Kevin Shockey and I have had many lenghty conversations (Genius-to-Jenius, as it were) about Puerto Rico's general and specific problems. A significant number of My posts cover topics he has either discussed with Me, were triggered by his comments or lead into more discussions with him.
One We touched upon recently was the oft-noted observation that Puerto Rico fosters new business growth like penicillin fosters infection. (To you statehooders out there: We're killing new businesses.) I noted that the overgrown legal system (laws, regulations, licenses, permits, taxes etc.) did that to legitimate businesses, and that in fact this was the prime motivator for the recent spurt of the "underground" economy, as evidenced by the huge proliferation of flea markets.
I touched upon this before, noting that flea markets have gone from "one or two, only on Sunday events" to "dozens, some open every day" with a parallel expansion from "mostly old junk" to "plenty of new stuff, groceries, electronics and services." Here's an example from a recent flea market visit I made:
Tony is a hair stylist who works Friday through Sunday at a flea market. His stall has two large chairs and several metal folding chairs, bright lights, two fans shoving air in semicircles and a 27-inch TV set on a pedestal playing a popular movie still in theaters. He cuts hair, trims beards and eyebrows and charges from $6 to $20 per client. In an average 9-hour day he pockets $250-$350, averaging about $1,000 on a weekend.
His Tuesday-Thursday job is manning a chair at a large local salon, in the Mall, with 11 other stylists, male and female. He has a few regulars, but he's young and hasn't built a clientele yet. The salon charges from $10 to $34 for the same hair cut, beard trim and eyebrow plucking services. Of the amount charged, Tony gets to keep roughly 40%, for he pays a "chair fee" to work at the salon, a cleaning fee to keep his chair area neat and an override commission to cover utilities . His average per 9-hour day at the fancy salon in the Mall: $60-$80.
Yes, Tony makes more in one day at the flea market than he does in three days at the salon.
Tony pays $200 a week for his space at the flea market, signing a guaranteed 20-week contract after his credit was verified. He gets space, electricity, security, even debit and credit card payment processing in the deal, which he worked out in about 2 hours one Thursday afternoon, when he called in sick at the salon and went to the flea market. Tony was even offered an instant loan of up to $3,000 to get his barbershop set up, at a very fair 15% interest rate, with only his stall's furnishings as collateral, even though they totaled about $550.
Would he consider opening a salon like the one he works in? Would you? Even before finding out it took the salon's owner 19 weeks to simply take over the salon from its former owner, who took 29 weeks to open it back in 1997? And since then, the legal system has thrown another 3-8 weeks of red tape, a.ka. garbage, to increasingly keep businesses from starting up efficiently.
Now it's true that Tony faces a hike in his rate soon, to about $225 or even $250 a week. Competition, you know. But he has seen a steady increase in clients as the months have gone by, with his salon regulars now dropping in--by appointment--to save themselves a few bucks. And as he told Me: Why bother for months with bureaucracy when you can have your business in a day?
And that, as they say in cardiology, is the heart of the matter. The more the Fools (politicians of every stripe, scar, birthmark, mole, open sore and leprosy) throw roadblocks at business, trying stupidly to skim even more of Our money as it changes hands, all they're doing is reducing legitimate businesses in favor of ad hoc--underground--commerce.
Like crack addicts, they can't stop what they're doing even if their microcephaly gives them a glimpse of a better way. As the economy worsens--and it will get much worse for Us--it is this ad hoc economy that will sustain Us. The huge amount of cash it represents is the underlying foundation for Our economic resistance to outright swooning. The moment that cash flow is interrupted, We will see an abrupt contraction of this underground economy and that will be like chopping the roots of Our economic tree.
Is this underground economy "right"? Isn't it, in fact, illegal to generate income and avoid paying taxes on almost all of it? Yes, the underground economy is illegal--because the legal economy is unfair, abusive and ineffective. How else could the ad hoc economy match or even exceed the legal type? When the benefits outweigh the risks, people will do what is wrong. When the benefits clearly outweigh the risks and no other viable option is allowed, many more people will do what's wrong. In this case, it means going undergroud. Either that or they leave, go on welfare , beg, steal, prostitute themselves or deal drugs. But they won't starve, that's for sure.
Should We do something about the underground economy, even though it allows rapid entrepreneurship, has a venture capital system that places greater value on the person's skill set and knowledge rather than his contacts in government, makes money quickly and consistently and keeps thousands of Our people "gainfully employed"?
Yes We should. As soon as We make the "legimitate" economy just as good.
The Jenius Has Spoken.