Europe: The Final Countdown?

 Imagine you and five of your friends start a combined checking account where each is free to withdraw based on their needs but must make deposits on occasion. The details could be worked out later as to how often one must put money in the account and how much they could draw out; the main point is no one is penalized for taking out more than putting in and everyone contributes different amounts. Not everyone makes the same salary after all. How many of your friends would withdraw more than deposit? At least a few right? How long would the savers be willing to cover the spenders? Does it sound crazy and kind-of a terrible idea?

It is an oversimplification to explain the European Union and its banking problems this way—but not much. The EU requires nations with different interests, histories and cultures to tie their economic interests' together. Germany is the linchpin with its high value manufacturing and frugal citizens keeping business afloat for the continent. Greece, Portugal and Ireland are the spenders who rely on ‘soft’ money from tourism and agriculture. Commerce hums right along until tourism suffers, or bad weather wipes out crops and suddenly yields are low. Farmers still get paid though, they have a right to withdraw remember. Government officials get paid as well, they can also withdraw. Students still get education for free, they also withdraw. Germany, Belgium and France still make deposits but by year three are getting a little tired of it.

Greece is the most egregious example of withdrawing from the ‘combined account’. Their finances were managed poorly; they bought a flat screen TV and installed a pool just after getting fired. The rest of the Union covered the losses with a bailout package and a restructuring of debt, and then another, and still another. Actually I’ve lost track of how many bailouts and ‘do-overs’ the Greeks have had, but like an addict promising to clean up they’re always found the next morning bleary eyed and remorseful in an alley. Old habits are hard to break and asking governments to, legitimately, cut spending is a monumental task—The US is no different.

The ‘help’ from the savers (Germans) involves higher taxes and greater limits for spenders (Greece). Their businesses have suffered under the crippling taxes, low wages, cost of living increases and lack of investment. Ireland, Portugal, Spain and Greece all required bailouts after 2008 for various reasons. The European Union had expanded too much. It was now paying for deadbeat relatives of account holders as well as the account holders because--someone has to.

Those of us who didn’t live through World War II or even the decades that followed can’t understand what a watershed it was for the continent. The displacement of peoples, the rebuilding of cities from scratch and the determination to prevent another disaster all led to the creation of the EU. Cooperation was the only real option in hopes of avoiding another catastrophic fight. The Marshall Plan, the North Atlantic Treaty Organization (NATO), the European Atomic Energy Community (EAEC) and European Coal and Steel Community (ECSC) are all cooperative organizations that followed WWII.

The idea to link countries through their industrial and military strengths worked well because of the cultural similarities of Northern European nations. Once the Union started to integrate countries with looser controls on banking and business, it got messy. Britain’s decision to leave the EU is a positive development for national sovereignty in Europe. Rich member states like Sweden and the Netherlands may also decide to stop depositing and just drop the whole deal, finding their lost national identity instead.   

Fair or unfair, countries hurting from unemployment blame the EU with its quotas on immigration, subsidies to farmers and everything related to commerce. It has kept peace among European nations by creating a market economy for its members through freedom of movement for people and goods. But the laggard countries have drained the account putting pressure on the savers to add more money every year. Wealthy countries in Europe will probably opt for a different deal than the current one which has them covering loses in the Euro zone.

The United Kingdom never joined the currency zone but didn't like where it was headed either. They made a wise choice to leave.

The Taxman Cometh

Amazon, Overstock and countless others exploit a loophole in online sales that bypasses the sales tax for most states. In order to make things ‘fair’, brick and mortar retailers and local governments are pushing states to fix the issue. The only ‘fix’ bureaucrats know is passing new laws to patch the loopholes technology has exploited. In this case online commerce is putting dents in state budgets and causing traditional retailers to gripe about the unfairness of it all. But raising funds by going after eCommerce sites will not gain additional money for states and will hurt overall growth by forcing consumers to small online business.

Changing Models:

I work for a local retailer (sporting goods) that relies heavily on walk in purchases. I hate losing out to warehouse businesses like Eastbay for cleats and Softball.com on bats and gloves. The problem comes like this. Yes, these big box companies with their online presence hurt the local shop by offering reduced rates on similar items with no sales tax. But we aren’t just salesmen we are consumers too and as members of any community we buy goods online as well. Some things are tough to find locally or even within state, like a vintage Walter Payton jersey. Buying online is the only choice.

Second, no one knows how their current business model might change in the future. Ours has moved partly to online sales. It is a specially designed 'shopping cart' of sports gear with the sizing needs of the athlete. Set up by the local coach for the player. This makes getting more business easier than ever since it doesn’t require the parent of the student to drive to the store and order the goods. It’s a classic way of solving an age old problem in the team sports business. Customers still pay the required sales tax processing fees from the website, but the fact that such a large percentage of business has moved online makes us cautious about additional taxes. We don’t know what the business of the store will look like in 5 to 10 years and may be radically different in 20. By lobbying for tax laws on internet sellers, local businesses are thinking short term. Better to lobby for lower rates on everyone.

With the way that businesses get acquired and transformed into something wholly different, not passing new taxes seems the wise choice. IBM, DuPont and Koch Industries have all seen dramatic changes in their core business models. They’ve all bought and redesigned the purchased companies to benefit the parent organization. IBM has the longest history of the three and is mostly in the business of software and services instead of just selling room size computers. How many smaller businesses did IBM buy and sell over the years, using components they developed and patents they bought from startups? Successful companies, even small ones, likely change some central part of their business model and adapt to changing consumer tastes, marketing fads or input costs.

Unintended Consequences:

The goal of governments should be to increase the overall number of transactions and money moving in circulation, not slow it.  State governments aren’t trained to think like innovators and develop products that fix ingrained social and financial problems. This isn’t their fault it’s just how the system works. We don’t ask Apple to pave city streets and hire bus drivers we shouldn’t expect governments to earn a profit, they redistribute it. The tax law being considered (MarketplaceFairness Act) would be terrible for consumers used to buying from Amazon and avoiding the tax. Previous laws (current ones) made sellers charge sales tax if the company had a physical presence in the state of the buyer. Amazon does not reside in Oklahoma so bring on the savings! Amazon charges sales tax (in the United States) in 28 states while the rest are betting on the MFA to pass.

 The bill contains an exemption for companies that make less than $1 million a year in profit. Companies just over the threshold will ‘adjust’ their earnings scale to get below it. This favors small online sellers and disadvantages companies like Amazon and Overstock.

A better option than bleeding new business is allowing tax cuts for current ones and large incentives for selling locally. Oklahoma has some good incentives for business but governments will be loath to give up existing streams of revenue through any tax cuts. Especially with recent oil prices still so low. It is a rough task asking buyers used to avoiding tax to suddenly pony up. They are likely to buy from the smaller internet sites rather than shop locally and pay tax.

Prediction:

The Marketplace Fairness Act will eventually pass and more internet companies will gobble up the commerce leaving Amazon, state governments still won’t get the money. Best bet, start a business selling online and keep the totals below $1 million; oh, and buy goods locally as much as possible.

Just Say No, Oklahoma

States are laboratories of democracy and harbingers of public policy trends. Good ideas get repeated when all the pieces fit together, like work for welfare. Bad ideas get tossed out like brown bananas, consider legal cannabis. Medical marijuana legalization efforts have been a disaster for law enforcement in the cases I examined, and a boon for sellers both legal and illegal. Cash strapped states see the promise of quick money from pot retailer licensing fees while voters primarily want to get high. Gains made from those sales turn to loses when cannabis fueled problems add another layer of crime to an overstretched police force.

Oklahoma doesn’t have a medical marijuana initiative on the ballot for the upcoming election but attitudes are moving in that direction. A group called Oklahomans for Health is in the process of getting signatures to put a state question (SQ) on the upcoming ballot to legalize cannabis for medical use. Medical marijuana is a Trojan horse for legalized pot; both are bad ideas. Marijuana is shown to help in pain relief associated with Multiple Sclerosis, glaucoma, cancer and joint pain. In every case however, other more effective drugs exist and are better understood. Cannabis is still a schedule I drug and until recently wasn’t seriously put through clinical studies. Even where some positive signs have been shown from the drug, the best case scenario is ‘promising’- hardly an endorsement. 

California’s law was passed in 1996 and although it was meant as a way to keep dispensaries from being dragged into court, it resulted in a tangle of legal contradictions and naivete. The problems with California’s proposition 215 were twofold according to Gerald Caplan in his 2012 paper Medical Marijuana: A Study of Unintended Consequences: first, the state had trouble distinguishing between ‘medial’ and ‘recreational’ cannabis. Second, retailers made huge profits from sales even though profits were specifically prohibited by law. A common issue was when ‘patients’ would sell their prescribed amount to non-patients for a larger fee. Since the state didn’t keep records on the number of patients overall they couldn’t know how many users had prescriptions. Also, distinguishing legally grown plants from illegal ones is impossible without following the legal plant with a tag. It would be so costly as to be unworkable.

In the case of dispensaries, the marketing techniques show the egregiousness of the whole experiment. Dispensers used glossy pamphlets and billboards to advertise their shops with suspect information like, “35 million suffer from long term insomnia sleeplessness…20 million to 30 million more…short term sleeplessness” (Caplan, 2012). They are in the business of getting customers despite (technically) being a non-profit organization. It shouldn’t surprise anyone that raids by federal police routinely uncovered large caches of money and marijuana. Feds seized 4000 pounds of marijuana (more than allowable) and $400,000 dollars in one case. The report is a few years old now but represents a stark reminder of how dumb laws give cover to bad actors and end up costing money to prosecute.

In Colorado they have likely tried to increase revenue from the licensing of dispensaries. They reasonably believed that physicians would consider marijuana only when traditional approaches failed and that even then, it would be used on a trial basis given the uncertainty of the drug’s effectiveness and the possibility of side effects. They did not foresee the birth of a new specialization in which a physician’s practice would be limited to patients seeking marijuana.

Imagine that? patients who seek doctors on the basis they prescribe cannabis exclusively.  This was in Colorado where recreational cannabis is legal.  Just as a common sense principle adding another layer of prosecution to already lengthy caseload isn’t wise. It is true that legalizing marijuana will eliminate some of the lesser offenses that clog up the courtroom. By decriminalizing small amounts of pot each person may poses state attorneys are free to prosecute bigger ‘fish’.  Most states had already started decriminalizing possession below certain amounts before legalization was in vogue. Colorado passed a superfluous law that with short term gain and long term headache. A few statistics compiled a year ago on the Colorado law:

– Marijuana-related traffic deaths increased 32 percent.

-Almost 20 percent of all traffic deaths were marijuana related compared to only

– 10 percent less than five years ago

– Marijuana-related emergency department visits increased 29 percent

– Marijuana-related hospitalizations increased 38 percent

– Marijuana-related calls to the rocky mountain poison center increased 72 percent

– Diversion of Colorado marijuana to other states increased 25 percent

It is unlikely that every marijuana sale came from licensed dispensaries or even physicians with carte blanche authority to write prescriptions. A section in the law requires individuals to have as many as six plants for personal use. Even with all that, it is unlikely that all the sales were from state authorized retailers. Unscrupulous sellers flock to easy money like rats to a landfill.

  

The problem of thinking that by legalizing weed you will eliminate the sale of illegal weed is that the logic doesn’t work with cigarettes. Most bureaucrats understand the link between taxes and black market tobacco products, when taxes increase so does the sale of black market cigarettes. In Oklahoma we have a slightly different problem of smokers buying from tribal lands and avoiding the higher tax. The problem is the same. States miss out on the revenue the sales tax would have provided at a lower rate and smugglers have likely moved into the area due to the high ‘sin’ tax. The problem is now compounded by a dumb and greedy legislature. Selling without a license still ensures a stiff penalty but just like with cigarettes, the higher price incentivizes risk (or illegality).

California lost the ability to discern ‘patients’ from non-patients. Colorado dropped the ‘medical’ ruse and let everyone have a go, they probably figured it was easier. Both were worse off and although other states have tried the experiment, it remains a bad idea. Oklahoma residents will be tempted to vote on something that guarantees a short term fix for the gaping hole in the budget. Caplan’s report on medical marijuana isn’t just an examination of specific wrong-headed legislation; it is a rebuke to the idea that states can even manage a workable cannabis policy. From the dubious medical claims to the increased crime, hospitalization and suspect retailers-Oklahoma should say no.   

Respecting the Process

I got a B- on a paper I turned in for a comparative studies class in grad school. I didn’t rise to the challenge and take the assignment seriously. Others were cut out for evaluating the minutia of academic research and writing dissertations from studies they had conducted, I told myself.  I learned the importance of elevating the assignment through effort and respect for format. My professor did me a favor by grading me poorly and laying out reasons for why formats are not flexible. 

   

The paper was a review of a LOOOONG book on how Bush and the Iraq war proved that the United States was entering a phase of aggressive nation building.  The author’s thesis was far richer and subtler than my evaluation suggests, remember though I didn’t do the book justice. He lost me at the literature review, the first part. Some people love words, their own mostly. If his words had weight they would have crushed me. He used them the way drill sergeants use criticism, unsparingly.

I gave a 15 minute summation of the book. Highlighted the main points for class discussion and turned in a review of the book with my own analysis. I handed in a stinker of a paper and knew it. It barely met the length requirement, included an incoherent argument and used material that supported a different conclusion. It was lazy and rushed; the assignment brought out the worst in me. I got assigned the toughest book in class written by the biggest windbag allowed to walk across the graduation stage at Harvard. He wore a tweed jacket with elbow patches and smoked a pipe through smiling lips at the dreck he forced me to read (none of that is true).

My professor didn’t cut me any slack and wrote a full page explaining why my piece wasn’t exactly up to par (no kidding). It technically met the requirements for number of sources, types of sources and page length. But the rest was a collection of academic research papers and hastily arranged quotes only marginally related to the subject. I slapped together a menu of pseudo-intellectual claptrap and pasted it to Word like a seamstress putting together a quilt. It’s almost like I said “I understand what the format should look like, but how about this instead?”

I disregarded the rules for what a book review should be. Why did I do it that way? It was easier. I didn’t have time to do it right. I didn’t understand the material I was researching. I didn’t like the point the author made; I didn’t agree with his argument, as much as I could understand of it.

All were excuses in my head. All were true but shouldn’t have mattered. I signed up for the class and decided to play by my own rules. Can you imagine an Olympic triathlete completing only part of his race? He stops after swimming and biking telling the judge, “I don’t like the rules on completing 3 events. It’s much easier to pick the two I am good at.”

We don’t get choices like that in life; we play the game we signed up for. We do the work even when we hate the material, the professor, the class and the book’s thesis. Just so you know a B isn’t a terrible grade but in Grad school a B- is really a C. It means, you ‘phoned it in son’ go back and write a decent paper. I wasn’t happy with the grade but should have seen it coming. His criticism taught me that paying for class and showing up aren’t enough.

With just a little effort I could have turned in an organized paper. I made a bargain with myself to slack off a little, just this time I thought. The book was nonsense anyway and the poor writing shouldn’t matter that much. The teacher had other thoughts and showed me that writing assignments have formats and rules must be followed. I won’t say I never slack off anymore but I do respect process and format more than ever. My writing improved markedly after that, as did my respect for process.