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Hidden Taxes

An HMO denies the doctor the discretion to do tests on his or her patients as he or she sees fit, and a cancer in its early stages goes undetected. Executives in a company, tempted by the returns on their stock options, mask their company’s debts until they have the opportunity to sell them. Then they let the inevitable occur, their money safe in the bank. A terrorist enters this country as a guest worker. Lousy turn of events, but someone had to have a cheap workforce around. A woman takes an herbal supplement day by day, unaware that the mixture isn’t only failing to help her, but is playing havoc with her system. A car company moves its factory south of the border, leaving a formerly thriving community collapsed into poverty and despair behind it.

Since Reagan, tax cuts have been the constant drumbeat of political life. They seem the perfect political gimmee: Vote for me, and you’ll get a bigger refund! They’ve become the third rail of the electorate, almost. But are taxes the only way a government can cost its citizens?

Take the SEC (Security & Exchange Commission). Underfunded and understaffed for years, they've mostly convicted a few symbolic and extreme cases of financial chicanery. The result has been a recurrent sense, especially in a culture as tolerant and forgiving of white collar criminals as ours, that the lesson of any one financial scandal was simply don't get caught.

The hidden cost of keeping the SEC small and underfunded, though, could likely be counted in the billions, and the people affected in the tens of millions.

Taken in strict cost-benefit ratios, perhaps that doesn't ring true. We don't live in cost benefit ratios. We live with the consequences of those decisions. We breath in the air, we use the products, we live with the disease we get, whether they are diagnosed or not. We have to live with the decisions of stockbrokers and corporate executives.

We can't always apply pressure through the market, or apply it quickly enough. And for every failure the market "punishes" there are so many other executives who do the same thing, but get rewarded for it, because their theft or other crime was not so flamboyant as to draw attention.

The market is like a big dinosaur with a diffused nervous system. Slap it on the tail, and a day later it turns its head, the offender long gone. The market is always going to respond slowly and inefficiently to change that adversely affects the bottom line in the short term.

We've been caught up in the seductive promises that we will have a better economy, if only we let certain undesirable things take place. Let us pollute, they say, and the economy will improve. Let us build up potential conflicts of interest, and the economy will improve. Let us ignore the realities of the practice of medicine, and the economy will improve. Cut taxes, and the economy will improve. Let illegal immigrants stay in this country and lowball minimum wage workers here, and the economy will improve. Of course, shipping jobs, the incorporation of the company, and manufacture offshore will improve the economy as well.

We're never given a scientific reason why we should accept Alternative medicine, high pollution levels, or a lack of preventative care, even though these would be the relevant criteria for the decisions on these systems.

The rationales for deregulation of financial markets always neglect to mention the conflicts of interest and shady practices the laws were intended to prevent. And afterwards, what do you know? Those same darn practices show up again!

The Glass-Steagall act was written after the 1929 crash to prevent banks, insurance companies and stock companies from getting in bed with one another. The reason for this would be obvious: would you tell your people to lower the equity rating of a company that owes money to you? The fear would be that an economically insolvent company might continue to be financed and have its stock sold, where unconflicted companies might have called in the loans and let the stock drop instead.

But we have to have deregulation, because the market demands it, right? Well, the thing is, there are situations and areas where the market can be fooled, can be manipulated, and can be taken away from serving the best interests of American citizens.

This is how WorldCom happened. Citigroup financed the company, and sold it's stock too. Citigroup was a superbank that resulted from the repeal of Glass-Steagall. When other banks might have called in the loan on WorldCom, and other stockbroking firms might have told their people to sell, Citigroup did neither, because they would have lost money. A good old conflict of interest. The more we look at this new economy, the more it looks like the old one, doesn't it.

Who can quantify the economic effects of ripping out all those plants and manufacturing jobs and sending them overseas? What has that done to our way of life? Can we realistically unbalance our economy so far away from that without there being serious consequences?

In the end it's a question of which is more powerful, and more prevalent: Greed, or good sense. The market would work wonderfully, if the two were always to be found together. But in the last twenty-five years, we've seen one occasion after another, from Junk Bonds, to Savings and Loans, to the Tech-Stock Bubble, to Enron and Worldcom, to today's mutual fund scandals to indicate that greed and good sense have long since parted ways.

We devastate local economies one by one through mergers and the shipping of labor overseas, and somehow we expect economies to continue functioning as if nothing bad has happened. Wages continue to be stagnant, working conditions continue to deteriorate. We could put a stop to this, if we wished. We could allow our tax dollars to fund enforcement of regulations. We could advocate further regulation through our government.

But to do that and the other things I have mentioned, we have to accept two things: The cost and the authority of our government. And we will get neither as long as we allow conservatives and moderates to bribe us with tax cuts and scare us with talk of "Big Government" in our lives.

Posted by Stephen Daugherty at January 28, 2004 9:36 AM