Archives for September 2014

Integration Vs. Separation

Global-Systems-IntegrationMuch was written in recent weeks and months about Scotland’s separationist movement. Most fortunately, the outcome of last week’s referendum on the subject is that Scotland will remain part of the UK, not becoming an independent nation.

In no way do I intend to be disrespectful to the large minority of Scots that voted for independence. Not at all. My position in this type of issue is based on what works better for the majority in the long run. I am a profoundly political person, in the Aristotelian way: looking for the common good. I am not a partisan person. I have never belonged to any particular affiliation and I try to be, as much as I can, a pragmatist.

Thus, at the end of the day, what really matters is the result of a well done cost/analysis of a possible separation. Indeed, it is hard (if possible at all) to run across any solid, comprehensive case where the benefit of separation of any region within a country far outweighs the associated costs. A notable exception to this would be any instance where civil rights are not fully respected, as was the case of the former USSR satellite countries that as soon as they had a chance when the USSR imploded, they didn’t hesitate to go towards the independence route. That certainly is not the case of Scotland, Catalonia, and many more jurisdictions that are part of a democratic developed nation.

The September 18th referendum on the possibility of Scotland becoming an independent nation must be seen as a wake-up call for the world at large about the risks inherent in separationist movements in different parts of the world, particularly in developed nations.

From my perspective, the major reason against any separationist movement is that the traditional nationality concept is increasingly becoming an anachronism, given its many limitations and inconveniences. As I explain in chapter 5 (Globalization’s Reach and Implications) of my book GLOBALIZATION:

“In many ways the traditional citizenship concept is outdated and obsolete due to the instantaneousness of modern communications and the globalization of the products and services markets. It is no longer functional, and therefore a new approach is needed.

Naturally, all the essential elements related to citizenship are basically immutable. Culture is the most essential element of citizenship, with multiple subdivisions and ramifications, like local art. Specific items essential to the nature of citizenship are language, history, geography, customs, cuisine, music, literature, proverbs, and so on. These concepts are so deeply rooted in the collective psyche that no human power can disrupt them. The cultural and artistic aspects of a nation’s collective are so strong that they cannot be manipulated or modified immediately. However, they are modified—to a degree—in an evolutionary manner, naturally and slowly. Additionally, cultural boundaries do not allow much room for more than gradual marginal changes.

Citizenship’s formal elements are those that basically no longer make sense: borders and currencies…

With the current needs and opportunities the world presents us, it has become consistently clear that our individual and collective mindsets must change into that of a global citizen. This means incorporating our own culture and upbringing into a broader mind frame, that of the global citizen.”

Most regrettably, mankind’s history has been characterized by a myriad of grievances, wars, deaths, misery, territorial annexation by military force, and so on. Theres is no exception to this. However, if constructive and practical thinking is utilized, the cost/benefit of trying to turn the clock backwards in history, trying to restate a past situation, is overwhelmingly tilted towards the cost side. The benefits to be reaped by any possibility of independence are washed away by the multiple costs associated with it, particularly when the independence movement is related to a region with a rather small population —with insufficient economies of scale. That is the case of Scotland and Catalonia, among many others.

In addition to the previous point, from the moral and spiritual perspective, past grievances and offenses must be forgiven. Otherwise, the seeds for perpetual conflict are in place everywhere in the world (i.e., the Arab/Israeli conflict, which has been going on for over two millennials).

However imperfect the current democratic system is (and boy, it truly is!), there does not seem to be a better way to settle differences than through negotiation, and free vote, just as it happened in Scotland. Undoubtedly, the perfect balance won’t be ever achieved, among other things because it is a moving target.

Plenty of mirages and delusions behind most separationist movements surface once a careful analysis is made. The economy, the world, and even psychology do behave in a certain given way. Experience and history unequivocally show it. Hence, a personal perspective, if is not rooted in reality is doomed to failure. The different separationist movements in different parts of  the world are not rooted in a clear understanding of how society and the economy work. Not coincidentally most separationist movements have a profound resemblance to the relatively recent vote in Switzerland whereby severe restrictions to the inflow and long-stay residence of foreigners is going to be limited (see related Post, Does Protectionism Protect?).

Throughout history, Scotland has produced very bright people. Among them, Adam Smith, deservedly known as the father of economics. The big irony being that in the land where the father of economics was born, lived, and died (224 years ago), a significant part of the population does not have a clue about the great findings their brilliant countryman made over two centuries ago. If they did, they would be addressing their cultural and identity efforts in a more constructive direction and manner.

Most certainly society requires a profound structural change. However, the great virtuous change inevitably requires as a prerequisite the preservation and fortifying of the many strengths the current system has, and a very well-calibrated effort to revamp and remove only the major weaknesses. The old adage “If it ain’t broke don’t fix it” must be carefully observed at all times.

The most harmonious way to progress is through teamwork, with collective efforts towards the common good. Unity is a must.

Mankind has struggled a lot to get where it is today, far from the cavemen we used to be thousands of years ago. We all should strive for unity not for divisionism.

Granted, the world is far from perfect. However, it is rather naive to expect a sort of magical solution to most (if not all) challenges by dividing already established nations. That is a misguided effort and objective. Most of the time, separationism is an on-balance value destructive proposition.

Unity within and among nations is a major strength. The myriad of imperfections within the system must be overcome, within the system, not severely impairing or destroying it.

Mankind’s collective knowledge on globalization, integration, and free markets —among other subjects— is a work in progress, and thus with plenty of catching up to do. Nonetheless, when dealing with the integration Vs separation of nations it is already unequivocally clear what works, what doesn’t work, and why. Hence, it is truly sorrowful to still see some separationist movements trying to materialize naive and impractical dreams and aspirations with the wrong approach.

Competitiveness Among Nations: Taxes (Part One)

tax-burdenIn recent months there has been a worrisome trend among a certain segment of the US’ political spectrum. Said political segment is against the redomiciliation (tax diversion) of US corporations to countries with a substantially lower tax burden.

If successful, this repudiation would be an escalation of a shameful movement in that direction initiated around ten years ago, when Section 7874 of the tax code was enacted, imposing significant limitations to the free movement referred. Before that, there were no regulations and limitations to tax diversion movements by US corporations.

In principle, such a relocation by US corporations is a zero-sum game and hence, it is against the economic interest of the US Treasury, since it tends to lower its tax base.

The major considerations made by the US Congress in support of that initiative are mainly two:

  • The harm made to the US’ tax base.
  • Corporations engaged in such redomiciliations are behaving in an unpatriotic manner, so that trend has to be stopped in its tracks or, at the very least become more limited and regulated.

To avoid making a confusing reading of the subject a clarification is in order. Nobody will question the legal power any Congress in the world has to enact laws and regulations: that’s the essence of their existence.

My focus is not from the legal perspective. It goes well beyond legal aspects. It goes to the core of things in socioeconomic issues: the common good. Hence, my objective is a pragmatic and moral analysis about what should be done and why.

Assuming the initiative were enacted into law, if no further analysis were made, that could be the end of it.

However, a further analysis of the issue very rapidly unfolds a radically different conclusion to the group’s redomiciliation repudiation.

Aiming to put this issue under the proper perspective and arrive to a solid, self-sustainable solution, it is indispensable to analyze and answer the following seven questions:

  1. Is competition among nations valid?
  2. Is competition among corporations valid?
  3. Is global competition (as a concept) essentially OK?
  4. Are nations legitimately entitled to differentiate themselves, among other things, with different tax structures?
  5. Is it logically sound and morally valid that governments try to shield themselves from the effects of society’s free will, from free markets, from the common good?
  6. What is the (philosophical) limit of the state in tax matters, particularly in the light of the global economy? What should be the limit if current practices are not self-sustainable?
  7. What is right, what isn’t, and why?
  8. Where to draw the line between right and wrong?
  9. How to deal with this situation looking for optimal results?

The answer to the first four questions is a resounding yes, since those questions deal with the very essence of  free markets and that of the global economy; the US has essentially been championing (very successfully, in fact) this political philosophy during most of its existence.

Questions 5 to 9 are a bit more complex, yet relatively easy to answer properly. To that end, let’s keep in mind three fundamental guiding concepts, already mentioned, that should be observed at all times as a sine qua non condition for answering questions 5 to 7:

  • The common good
  • The search for an answer logically sound and,
  • Morally right

Reiterating, the core issue is what to do about corporations moving to countries with a substantially lower overall tax burden? How to deal with them and why?

If the three previous conditions are met, the solution is inescapable. A correct differentiation between cause and effect provides the solution. Balanced and effective solutions to any situation should always strive to deal with the causes, not only with the symptoms.

As it can be seen, the group of politicians behind repudiating the redomiciliation are trying to deal with the symptoms, and not with the causes. Hence, they are wrong from inception. Moreover, their strategy does not place the common good at the top. Hence, this group of politicians isn’t providing a solution that is logically sound (for obvious reasons, already expounded), nor morally right.

Contrary to the strategy being pursued by the policy makers repudiating the tax diversion process, the root of the solution in this issue is not to try avoid competition (among nations, in this case) but to meet it head on.

Granted, facing challenges head on requires a great stature, greatly lacking in most congresses throughout the world. That’s why congresses are (most of the time), so adept to “easy” ways out, and “quick fixes”. I emphasize the words “easy” and “fixes” because the type of solutions congresses usually develop when confronted with tough situations are anything but “easy” and, regrettably, most of the time they do not “fix” anything.

Is shooting-the-messenger a morally valid and effective strategy? Absolutely not. We all know that.

What must be wholeheartedly repudiated are those ridiculous attempts of avoiding tough decision making by congresses, in this case the US’.

That pernicious way of thinking —and acting—, avoiding tough decision making,  is extremely costly to society.

When compared to nations like Ireland, Singapore, Switzerland, Canada, and others, the US’ tax structure is not competitive. Hence,the real solution lies in reengineering the federal government, which would inevitably conduct to belt-tightening, and drastic reduction of government expenditures, a truly tough ordeal. That is why the political group trying to repudiate the redomiciliation is attempting to go after a smoke screen, instead of doing what is right, however difficult and challenging it might be.

From many angles, it is inconceivable to see that 238 years after the publication of The Wealth of Nations, Adam Smith’s superb book about free markets, mankind is still struggling to grasp the basics of Smith’s findings (read more here). Naturally, Smith did not invent the way the economy works, he simply conceptualized it in a superb manner. His findings were so powerful (valid and true) that they have stood the test of time unscathed.

As the issue under focus clearly exemplifies it, there is still a lot of collective learning to be done, given some unsettling trends and attitudes, like the one we’re dealing with. The lack of understanding of capitalism, the common good, and of how things really work and why is quite evident.

Part Two continued here.

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