If I were a still a Wall Street type, I don’t think I could have done a better job of sabotaging an effort to impose transaction taxes on big financial firms than the left has managed to do itself with lousy branding.
By way of background, transaction taxes are a perfectly legitimate concept, in fact, they were first proposed by a Serious Economist called James Tobin as a way to dampen hot-money currency speculation and are thus often called Tobin taxes. This is Tobin’s own explanation of the logic of this type of levy:
The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied – let’s say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties’ crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets.
And Tobin is hardly the first to recognize that while some speculation is necessary and desirable, too much is a bad thing. As Keynes, who was a very successful investor, noted:
Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done
Now it’s hard to say exactly how much speculation is too much speculation. But equity markets dominated by high frequency traders are an obvious candidate. The estimate that HFT has reduced the averaged holding time of exchange-traded equities to 22 seconds is controversial but probably directionally correct. But even that factoid doesn’t give an adequate picture of the impact of high-frequency trading, which accounts for somewhere between two-thirds and three-quarters of equity trading in the US. So let’s turn the mike over to Andrew Haldane, executive director of financial stability at the Bank of England, who said in 2011:
As of today, the lower limit for trade execution appears to be around 10 micro-seconds. This means it would in principle be possible to execute around 40,000 back-to-back trades in the blink of an eye. If supermarkets ran HFT programmes, the average household could complete its shopping for a lifetime in under a second. Imagine.
It is clear from these trends that trading technologists are involved in an arms race. And it is far from over. The new trading frontier is nano-seconds – billionths of a second. And the twinkle in technologists’ (unblinking) eye is pico-seconds – trillionths of a second. HFT firms talk of a “race to zero”. This is the promised land of zero “latency” where trading converges on its natural (Planck’s) limit, the speed of light.
And this activity is not salutary. Lower bid-asked spreads in “normal” markets come at the cost of higher volatility on an ongoing basis AND worse liquidity crunches in times of stress:
Taken together, this evidence points towards market volatility being both higher and propagating further than in the past. Intraday evidence on volatilities and correlations appears to tell a broadly similar tale. Overnight and intraday correlations have risen in tandem. And intra-day volatility has risen most in those markets open to HFT…
Far from solving the liquidity problem in situations of stress, HFT firms appear to have added to it. And far from mitigating market stress, HFT appears to have amplified it. HFT liquidity, evident in sharply lower peacetime bid-ask spreads, may be illusory. In wartime, it disappears. This disappearing act, and the resulting liquidity void, is widely believed to have amplified the price discontinuities evident during the Flash Crash. HFT liquidity proved fickle under stress, as flood turned to drought.
Another area where trading levels look wildly out of line in relationship to the level that would facilitate commerce is derivatives. As Satyajit Das wrote:
Based on surveys conducted by the Bank of International Settlements (BIS), the global derivative market is around US$600 trillion in notional amount. This is a large increase in size from less than US$10 trillion 20 years ago. The outstanding amount compares to a global gross domestic product (GDP) of around US$60 trillion. While this comparison is not ideal, it begs the questions why volumes should be so high? What is the legitimate reason for this activity?… While they can be used for this purpose, derivatives are now used extensively for speculation; that is, manufacturing risk and creating leverage. The UK FSA Turner Report reached this conclusion.
So let’s recap:
1. Transaction taxes are a way to curb an undesirable undertaking, namely, too much speculation, similar to taxes on cigarettes.*
2. Plenty of financial markets look to be legitimate targets, such equity markets where HFT traders operate, and the more liquid derivative and foreign exchange markets
3. Tobin gave an off-the-cuff suggestion of a tax of 0.5% when he first proposed the concept, in the early 1970s. Markets were much less liquid then. There’s been some academic debate since then as to what the proper level might be, which is a plus for policy-making (as in the studies can help inform how to design these taxes.
So what happens? The left goes and screws it up.
When I first heard of “Robin Hood taxes” which seems to be the preferred messaging for financial transaction taxes, I had no idea what they were talking about. This is just about the worst possible remotely accurate labeling that could have been chosen.
First, “Robin Hood tax” does not clearly finger banks or financial firms. Banks are a really easy target! They blew up the economy and got bailed out and paid themselves record bonuses right after that and no one of any consequence has been prosecuted, much the less gone to jail. But the proponents couldn’t figure out a way to finger the perps in their label? How about “speculation tax” or “Wall Street casino tax”?
Second, the point of a Tobin tax is to discourage undesirable activity. It will also raise revenue, but that is a secondary objective. If you make it about raising revenue, the targets (the banks) can take the position that they are being unfairly targeted. In fact, the fact that Robin Hood was a thief plays right into the banks arguing that this is really a Willie Sutton tax: they’re being targeted because “That’s where the money is,” meaning they are being targeted because they are successful, as opposed to because they are engaging in socially undesirable activity.
Third, “Robin Hood tax” alienates people who ought to be on your side. People in the real economy, including wealthy businessmen, are losers in a financialized economy. Unless they have a countercyclical business like a pawn shop, the financial crisis and its aftermath has cost them revenues and profits (and probably lost sleep too). Even investors, who might be relieved that the stock market is perking along, are unhappy about the stealth bailout and tax on savings known as ZIRP. But “Robin Hood tax” pits the rich against the poor. It reduces rather than enlarges the pool of potential supporters.
It’s not the fault of Real News Network, but when I see videos like the one below, where you have economists reducing their logic to soundbites that then get turned into something self-defeating in the follow-on political messaging, I want to scream. For instance, you’ll hear a $350 billion tax receipts estimate based on a 0.5% tax on all stock trades. I guarantee you won’t see anything even approaching that level of receipts. That two-thirds to three-quarters of all stock trades that are HFT goes poof (which is not a bad thing, mind you). That charge is also way higher than what even retail investors pay. It would significantly reduce both retail and institutional trading volumes. The naivete about how that level of tax would impact the level of activity and hence tax receipts is stunning and just discredits the proponents (as in bank lobbyists will be able to laugh them out of the room).
As Lambert says, “That’s the Democrats for you, stupid and deceptive.” But if the idea was to make sure this good idea got no traction, they couldn’t have done a better job.
* New York City has particularly high taxes on cigarettes with the stated aim of reducing smoking, and various media stories have reported on their impact in lowering the level of smoking, not revenue collection.