In the News: The Costs and Benefits of More Data

Is having more information always a good thing? It’s generally hailed as such, but, depending on your perspective, the reality may be more complicated.

In the news today, there are several examples of more data leading to changes that, while painful in the short run, should yield long-term positive results.

Taxation becomes harder to evade

The problems with the Foreign Account Tax Compliance Act (FATCA) are many and varied, but the intent is good—to make sure everyone pays their taxes. Evasion by some results in those who do pay paying more. So, in the long run, higher compliance rates are in everyone’s best interest. The growing availability of easily searchable data has reduced the costs of demanding compliance from financial institutions, as well as making it easier to catch them when they cheat. Increasing use of digital money will also make it easier for governments to track (and tax) economic activity.

While I hold no brief for higher taxes, evasion of existing taxes is simply wrong—and costly to everyone else. The short-term problems of a tax crackdown are clear (see today’s Wall Street Journal article about how Americans living abroad are increasingly renouncing their citizenship to avoid tax penalties). On the other hand, the longer-term benefits for the country as a whole are lower tax rates or deficits, or both.

Financial markets become more efficient

Over the past couple of months, we’ve discovered that the interest rate market, the gold market, and now the M&A markets have been subject to collusion and insider trading. In other words, insiders have been ripping off the average investor. More data has made this kind of dealing much easier to discover and correct.

After decades of simply presuming a transparent and equal market, significant strides are being made to turn that presumption into a reality. The short-term costs are substantial, especially for the banks that have been cheating, but the far-reaching benefits are more efficient markets and better capital allocation.

Business and government become more accountable

GM has been under fire for multiple safety violations affecting millions of cars, as have other manufacturers. Does this reflect worsening performance by companies or a higher standard, made possible by more readily available information? I would argue the latter. (A similar example is the heightened attention to labor standards for subcontractors in developing countries.) Again, the short-term costs to business are substantial, but the longer-term benefits—safer cars, for example—should also be great.

Meanwhile, state and municipal governments are being held accountable for pension promises—a major step in getting the problem under control. While the short-term costs could be high (steeper taxes or lower benefits to close the gap), solving the problem now will be less painful than doing it later.

Conclusion: keep the data flowing

Data is a great tool for showing us the difference between what we think and what actually is, and that's what I try to do in much of my writing and research. One of the real advantages of working for an independent broker/dealer is that my analysis isn’t constrained. Unlike at a company with proprietary products, which has a vested interest in its own cooking, I can look at any data I want.