The answer to the second of my three questions for policy makers then is clear: “competition” among states on corporate taxes is indeed a race to the bottom that increases inequality and harms the world at large. It is not efficient, and it benefits a few rich folk at the expense of much larger, poorer communities.
The third question is bigger and thornier. In fact, it is one of the thorniest economic questions of all time. It is this: Whether or not “competition” is a harmful race to the bottom that hurts the world at large, does it make sense for my country or state to “compete,” from the perspective of local self-interest?
Schreck used to think not, at least for his area, but now he seems less certain. “In Lenexa we used to just say no,” he said. “But you have to get in the game, and once you’re in the game, it’s hard to get back out, the argument being that half of something is better than all of nothing. There are states, especially in the Deep South, which are much more aggressive, with amazing incentive packages. It’s a little whirlpool sucking on all of us. If you tried to swim out of it, you know, could you make it?”
There is a deep and pervasive belief that holds firm to the idea that yes, the giveaways are sadly necessary from a local perspective and we should play beggar-my-neighbor. The notion that countries have no choice but to be “competitive” in areas such as corporate tax or financial regulation has been the basis of some of the main national economic strategies of Britain and the United States for the past few decades. As Bill Clinton once put it, each nation is “like a big corporation competing in the global marketplace.” Donald Trump has repeatedly touted plans to “make America more competitive, to reduce taxes, to roll back regulations.” David Cameron, a former British prime minister, put it in even starker terms: “We are in a global race today. And that means an hour of reckoning for countries like ours. Sink or swim. Do or decline.”33
This belief system is, however, flatly wrong. Like Tiebout’s theory, it is underpinned by elementary economic fallacies. In general terms countries can opt out of this race unilaterally, with no economic penalty—in fact with a net national benefit. Beggar-my-neighbor is in reality beggar-myself. The only good move is not to play.
To see why this is so, it is necessary to leave the relatively calm waters of individual US states and venture into rougher, wilder, more perilous global seas. Here we will find that of the two major players in the global economy, Britain and the United States, Britain decided to play this game harder, faster, and more ruthlessly. In the process it has caused devastating damage to the international economy, and it has also beggared itself.
For centuries the City of London, the cash-pumping financial center at the heart of the British Empire, ran the greatest system of wealth extraction ever devised. Royal Navy gunships supported the predations of City-based groups like the East India Company, a trading organization that evolved into a bloodthirsty and unregulated operation with a private army, which in the eighteenth century looted the Indian subcontinent. At the Battle of Plassey, in 1757, the company defeated the nawab of Bengal; it then loaded the Bengal treasury’s gold and silver into a fleet of over a hundred boats and sailed off with it down the Hooghly River. British imperial rule in India was founded on this gigantic international monopoly, and its control over India’s industry, trade, and money would enable one of the greatest systems of wealth extraction ever devised. (That’s the very same East India Company that provoked the Boston Tea Party in 1773 and helped pave the way to the American Declaration of Independence.)
The City’s core principle underpinning these imperial adventures was freedom—specifically, freedom for finance and trade to flow unmolested across borders. “It is the business of government,” one British prime minister declared in 1841, “to open and secure the roads for the merchant.” The City’s devotion to this principle was so extreme, in fact, that it became the unofficial religion of empire. “Free trade is Jesus Christ, and Jesus Christ is free trade,” declared Sir John Bowring, a former City trader who became governor of the British territory of Hong Kong, as Britain sought to bludgeon open the mouthwateringly large Chinese market for its goods and services. Britain fought and won the two Opium Wars, in 1839–42 and 1856–60, enabling it (and other European powers) to impose on China its drug-dealing system of free trade.1
As with everything in finance, the City’s imperial role was not a simple tale of good and evil. Alongside all the militarized predation, the City financed railways, roads, and many other beneficial projects in the empire and far beyond, lending to France, Russia, Prussia, Greece, and the new South American republics. London was, as the financier Nathan Rothschild put it, “the bank for the whole world.” Its relentlessly international outlook was also the bedrock of Britain’s relatively tolerant multiculturalism, which has for centuries made London one of the most diverse and exciting cities on the planet and contributed to Britain’s decision to send out its warships in support of policies to end the international slave trade. “[In London] the Jew, the Mahometan, and the Christian transact together,” the French writer Voltaire declared in 1733, “as though they all professed the same religion, and give the name of infidel to none but bankrupts.” The American Revolution, which ended in 1783, drastically curbed the City of London’s presence in the United States, which rapidly developed its own financial system interests, so much so that by the mid-nineteenth century the North American colonies held their reserves not in London but in New York City. Yet the London banks continued to lend and trade heavily with the countries around the United States. “In a very real sense,” explains one classic historical account, “the colonies became part of the invisible financial and commercial empire which had its centre in the City of London.”2
Yet all these riches flowing into the City of London didn’t necessarily benefit Britain as a whole; they benefited certain interest groups in Britain, often at the expense of others. Clashes and tensions between finance and the other parts of the economy happened again and again over the centuries. For instance, free trade benefits financial interests that profit from servicing both imports and exports, but it potentially harms local manufacturers, who benefit from protective barriers against cheaper foreign imports. For all the free-trade rhetoric, protectionism was central to the successful industrializing strategies of the United States, Britain, Japan, South Korea, and many others. The outward focus also meant that while the City was great at serving colonies, it often severely neglected British domestic industrialists outside London, something that continues today.3
The sinews of empire—British cunning, diplomacy, money, and violence—were finally broken by World War II, as Britain spent its national strength and treasure defending itself against Nazi Germany. So when the world’s leading nations put together the Bretton Woods architecture at the end of the war, curbing speculative flows of capital across borders to give governments the space to put in place policies their war-weary populations demanded, power had shifted decisively across the Atlantic to Washington, DC, and Keynes and the British establishment failed in their attempts to fashion the new system in a way that would restore Britain to its self-appointed place at the center of world economic affairs. The empire staggered on for a few years, but by then it was an empty shell, ready to crack.
It may seem counterintuitive, but Britain and the United States entered their greatest period of broad-based prosperity and economic growth at precisely the moment the City of London and Wall