(Versión española aquí)
"The debt crisis is here! The debt crisis is here!"
In today’s life, newsrooms around the globe cannot take their eyes off the sovereign debt crisis. This crisis is hovering above our heads giving our economic outlook one of the gloomiest of forecasts. Reading reports about it, I see a lot of people have used the English metaphor of the elephant in the room (an obvious truth that is being ignored or goes unaddressed). Indeed, to the general public, this problem appears to have popped out of a magic top hat and all of the sudden we have all been forcibly introduced to this elephant in the room.
But this elephant did not come out of nowhere. We have nursed it and fed it carefully over years and years of public expenditure and fiscal stimulus. No one seemed to care, though. World leaders, corporate titans, and heads of households of the last decades have run their countries, companies and families at the cost of their children's future. No wonder people in the present choose to have fewer kids. What's the point of bringing another kid into this world so he can pay back for the short-sighted actions of their irresponsible predecessors?
Before having twins, I used to love going to dinner parties. Somehow, casual banter about ways to save the world helps my brain relax thinking that at least I debated the world's future. If you attend parties yourself, you might have come across some of the different topics that recurrently pop up. One of my favorites, apart from “how expensive everything is" (yet every restaurant, school or housekeeper has a waiting list) is the one about “how the new generation of teenagers is worst dressed, behaved and educated than the one before”. We would like our teenagers to be more cultured and educated. However, could an adolescent mind care about learning advanced calculus when his/her parents are only worried about what's the next hot thing to flip and make money with? What's the point of having all this knowledge at our disposal if we are all trying to find the next bargain to flip?
As an investment bank professional working with Sovereign Debt in one of the regions currently "under stress", I get a lot of questions from family, friends and coworkers about what's going on and when is it going to be sorted out. People are simply scared and so am I. This elephant could easily take us all down.
In the summer of 2007, it was clear to me that this elephant existed. I decided to start my own personal search for the long answer to the problem. But long answers take a long time, so after writing a book for over two years, and spending another two years completing and reviewing it, I decided that it was about time taxpayers get the long answer to what's coming up. If we continue to ignore the elephant in the room, its wild behavior will simply end up crashing our society.
First point I will like to make is that this crisis is a result of a fiscal arbitrage.
What do I mean by this? Our fiscal code is an evolution of previous ones. When it was designed it was appropriate to take Western societies into a brighter future. And so it did. Thanks to our current fiscal codes, Western countries have built the perfect environment for entrepreneurs to thrive. Our corporations grew and created products, services and brands that have forever altered the way we live. Simultaneously, tax revenue linked to the economic activity has made possible the creation and development of the welfare states.
But funny thing, as time passes it gets harder to sell a third car to the same consumer, harder to stay competitive without transferring costs to your products’ prices and harder to negotiate with unions as other countries offer low labor costs. Corporate managers have learned the lesson and anyone who have studied an MBA in at least the last fifteen years, has been taught the lesson and the lesson is "Less is More"
The lesson’s motto could be phrased as follows: “Capture the consumer, capture the sale,monetize your brand, and forget about everything else. For everything else, copy, minimize, outsource or place the cost out of your balance sheet, because doing less means making more".
All I have to say about this contemporary school of business is that it is pure common sense.
Somehow, congressman after congressman in the developed world has thought that their fiscal code was perfect and set on stone. No one has even imagined that now that we have so much more intellectual capital than fifty years ago, we could maybe need a thorough fiscal reform that help us keep the government’s workload light and the private sector appropriately incentivized.
But, guess what? What congressmen did not spare any time with, businessmen did. If you think we are suffering this crisis because of an invisible hand mafia is setting us all up to make money at our expense, you are wrong and right.
Right, because probably the company you own, or work for, is part of that invisible hand, part of the business school that is making taxpayers’ pockets emptier.
Wrong, because there is no mafia behind it. Free or bundled-up products and services usually get over consumed. Give it a try yourself. Next Sunday morning, go into your town’s main street and set up a stand with free lemonade. You will find out how quickly you run out of lemonade. Something free tends to be organically over consumed.The intellectual capital at many large corporations has been dedicated to studying our fiscal codes to reduce their fiscal bill, or even better, to assign entire costs outside their balance sheet, leaving it unfunded for the State (and therefore the taxpayer) to take care of it in the future. However, this behavior is purely organic and far from being consciously ill-intentioned.
So, instead of looking for whom to blame, we've got a beast to tame.
I always give the same example, which I believe is pretty self explanatory. A fast food restaurant and a traditional restaurant both serve the same function, serve ready-to-eat food.The way they conduct their business, however, has very different consequences for the taxpayers’ account. Fast food restaurants and chains create much more garbage due to their intensive usage of containers than traditional restaurants. The more restaurants jump into this container intensive business model, the sooner the town will need to hire more trash collectors, the sooner they will need a new waste processing plant, the sooner they will need to assign new land for dumps, etcetera. In other words, the sooner the expenses for the taxpayer in that region will increase. Surprisingly, our set-on-stone fiscal code is not worried about who causes the problem, but only identifies who is making money. This means that in the best case scenario, both restaurants pay the same tax. And I say “best case scenario” because many times bigger companies pay fewer taxes as they have studied better how to minimize their tax bill. Having a one-of tax for containers (known as Pigouvian taxes) will only curve modestly this behavior, as bundled-up public services will continue to be over consumed especially when the biggest part of the cost is defrayed by the taxpayer and not by the problem maker.
Are the foundations of our fiscal code properly set for the twenty first century? Although I worry for the future of the planet, I did not mean to give this example to make the cause of environmentalists. This blog supports the cause of all the taxpayers out there that have no control over a sky rocketing tax bill that never seems to tackle down the source of the problem. So even if we pay and pay taxes we never have the satisfaction of leaving our kids better off, but the opposite.
After decades of listening to different lobbies on how to change our taxes so corporations can pay less, can our politicians stop and think for a moment on how to design a fiscal code that will defend the common interest making taxpayers' life simpler?
More importantly, I have asked myself, are we all just sending our different types of “garbage” the government's way? Are we teaching our kids to only care for the fun part and send all other duties and responsibilities the government’s way? What other types of garbage are out there? Wasn't the subprime crisis a garbage crisis where banks made money leaving their garbage loans out on the street and left the responsibility of cleaning it up to the government?In today’s world we have access to so much information. Anyone, including me in this blog, can share with the rest of us their thoughts instantly. Most of this information posted has not been thought through and is shared with the rest of us in a convulsed manner. For that reason, we could name these posts as “information flatulences”. Of course, all this information flatulence is worth state-of-the-art devices, titanic databases, instant alerts of all sorts and the most developed telecommunications. Nothing is too much when we are talking about letting people smell their friends’ information flatulence. Not for nothing, Facebook’s value will soon reach 100 billion dollars. So while we are ready to put so much time, effort and money in keeping our relationships on real time thanks to the usage of technology, shouldn’t our government use technology to understand which relationships with the corporate sector are most likely to end up costing taxpayers’ money so they can tame the beast before is too late? Who should pay more taxes? The company that makes more money but cleans up after itself or the company which behavior has more chances of leaving hidden costs for its fellow citizens to defray?
The good news is that our current situation can be fixed. The technology to start identifying free riders is available. And the best news is that it can be done in an organic way that will stimulate the economic cycle, will write debt off the public accounts, will create jobs and more importantly, it will do all that without introducing in our society the paternalistic element derived from discretionary taxes.
The way to start domesticating the beast of public expenditure and fiscal arbitrage is the creation of the Markets of Social Utility. In the future, each corporation or economic agent will have the choice of keep doing business as usual, or in the contrary, start leaving potential problems funded by trading directly in the Markets of Social Utility. The information registered in these markets will facilitate a powerful and objective tool for tax authorities to distribute its fiscal levy in a non-discretionary way that incentivizes healthy organic growth. All of the sudden, keeping public expenses low will become a business. When something is profitable, people always show up. Hence, as people see this new business opportunity, we will finally restore the relationship between the State and its best ally, its own people.
If you are looking for what is the next market to heat up, you just found it. It will be the operating companies in the Markets of Social Utility. The companies that better prepare for this new Functional Capitalism (as oppose to our current dysfunctional capitalism) will play a key role in the twenty first century, so make sure you do the stock picking right.
"The debt crisis is here! The debt crisis is here!"
In today’s life, newsrooms around the globe cannot take their eyes off the sovereign debt crisis. This crisis is hovering above our heads giving our economic outlook one of the gloomiest of forecasts. Reading reports about it, I see a lot of people have used the English metaphor of the elephant in the room (an obvious truth that is being ignored or goes unaddressed). Indeed, to the general public, this problem appears to have popped out of a magic top hat and all of the sudden we have all been forcibly introduced to this elephant in the room.
But this elephant did not come out of nowhere. We have nursed it and fed it carefully over years and years of public expenditure and fiscal stimulus. No one seemed to care, though. World leaders, corporate titans, and heads of households of the last decades have run their countries, companies and families at the cost of their children's future. No wonder people in the present choose to have fewer kids. What's the point of bringing another kid into this world so he can pay back for the short-sighted actions of their irresponsible predecessors?
Before having twins, I used to love going to dinner parties. Somehow, casual banter about ways to save the world helps my brain relax thinking that at least I debated the world's future. If you attend parties yourself, you might have come across some of the different topics that recurrently pop up. One of my favorites, apart from “how expensive everything is" (yet every restaurant, school or housekeeper has a waiting list) is the one about “how the new generation of teenagers is worst dressed, behaved and educated than the one before”. We would like our teenagers to be more cultured and educated. However, could an adolescent mind care about learning advanced calculus when his/her parents are only worried about what's the next hot thing to flip and make money with? What's the point of having all this knowledge at our disposal if we are all trying to find the next bargain to flip?
As an investment bank professional working with Sovereign Debt in one of the regions currently "under stress", I get a lot of questions from family, friends and coworkers about what's going on and when is it going to be sorted out. People are simply scared and so am I. This elephant could easily take us all down.
In the summer of 2007, it was clear to me that this elephant existed. I decided to start my own personal search for the long answer to the problem. But long answers take a long time, so after writing a book for over two years, and spending another two years completing and reviewing it, I decided that it was about time taxpayers get the long answer to what's coming up. If we continue to ignore the elephant in the room, its wild behavior will simply end up crashing our society.
First point I will like to make is that this crisis is a result of a fiscal arbitrage.
What do I mean by this? Our fiscal code is an evolution of previous ones. When it was designed it was appropriate to take Western societies into a brighter future. And so it did. Thanks to our current fiscal codes, Western countries have built the perfect environment for entrepreneurs to thrive. Our corporations grew and created products, services and brands that have forever altered the way we live. Simultaneously, tax revenue linked to the economic activity has made possible the creation and development of the welfare states.
But funny thing, as time passes it gets harder to sell a third car to the same consumer, harder to stay competitive without transferring costs to your products’ prices and harder to negotiate with unions as other countries offer low labor costs. Corporate managers have learned the lesson and anyone who have studied an MBA in at least the last fifteen years, has been taught the lesson and the lesson is "Less is More"
The lesson’s motto could be phrased as follows: “Capture the consumer, capture the sale,monetize your brand, and forget about everything else. For everything else, copy, minimize, outsource or place the cost out of your balance sheet, because doing less means making more".
All I have to say about this contemporary school of business is that it is pure common sense.
Somehow, congressman after congressman in the developed world has thought that their fiscal code was perfect and set on stone. No one has even imagined that now that we have so much more intellectual capital than fifty years ago, we could maybe need a thorough fiscal reform that help us keep the government’s workload light and the private sector appropriately incentivized.
But, guess what? What congressmen did not spare any time with, businessmen did. If you think we are suffering this crisis because of an invisible hand mafia is setting us all up to make money at our expense, you are wrong and right.
Right, because probably the company you own, or work for, is part of that invisible hand, part of the business school that is making taxpayers’ pockets emptier.
Wrong, because there is no mafia behind it. Free or bundled-up products and services usually get over consumed. Give it a try yourself. Next Sunday morning, go into your town’s main street and set up a stand with free lemonade. You will find out how quickly you run out of lemonade. Something free tends to be organically over consumed.The intellectual capital at many large corporations has been dedicated to studying our fiscal codes to reduce their fiscal bill, or even better, to assign entire costs outside their balance sheet, leaving it unfunded for the State (and therefore the taxpayer) to take care of it in the future. However, this behavior is purely organic and far from being consciously ill-intentioned.
So, instead of looking for whom to blame, we've got a beast to tame.
I always give the same example, which I believe is pretty self explanatory. A fast food restaurant and a traditional restaurant both serve the same function, serve ready-to-eat food.The way they conduct their business, however, has very different consequences for the taxpayers’ account. Fast food restaurants and chains create much more garbage due to their intensive usage of containers than traditional restaurants. The more restaurants jump into this container intensive business model, the sooner the town will need to hire more trash collectors, the sooner they will need a new waste processing plant, the sooner they will need to assign new land for dumps, etcetera. In other words, the sooner the expenses for the taxpayer in that region will increase. Surprisingly, our set-on-stone fiscal code is not worried about who causes the problem, but only identifies who is making money. This means that in the best case scenario, both restaurants pay the same tax. And I say “best case scenario” because many times bigger companies pay fewer taxes as they have studied better how to minimize their tax bill. Having a one-of tax for containers (known as Pigouvian taxes) will only curve modestly this behavior, as bundled-up public services will continue to be over consumed especially when the biggest part of the cost is defrayed by the taxpayer and not by the problem maker.
Are the foundations of our fiscal code properly set for the twenty first century? Although I worry for the future of the planet, I did not mean to give this example to make the cause of environmentalists. This blog supports the cause of all the taxpayers out there that have no control over a sky rocketing tax bill that never seems to tackle down the source of the problem. So even if we pay and pay taxes we never have the satisfaction of leaving our kids better off, but the opposite.
After decades of listening to different lobbies on how to change our taxes so corporations can pay less, can our politicians stop and think for a moment on how to design a fiscal code that will defend the common interest making taxpayers' life simpler?
More importantly, I have asked myself, are we all just sending our different types of “garbage” the government's way? Are we teaching our kids to only care for the fun part and send all other duties and responsibilities the government’s way? What other types of garbage are out there? Wasn't the subprime crisis a garbage crisis where banks made money leaving their garbage loans out on the street and left the responsibility of cleaning it up to the government?In today’s world we have access to so much information. Anyone, including me in this blog, can share with the rest of us their thoughts instantly. Most of this information posted has not been thought through and is shared with the rest of us in a convulsed manner. For that reason, we could name these posts as “information flatulences”. Of course, all this information flatulence is worth state-of-the-art devices, titanic databases, instant alerts of all sorts and the most developed telecommunications. Nothing is too much when we are talking about letting people smell their friends’ information flatulence. Not for nothing, Facebook’s value will soon reach 100 billion dollars. So while we are ready to put so much time, effort and money in keeping our relationships on real time thanks to the usage of technology, shouldn’t our government use technology to understand which relationships with the corporate sector are most likely to end up costing taxpayers’ money so they can tame the beast before is too late? Who should pay more taxes? The company that makes more money but cleans up after itself or the company which behavior has more chances of leaving hidden costs for its fellow citizens to defray?
The good news is that our current situation can be fixed. The technology to start identifying free riders is available. And the best news is that it can be done in an organic way that will stimulate the economic cycle, will write debt off the public accounts, will create jobs and more importantly, it will do all that without introducing in our society the paternalistic element derived from discretionary taxes.
The way to start domesticating the beast of public expenditure and fiscal arbitrage is the creation of the Markets of Social Utility. In the future, each corporation or economic agent will have the choice of keep doing business as usual, or in the contrary, start leaving potential problems funded by trading directly in the Markets of Social Utility. The information registered in these markets will facilitate a powerful and objective tool for tax authorities to distribute its fiscal levy in a non-discretionary way that incentivizes healthy organic growth. All of the sudden, keeping public expenses low will become a business. When something is profitable, people always show up. Hence, as people see this new business opportunity, we will finally restore the relationship between the State and its best ally, its own people.
If you are looking for what is the next market to heat up, you just found it. It will be the operating companies in the Markets of Social Utility. The companies that better prepare for this new Functional Capitalism (as oppose to our current dysfunctional capitalism) will play a key role in the twenty first century, so make sure you do the stock picking right.
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