Wednesday, August 24, 2011

Saving the Economy 1-2-3

At the time of this writing -- well, let's face it, at any time anyone whines about government, taxes and debt-drowning economies spiraling out of control, the air suddenly gets clouded with smoke and fog rather than clear cut solutions. The year 2011 will no doubt go down in history as the Year of Fear, wherein every western country had to deal with severe economic panics. Once great civilizations such as Greece, Spain, Portugal, Italy and Japan have been rocked by economic chaos. The international community has been plagued by fear and speculation, climaxing in Standard & Poor's unthinkable downgrading of the United States' credit rating, due mainly to America's unacceptable handling of its national debt.

The downgrade was shocking. Unacceptable. But not, as it turns out, completely unavoidable. Because it turns out there's a way to solve all of our economic problems quickly. Permanently. And with no need to raise taxes at all. No cuts in services are required, either. In fact, if you do this right, medical and social services could actually increase without even breaking a sweat.

Of course, if you ask the dolts in Washington, D.C., they'll tell you it's impossible to balance the budget without cutting more and spending less. But I'm a branding guy. I have no political constituency to lose, so I can dare to be bold. And I'm here to tell you that it can all be solved as easily as one, two, three.

The first issue to accept is that the problem isn't taxes or what we spend. The real problem is the underground cash economy that avoids taxation. If you think that's a small number, think again. Search anywhere on the internet and you'll find that everything from minor labor to illegal arms deals to backyard marijuana sales are generally exchanges of under the table, untraceable cash transactions which are never taxed.

There are generally two reasons for cash transactions, depending if you're transacting legal or illegal business. In the illegal market, paying tax on drugs, contraband and the like is tantamount to a one-way ticket to prison. It's an admission that you actually did pay for something the government forbids. In the legal market, people do cash transactions to avoid taxation. After all, what the government doesn't know about, the government can't tax. And at any tax rate higher than a few points, all tax rates do is motivate people to find a way not to pay them. This is why the pudgy guy with the five o'clock shadow and green teeth at the car lot will sell you that used Chevy for $2500 plus sales tax -- or $2000 if it's all cash.

Lest you think the American Underground Economy is trivial in stature, let me state that the average internet search (where such things are discussed) puts the annual figure somewhere in the trillions of dollars every year. That's a trillions of bucks on which the government collects no revenue at all. Nothing. And it slips out of the public coffers every day for just one reason:

They're all cash or barter - untraceable - transactions.

But what would happen if we eliminated cash completely? What if everyone were given debit cards and little swipers they can attach to their smart phones (which by the way, is already in wide use out there)? Here's what would happen: Every single transaction would be tracked and reported. Who paid it. Who received it. And even if it didn't expose the people involved, the system could automatically tack on the appropriate tax before approving the transaction.

It's not as nutty as you think. Merchant Service Providers (MSP) already do that when they verify every single credit card transaction they process. This is just one more nano-second stop along the way. But here's the real kicker:

With far more revenue exposed to taxation, every single local, state and federal authority could actually lower its tax rate. And I mean really lower it. In fact, I'd recommend doing away with the entire tax structure in favor of a 1-2-3 plan:

One percent of each transaction goes to the local government.
One percent of each transaction goes to the state government.
One percent of each transaction goes to the federal government.

That's a total of 3% on any transaction anywhere in the United States, applied to any and all transactions, collected at the moment it's paid. Add the 3% on the underground economy's trillions to the 3% of the legitimate market's trillions, and to paraphrase the late Senator Everett Dirksen, pretty soon you're talking serious money. Crisis-solving money, with corporate and personal taxpayers alike rejoicing because the days of double digit tax brackets are gone. If I haven't lost you yet, consider this, too: Because everything is tracked, reported and paid in real time, there's no more need to file income tax returns. No more Internal Revenue Service. No more audits. Just pay as you go government. How cool is that? What's the worst that could happen - the illicit drug culture turns to the Euro for its commerce? Please.

Fairer taxation. Lower tax rates for you and me. Higher revenues for the government with less government bureaucracy. It just doesn't get any better for this.

Unless you're an income tax preparer. In that case, you'd best be dusting off that resumé.

Wednesday, August 10, 2011

Technology Causes Recession

Some years from now, this article will probably be woefully out of date. Well, the point of the article won't be out of date, but this particular instance will have long since been relegated to the history books, just one more exhibit in the freak show known as Modern American History.

At this writing, the world economies are in chaos. Major nations around the globe are watching their credit ratings melt. People are rioting in the streets. Budgets are being cut. Unemployment is very high and morale is very low. It's a tough time for optimists.

Among the strangest behaviors we're enduring are wild, mega-swings in global financial markets. Whereas a daily 20 point rise or fall in the Dow Jones Industrial Average was big news in the 1970's, swings of 400 to 600 points - in either direction - have become more commonplace. One explanation is that there are simply more shares and more people to trade them. Another is that we now have the technology to trade those shares much more rapidly than ever before.

It doesn't take a genius to do the math. When a micro-chip can observe, analyze, deduce a result and execute a trade order for millions of shares from hundreds of companies in less time than it took you to read this sentence, you know things are moving at a pretty brisk clip. It's not surprising, then, that market actions and reactions would occur with ever-increasing rapidity.

But that's not the real culprit here. The demon you want is hiding just below the surface, affecting far more than the price of today's stocks. As I've written here previously, technology speeds up just about everything except for human nature. As a result, it's technology, more than anyone realizes, that's adding to - if not causing - our recessionary times. Let me clarify this:

Unless you've been hiding under a a very large rock since 2008, you no doubt have heard about or painfully felt the very real effects of the global economic recession. If you're been fortunate enough to be spared the financial pain, I doubt you've escaped the unending re-hash and faux analyses by television "experts" whose simplistic explanations pass less for truthful explanation than they do for furthering political agenda. Most of those pundits draw their opinions by citing "similar situations" throughout history, including expansions and contractions dating back to the Great Depression of the 1930's. Although there are some similarities to be compared, there's one giant difference that, for some reason, negates just about all of their relevance to today's issues:

Technology. And here's how:

While technology can move data at nearly the speed of light, it does nothing to speed up human behavior. In the old days, both human behavior and data moved at the same speed, because both were powered by humans. For example, if you wanted to buy a stock, you called your stockbroker, who in turn called his floor trader, who placed the trade. The transaction could take hours or days. Same thing with selling. Today, however, there are fewer brokers and traders because everything has been reduced to a simple point and click.

So a huge problem arises when a political administration announces a long term plan to aid economic recovery, mainly, an economic plan takes time to be assessed, implemented and resolved. However, speculating on the viability of a long term plan takes less than a millisecond, which means unlike the days of yore, speculation moves at a far greater rate than real information, which in turn dooms all markets to higher risks of failure because technology is manipulating it based on fear rather than any wisdom borne of financial strategy.

That last part is something not to to be considered lightly. In the end, technology may speed up action but completely ignores wisdom, which means that market decisions - and the plans designed to affect them -- must incorporate technology's need for speed or face a higher risk of failure than necessary. This week the Federal Reserve took an unprecedented step by announcing its interest rate level would be maintained at low levels for the next two years. It's a hugely historic tactic, in that it's the first economic pronouncement designed to destroy the effect of speedy speculation by providing a base of stability for the long term. Previously, the Fed had encouraged speculation by offering only short term announcements. By removing the speculative data from its announcement, the Fed has effectively diffused at least one factor of market instability, which technology cannot distort -- and we need more of that.

The old days of deliberation are long gone, no longer a factor in the eye blink world of the microchip. No matter what your business, know that it's moving at a faster clip than you are -- and unless you manage it, it will mange you. If one truth remains, it's that bad news travel fast and doesn't often wait for wisdom to catch up.