The decline of established institutions is supposed to be a liberating process, allowing individuals to express themselves fully and society to reach its potential through temporary structures that express its needs and values at a given time. Yet for those of us who are not 28 year old hedge fund traders, the new unstructured world seems likely to be a pretty grim place. “If you want a friend, get a dog” is in the long run an unpleasant way to live life.
The public sector in this respect is less of a problem than the private. The IMF and the World Bank have lost their useful economic role (to the extent they ever had one) but it appears unlikely that they will ever be abolished. The World Bank in particular is currently going through a bout of questioning because of its president Paul Wolfowitz’s crusade against Third World corruption. This is an entirely worthy if unpopular cause that is marred by the World Bank’s arrogance in tying it to handouts of money and by Wolfowitz’s own activity in arranging an overpaid tax-free job for his mistress. (One does not wish to be ungallant, but those wishing to make a salacious meal out of this case cannot have Googled the lady’s photo.)
Were the World Bank a private sector operation, there is no question that its shares would currently be trading at a low multiple, while Carlyle, Blackstone or KKR geared themselves up for an asset-stripping bureaucracy-slashing leveraged buyout (Carlyle, given its political connections, might be the most appropriate buyer.) After all, with equity of $36 billion and a net loss of $2.4 billion, the World Bank’s value should be well within the range of the private equity sector.
As for bureaucracy, it is notable that through endless reorganizations and a substantial shrinkage in the real value of its loans (to the extent that its net provision of funds to clients has been negative for a decade or more) the World Bank’s headcount has remained stable at around 12,000, while its usage of outside consultants, generally retired World Bank staffers, has mushroomed. Job security for World Bank staffers is minimal, for the constant reorganizations all involve firing some staff and hiring others in different areas, but the overall headcount remains the same, or tends to increase. The World Bank’s productivity has thus been steadily declining for the past 15 years; indeed, in terms of net resources transfer to the Third World, it has for several years been negative.
The World Bank represents one extreme, that of a public sector bureaucracy that has become hopelessly ossified yet is unable to be put out of its misery (no international bureaucracy of this type has ever been eliminated – at best it has been replaced with another bureaucracy performing many of the same functions.) At the opposite extreme, the private sector is currently eliminating large corporate bureaucracies at the rate of four or five a week. It is the latter problem that appears more urgent.
Most people do not have the ability to turn on a dime that is required when their job is suddenly eliminated. Instead they must struggle to find further employment that may well not be as well paid or comfortable as the job that disappeared. The alternative of entrepreneurship, so alluring in principle, is in reality for 90% of the people who try it a recipe for anxiety, poverty and remuneration far below what is appropriate for their services.
It is not at present clear whether this is a phenomenon due to excessive cheap money since 1995 – but if it is, it has been remarkably prolonged – or whether the 21st century will see the death of the large corporation and its replacement by rapidly shifting aggregates of capital seeking to maximize returns. It’s worth considering for a moment what in the latter case the world of say 2030 might look like.
In terms of income distribution, there would be a small elite of very rich people, managing hedge funds and private equity funds, whose reach would be worldwide. In theory, these would be the best and brightest of each generation, a true meritocracy. In practice, judging by hedge fund management’s current practices as well as by what appears to be acceptable in a World Bank president, nepotism and favoritism would be rife. The Funds’ resources would be raised from passive investor sources, notably in the pension and insurance sectors, but they would be wholly under the control of the Fund management elite.
As well as the truly rich who ran the Funds two penumbras would exist. One would be the gilded youth, chosen by the Fund elite as their minions and eventual successors, who would be paid superbly, but would have to abandon both their integrity and all semblance of a life outside their Fund in order to qualify for their largesse.
The other would be the managers employed by the Funds to asset-strip the companies they bought. These would be tough operators, probably military-trained, whose job would be to overcome the hostility of the masses whose lives they destroyed. Inevitably bomb threats and assassination attempts would be an accepted part of their existence. Their sole goal would be to extract “value” from the assets they oversaw, rather than to produce any operating improvements. They would be less well paid than the titans of the Funds, and would serve at their pleasure, but would still be hugely richer than everyone else.
There would be completely free migration around the globe, since the Fund titans would have paid off politicians to ensure that all barriers were removed, whatever the wishes of the electorate. In this way, labor would always be available at the lowest possible cost to carry out the Fund managers’ wishes. This free movement of labor and utilization of the near-infinite pool of Third World cheap manpower would be the most important weapon enabling Fund managers to “extract value” from all situations, breaking up or squeezing out any activities whose operating managers and staff appeared to be building a Fund-proof alternative power nexus.
Job security would be something that little people didn’t enjoy. Jobs would be available in most specialties, and career ladders would be dangled before the proletariat to ensure docility and hard work, but jobs would be terminable at a moment’s notice. They would be vulnerable to asset-stripping, when Fund managers wished to loot the operation for which you worked, to outsourcing, when the Funds found a cheaper source of labor for the work you did and to office politics, when the Funds or their tame top corporate managers decided you were subversive or they didn’t like your face. Once you lost your job, you might if lucky be able to find another in the same specialty, albeit probably worse paid, but most probably you would have to retrain expensively for whatever new specialty had become fashionable in the years since your last redundancy.
Naturally the masses would need to be kept in a state of passive discontent rather than outright rebellion, in spite of their modest living standards and lack of prospects. The Fund managers and their political allies would have a number of ways to achieve this.
The government would be large, supported primarily by taxing the labor force (the Fund titans would not pay taxes, like the Russian mafia and foreign bankers in today’s London.) As well as providing innumerable reasonably paid near-sinecures, the government would also provide social security and healthcare, available to all but revocable at the pleasure of the bureaucracy so that control could be maintained. Government economic statistics would be tailored to the Fund managers’ needs, disseminated by the Fund-controlled media so efficiently that any minion who attempted to disbelieve their universally sunny data would be unable to propagate his subversive opinions. Elections would be held, but only candidates acceptable to the Funds would get adequate campaign financing and access to the Fund-controlled media.
Internationally, an immensely powerful World Bank, supported by the West’s taxpayers but controlled by the Funds, would provide handouts for Third World governments to keep them in line with the Funds’ worldview and to ensure that sufficient labor was adequately educated and available for the Funds’ needs. Cooperating governments would find their people’s living standards modestly improving, and their leaders would be directly rewarded in person by Fund-controlled think tanks or the World Bank. If there were governments that refused to cooperate, they would be largely cut off from international trade and investment and World Bank subsidies. Military force would be controlled by the United Nations and other international bureaucracies, which would themselves be controlled by subsidies from the Funds and the World Bank.
Don’t like this future? Recognize aspects of it already appearing? Well then, pray that the present period of easy money and rapid-fire private equity acquisitions ends quickly. In that way a healthy recession will allow normal economic and democratic forces to retake control of the world economy, removing the more egregious capitalist cowboys to the jail cells where they belong.
Otherwise, every month of rising stock prices and negative real interest rates will increase the control of the Fund managers and lock the new dystopia more irremovably into place.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)