Dark Capital: Panama Papers just the tip of the iceberg

A couple of decades ago physicists realized that their calculations about the amount of matter in the universe, based on what their instruments were able to measure, were way off. Based on everything they knew about how fundamental physical forces work, there had to be a much greater amount of matter in the universe than they had thought. They coined the term Dark Matter to describe the extra stuff. But they didn’t have a clue about what Dark Matter actually was.

Similarly, given huge corporate profits, there must be more money around to launch companies, hire workers, increase salaries and fund investment in public goods, such as rapid transit and the health and welfare of the work force. Instead, there is a huge sucking sound.

Recently, however, students of the world economy and the fundamental social forces that flow from of its workings have been handed a window into the universe of another shadowy entity that in part accounts for that sucking sound. Call it Dark Capital.

We have known that there was some Dark Capital out there for a long time. Switzerland was the earliest big tax haven, protected by previously impregnable banking secrecy laws. But the country has been pressured by the big players in the global economy to partially lower its walls. Meanwhile, the number of new tax havens has grown and the amount stashed away in their vaults has skyrocketed. It is mainly, although not solely, an expression of the colossal economic inequality that characterizes capital in the twenty-first century. And it is at once product and cause of that massive inequality.

Dark Capital is a big reason there is never enough tax revenue around to rebuild infrastructure, to reinvent industry, to bear the cost of transitioning to a green energy paradigm, to stimulate the economy enough to overcome zombie recoveries like the one we are living through right now, and to provide the most vulnerable here and around the world with a dignified standard of living.

Writing in the April 7 edition of the Miami Herald, Fred Grimm (“No room in the skyline for a sucker without a tax haven”) quotes some eye-popping numbers about Dark Capital from University of California economist Gabriel Zuckman, author of ‘Hidden Wealth of Nations, the Scourge of Tax Havens’:

• Tax Havens hold as much as $7.5 trillion;
• 4 percent of U.S. wealth is parked in offshore accounts;
• 20 percent of Latin American wealth is sitting in such secret accounts.

To put these figures into perspective, you have to consider that the U.S. economy is significantly larger than that of all the Latin American countries combined.

The Gross Domestic Product (GDP) of the United States in $17,419 billion. The GDP of Latin America and the Caribbean combined is $9,517 billion. Thus the U.S. economy is almost twice as large as the Latin American economy. In addition, GDP measures the value of the total goods and services produced in a single year, not total accumulated wealth. Given centuries of underdevelopment in Latin America versus more than two centuries of economic growth in the United States, the difference between accumulated wealth in the United States versus Latin America must exceed the gap in GDP. Thus the total amount of money in offshore accounts originating in the United States might well exceed the amount from Latin America.

I have been using layman’s language in calling offshore accounts Dark Capital. Dark Capital is dead capital, and in some senses not capital at all, since it doesn’t fulfill the primary function of capital: investment for profit. Certainly, Dark Capital is potential capital; it could easily be converted into factories, technology firms, and other investments that could yield profits and employ workers. So why isn’t that happening? I am not an economist so I can only venture some educated guesses.

For instance, the gains from tax evasion may in some cases exceed expected profits, especially since investment always involves risk while offshore accounts are secure. In the case of those whose money comes from corruption or other criminal activities, they usually don’t want to answer questions about how they came to acquire enough money to create or buy a big company.

Miami plays a significant role in the universe of Dark, Dead Money even though we are obviously not an offshore tax haven. The game here is real estate. That is where the Dark Money is parked, in huge amounts. That accounts for the condo canyons Fred Grimm bemoans and which have turned our city into a soulless futuristic dystopia. Real estate is dead capital too.

It’s just possible, however, that the game may be turning a little tougher for the dons of Dark Capital. The leak of the Mossack Fonseca law firm’s records must be making a lot of people nervous, and not just the ones that had their money managed by the Panamanian law firm. They are realizing that in a digital world there can be no absolute guarantee of secrecy.

The Panama papers revelations are generating a lot of unwanted attention for those who dwell in darkness. Journalists are getting in on the action big time. In a separate article on Sunday, for example, the Miami Herald reported on a Mexican union official who earns at most $2,500 a month who in a short time spent $8.2 million on Miami real estate.

Yet the scourge of Dark Capital and tax havens will persist as long as we live in a world of grotesque inequality and brazen social injustice.