly growing company that has been valued at more than $60 billion by its investors. Rival Lyft, valued at $7.5 billion, debuted in Chicago in 2013.
“Since the entrance of Uber and other ride-sharing companies into the public passenger vehicle market, Chicago taxicab medallions have consistently lost value,” according to one of the lawsuits Lomto filed since April 28 in Cook County.
“The value of the medallion will continue to decrease significantly,” the suit says.
The issue isn’t limited to Chicago.
Bhairavi Desai, executive director of the New York Taxi Workers Alliance, said in an emailed statement that competition from ride-sharing companies is turning “full-time professional jobs … into low-pay, insecure gigs.”
“For drivers who also own the medallion, it means they face bankruptcy and foreclosures and longer hours to just make ends meet,” Desai said. “It’s a race to the bottom for a workforce already on the edge of poverty.”
For Lomto and other lenders, meanwhile, it means souring loans on their balance sheets.
New York-based Signature Bank last year wrote down the value of, or set aside reserves for, each Chicago taxi medallion in its loan portfolio, company documents show. Citing dropping medallion prices, the company charged off $108.6 million in taxi loans in Chicago last year. Charge-offs occur when a loan is deemed uncollectable.
Signature holds another $55.2 million of loans tied to Chicago medallions and has made provisions for $12.2 million of those loans potentially going bad. That means Signature’s exposure to the Chicago taxi market is now down to $43.1 million. That comes out to about $60,000 per medallion, Signature says.
Doing business with the taxi industry has been a bumpy ride for lenders both big and small.
Capital One blamed an earnings drop last year partly on rising losses in its national loan portfolio for taxi medallions. In late 2015, New York-based Montauk Credit Union, which, according to the National Credit Union Administration, primarily served taxi industries in New York, Chicago and Philadelphia, was seized by New York financial regulators due to “unsafe and unsound” conditions and later merged with another credit union.
Medallion Financial also has been dealt a blow by the taxi industry. The New York-based company, whose business lines include originating, acquiring and servicing loans that finance taxicab medallions, estimated the value of Chicago taxi medallions to be about $60,000 at the end of last year, down from a high of $370,000 in 2013. It cited increased competition from ride-sharing apps as a factor for pressures in the taxi industry. Medallion Financial said in company documents that about 20 percent of its medallion loan portfolio was at least 90 days past due at the end of the year, up from about 4 percent the prior year.
Records from the city of Chicago support the lenders’ claims about dwindling medallion values.
The top price paid for a city cab medallion so far this year has been $100,000, according to city records on medallion sales.
In the taxi industry equivalent of a foreclosure, Lomto, founded 80 years ago by New York City cab medallion owners, is asking for the medallions back and says it’s entitled to all proceeds of the businesses in the meantime. It also wants the court to prevent the taxi companies from selling or transferring the medallions.
Its most recent lawsuits have been filed against Future Cab Co., Modan Enterprise, Durrani Ent., Nanayaw and Vali Trans, all of Chicago.
In February 2014, for example, Lomto lent $260,000 to Future Cab so it could refinance its medallion. The loan, requiring monthly payments, comes due in 2019. The lawsuit alleges Future Cab is in default because it has been missing payments, and the court filing says that under the loan agreement, Future Cab is supposed to turn over its medallion to Lomto in case of a default.
But the company refuses to hand over the medallion, Lomto alleges. The lender also says it’s entitled to all revenues generated through the cab, a white 2010 Toyota Camry Hybrid, according to city records.
Lomto is asking the court for a preliminary injunction and temporary restraining order to prevent Future Cab from selling or transferring the medallion and from operating a cab with the medallion. The reason: The value of the medallion could drop if, say, the taxi were found liable in an accident.
“The medallion is losing value every day to the market entry of ride-sharing companies,” the lawsuit says.
Lomto wants the court to award a judgment of more than $248,000 due on Future Cab’s loan as of last month.
The background, allegations and relief sought in the lawsuit against Modan and others are similar.
Lomto made two loans for a combined $500,000 in 2013 to Modan to refinance two medallions, both for white 2011 Toyota Camry Hybrids. The loans mature next year. Lomto, based in Woodside, N.Y., is asking the court to award it about $480,000 in the Modan case.
Cook County Circuit Judge Kathleen Pantle on Thursday approved two emergency temporary restraining orders against Modan and Nanayaw, meaning they’re now not supposed to be driving the cabs in question.
Lomto lent $185,000 to Nanayaw in May 2012, a debt that matured Friday, according to the lawsuit. Lomto says it’s owed about $175,000.
Lomto is represented by Chicago lawyer Frank Andreou. The credit union and Andreou declined to comment beyond the lawsuits, but Andreou said “amicable resolution is always preferred over litigation.”
Four of the five recently sued cab companies couldn’t be reached for comment.
Salman Durrani of Durrani Ent., one of the cab companies Lomto is suing, agrees with the credit union on one matter: He said he is “not making money due to Uber.”
He said he tried to communicate that fact to Lomto in hopes of getting his loan modified but that he was unable to do so.
When facing bad public relations, one of the oldest plays in the playbook is to try and change the narrative. Execs are departing? You’re being sued over possibly stolen technology? Stories of sexual harassment in the workplace are making national news? How about you openly share some of your heretofore mostly secret financial performance to get people focused on some cold, hard numbers, instead? Whether this is literally what went on in the minds of the executive team at Uber, yesterday’s data dump showing that Uber booked a staggering $20 billion in rides last year certainly got a lot of attention.
Unfortunately for Uber, the financials shared with Bloomberg, paint a decidedly mixed picture beneath that eye-popping figure. While Uber’s growth has been remarkable and remains very strong as it approaches 7 years old — business more than doubled in 2016 — the company has yet to demonstrate a sustainable or profitable business model. Perhaps worse though is that despite at least $8 billion in cash burn Uber has little in the way of a strong competitive moat to show for its efforts.
(Disclaimer: I worked for Uber in 2015 for the communications and policy team. All data in this report, however, is based on publicly available information about the company’s growth and profitability.)
First, the good news
In 2016, Uber managed to record revenue of $6.5B on those $20B in bookings. That’s a “take rate” of more than 32%. Over time, Uber has been able to record a higher percentage of the cost of each ride as revenue, typically giving drivers a smaller slice of the fare. Drivers used to typically receive 80% of each ride’s cost but now are clearly averaging a lower figure.
It’s also true that growth remained strong throughout last year. Uber told Bloomberg $6.9 billion of the bookings came in Q4 and from other data provided made it possible to impute $5.4 billion was booked in Q3. That means just $7.7 billion was from the first half of the year and the final three months were nearly equal to the first six. That kind of growth isn’t just healthy it’s meteoric. By way of comparison, Facebook added about $10B to its top line last year, but that was from $17B –> $27B. Uber managed more absolute dollar growth on a smaller base. It’s likely there’s much more growth to come.
Indeed these booking figures have been soaring for years, from about $3B in 2014 to $9B in 2015 to last year’s $20B. NYU finance professor Aswath Damodaran, a longtime Uber skeptic, suggested back in 2014 the entire global rides-for-hire market was $100B. While the growth of Uber has doubtless hurt incumbents like taxi services, it’s actually unlikely it has taken a 20% global share. Instead the combination of innovations Uber has delivered — on-demand rides through an app with route tracking, upfront pricing, et al. — has allowed it to grow the market in for-hire rides.
The figures above are all, incidentally, exclusive of China which Uber left last year through a sale of its business to rideshare giant Didi. Uber had been burning $1 billion+ in China for the past two years. The drain of that business is now a footnote on its financials and, perhaps equally importantly, allows the company to concentrate management attention elsewhere. While exiting China might not have been the desired course of action, it doubtless leaves Uber better to compete in India, Latin America, and Europe.
Next, the not-so-good news
All those gains in bookings are fairly easily to understand but breaking it down into financial performance is much harder. For accounting reasons, Uber correctly only records its “take” as revenue under Generally Accepted Accounting Principles, or GAAP as it’s known. At least it does this most of the time. The accounting fiction Uber has operated under is that the real transaction is between rider and driver, with Uber merely a market maker. On traditional Uber rides that means the piece it claims is a “license fee” for use of the software and underlying marketplace. Priceline and Groupon similarly only book their slice of the pie as revenue, not the total amount of the hotel room or discount voucher they sell.
What’s concerning with Uber is that something very different happens with UberPool, the company’s shared-car service. It’s an essential component of growth in that it allows for more riders without an increase in drivers. But on UberPool, the company told Bloomberg, “the company counts the entire amount of an UberPool fare as revenue.”
I’ve sent a request into the company asking to clarify why, but based on what I do know here’s the likely reason: With UberPool, the company often charges a flat rate irrespective of distance traveled or otherwise discounts the offering. It then pays the driver based on a formula accounting for time and distance whether or not the ride ends up being shared. (For those unfamiliar, if you request an UberPool and you’re the first person picked up, there’s a chance you will never be matched with another ride and end up riding alone. You don’t pay more when this happens, but Uber is on the hook for standard UberPool rates to the driver.)
In these cases, Uber is basically paying the driver a rate for work and charging the rider something often very different — there’s no way to claim this is any sort of license fee. The gross margin on UberPool is likely quite low, then, given that rides can be as low priced at $3-5 in some markets. But taking the price paid as revenue necessarily inflates that figure versus a traditional Uber ride even if said ride costs 2x as much. Example: Rider pays $5 for an UberPool ride, revenue = $5 — that’s often $5 x 2 or $10. By contrast, rider pays $10 for an UberX ride, Uber’s revenue averages about $3.20 but the margin is only impact by the costs of payment processing, fraud, insurance, etc.
With all that, Uber grew its reported revenues from about $1.8B to $2.9B over those last two quarters of 2016. It was able to translate more than 70% of bookings growth into actual revenue and saw its loss only expand by about $60 million. But what a loss it was; Uber bled $991 million in red ink just in Q4. And here’s where that gets scary: Of $2.8B in losses last year, more than 1/3 were incurred just in the fourth quarter. What that demonstrates is though the ratio of losses : revenue may be shrinking, the absolute size of the loss continues to grow.
With a self-reported $7B+ in cash still on hand and another $2.3B in available credit, Uber isn’t in any short-term danger of a cash crunch. But the fact that losses have still grown with revenue suggests something approaching $1B each quarter is a possible scenario for 2017. There is no precedent for these kinds of losses in startup history. Worse still is that seven years into the Uber story, it’s reasonable to argue whether this business model works as currently constituted.
On Twitter, startup investor and AngelList founder Naval Ravikant suggest this isn’t a problem: “If Uber raised prices 15%, it’d be profitable.” Except it isn’t that simple. If Uber raised prices 15% and kept 100% of the increment, it would’ve earned an additional $3B last year — perhaps just enough to offset its losses. If Uber raised prices and — in a more likely scenario — only kept the 1/3 it normally receives, the extra $750M would have covered about 1/4 of the company’s loss.
Then, of course, there’s the issue of whether a price increase so large would have no impact on demand. Everything I know about the company says instead that it would. Uber routinely has used lower prices to expand the number and frequency of riders. Few goods are truly inelastic and on-demand rides don’t fit the model well. When they are inexpensive enough, people will find themselves in Ubers often. But if prices rise, options like transit, driving one’s own car, biking, et al. begin to look much more attractive. Even if volume fell just a few percent with such a large price increase, the gap that would leave would be in the nine figures.
And finally, the worst news
Underlying the assumption that Uber even could raise prices is the belief that it has created a competitive “moat” that gives it a path toward monopolistic power. There is scant evidence that’s true, however. Uber has strong competition around the globe, from Lyft in the U.S. to Ola in India and a major player working against it nearly everywhere else. In attractive markets like New York City, there are numerous options, including Gett, Juno, and Via.
Uber fans tend to draw comparisons to Amazon, which long made a habit of money-losing quarters and has seemingly emerged on the other side as an unassailable force, slowly crushing its retail competition. But Amazon spent much of the last two decades creating its fortress, which consists of things like a network of distribution centers located ever closer to customers, more power over suppliers who have little choice but to sell on Amazon, and arguably the greatest loyalty program ever created in Amazon Prime.
For all the success of Uber, it has few assets to show for those billions in losses. Beloved by many customers, its brand is also among the more hated in technology. Anecdotally, I know dozens of people who will simply never do business with Uber. And the recent firestorm surrounding the company over that began with the Susan Fowler story and escalated over President Donald Trump and his travel fan has doubtless added to the #neverUber rolls. The exodus of top-level executives is rarely a good sign for recruitment; and at Uber it’s a lengthening list.
Further, while it does have an excellent technology suite, there are still too many times when Uber offers a frustratingly inaccurate estimate of wait times and even untrustworthy pricing on some occasions. The closest thing to Amazon’s assets is that Uber has the longest roster of drivers in nearly all markets. That bigger supply leads to shorter waits and greater availability than competitors.
Unfortunately for Uber, it’s often at odds with those drivers as it cuts rates, pushes UberPool (where drivers are convinced they earn less), and fights them in court over whether they ought to be treated as employees. Drivers very frequently take advantage of their freedom as independent contractors to work for multiple services and few express much loyalty toward Uber. Further, unlike an Amazon distribution center in Northern Virginia that might serve the D.C. metro area for decades to come, Uber’s driver pool consists of a lot of transient part timers, many recent immigrants who will likely be in shorter supply for the next several years, and retirees who typically won’t be Ubering forever.
Yet even if Uber somehow turns around its driver relations, a goal of the recently departed executive Jeff Jones that seems far distant, it still faces a reality that other recent tech giants haven’t deal with: Uber is not a returns-to-scale business. Facebook’s giant user base allows it to sell more and more advertising without significantly growing its headcount. Netflix might spend millions on a new show but can stream it to new users for pennies without paying any extra for the content. And, Amazon, for all its reliance on old-school logistics like UPS, physical goods management, and the like can ship more packages to more people over time. Partly that’s robotics, partly it’s more efficient methods, partly it’s through acting as a market and taking a cut of others’ sales. It also can fund its retail ambitious through Amazon Web Services, it’s dominant hosting provider.
Uber looks more like a ground-based airline: It can’t carry more people without more drivers (planes). Once it fills all the seats in an UberPool (maximizes yield), it has maxed out returns. It can’t raise prices with viable competitors around (unless they match the increases). And the market for new drivers is constrained (perhaps not quite as severely as aircraft or gates at airports) by population growth, availability of other attractive jobs, affordability of vehicles, etc. Uber can do little or nothing to mitigate those.
Where does this leave the company? In a rather uncertain place. Those betting on self-driving cars to solve Uber’s economics down the road are assuming that competition there won’t be robust, which seems far-fetched. And in the meantime, the company is literally losing billions every year without demonstrating that its business should continue to receive the kind of investor faith it has to date. While this doesn’t mean Uber is going away, it also casts doubt on whether it’s poised to deliver on its $69B valuation anytime soon.
I write about technology, trends and companies on the leading edge. I’m a multiple-time entrepreneur, working in the heart of Silicon Valley for the past quarter century — most recently at Uber. Currently, I live in Seattle and spend most of my time working on a book and a new blog. I’ve got a BA in political science and an MBA from Stanford. Having been around technology and business on the leading edge, I write mostly about what’s new and what’s coming for companies and the country. You can find me on Facebook, Twitter and Google+ You can e-mail me at forbes_at_rogodotnet
If there is a political vision underlying Trumpism, however, the person to ask is not Trump. It’s his éminence grise, Stephen K. Bannon, the chief strategist of the Trump administration.
Bannon transcended his working-class Virginia roots with a stint in the Navy and a degree from Harvard Business School, followed by a career as a Goldman Sachs financier. He moved to Los Angeles to invest in media and entertainment for Goldman, before starting his own investment bank specializing in media. Through a combination of luck (a fallen-through deal left him with a stake in a hit show called Seinfeld) and a knack for voicing outrage, Bannon remade himself as a minor luminary within the far edge of right-wing politics, writing and directing a slew of increasingly conservative documentaries.
Bannon’s influence reached a new high in 2012 when he took over Breitbart News, an online news site, following the death of creator Andrew Breitbart. While at Breitbart, Bannon ran a popular talk radio call-in show and launched a flame-throwing assault on mainstream Republicans, embracing instead a fringe cast of ultra-conservative figures. Among them was Trump, a frequent guest of the show. They established a relationship that eventually led Bannon to mastermind Trump’s populist romp to the White House, culminating in his taking the administration’s most senior position (alongside the chief of staff, Reince Priebus).
It’s impossible to know for sure what Bannon will do with his newfound power; he honors few interview requests lately, ours included. (The White House did not respond to our request to speak with Bannon.) But his time as a conservative filmmaker and head of Breitbart News reveals a grand theory of what America should be. Using the vast amount of Bannon’s own publicly available words—from his lectures, interviews, films and more—we can construct elements of the vision for America he hopes to realize in the era of Trump.
The three tenets of Bannonism
Bannon’s political philosophy boils down to three things that a Western country, and America in particular, needs to be successful: Capitalism, nationalism, and “Judeo-Christian values.” These are all deeply related, and essential.
America, says Bannon, is suffering a “crisis of capitalism.” (He uses the word “crisis” a lot—more on that later.) Capitalism used to be all about moderation, an entrepreneurial American spirit, and respect for one’s fellow Christian man. In fact, in remarks delivered to the Vatican in 2014, Bannon says that this “enlightened capitalism” was the “underlying principle” that allowed the US to escape the “barbarism” of the 20th century.
Since this enlightened era, things have gradually gotten worse. (Hence the “crisis.”) The downward trend began with the 1960s and ’70s counterculture. “The baby boomers are the most spoiled, most self-centered, most narcissistic generation the country’s ever produced,” says Bannon in a 2011 interview.
He takes on this issue in more detail in Generation Zero, a 2010 documentary he wrote and directed. The film shows one interviewee after another laying out how the “capitalist system” was slowly undermined and destroyed by a generation of wealthy young kids who had their material needs taken care of by hardworking parents—whose values were shaped by the hardship of the Great Depression and World War II—only to cast off the American values that had created that wealth in the first place. This shift gave rise to socialist policies that encouraged dependency on the government, weakening capitalism.
Eventually, this socialist vision succeeded in infiltrating the very highest levels of institutional power in America. “By the late 1990s, the left had taken over many of the institutions of power, meaning government, media, and academe,” says Peter Schweizer, a writer affiliated with Bannon’s Government Accountability Institute, a conservative think tank, in Generation Zero. “And it was from these places and positions of power that they were able to disrupt the system and implement a strategy that was designed to ultimately undermine the capitalist system.” (As he says “undermine the capitalist system,” the film zooms in on the word “Lucifer” in that now-infamous epigraph from Saul Alinsky.)
Underlying all of this is the philosophy of Edmund Burke, an influential 18th-century Irish political thinker whom Bannon occasionally references. In Reflections on the Revolution in France, Burke presents his view that the basis of a successful society should not be abstract notions like human rights, social justice, or equality. Rather, societies work best when traditions that have been shown to work are passed from generation to generation. The baby boomers, Bannon says in a lecture given to the Liberty Restoration Foundation (LRF), failed to live up to that Burkean responsibility by abandoning the tried-and-true values of their parents (nationalism, modesty, patriarchy, religion) in favor of new abstractions (pluralism, sexuality, egalitarianism, secularism).
For both Burke and Bannon, failure to pass the torch results in social chaos.
The new liberal order
Once in power, the liberal, secular, global-minded elite overhauled the institutions of democracy and capitalism to tighten its grip on power and the ability to enrich itself. The “party of Davos,” as Bannon long ago dubbed this clique, has warped capitalism’s institutions, depriving middle classes everywhere of the wealth they deserve.
This pattern of exploitation came to a head in the 2008 global financial and economic crisis. Wall Street—enabled by fellow global elites in government—spun profits out of speculation instead of investing their wealth in domestic jobs and businesses. When the resulting bubble finally burst, the immoral government stuck hardworking American taxpayers with the bailout bill.
This is the kind of thing that led Bannon to say in that 2011 LRF lecture that there is “socialism for the very wealthy.” The rest of the country, he says, is “common sense, practical, middle-class people.”
There is also “socialism for the very poor,” he adds. “We’ve built a welfare state that is completely and totally unsupportable, and now this is a crisis.”
Bannon wants all of this liberal-sponsored “socialism” to end. He celebrates CNBC host Rick Santelli’s famous 2009 tirade about “those who carry the water and those who drink the water,” which sparked what became the Tea Party, a populist movement focused on tax cuts, fiscal scrimping, and a narrow interpretation of constitutional rights. Channeling the spirit of the Tea Party, Bannon blames Republicans as much as Democrats for taking part in cronyism and corruption at the expense of middle class families.
“We don’t really believe there is a functional conservative party in this country and we certainly don’t think the Republican Party is that,” says Bannon in a 2013 panel in which he discusses Breitbart’s vision. “We tend to look at this imperial city of Washington, this boomtown, as they have two groups, or two parties, that represent the insiders’ commercial party, and that is a collection of insider deals, insider transactions and a budding aristocracy that has made this the wealthiest city in the country.”
In short, in Bannonism, the crisis of capitalism has led to socialism and the suffering of the middle class. And it has made it impossible for the current generation to bequeath a better future to its successors, to fulfill its Burkean duty.
So what exactly are these traditions that Americans are meant to pass along to future generations? In addition to “crisis of capitalism,” one of Bannon’s favorite terms is “Judeo-Christian values.” This is the second element of his theory of America.
Generation Zero, Bannon’s 2010 documentary, has a lot to say about “American values,” and a lot of this matches closely the ideals of the Tea Party. But since 2013 or 2014, Bannon’s casual emphasis on American values has swelled to include a strong religious component. The successful functioning of America—and Western civilization in general—depends on capitalism, and capitalism depends on the presence of “Judeo-Christian values.”
For Bannon, capitalism was not only responsible for bringing the US out of the war successfully; it also brought about the restoration of Europe and the Pax Americana that followed, he explains in his 2014 speech to the Vatican conference. But capitalism alone is not enough. Unmoored from a Judeo-Christian moral framework, capitalism can be a force of harm and injustice—exemplified by the US’s economic decline.
To restore the health of America’s economy and patch its shredded social fabric, Bannon wants capitalism to be re-anchored by the Judeo-Christian values he believes made the country great throughout its history. This shared morality ensures that businesses invest not just for their own benefit, but also for the good of native workers and future generations.
As in Burke’s view, human rights and civil society do not come from anything abstract, but from tradition. For Bannon, this tradition is God; nation-states that establish people as the arbiters of truth and justice will ultimately give way to tyranny. The “ultimate check on the power of the state is God’s teaching,” says Duck Dynasty’s Phil Robertson in Torchbearer, the 2016 documentary that Bannon co-wrote, directed and produced. The film is full of Robertson offering similar aphorisms about how society falls apart without a religious foundation.
It’s important to note that “Judeo-Christian values” does not necessarily seem to require that all citizens believe in Christianity. Bannon doesn’t appear to want to undo the separation of church and state or freedom of religion enshrined in America’s constitution. After all, both of these are traditions that have led America to success in the past. What he believes is that the founding fathers built the nation based on a set of values that come from the Judeo-Christian tradition.
In order to make sure the whole country is on board with these values, it must limit or halt the influx of people who do not share them by rallying around nationalism. And it is through this final ingredient—the primacy of the nation-state’s values and traditions—that America can drive a stake through the heart of the global, secular “establishment.”
In addition to enriching themselves and encouraging dependency among the poor, global elites also encourage immigrants to flood the US and drag down wages. Immigrant labor boosts the corporate profits of globalists and their cronies, who leave it to middle-class natives to educate, feed, and care for these foreigners. The atheistic, pluralist social order that has been allowed to flourish recoils at nationalism and patriotism, viewing them as intolerant and bigoted. Without the moral compass of our forefathers, the system is so adrift in relativism that it champions the “rights” of police-hating deadbeats, criminal aliens, and potential terrorists over ordinary Americans, turning cities into hotbeds of violence and undermining national security. As one interviewee declares in Border War: The Battle over Illegal Immigration, another of Bannon’s documentaries, “The right sees [undocumented immigrants] as cheap labor, the left sees this as cheap votes.”
Mired in near-zero growth and financial chaos, the European Union epitomizes the catastrophic fate of a globalist system governed by elites who are not accountable to the citizens that elected them.
“[P]eople, particularly in certain countries, want to see the sovereignty for their country, they want to see nationalism for their country,” Bannon says in the Vatican speech. “They don’t believe in this kind of pan-European Union or they don’t believe in the centralized government in the United States.”
Nationalism, then, is the mechanism through which Judeo-Christian traditions and values become part of society. That’s because nationalism is fully inclusive, in the sense that it invites people of different backgrounds to unite under a common “American” sense of self. It dissolves minority identities—leading to the emphasis on “colorblindness” of “all lives matter” and opposition to affirmative action. This shared set of Judeo-Christian, nationalist values prevents minorities from claiming special rights. For instance, Generation Zero blames the 2007 housing collapse on “black victimization” that undermined capitalism and encouraged dependency on the government. At the same time, Torchbearer celebrates Dr. Martin Luther King Jr. as a paragon of traditional American morality because his view of human rights was based in Christianity.
The liberal elite’s pervasive emphasis on pluralism and minority rights—and its financial and political support of these groups—constrains shared American-ness. This erosion of Judeo-Christian nationalism weakens the country. Again, this applies not just to America, but also to other Western countries. As Bannon declares at a 2016 South Carolina Tea Party convention, the “swells, the investment bankers, the guys from the EU” are the “same guys who have allowed the complete collapse of the Judeo-Christian West in Europe.”
People who do not sign off on this set of shared values should not be welcome in the US. This logic forms the basis of Bannon’s opposition to immigrants, whose lack of democratic “DNA,” he believes, will harm society.
“These are not Jeffersonian democrats,” Bannon said last year, referring to immigrants heading from Muslim majority countries to Europe, USA Today reported. “These are not people with thousands of years of democracy in their DNA coming up here.” That rationale might justify closing the borders to immigrants from Latin America, even though they are usually devout Catholics.
A theory of generations
The crisis of capitalism and the undermining of the Judeo-Christian West that Bannon proclaims in his Vatican lecture is not an isolated event. It is, in his view, one of a repeated cycle of crises that occurs periodically, each of which inevitably culminates in war and conflict on a grand scale.
“This is the fourth great crisis in American history,” he says in the speech to the LRF. “We had the revolution, we had the Civil War, we had the Great Depression and World War II. This is the great Fourth Turning in American history.”
What he is getting at here is based on the work of Neil Howe and William Strauss, two amateur historians who in the 1990s presented a “generational theory” of American history. The theory views American history through the lens of repeated cycles lasting roughly 80 years, about the length of a single lifetime. Within each 80-year cycle, say Howe and Strauss, are four “turnings”—periods of around 20 years that are characterized by a particular mood. These four moods are the “high,” “awakening,” “unraveling,” and, finally, “crisis.”
The theory is too vague to be proven wrong, and has not been taken seriously by most professional historians. But it is superficially compelling, and plots out to some degree how America’s history has unfolded since its founding.
It’s also clear how the generational theory fits with Bannon’s view that the slow erosion of Judeo-Christian values has been bad for the country. The most recent cycle, according to Howe and Strauss, went from the “high” of the postwar era—a time of which Bannon is particularly fond—to an “awakening” of activism in the ’60s, followed by an “unraveling” of institutions and shared values thanks to the individualism brought on by the preceding “awakening.” That brings us to the current crisis, the great “Fourth Turning,” following the American Revolution, Civil War, and the Great Depression/World War II.
How to solve the crisis: Large-scale conflict
“Turnings” feature very heavily in Generation Zero. “Turnings are like the seasons—every turning is necessary,” says historian David Kaiser in the documentary, over stock footage of clocks ticking, suns rising, and butterflies emerging. “Cities are founded, cities collapse. States rise, states fall,” he continues.
What exactly is the current crisis? Bannon’s view on it has evolved. In 2010, he appears to have regarded it as the result of the debt racked up in the 2000s and the 2008 financial crisis.
“This accumulated debt at all levels of our society poses an immediate existential threat to America,” he says in a 2010 speech in New York City. “Now unlike the manufactured crises of global warming and healthcare, this is a true crisis. This crisis threatens the very sovereignty of our country.”
And in the 2011 LRF lecture, when Bannon declares the US faces the “fourth great crisis in American history,” he still seems to suggest that it consists largely of the global financial crisis that began in 2008.
But there’s more to it than that. Comparing the current crisis to events like the Revolutionary War and World War II, Bannon appears to believe that the US is heading inevitably toward violent conflict. This interpretation is backed up by other statements from and about Bannon.
David Kaiser, the historian interviewed in Generation Zero and also a proponent of the Strauss-Howe theory, recently recounted his conversation with Bannon, including Bannon’s militaristic interpretation of the theory, in Time:
A second, more alarming interaction didn’t show up in the film. Bannon had clearly thought a long time both about the domestic potential and the foreign policy implications of Strauss and Howe. More than once during our interview, he pointed out that each of the three preceding crises had involved a great war, and those conflicts had increased in scope from the American Revolution through the Civil War to the Second World War. He expected a new and even bigger war as part of the current crisis, and he did not seem at all fazed by the prospect.
Let’s follow the logic of this generational theory for a second: If a “high” only comes after a “crisis,” and if a “crisis” must necessarily be an increasingly large-scale war, Bannon is left searching for a major, existence-level enemy. Does the “Party of Davos” alone qualify? Who else could this war be fought against?
In the 2014 Vatican lecture, Bannon goes further. “I think we are in a crisis of the underpinnings of capitalism, and on top of that we’re now, I believe, at the beginning stages of a global war against Islamic fascism,” he says. Bannon adds:
“This may be a little more militant than others…I believe you should take a very, very, very aggressive stance against radical Islam…. See what’s happening, and you will see we’re in a war of immense proportions.”
Bannon’s “global war against Islamic fascism”
The fourth great civilizational showdown—a “global existential war,” as Bannon describes it in July 2016—pits the “Judeo-Christian West” against “Islamic fascism”—especially ISIL. But the threat isn’t necessarily limited to ISIL.
Bannon’s remarks and his affiliations with anti-Muslim activists like Pamela Geller and Robert Spencer leave the impression that the enemy might well be Islam in general. As Breitbart notes in 2014, the “erudite Bannon” entertains the argument that Islam’s “war” against Christianity “originated almost from [Islam’s] inception.” He endorses the view that, in the lead-up to World War II, Islam was a “much darker” force facing Europe than fascism. Other ideas he has supported include: a US nonprofit focused on promoting a favorable image of Muslims is a terrorist front; the Islamic Society of Boston mosque was behind the 2013 Boston Marathon bombing; and Muslim-Americans are trying to supplant the US constitution with Shariah law.
Because Islam is rooted in anti-Christian violence, goes the logic, the only way to ensure that Muslims in America don’t pose a terrorist threat is to make sure they honor the US constitution as the rule of law and accept Judeo-Christian values.
“Darkness, Darth Vader, and Dick Cheney”
There are a few loose ends in Bannon’s thinking—comments that seem consequential, but are vague or don’t fit clearly into any bigger vision.
Consider, for example, his statement that “darkness is good,” which he told Michael Wolff of Hollywood Reporter. “Dick Cheney. Darth Vader. Satan. That’s power,” he continued. Or the statement, reported by the Daily Beast, that Bannon views himself as a “Leninist” who wants to “bring everything crashing down, and destroy all of today’s establishment.”
The constant repetition of the phrase “Judeo-Christian values” should convince us that Bannon does not worship Satan. “Darkness is good” appears to suggest that the perception of being dark is good. The quote continues, “It only helps us when [liberals and the media] get it wrong. When they’re blind to who we are and what we’re doing.” Thus if the perception of him as a Darth Vader-like figure makes it easier for him to create his enlightened capitalist utopia, so be it.
As for the Leninist remark, it seems pretty consistent with what we know of Bannon thus far: The conservative Burke himself thought that throwing out leaders was justified when “necessary” to restore the old values.
Then again, this delight in being a “dark” oppositional force pairs nicely with his ferocious hatred of the “establishment.” In particular, Bannon’s diatribes against the media brim with spite toward journalists’ arrogance, superiority, and naivety.
On Breitbart radio in early November, he praised the “insight and savvy” of its callers and website commenters, while ranting about a “smug, smirking” New York Times reporter who suggested that Trump rally attendees in Mississippi didn’t know who Nigel Farage, a right-wing populist leader in the UK, was. “120% of the people” at the rally knew of Farage, who is “kind of a cult hero in this global populist movement,” said Bannon. More recently, he told the New York Times (paywall) that the media “should be embarrassed and humiliated and keep its mouth shut and just listen for a while.” He added: “I want you to quote this. The media here is the opposition party. They don’t understand this country. They still do not understand why Donald Trump is the president of the United States.”
Some of his hatred of the elite seems rooted in his experiences living and working among the elite. He frequently references his Harvard and Goldman Sachs pedigrees. However, when he describes his time as an elite, it’s as an “outsider”—a term he used in the early days to describe the populist movement he represented—passing among the privileged and deciphering their nefariousness for ordinary middle-class Americans. For example, in his 2014 Vatican speech, he says:
I could see this when I worked at Goldman Sachs — there are people in New York that feel closer to people in London and in Berlin than they do to people in Kansas and in Colorado, and they have more of this elite mentality that they’re going to dictate to everybody how the world’s going to be run. I will tell you that the working men and women of Europe and Asia and the United States and Latin America don’t believe that. They believe they know what’s best for how they will comport their lives.
But this cosmic avenger role Bannon seems to claim as voice-giver to the “forgotten” middle-classes hints at a deeper relish of conflict. A fascination with warfare and violence emerges in, for instance, his frequent allusion to the glory of the amphibious invasion at Normandy, or his taking the time out of his duties as Breitbart’s CEO to pen an obituary for Vo Nguyen Giap, a Vietnamese general who led a war for independence that Bannon described as “one of the bloodiest and hardest fought by all combatants.” In particular, the aesthetic of his documentaries can be nauseatingly violent. Torchbearer is a tour de force of gore. (There are at least six separate shots of falling guillotines, as well as lingering footage of nuclear radiation victims, mass burials from Nazi gas chambers, and various ISIL atrocities.)
What all this means for the Trump presidency
Even before he took charge of Trump’s campaign, in Aug. 2016, Bannon’s philosophies pervaded its rhetoric. If there was any question about the role his views would play in the Trump administration, the last two weeks have made it clear: The president’s leadership hangs from the scaffolding of Bannon’s worldview.
Trump’s inaugural address was basically a telepromptered Bannon rant. Where inaugural speeches typically crackle with forward-looking optimism, Trump’s was freighted with anti-elite resentment. He described a Bannonistic vision in which the “wealth of our middle class has been ripped from their homes and then redistributed all across the world.” The “forgotten men and women of our country”—a meme that Trump claimed, but that appears in Generation Zero—had a cameo too.
Trump heaped blame on the “establishment,” which “protected itself” but not American citizens from financial ruin. “And while they celebrated in our nation’s capital, there was little to celebrate for struggling families all across our land,” Trump continued. “We’ve made other countries rich, while the wealth, strength and confidence of our country has dissipated over the horizon.”
“America first” is Bannon’s economic nationalism in slogan form. Trump’s vow to “unite the civilized world against radical Islamic terrorism, which we will eradicate from the face of the Earth” was a mellowed-out version of the West’s battle against “Islamic fascists.”
There’s more. Trump’s remarks that the “Bible tells us how good and pleasant it is when God’s people live together in unity,” that “most importantly, we will be protected by God,” and that children from both Detroit and Nebraska are “infused with the breath of life by the same almighty creator” seemed kind of bizarre coming from a not-very-religious man. They don’t, however, in the context of Bannon’s insistence in Torchbearer that a society without God disintegrates.
Within days of the inauguration came the dizzying spurt of executive actions—written by Bannon and Stephen Miller, a White House policy advisor—many of which contained “press release-friendly ‘purpose’ sections making extravagant claims not usually found in executive orders,” says Andrew Rudalevige, government professor at Bowdoin College.
Bannon’s philosophy toward Islam seems likely to have influenced the order, “Protecting the Nation from Foreign Terrorist Entry into the United States.” Recalling that line about how immigrants are not “Jeffersonian democrats,” the document prescribes ensuring the allegiance to America’s “founding principles” and the US constitution of anyone admitted to the country, including tourists. Trump also implied in a TV interview with the Christian Broadcast Network that he wanted to prioritize Christians refugees over Muslims, accusing the US government of favoring Muslim refugees over Christians in the past (a claim for which there’s no evidence). Some argue (fairly convincingly) that Trump’s ban risks lending credence to ISIL recruitment propaganda claiming that the US is leading the West in a war on all of Islam.
Another of the new administration’s focuses—the danger posed by Mexicans flooding over the border—is also a central theme of Bannon’s vision of America under seige. Trump’s executive action declares that “many” unauthorized immigrants “present a significant threat to national security and public safety,” though criminology and immigration experts say most evidence suggests immigrants in general commit crimes at a lower rate than native-born citizens. “Sanctuary” cities—those that voluntarily cooperate with immigration enforcement only on deporting unauthorized immigrants convicted of violent or serious crimes—are also critiqued in Bannonist terms: They have “caused immeasurable harm to the American people and to the very fabric of our Republic.” In other words, they do not share America’s values.
Finally, Trump’s withdrawal of the US from the Trans-Pacific Partnership, a multilateral trade deal supported by what would count as the “elite,” includes a special shout-out to “the American worker,” the classic Bannon theme.
Bannon savors the power of symbolism. That symbolic power infused Trump’s campaign, and now, apparently, his administration’s rhetoric. After all, as Andrew Breitbart made clear when he famously dubbed him the “Leni Riefenstahl of the Tea Party,” Bannon is a master propagandist. He’s also a master opportunist, going by his fitful shifts in career. So it’s possible that the narrative flowing through Trump’s inaugural address and executive actions is simply what Bannon has calibrated over time to rouse maximum populist fervor—and that it doesn’t reflect plans to upend America.
There’s also, however, the possibility that Bannon is steering Trump toward the “enlightened capitalist,” Judeo-Christian, nationalistic vision that he has come to believe America needs.
Which it is, we can’t know, of course: Only Bannon knows what Bannon really wants. What we do know for sure, though, is that a man who has staked out a deep desire for a violent resurgence of “Western civilization” now has the power to fulfill it.