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The Panama Papers Actually Reflect Pretty Well on Capitalism

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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The leak of confidential documents from Panama law firm Mossack Fonseca has had many interesting results. We’ve seen the biggest dump of confidential documents in history. Prominent international figures have been revealed as the holders, or near-holders, of shadowy offshore accounts. The prime minister of Iceland has resigned over allegations of impropriety.

Less interesting is the predictable result: a flurry of people rushing to blame “global capitalism.”

“The documents, which show the extraordinary lengths the global elite have gone to in order to shield their wealth from taxation, are at once big news and old hat,” says my friend Freddie deBoer in Foreign Policy. “They provide the nasty details of the kind of business most savvy people assume goes on all the time. You and I pay our taxes; the wealthy find ways to avoid them. For some, reading about the Panama Papers will feel like being told by your parents that Santa isn’t real: merely the final confirmation of a suspicion that you have harbored for a very long time. The game is rigged, and unless you are part of the global one percent, it isn’t rigged to help you.”

A libertarian of my acquaintance wrote to inquire whether this is going to sour people on global capitalism.

It shouldn’t. What we’ve seen from the papers so far is not so much an indictment of global capitalism as an indictment of countries that have weak institutions and a lot of corruption. And for all the outrage in the United States, so far the message for us is pretty reassuring: We aren’t one of those countries.

Consider the big names that have shown up so far on the list. With the notable exception of Iceland, these are not countries I would describe as “capitalist”: Russia, Pakistan, Iraq, Ukraine, Egypt.  They’re countries where kleptocratic government officials amass money not through commerce, but through quasi-legal extortion, or siphoning off the till. This is an activity that has gone on long before capitalism, and probably before there was money. Presenting this as an indictment of global capitalism is like presenting Romeo and Juliet as an after school special on the dangers of playing with knives.

The only American I’ve so far seen identified was a Chicago-area financial coach I’ve never heard of.  Moreover, even the folks who may be putting money offshore won’t necessarily be doing so to avoid taxes or hide nefarious activity. Hedge funds, for example, are often incorporated in the Caymans for boring reasons having to do with quirks in the U.S. tax code (which would tax foreign investors on certain types of transactions) rather than to hide income or let Americans avoid their legally owed tax liabilities.

For that matter, even foreigners who are trying to hide their names might not be doing so for entirely unsavory reasons. People living under unstable regimes may have very good reasons to want to move assets outside the country; Jews in 1930s Germany did not put money in Swiss accounts because they were trying to lower their tax bill, but because they were trying to ensure that they would have enough set aside to flee the genocidal maniac ruling their country.

Trying to lump all these behaviors together under the rubric of “global capitalism” distorts the term to uselessness. While the economy is certainly more global than it used to be, most capitalism is local. There is, of course, a fair amount of interaction between economic elites. Nonetheless, most of those people still live under local law and local government, and make their money in a particular local economy. When some of those people break their local laws, this is not some sort of collective enterprise that indicts everyone, everywhere.

But there’s a common tendency, when talking about “global capitalism” to forget that borders and governments still exist. A few weeks back, I was the designated capitalist punching bag on a panel well attended by socialists. A woman in global development stood up and delivered a heartfelt rebuttal to my arguments on the grounds that places like Saudi Arabia had immense and wild excess, while their near neighbors had desperate poverty. This, she said, was something that we needed to fix.

That discussion rapidly went south when I asked her how many troops she wished to commit to this project. Saudi Arabia is its own country. Even if the rest of the world went socialist, we’d probably have to give them something in exchange for their oil, which would mean that there would probably be wealth disparities between them and their nearest neighbors.

“We” are not going to rectify this situation without some pretty old-school empire building, in which we invade and seize the lands of folks who happened to end up sitting atop some valuable natural resources, and then reassign those resources to uses that “we” deem more appropriate. By “we,” of course, I mean educated affluent white people in Western countries.

Projecting our concerns onto the governance problems of Pakistan, or pretending that the Russian oligarchs are part of some club that jointly rules the world with the Walton family, is a convenient way to give our local complaints extra oomph by projecting them onto the world stage. But while it may be emotionally satisfying, it’s worse than useless, because it suggests terrible policy solutions to those complaints, or no solution at all.

What we seem to have learned from the documents so far is that this particular sort of corruption isn’t a big local problem for the U.S. We do of course have some law breakers, because there is no such thing as a law that won’t be broken. But it seems to be a minor, furtive thing, rather than the mass habit you see in parts of the developing world. The IRS is very good at finding offshore tax cheats, and getting better all the time. I am confident that if U.S. scofflaws should be revealed by these documents, the tax authorities will waste no time ensuring that they get what is coming to them.

Other governments may fail to enforce their laws, perhaps because the named figures sort of are the local government. That is a big problem. But that doesn’t mean that it’s our problem. Global capitalism didn’t create the issues plaguing weak states. And global anti-capitalism won’t fix them, either.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net