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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• Should potential employers have access to your financial history?
• What relevance does one’s credit score have on employment candidacy?
• What protections have been put in place to prevent abuse?
• Who (what federal agency) is representing the interests of the candidate?
• Are employers opening themselves up to potential legal problems by making hiring decisions based on personal and confidential financial information?
• What kinds of externalities can we expect from this activity?

Lets start with the most basic question – why should potential employers have access to this information?  The most compelling argument I have seen is that potential employers can use a credit report to gauge a candidate’s decision-making abilities.  It goes like so: the likelihood that a candidate who has a history of delinquencies, collections, foreclosure or perhaps a bankruptcy will make similarly poor decisions in their professional life is higher than a candidate with a clean credit history with few or no blips. In other words, the argument says, “hey, this person has taken good care of his/her financial reputation and demonstrated responsibility over the long term”.

While I may appreciate and even agree with that claim, I cannot reconcile that argument against a more important claim – that personal financial and medical information is too sensitive to be used for anything other than what they were originally intended for – doctors need your medical record to provide health care and banks need it to decide whether they should lend you money for that car or business idea. Why did I throw in medical information? Because I consider both to be the last bastions of personal privacy afforded us by the government from prying employers, insurance companies, marketing agencies and the like.  Although HIPAA has made progress with Protected Health Information it seems that our credit history is slowly becoming a one-stop shop for anyone willing to write Experian, TransUnion or Equifax a check.

Another area of concern is what happens to this information once it is obtained by potential employers?  Who in the organization has access to this information?  In today’s world of Twitter and Facebook how long will it be before we hear about someone tweeting about a candidate’s bankruptcy?  What happens after a candidate has been hired?  Will the employer have an obligation (read unintended consequence) to disclose any of this information to other parties?

Perhaps my strongest concern for using credit reports as a way to screen job candidates is the long-term and compounding (yet to be determined) socioeconomic effect.  Hans Rossling’s enlightening presentation at the 2006 TED Conference comes to mind.  Watch it below.

What we should be cognizant of is that this is a slippery slope we have started.  I know that my car insurance provider accesses and (whether they acknowledge it or not) utilizes my credit score to determine my premiums.  Although I have yet to be asked by a potential employer for my credit report it may only be a matter of time.  What will be next?  Will credit scores be required for admission to colleges and universities? Hey, the admissions departments could argue that it would help them keep their graduation rates high.

I can imagine a situation where pervasive use of credit reports for employee screening could perpetuate a gradual segregation of those who have had the success or luck in maintaining their credit in good standing from those who have not.  I can imagine watching Hans Rossling’s presentation 10 years from now as he shows the ‘completely new world’ we live in, where those with good credit have access to every definition of economic opportunity one could conceive while those with poor credit are left to struggle for whatever remains as they descend into a self reinforcing spiral.

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It has always been my opinion that GM is the embodiment of poor management, lack of vision and a stubborn proclivity to rely on excuses in the face of adversity.  The public apprehension towards bailing out the Big 3 seems to be a manifestation of the same sentiment.

What I find unfortunate is that Ford, while equally responsible for its current situation, has been more responsive to the realities of the marketplace and yet seems to be getting dragged down with GM’s bad reputation.  Ford has brought in a new CEO, it has been in the process of painful but necessary steps to restructure and it has quickly begun to adapt.  If any of these firms should be bailed out it should be Ford.  GM should be forced to restructure under Chapter 11.

What many do not seem to understand is that allowing GM to fail could be a blessing in disguise.  With the anticipated growth of the alternative energy industry (wind, solar, etc…) we will need workers to man these jobs.  Where will they come from???  Look at the unemployment rate as it stands in the midst of a considerable economic  downturn – 6.5%.

Let’s look past the trees for a moment and see the forest.  The next decade will see baby boomers leaving the job market en masse – creating an industry that caters to them in the process.  Energy will be an ever increasingly important industry that will require imagination, talent and huge amounts of capital.  There is opportunity on the horizon, but we need to recognize it and prepare ourselves for it.  Americans have always shown their ability to take a bad situation and thrive on it.  Let’s keep that tradition alive.

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Now this one may be a stretch, but if you find yourself unable to make those mortgage payments because you bought a house that you cannot afford or lied on your stated income form or thought an ARM loan was the best thing since sliced bread then all you have to do is foreclose and then blame it on those evils banks.

I won’t comment on President Bush’s lack of ownership on his administration’s actions.  I don’t want to send the terrorists “mixed signals” or “embolden” them anymore.

What I will comment on is the serious lack of responsibility we as a nation are taking with so many aspects of our lives.  What happened to saying, damn I shouldn’t have done that instead of I got hurt because YOU let me?  When did it become someone else’s responsibility for your actions?  The logic behind blaming someone else for your actions is so backwards that I just can’t fathom that it should be pointed out and much less explained!

It would sound pretty absurd (and stupid) if I told my son (hypothetical son) to run across the street without looking and if he gets hit by a car then we will sue the driver.  It would also be foolhardy for me to visit an internet chat forum to get anonymous stock tips, make investment decisions based on those tips, lose my shirt, and then complain to the government that I should get my money back.

Now that I think about it, I’m rolling around in my sleep wondering who is going to sue me for breaking into my home, stealing one of my dinner forks and then shoving it into an electric socket!  I wonder if I can get some kind of ‘Stupidity’ insurance.

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Unfortunately, it costs the U.S. Mint more than 70% over the value of these coins to manufacture them. Appropriately enough, the Mint has banned melting or exportation of 1 and 5 cent coins.

I think the Mint would have been better off NOT making an issue of this, as the number of people trying to make some arbitrage profits off of this would most definitely be smaller than every naive bob and Mary out there who is now seeing a light bulb turn on after hearing about the new ban.

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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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This is yet another example of human stupidity asking for protection against itself. There was a time when something called common sense prevailed. A time when most people would have laughed at this guy and said, ˜that’s what you get for turning up the volume so high”.  But these days, a lack of intelligence or a complete absence of common sense can earn you special privileges – like doing something very stupid and getting someone else to foot the bill for the consequences.

Increasingly, I am noticing a worrisome trend in our culture and society. We are continuously protecting people from making less than intelligent decisions and passing the cost of those bad decisions on those who should not be bearing it.

A few years ago, I remember a teenager made a killing after he talked up a stock in an internet chat room. The federal government stepped in later, after those poor little investors complained, and prosecuted the teenager. When I heard that story, I was appalled! I was appalled that the government was actually stepping in to make the teenager return the money!

I more than agree that it was wrong what the teenager did, but that does not give a group of investors a free pass into stupidland for a day to buy stocks that they probably did no due diligence on and consequently lost their shirts. That teenager should have been allowed to keep the money and those investors should have bucked up to a stupid decision and walked away from the experience saying, I’ll never do that again!”  Instead stupidity prevailed.

Here is the problem I have with this trend, if we continue to protect people from making very poor decisions then they will only make increasingly more poor decisions. When you remove the cost of making a bad decision, you take away the “ouch” effect. I see it everyday now, people making bad decisions because they do not actually feel the consequences.

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I was impressed with Bush’s presentation – well done; but I am not moved. He continues to polarize and aggitate. He continues to call anyone who disagrees with him a defeatist, isolationist (incorrectly), or a protectionist.

America is a great nation, but I think it should be more humble; and that includes refraining from saying things like ‘we are the envy of nations’.

He mentioned lots of new initiatives as well as the effects of previous ones. Again, I am not moved. Why he would mention the succes of the No Child Left Behind Act when he has continued to stifle it by not funding it adequately, I can only guess. He says that our economy is doing well… well, I am not a doomsdayer, but I think the jury is still out on that one.  Hold off for a little longer Mr. President.

You see, while you mention GDP I think about higher interest rates and how that will affect spending (the engine of choice in our current economy) as well as how higher short term interest rates will affect the housing market in the long run. I am also deeply concerned about stagnant wage growth and the increasing gap between the rich and poor.

Instead of giving the nation a real state of the union address, he gave us a sugar coated pep talk. When I buy shares of stock in public companies, I listen to the quarterly conference calls made by the top level executives. I, as well as most other prudent investors, tend to respect and give credibility to those executives that highlight their mistakes and problem areas and how they will be addressed. Those executives that simply walk up to the podium and say, “everythings going great guys” deserve that much more scrutiny.

After all, didn’t Kenneth Lay and Jeffrey Skilling say that everything was ok?

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December 1, 2005

Congressman Pete Sessions
Park Central VII
12750 Merit Drive, Suite 1434
Dallas, Texas 75251

Congressman Sessions,

As one of your constituents, I am writing you to express my deep concern for the corruption, dishonesty, and questionable dealings that appear to be going on in our government. I do not take comfort in having to pick up the newspaper, only to see yet another article about another politician or lobbyist or other government worker doing something that is unethical and dishonest.

I am equally frustrated with, what seems to be a growing trend, efforts to undermine or circumvent checks and balances as well as processes set up to maximize transparency in our government. Instead of placing a proposal or project out onto the table for debate, politicians are getting creative with ‘earmarks’ and such to pass items that are more than likely representing narrow interests.

That said, I am asking you follow on the initiative some politicians have taken, like that of Senators McCain and Coburn, to stop this rampant abuse of public trust and begin representing the true interest of Americans. I am tired of hearing ‘sound bites’ and insincere public statements. I want to see politicians, regardless of political affiliation, who stand for integrity.

I sincerely thank you for taking the time to read my letter.

Respectfully,

Jose Lionel Velez

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Olson begins his discussion of groups by explaining their purpose – to further the common interest of a group of individuals. As Olson explains, the “provision of group goals is the fundamental function of organizations”. Rational individuals join associations or groups to achieve a goal or benefit which they cannot achieve themselves alone. Individuals are capable of furthering their own interests more effectively alone and therefore will not, as rational decision makers, organize to provide an individual good or benefit.
Olson continues by defining the properties characteristic of large and small groups relative to their ability to achieve their objectives. He argues that when groups form to achieve a common goal, they are inherently seeking to provide a collective good for that group. Therefore, any member of a group, that provides a collective good, will receive that good regardless of their individual contribution. Olson argues that this property of non-excludability compels the rational individual to restrict his own contribution to maximize his individual welfare.

This dynamic is dependent upon the size of the group, however. Small groups tend to more effective in providing collective goods, although the good will be provided at a suboptimal level. Olson explains that this tendency for small groups to provide collective goods at suboptimal levels is dependent on the cost of providing the good and the amount of benefit derived by a single individual in that group. If an individual in a group receives a benefit equal to or greater than the cost of providing that good, then “there is some presumption that the collective good will be provided”. This can be illustrated with use of a lighthouse. Once a lighthouse has been constructed, it is impossible to exclude others from using it. It becomes a collective good which can be used by any other ships. Although the individual firm may face difficulty in compelling each firm to pay a proportionate share of the burden of providing that good, it may still be beneficial to that firm to provide the good by itself. If the cost of constructing and operating the lighthouse can generate enough savings to pay for the costs associated with not having it, then the firm will most likely provide the good. However, since that firm is the only firm bearing the costs of providing the good, it will only provide the good to the point when the cost of providing it is less than or equal to the benefit received. This will lead to an undersupply of the good or a suboptimal level of provision.

Large groups face a more serious problem of providing a collective good. In the case of the large group, provision of the collective good will not take place without some level of coercion or inducement. As Olson argues, the rational and self-interested individual will not contribute to a common group goal. Since group objectives are public goods, just as in small groups, the individual member will receive the collective good regardless of the level of contribution made on his part. Some kind of coercion or inducement must take place in order for a large group to provide a collective good; because the individual contribution of a group member will be insignificant to the overall provision of any collective benefit. Olson argues that the rational individual understands this and that since his contribution will have no perceptible effect on the outcome of the provision of any collective good, he will not make any contribution. This is referred to as the problem of the ‘free-rider’ in economics.

What Olson has established here is that groups, large or small, exist only to provide a common good and that, generally, the rational, self-interested individual will not participate in the furtherance of obtaining a collective good unless he either benefits enough to provide the good himself or he is forced to bear some of the cost by means of inducement or coercion. He mentions an objection made against his theory that claims that “attitudes in organizations are not at all like those in markets”. Olson provides a compelling test of his argument by considering what happens if an “emotional or ideological element” is involved and asking if it makes “the argument offered here practically irrelevant”. He concludes that although “patriotism is probably the strongest non-economic motive for organizational allegiance in modern times…no major state in modern history has been able to support itself through voluntary dues or contributions.” The end result is that in the provision of a collective good, there will be a ‘tendency’ for the “exploitation of the great by the small”. He provides evidence of the need for compulsion with the case of labor unions; where labor organizations only began to succeed after they were able to negotiate with the firms directly and establish ‘closed-shop’ policies. The only way an individual was able to become employed in certain firms was to join the related labor union and act to support its common interest.

Olson compares his theory with orthodox theories of state and class as well as various theories of pressure groups. In considering Marxian theory, he argues that Marx was inconsistent in his arguments by expecting a ‘class’ to organize and act for the interest of the group as a whole. Precisely because a group is composed of ‘rational utilitarian’ individuals, they will not organize to act. I disagree with Olson’s argument that Marx did not overestimate the strength of class action through rational behavior. Where Olson attributes an inconsistency in thought between rational behavior and class action I see an idealistic, yet unrealistic, argument proposed by Marx. Marx may have been arguing that the rational individual is aware that, as Olson explains, individuals will not work towards a collective good if they know that they can benefit regardless of their contribution, and that very awareness may compel the rational individual to make a contribution.

In his consideration of pressure groups, Olson argues that again there is an inadequacy in thought about the importance of the individual in group theory. Pluralist writers have “assumed’ away the individual and have explained their theories solely in terms of the group. Writers such as Bentley, Truman and Commons “take for granted that such groups will act to defend or advance their group interests, and take it for granted that the individuals in these groups must also be concerned about their individual economic interests.” Olson provides an insightful comparison to the thoughts of the pluralist writers with that of anarchist theory. By expecting groups to join out of “suffering”, “dislocation” or “disturbance” spontaneously, Olson argues that the pluralist theories resemble characteristics of anarchist thought.

Olson’s last chapter on “By-product” and “Special Interest” theories offers an interesting new perspective on modern pressure groups with large lobbying capabilities. He argues that the “common characteristic which distinguishes all of the large economic groups with significant lobbying organizations is that these groups are also organized for some other purpose.” He helps to strengthen his argument by placing these large organizations in the context of his theory. The example of the American Medical Association and the various state bar associations offer compelling evidence to support his claims. The example of the bar associations is especially interesting. The point of these examples is to illustrate that these organization have significant lobbying power, insofar that their strength is not derived from it but from their ability to ‘mobilize’ their members through compulsion. As Olson explains, this ability to ‘mobilize’ a ‘latent’ group of members is the by-product of another function the organization is performing.

In Olson’s discussion of large groups, he asserts that there are three factors that preclude large groups from achieving the provision of a collective good. His arguments here can be weakened by certain circumstances. In the first factor he mentions that the larger the group is, the smaller the fraction of the total group benefit will be. If I use the lighthouse example again, it can be argued that the ‘total group benefit’ is indivisible. No one individual’s use of the lighthouse will detract or preclude any other individual from using it concurrently. Therefore, whether the group is composed of 10 or 10,000 individuals, the total group benefit will be the same as well as the fraction allotted each member of the group. Perhaps an even stronger argument weakening Olson’s argument is national defense. National defense is a public good by definition, in that no one individual can be excluded from its provision. This group is composed the largest possible group of individuals within a national context. Olson’s argument is unable to explain this situation adequately. His second argument that, given his first argument, it is less likely that any individual will want to bear the burden of paying for the good because his share of the benefit will not be sufficient helps to strengthen his theory of groups, however. Taxation of citizens is the only method in which the government can support public goods like that of a national defense program. Olson’s third factor, that as the group gets larger, the greater the cost of organization, and thus the less likely it will provide any public good at all can also be weakened. Using the lighthouse example again, even if there are 1,000 ships benefiting from the use of the lighthouse but there is insufficient collective action to bear the cost of provision, it is still likely that the lighthouse will be provided if the cost of providing it is greater than or equal to the benefit any one individual or firm receives from its use. This is because of the indivisibility of the total group benefit. I think that the weaknesses I discuss here are more of an exception to Olson’s argument and that his theory holds true in most situations.

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