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The principal driver of global inequality—both within and between countries—is the global financial regime. This has been a feature since the end of the Bretton Woods system in 1971, with recurrent catastrophic effects following the onset of the 1980s debt crisis, including the collapse of the socialist nations and the 1997 Asian financial crisis. Back then, it was a conservative stroke of genius to institutionalize “market exchange rates” on a global scale. Those markets work well enough for rich nations, but they guarantee problems for everyone else. Each exchange crisis has wiped out a decade or more of progress against inequality, as anyone in Brazil, Argentina, Mexico, or much of Africa will tell you. The rise of China, on the other hand, has everything to do with its refusal to play the game of open capital markets. And while inequality in China rose rapidly for internal reasons beginning in the 1990s, it stabilized more than a decade ago.1 Ad Policy

Global inequality is a security risk—and not just because it breeds resentment, violence, and mass migrations. It also makes the entire system prone to collapse. For over 40 years, the United States has enjoyed the advantage of issuing the world’s reserve currency, running a trade deficit, and living well off the work of others. But the respect that would be due to exercising that role responsibly has been squandered by our behavior.2

Reckless interventions have demonstrated the limits of military power—as our professional soldiers can attest, and as the current state of Afghanistan, Iraq, and Libya demonstrate. A self-centered economic strategy is only a bit more subtle. Yes, even when a financial crisis originates in the United States, as happened with the subprime-mortgage debacle of 2007–09, funds still flow to the safety of the US dollar and government bonds. So long as this pattern holds, the United States actually benefits from economic insecurity and instability, both at home and abroad. But you have to be very optimistic—or flat-out crazy—to think that this can go on indefinitely.3

Controlling inequality—like controlling blood pressure—is good for your economic health. Economies with less inequality generally have lower unemployment and stronger productivity growth, and some researchers also claim better human health and social cohesion. In terms of the rest of the world, the peculiar organization of the United States into a boom/bust economy based on finance and high technology is the exception rather than the rule: We combine record-breaking inequality with low unemployment. But this is a formula that generates massive instability, as well as the resentments that gave us President Trump. Countries with stronger stabilizing institutions built on the principle of countervailing power may be less rich over the short term, but they are better-governed and built to last.4 Special Foreign Policy Issue Why We Need a Wider Foreign-Policy Debate Katrina vanden Heuvel

Our long-term safety and prosperity will therefore depend on creating a more just and stable world banking and monetary system. We can either get to work on this ourselves, or accept that other large countries and blocs will take up the task, creating regional alliances that will restructure global trade and finance—as is already beginning to happen. If we are not part of a common process, then ultimately we will be cut out and cut back. No one should think that a policy of provoking and destabilizing Russia, China, and Iran is going to work for us, over the long or even the medium run. No one should think that Europe and Japan will stay US economic allies forever if their interests dictate otherwise. No one should imagine that military power provides enduring safety in a world of multiple major powers with their own resources, technologies, and ideas.5

In the United States, the key driver of inequality is capital-asset prices. This is because in a capitalist nation, capitalists and not workers own such assets and get their income from dividends, interest, stock options, and capital gains. Capitalist booms yield prosperity—often a wasteful prosperity—along with instability; as the bankers say, it’s not the speed that kills, it’s the sudden stop. Concentrated ownership of capital assets is therefore a central issue. Spreading the wealth sensibly over time means more public investment at every level and more investment by nonprofits with longer time horizons and sensible social objectives. It means fostering cooperatives and other stabilizing private economic forms that are not dependent on Wall Street. Instead of boosting the economic growth rate—a measure largely disconnected from social well-being—we should have a strategy to live better: more sustainably, more equally, with less waste and more common spaces, more public goods and enjoyments.6 Controlling inequality is good for your economic health.

A first step toward that goal is to break up the big banks. Smaller banks mean smaller bankers, loans to smaller businesses, and decentralized decision-making; it means more employment and bank organizations on a scale that can be supervised effectively by regulators. Public banks should be part of this mix, as should cooperative and mutual financial institutions. Mediating the entire economic organization of the country through a handful of mega-banks has been tried. It did not work out. And not incidentally, if the Democratic Party had taken a hard line on the big banks back in 2009, it might not be the wreck that it is today.7

New technologies also concentrate capital values, and this cannot really be stopped. Nor can all those riches be taxed away in real time, though the country will survive a handful of young billionaires at any given time. What can be stopped is the transmission of excess wealth down through the generations, with the ensuing creation of political dynasties. This is the function of the estate and gift tax! It should be applied with far more rigor, especially against big fortunes. And the dodge of putting vast wealth into charitable foundations should be weakened by the timely separation of the donor from control and by more rapid payouts. Foundations should not be playthings of the rich, nor should they become eternal independent powers unto themselves.8

The fundamental uncounted wealth of middle-class America is our social-insurance system: Social Security, Medicare, Medicaid, disability insurance, unemployment insurance, deposit insurance, and mortgage guarantees. Along with the income tax and the earned-income tax credit, this system stabilized the economy after the great financial crisis of 2007–09 and also mitigated the rise in post-tax inequality for many lower-income Americans. The system is messy, but it works. That is why the elites hate it. It should be strengthened, not weakened, by the kind of measures proposed by Senator Bernie Sanders: expanding Social Security; passing Medicare for All and a $15-an-hour federal minimum wage; providing tuition-free public universities, foreclosure protections, and a jobs guarantee. The Sanders program builds proudly on what is already there, and that is why it’s politically potent.9 Needed: A New Foreign Policy How to Challenge the Elite Consensus for Endless War Andrew J. Bacevich Climate Change Is Our Most Critical National-Security Challenge Bill McKibben Nuclear Weapons Pose the Ultimate Threat to Mankind Betsy Taylor More in this series

The US government, in short, needs to break away from the grip of concentrated financial power and from the illusions of dominance that come with feeling exceptional, invincible, and rich. Financial power has an interest in instability at home and abroad. It has an interest in seeking to dominate what can no longer be dominated. It is therefore a vector for depredation and for conflict, neither of which we can afford—especially in an era of existential risks to the environment, through climate change, and to the future of life on the planet, through nuclear war.10

Ultimately, therefore, this is a political struggle. “Wealth, as Mr. Hobbes says, is power,” notes Adam Smith in The Wealth of Nations. And Thomas Hobbes was right; anyone who observes the US political scene knows this, as does anyone who participates in American politics. In the end, inequality—both in the United States and around the world—is a problem that can only have a political solution.11