the profit shift game

Are massive American multinational companies behaving like some System D merchants and cheating on their taxes?

Yes, according to a recent study by the Congressional Research Service that was posted online by the Federation of American Scientists. According to the report, which was based on 2008 data compiled by the Department of Commerce's Bureau of Economic Analysis, U.S.-based global firms bookkeep 43 percent of their foreign earnings in Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland, countries where they will pay low taxes, though those countries account for only 4 percent of their foreign employment and 7 percent of their foreign investment. According to the report, U.S.-based multinationals may be sheltering close to half a trillion dollars in income in these low-tax nations.

By contrast, Australia, Canada, Germany, Mexico and the United Kingdom--which do not offer low tax rates--accounted for 14% of US multinational corporations' overseas profits, but 40% of foreign hired labor and 34% of foreign investment.

The report suggests that this practice of moving the location of foreign income from high tax to low tax countries--commonly known as profit shifting--increased between 2002 and 2008. Unfortunately, it's impossible to tell if profit shifting has continued to increase since 2008.

It's clear, though, that pursuing small-scale System D entrepreneurs for not paying taxes is really unfair. The big boys cheat on their taxes with impunity.

food blackouts in Kinshasa

The New York Times reports on a new and outrageous form of power outage: délestage, the way ordinary people balance money and meals in Congo (Kinshasa.)

"If today we eat, tomorrow we’ll drink tea," said Dieudonné Nsala, a father of five who earns $60 a month as an administrator at the Education Ministry. Rent is $120 a month; the numbers, Mr. Nsala pointed out, simply do not add up. Are there days when his children do not eat? "Of course!" Mr. Nsala answered, puzzled at the question. "It can be two days a week," he said.

It's not that the numbers don't add up. It's that they're impossible. Income of $60. Rent of $120. Unless there's a huge source of other income, not only will there be no food, but there'll be no home either.Which leads to the suspicion that coop -- the Kinois version of System D/informality -- is how most people cope, including administrators at government agencies.

Congo is rich in minerals -- but last on the global hunger list. Talk about an extractive economy.

still waiting in Haiti

One new housing project has no water.

For those that might have lost track of the news in the haze of the holidays, The New York Times ran a strong article the day before Christmas documenting the amazing futility of disaster relief in Haiti. Among the staggering factoids:

• $7.5 billion has been spent so far. That's $740 for every man, woman, and child in the country.
• Three years on from the disaster, 357,785 Haitians (3.5 percent of the country's population) are still living in tent cities.
• Much of the money spent went to aid-workers salaries. For instance, perhaps $400 million of the $2.2 billion disbursed for humanitarian aide went to U.S. Department of Defense, to pay the 22,000 troops who were operating in Haiti. 
• Even well-respected aid groups spend much of their money on staffing. One-third of the $96 million spent by Oxfam went to management and logistics, while Doctors Without Borders spent 58 percent of its $135 million outlay on staff and transportation.
• the "primary resettlement tool" most agencies are using involves handing out cash grants of around $400 per family to get people to leave the temporary camps.
• Only $215 million (or less than 3 percent of the total) has been allocated for permanent housing.
• An American-led project to build homes in rural Caracol cost $31,400 per house. Haitians generally build single-family homes in Port-au-Prince for one-fifth that amount--or around $6,000. As of a month ago, only 70 of the 750 homes were finished.

"No one wanted to do debris removal," Josef Leitmann, manager of the Haiti Reconstruction Fund, one of the entities set up to manage the earthquake relief, told the paper. "It's not sexy. There are no ribbons to cut." Added Priscilla Phelps, who was a consultant on some of the efforts, donors "wanted little pastel houses and kids with ribbons in their hair to put on the cover of their annual report[s]."


Part of the problem, Leitmann told the paper, was that many people--including some very high in Haitian government--wanted to use the earthquake as a tool to de-densify Port-au-Prince. "There were all sorts of fantasies about shutting down the mess that is Port-au-Prince before people started to understand that there is a huge amount of capital built up in the city and chaotic as it is you don’t throw it out."

Clearly, the missing ingredient in this relief effort were the people themselves and their haphazard but effective local structures. Why shut out their initiative. Wouldn't the aid groups have been much more efficient if they had been willing to work with System D entrepreneurs and associations--in other words, with the people they were hoping to help.

liberté, égalité, compétitivité

Louis Gallois,French Pres. François Hollande

A major French industrialist has proposed a new French revolution based on super-competitiveness, to shock the country back to economic growth.

"In France, there is not actually agreement that companies must be competitive to create value," Louis Gallois, who this year stepped down as CEO of EADS, the parent company of the European airplane manufacturer Airbus, told The New York Times. "We need to create that consensus first, and after that people can fight over sharing the benefits of competitiveness."

The problem here is that what is of value to Monsieur Gallois, who remains on the board of EADS and spoke with the Times from his "gilt-trimmed office in central Paris," wearing his "Légion d'Honneur pin," may not match with what's of value to a worker in his firm.

Indeed, neither Gallois nor anyone else quoted in the article specifies exactly what France must do to become competitive. The article implies that a panoply of tax breaks, lower corporate tax rates, and relaxed labor rules, making it easier to hire and fire, are what's needed. But this is the toolkit always advocated by big business--achieving profits by punishing workers.

Further, the Times article notes, "Culturally, France and many of its leaders are wedded to the idea that a social safety net -- despite its expense -- is needed to protect society from the ravages of lassez-faire economics. Economists say a pullback would have to happen to ensure competitiveness."

While I'd love to endorse Gallois' vision of a French economy in which "small and midsize firms can grow and create jobs," the "competitiveness shock" proposed by a global industrialist whose firm's revenues were close to 50 billion euros in 2011 ($66 billion, U.S.) is likely out of synch with what small businesses need to grow.

the true size of System D in Mexico

It's amazing what a change in methodology can do. In a new study, Mexico's National Institute of Statistics and Geography discovered that twice as many people were working in System D than it initially had thought.

Now, the agency estimates that 29.3 million people, or 60.1 percent of the country's workforce, is in System D. The previous estimate was 14.2 million.

How did the Institute come up with new figure? It suddenly realized that it could count "all people who are economically active but lack access to the social security system," La Prensa reports. That makes sense.

The newspaper also reports that the people in System D earn, on average, one-third less than workers in formal jobs. The article suggests that this is a difference in take-home pay, but it's hard to judge the comparison because the paper doesn't describe how the Institute measured income. It's true that System D workers often earn less, but most often they take home a larger share of their income than formal wage laborers.

more unproductive progress in Mexico

Mexico's millions of street vendors have little to gain the new labor law the government has engineered to bring them in from the cold, Reuters reports.

Indeed, the news agency notes, the so-called market reforms seem little more than a transfer of rights from labor to manaement. The law, Reuters reports "aims to make work contracts more flexible by providing for trial periods for new employees and specifies that productivity, not seniority, should be the main criterion in assessing a worker's suitability for a new position. It also caps the amount of back-pay workers can receive after winning a lawsuit for wrongful dismissal."

This, of course, only makes life better for big businesses, but won't do anything to improve life for System D entrepreneurs.

Similarly, part of the proposal to allow hiring of part time workers for as little as an hour a day seems unlikely to be attractive to energized entrepreneurs. And another proposal that would liberate short-term hiring ignores the fact that many firms already hire temporary workers for cash under the table.

Mexico's leaders would do well to consult "El Progreso Improductivo" ("Unproductive Progress")., by the amazing essayist Gabriel Zaid. It's only been translated into English in fragments. But what fragments there are (courtesy of Ibsen Martinez) are amazing: introducing faith into the discussion of economic progress, and evaluating bribery as an economic system.

That's the Free Market for you!

The Guardian newspaper inadvertantly offers the summa theologica of the 'invisible hand' of the free market in their bio of the guys who won the Nobel in Economics:

'[Lloyd] Shapley was part of a four-man team that invented the board game So Long Sucker in 1950. The four-person bargaining contest involves the players making commitments they cannot keep and which have to be reneged upon in order for the game to be won.'

Ah, so that's the secret of economic success: you have to be willing to lie and cheat and double-deal and bail on your promises to get ahead!

Score one for Bernard Mandeville!