Eating is important

Tuesday, 1 December 2009

Hugo Salinas Price

A few days ago I asked a good friend of mine if he had any idea what part of the Mexican economy could be classified as “informal” – the term used in Mexico when referring to people who are “flying under the radar” of the tax-collector. He told me he had recently read that 50 to 60% of the Mexican economy is “informal”. I was pleasantly surprised.

The official representatives of Mexican Business always oppose  government moves for higher taxes and one of their arguments is: “Don’t increase taxes on those who are already paying, while there are so many that are not paying taxes.” I think this is a weak argument, for a couple of reasons:

One, I think that the “informal sector” – the non-tax-paying sector – really cannot afford to pay taxes. Taxing these people means squashing their means of survival, and that means social outrage and disorder. Hungry people get nasty.

Two, government spending is insatiable. Can one really believe that if we have everybody paying taxes, government will finally stop increasing their spending? Of course not.

I am pleased that we have such a large “informal”, non-tax-paying sector. It bodes well for the country. People are making-do with the scarce capital they have. With tiny amounts of money, they put their families to work and earn their living. Organized, tax-paying businesses require large amounts of capital to create jobs; they simply do not have the large amounts of capital required to put the whole Mexican population to work.

Mexico has too large a government head for a small productive body. The large percentage of “informal economy” in Mexico shows quite clearly that we don’t need this bloated government; we can get along quite well with much less government.

The “informal economy” survives and prospers, because the “taxes” that it pays are in the form of bribes to inspectors. Inspectors rake in enormous amounts made up of innumerable small bribes, and they in turn pass on, up the ladder, a part of their bribes to their bosses.

The result is very important: 50 to 60% of México that is “informal” gets to eat three meals a day.

Around the world, similar problems produce similar solutions. For instance, back in 1960 the wife and I were on a visit to Turkey, and found that taxi drivers in Istanbul were working certain routes in the city, transporting several passengers at a time, for a fixed lower fee from each. Passengers got on and off the taxi, according to their particular wishes. Nobody planned this, it just happened. When we arrived back home in Mexico City, I discovered that we had the same new solution to the problem of personal transportation – something that was not there before and had not been planned.

I feel pretty sure that Americans will turn to the “informal economy” to survive. Indeed, I think it’s already happening. With an unemployment rate of at least 10.2% according to official figures, it doesn’t seem likely to me that these unemployed are just sitting around watching T.V.  More likely, they are earning money to feed their families and not reporting any income. Doing so within the formal, tax-paying economy is just not possible in present circumstances.

All the articles I read about the US economy – and I read quite a bit on the Internet – deal with the problems in the US based on the reported numbers gathered by various institutions and investigators. The “informal economy” in the US would not, of course, provide any numbers at all, so all analysts are looking at the US economy as if no “informal economy” exists.

I doubt very much that the “informal economy” does not exist in the US. It’s true that not paying taxes is a dangerous game, but in times like these, when we are told that unemployment – including drop-outs from the unemployed lists plus people who are working part-time and want a full-time job – is over 17% of the employable population, there is no doubt in my mind that probably several million people are working and earning money and not paying taxes or any government fees.

I think that pretty soon, the existence of the “informal economy” will become too pervasive to ignore. Look for people selling stuff on the sidewalks in the towns, or in the parking lots. The cops will chase them away, but they will be back hours later. Look for people hawking stuff at stop-lights. Look for more and more people resorting to garage sales to raise a few dollars. Look for more people offering to do odd jobs for cash. Look for even some small businesses offering better prices for cash payments from people that do not require an invoice. Farmers close to urban centers will be able to sell produce for cash and not report the income.

The “informal economy” thrives on cash; it can’t use credit cards because they leave a trail for the IRS. Since this Depression will last quite a while and lead to a considerably more modest standard of living both in the US and the rest of the world, I think the trend to Credit Cards will reverse and cash will steadily become more important in the US. The computer has met its match and it is – the stomach.

Here in Mexico, the Treasury has had a law passed that taxes all bank accounts with 3% on all sums in excess of $15,000 pesos (about $1,100 dollars) deposited in an account in a period of one month. This is up from 2% on deposits exceeding $20,000 pesos in one month. The government hates the “informal economy” that operates in cash and wants to stamp it out by stamping out cash. Of course, the monetized silver coin would be doubly hateful, as besides serving as cash, it would be an excellent means of savings, out of reach of the grasping banking system.

The general opinion is that those people who are getting by without paying taxes will just decide to hang on to their cash and not deposit any cash at all in their bank accounts. Governments don’t seem to care whether people eat or starve – they want their tax payments no matter what.

Once again, when government becomes too expensive for the governed it becomes irrelevant, because eating is more important than complying with rules regulations and tax laws.