[lbo-talk] Krugman: In favor of the modern Tobin tax

Michael Pollak mpollak at panix.com
Thu Nov 26 23:43:07 PST 2009


http://www.nytimes.com/2009/11/27/opinion/27krugman.html

The New York Times

November 27, 2009

Op-Ed Columnist

Taxing the Speculators

By PAUL KRUGMAN

Should we use taxes to deter financial speculation? Yes, say top

British officials, who oversee the City of London, one of the world's

two great banking centers. Other European governments agree -- and

they're right.

Unfortunately, United States officials -- especially Timothy Geithner,

the Treasury secretary -- are dead set against the proposal. Let's hope

they reconsider: a financial transactions tax is an idea whose time has

come.

The dispute began back in August, when Adair Turner, Britain's top

financial regulator, called for a tax on financial transactions as a

way to discourage "socially useless" activities. Gordon Brown, the

British prime minister, picked up on his proposal, which he presented

at the Group of 20 meeting of leading economies this month.

Why is this a good idea? The Turner-Brown proposal is a modern version

of an idea originally floated in 1972 by the late James Tobin, the

Nobel-winning Yale economist. Tobin argued that currency speculation --

money moving internationally to bet on fluctuations in exchange rates

-- was having a disruptive effect on the world economy. To reduce these

disruptions, he called for a small tax on every exchange of currencies.

Such a tax would be a trivial expense for people engaged in foreign

trade or long-term investment; but it would be a major disincentive for

people trying to make a fast buck (or euro, or yen) by outguessing the

markets over the course of a few days or weeks. It would, as Tobin

said, "throw some sand in the well-greased wheels" of speculation.

Tobin's idea went nowhere at the time. Later, much to his dismay, it

became a favorite hobbyhorse of the anti-globalization left. But the

Turner-Brown proposal, which would apply a "Tobin tax" to all financial

transactions -- not just those involving foreign currency -- is very

much in Tobin's spirit. It would be a trivial expense for long-term

investors, but it would deter much of the churning that now takes place

in our hyperactive financial markets.

This would be a bad thing if financial hyperactivity were productive.

But after the debacle of the past two years, there's broad agreement --

I'm tempted to say, agreement on the part of almost everyone not on the

financial industry's payroll -- with Mr. Turner's assertion that a lot

of what Wall Street and the City do is "socially useless." And a

transactions tax could generate substantial revenue, helping alleviate

fears about government deficits. What's not to like?

The main argument made by opponents of a financial transactions tax is

that it would be unworkable, because traders would find ways to avoid

it. Some also argue that it wouldn't do anything to deter the socially

damaging behavior that caused our current crisis. But neither claim

stands up to scrutiny.

On the claim that financial transactions can't be taxed: modern trading

is a highly centralized affair. Take, for example, Tobin's original

proposal to tax foreign exchange trades. How can you do this, when

currency traders are located all over the world? The answer is, while

traders are all over the place, a majority of their transactions are

settled -- i.e., payment is made -- at a single London-based

institution. This centralization keeps the cost of transactions low,

which is what makes the huge volume of wheeling and dealing possible.

It also, however, makes these transactions relatively easy to identify

and tax.

What about the claim that a financial transactions tax doesn't address

the real problem? It's true that a transactions tax wouldn't have

stopped lenders from making bad loans, or gullible investors from

buying toxic waste backed by those loans.

But bad investments aren't the whole story of the crisis. What turned

those bad investments into catastrophe was the financial system's

excessive reliance on short-term money.

As Gary Gorton and Andrew Metrick of Yale have shown, by 2007 the

United States banking system had become crucially dependent on "repo"

transactions, in which financial institutions sell assets to investors

while promising to buy them back after a short period -- often a single

day. Losses in subprime and other assets triggered a banking crisis

because they undermined this system -- there was a "run on repo."

And a financial transactions tax, by discouraging reliance on

ultra-short-run financing, would have made such a run much less likely.

So contrary to what the skeptics say, such a tax would have helped

prevent the current crisis -- and could help us avoid a future replay.

Would a Tobin tax solve all our problems? Of course not. But it could

be part of the process of shrinking our bloated financial sector. On

this, as on other issues, the Obama administration needs to free its

mind from Wall Street's thrall.



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