Just last week the U.S. Department of Justice and the I.R.S reached a deal with Switzerland to get the names of 4,450 U.S. account holders who may be suspect of hiding income and assets from Uncle Sam.

And the week before that Britain and Liechtenstein inked a new tax cooperation agreement to allow British account holders the opportunity to disclose their hidden accounts.  British citizens must disclose their accounts to get some leniency for tax evasion and those who do not will be forced to move their money out of Liechtenstein and face the full consequences – back taxes, penalties and possible legal action.

These three events are not coincidental and clearly indicate a growing trend among nations to shore up badly needed tax revenues.  The question is what will happen when the global economy picks up again.  There are hundreds of millions, if not billions, of dollars at stake for countries like the United States, Britain, France, Germany and Italy.

Once the tax coffers begin to rely on an increased taxpayer participation rate it would be hard to notice any dramatic reduction.  But that is where I think we could see an eventual pullback to the traditional tax evasion scheme.  It is always that slow and gradual change that proves to be the hardest to see.  A slow but sustained effort to chip away at these new rules and agreements could be just what the banks ordered.

The motivations behind hiding assets from tax authorities can vary from the outright criminal to well justified.  For those parties that use offshore havens to sustain their criminal activities I share no sentiment with you.  Those activities include money laundering, tax evasion and fraud.

In the case of tax evasion I take additional exception, as I liken it to you living under my roof and refusing to help pay the rent.    Regardless of the extent to which one may agree or disagree with the tax code, the fact should not be lost that citizenship has its privileges AND responsibilities.  One of those responsibilities being that of helping to pay for the government that protects you, defends your way of life and makes it possible for you to create any wealth in the first place.  Grievances with tax rules should be funneled through the appropriate channels – call your senator not your offshore banker. 

If you are one of those 4,450 lucky winners on that UBS list then you might want to call your local I.R.S agent too, as the Sep. 23 deadline for disclosing those secret accounts is getting close.

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Big business, big risks
For decades we have talked about the impact globalization has had on society, political affairs and economics around the globe.  The range of opinions about this phenomenon are as varied and numbered as the impacts.  Often Globalization gets tied to outsourcing and, depending on whether you are a savvy business person or an ambitious politician, it signifies the creation of competitive advantage or the loss of many jobs. 

It has also found itself as the centerpiece of a merger or acquisition strategy for a large business that needs to ‘compete on a global scale’.  Globalization also receives credit, rightfully so, for the creation of a new more advanced global economy where integration and a shared sense of fate are its underpinning.  But there is something else that Globalization has done which may bring with it a new set of risks.

Only as strong as the weakest link
Globalization has, at least in the public discussion, subordinated the importance of the local economy and small business to macroeconomic initiatives and large enterprises.  I have no intention of meaning this as a blanket statement but only to describe the extent to which we have operationalized globalization into our social, political and economic models.  The risk of glazing over the details and focusing on the forest is that we are unable to see if the trees are rotting from within.

Take our current situation, where one large institution after another has failed, gone under or is in the process of going under.  We can also ponder over the real estate crisis and whether California, Florida and Nevada where signs of a distressed forest.  The inherent risk of this flawed perspective is that risk itself is magnified.  Whereas mergers and consolidations were viewed as positives for the customer and business the unintended consequence and therefore risk to society was that a failure would sting that much more. 

All economics is local
I think ‘Tip’ O’Neill was onto something when he said that “all politics is local”.  That statement could easily be tweaked to say the same for economics and evolution – I will get back to the evolution part later.  There are some products and services that just have no business being brought in from anywhere other than the local community. 

Take for example food from the grocery store.  With the exception of those foods that require specific geographic characteristics most fresh foods could be produced within close proximity to its customer base.  There are several advantages to the customer, business and economy from maintaining a close relationship between the food we eat and our community.  This form of food patriotism is among other ways to achieve better sustainability. 

Another trend that is becoming prevalent in today’s economic climate and ties back to the local economy is community banking.  Local banks are benefiting directly from the lack of confidence in large banking institutions.  In fact many are seeing double digit increases in new deposit accounts as a result.  Local banks, which tend to have more established and personal relationships with their customers, have the advantage of knowing their customer and what their needs are.  The risk of lending can be further reduced because the banker has a more intimate knowledge of the business, its risks and, most importantly, the principal asking for the money. 

Survival of the fittest
This is an aside but I mentioned evolution earlier and wanted to take this opportunity to throw organized labor under the bus.  The fundamental idea behind organized labor has always irked me, as it seems to fly in the face of evolution.  There are some things in life that we simply cannot control and must either adapt to or die from it.  Organized labor, for the most part, has fought progress only to stave off the inevitable.  Not only does this intransigence make it difficult for a business to operate competitively but it poses a significant risk to a community when this mentality pervades its labor force.

Some communities in Michigan are looking how to offset the effect of job lossess as a result of failing auto companies.  In deed some of these small cities face serious problems as their largest employer is on the brink of failure.  Their precarious situation presents an opportunity for adaptation to the reality of the marketplace for labor.  While some communities are working to bring other major employers to the area they will face a major obstacle.  Until the business community sees a fundamental capitulation in the trend for labor to organize these communities will face an uphill battle – let me rephrase that, they will have to scale a near vertical mountain on a rainy day with only a tattered old 1/4 inch nylon rope.  Good luck, I am sure that you all can organize into a tall human chain with the prospect of getting at least one of you to the top, but then you will spend an eternity arguing why YOU should not be the one on the bottom.

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Every time I decide to blog something about this issue I can’t get over how anyone could take issue with unrestricted trade policies. It takes acute short sightedness and a very narrow interest to do so.

What do protectionists want? Well, they want to protect a small group’s interests at the expense of everyone else. For example, GM and Ford workers argue that they are entitled to a job, regardless of whether or not they can work as competitively and cheaply as workers at Toyota or Nissan. Not only do they feel that Ford and GM owe them a job, but they should be paid handsomely for it as well. In the case of GM, if the company has trouble finding people to buy these cars at inflated prices, these prima donna workers are entitled to participate in the Jobs Bank Program, whereby they get to receive full pay and benefits regardless of whether they have work or not. Who do you think is paying the bill?

In a nutshell, protectionists feel that everyone should pay more for a Tahoe or Explorer simply because some workers want to shield themselves from the competitive pressures of the labor market. Protectionists like to use fancy terms like ‘exporting American jobs’ or make one-sided statements like we will hear a ‘giant sucking sound’ as American jobs are moved out of the country, but the truth is that we benefit in many ways.

What gets me is that they are ironically protecting themselves from any form of self improvement. Our economy, and anyone else’s for that matter, depends on increasing productivity gains to raise the standard of living while at the same time staving off inflationary pressures. These productivity gains essentially allow firms to make a product or provide a service at the lowest cost per worker hour.

What protectionists often fail to mention is that many overseas competitors actually create jobs in the U.S. that were supposedly exported. Using the auto industry again as an example, Toyota and Nissan have invested billions in the South to build new plants. What Toyota and Nissan and others like Mercedes Benz are NOT doing is creating these jobs in places up north like Detroit. Gary N. Chaison of Clark University in Worcester, Mass. is quoted in the Times article saying that ‘These international companies want a fresh start — not in a town like Detroit, with a long history in the auto industry, but in an empty field where people appreciate them.”

Toyota must be doing something right because it is now the number 2 automaker and is not far behind GM. Toyota is making a profit and GM is hemorrhaging cash. Toyota makes cars that people want at attractive prices and GM is doling out discounts as incentives to attract buyers. What the two automakers do have in common is that both are unapologetic for their performance. However, if I were Rick Wagoner I would reconsider this.

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1. China:

a. The Currency Issue

b. Internal inflationary pressures

c. The Chinese export infrastructure and its role in economic growth.

2. The U.S.:

a. Wagflation

b. Deficit Spending

c. Widening account deficit

d. Slowing housing market

3. India:

a. _______

4. Germany:

a. _______

5. Japan:

a. _______

As you can see, I have many blanks to fill in. I want to build a somewhat comprehensive analysis based upon separate country analyses. This would be an interesting little project to undergo. At the least, I get to learn more about my global neighbors. Check in later. If you’d like to pitch in and help me research one of these countries let me know.

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