I read an article in the Financial Times earlier this week (September 23, 2023) -…
There was an article in the International Politics and Society journal (August 27, 2017) – Robin Hood had the right idea – which continues to demonstrate, how in my view, the Left has gone down a deadend path with respect to financial market reform and re-establishing a credible progressive agenda. The sub-title of the article ‘Why the left needs to deliver on the financial transaction tax’ indicates that the author, Stephany Griffith-Jones, who has long advocated positions I am sympathetic to (particularly with respect to development economics), thinks a financial tax is a viable strategy for the Left to push. The problem is that none of these ‘Robin Hood solutions’ are viable and are based on faulty understandings of the way monetary systems operate.
My previous blogs on this topic include:
1. A global financial tax? (November 9, 2009).
2. Robin Hood was a thief not a saviour (April 1, 2010).
They were written as the GFC was morphing out of control in some nations and governments were beginning to impose austerity. The loudest voices on the progressive side of the debate thought they had the solution. I believed they were wrong.
But like a boomerang, it seems that the progressive side of thought has not moved on much since then, and Robin Hood still keeps coming back into the political debate. Exactly like the other progressive furphy – universal basic income.
Stephany Griffith-Jones writes:
A financial transaction tax (FTT) – a charge on the buying and selling of stocks, bonds and derivatives – is an idea with widespread support amongst leading academics, many politicians and, most importantly, citizens. It was initially proposed by Maynard Keynes, the greatest economist of the twentieth century, and developed by Nobel Prize winner James Tobin.
One could dispute the claim that John Maynard Keynes was “the greatest economist of the twentieth century”. He doesn’t get that rank in my table.
But that is an aside and more to do with ideological considerations and style than anything. We can agree he was very influential and even the mainstream neo-liberals still try to hang their hat on his name (the so-called New Keynesians, which is a misnomer if there ever was one).
In Section VI, Chapter 12 on the ‘State of Long Term Expectation’ in his 1936 Macmillan book – The General Theory of Employment, Interest and Money – Keynes was discussing “the influence of speculation” in what he called the “greatest investment markets in the world, namely, New York” (that is, Wall Street).
He wrote (pages 159-60 in the original edition):
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. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism – which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.
… It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive. The jobber’s “turn”, the high brokerage charges and the heavy transfer tax payable to the Exchequer, which attend dealings on the London Stock Exchange, sufficiently diminish the liquidity of the market (although the practice of fortnightly accounts operates the other way) to rule out a large proportion of the transactions characteristic of Wall Street … The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.
Clearly, the problems identified by financial market operatives who only desired to advance their own greed without regard to the well-being of general society was an issue in the 1930s, after the financial crash of 1929 was clearly the result of unregulated excess.
Not much has changed really except for a period governments assumed a much more regulative role to stifle the casino nature of the financial markets.
That regulative oversight started to diminish and even vanish in some quarters as the neo-liberal emergence strengthened into domination in the 1980s and politicians sold out to the financial market lobbyists.
Keynes was, of course, just rehearsing the idea he got from Alfred Marshall that adding a tax to a price would increase it and reduce demand.
It is the same principle that leads progressives to advocated carbon taxes. The idea is that the ‘price system’, the market will work to reallocate resources away from the taxed activity or product.
The problem with any market solution for the climate change/environmental devastation problem is that we have no idea of when a biological system will simply die.
Economists think that there are trade-offs between the use of a resource (growth) and pollution control, which is mediated by the price system. Of course, they have no idea of what they are talking about given the binary nature of ‘life’ (die or live).
Price systems are also corrupted by moneyed interests (as we have seen with the carbon tax aand carbon trading systems already implemented).
The only way to achieve some certainty with respect to say the coal industry is to fast-track renewable energy and just regulate the carbon industry out of existence via transition process.
The financial transactions tax is a similarly fraught market solution which requires regulation rather than price mediation.
What is agreed is that a motivation to curb this mindless and unproductive ‘casino’ behaviour is a sound basis for policy.
A 2009 study from WIFO (Austrian Institute for Economic Research) – A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal – documented the explosion of global financial flows and derivative markets over spot markets since the 1990s.
WIFO describe this dominance as follows:
Observation 1: The volume of financial transactions in the global economy is 73.5 times higher than nominal world GDP, in 1990 this ratio amounted to “only” 15.3. Spot transactions of stocks, bonds and foreign exchange have expanded roughly in tandem with nominal world GDP. Hence, the overall increase in financial trading is exclusively due to the spectacular boom of the derivatives markets …
Observation 2: Futures and options trading on exchanges has expanded much stronger since 2000 than OTC transactions (the latter are the exclusive domain of professionals). In 2007, transaction volume of exchange-traded derivatives was 42.1 times higher than world GDP, the respective ratio of OTC transactions was 23.5% …
In other words, most of the financial flows comprise wealth-shuffling speculation transactions, which have nothing to do with the facilitation of trade in real goods and services across national boundaries.
Stephany Griffith-Jones considers that:
… a transaction tax helps diminish risks of costly financial crises by discouraging speculative behaviour and the short-term churning of assets. It is easy to implement, and can yield valuable tax revenue which can be used for financing investment. This in turn leads to inclusive and sustainable growth.
Note the reference to yielding “valuable tax revenue which can be used for financing investment”.
As noted above, the idea of a financial transactions tax goes back. After Keynes, one of his acolytes James Tobin (1972, then 1978) proposed a tax on foreign exchange and share transactions.
He first proposed it during a lecture at Princeton University in 1972 which was subsequently published in J. Tobin (1972) The New Economics: One Decade Older, Princeton University Press, 88-93. It was later developed in his Presidential Address to the Eastern Economic Association in 1978 which was published as J. Tobin (1978) ‘A proposal for international monetary reform’, Eastern Economic Journal, 4.
Whenever, progressives start talking about the need for a financial transactions tax they always tie it into fiscal shortfalls and how such a tax would allow a host of progressive things to be achieved.
They don’t seem to ask the question: Why can’t these things be achieved now? Why? They have been lured into the neo-liberal myth that there is a financial constraint on government spending and do not seem to understand that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency.
There is an asymmetry here. They advocate a government standing up to the powerful investment banksters (levying the tax) but cannot get their heads around the spending capacity of the same government.
In this vein, Stephany Griffith-Jones writes that:
… a Wall Street Speculation Tax to pay the college fees of less well-off students.
She says this was the idea of Bernie Sanders in the US but had support from his rival Hillary Clinton.
The question that goes begging: If paying the college fees for less well-off students was desirable then why doesn’t the Democratic Party advocate that upfront – as a core spending responsibility of the US federal government?
The reason is that they have a flawed understanding of the capacities of currency-issuing governments and are thus prey to the neo-liberal call, whenever a progressive cause is advocated, of ‘how are we going to pay for it’ or ‘how can we afford that’ or whatever variation the myth that governments can run out of money is perpetuated.
What progressives need to ingrain in their knowledge set is that taxpayers did not bail out the banks during the crisis and that taxpayers do not fund anything.
Modern Monetary Theory (MMT) shows that the motivation to “raise revenue” is redundant as the national governments are not revenue-constrained.
Please read my blog – Taxpayers do not fund anything – for more discussion on this point.
Taxes play an important role in the Modern Monetary Theory (MMT) argument given they provide the ‘real resource’ space which permits governments to spend (in pursuit of their socio-economic mandate) and command real resources without introducing inflationary pressure.
Taxes can also play an allocative role – to discourage use (tobacco, carbon etc) but relying on the price system is fraught.
Abba Lerner introduced the concept of functional finance into macroeconomics in the 1940s and beyond.
Lerner’s objective was to advance economic policy debate beyond what he called “sound finance” (which is the precursor of modern mainstream (neo-liberal) thinking).
Please read my blog – Functional finance and modern monetary theory – for more discussion on this point.
Essentially, fiscal and monetary policy decisions should be functional – advance public purpose and eschew the moralising concepts that public deficits were profligate and dangerous.
Lerner outlined three fundamental rules of functional finance in his 1941 article (The Economic Steering Wheel) and later his 1951 book (The Economics of Employment).
1. The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.
2. By borrowing money when it wishes to raise the rate of interest, and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.
3. If either of the first two rules conflicts with the principles of ‘sound finance’, balancing the budget, or limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.
These principles help us understand how to design a taxation system.
Taxation thus serves multiple purposes:
1. Creating real resource space in which government can spend without creating inflation. So the non-government sector has to be deprived of access to resources – that is, taxes reduce the non-government purchasing power.
If the primary role is to create the ‘real resource space’ that MMT highlights, is a financial transactions tax a sound addition to the suite of taxes that might achieve that role.
2. Equity effects – to help redistribute income according to ideas of justice and fairness.
Public purpose from a progressive perspective also involves equity and there are distributional consequences of different tax changes.
Is a financial transactions tax progressive, in that the burden falls more on the higher income earners? Stephany Griffith-Jones thinks so.
FTT is very progressive, as it is paid mainly by those with the deepest pockets … This is because ownership of financial assets is concentrated among the richest people.
Concentrating only on the ‘progression’ of the tax system is another often-found limitation of the progressive narrative. When we talk about progression in the fiscal system, we should not just think of the tax side.
We should also include the impacts of government spending on distribution as well.
So, for example, I have long supported broad-based Goods and Services Taxes with zero exemptions (which in itself is highly regressive) accompanied by very generous social wage spending measures (which would be very progressive) to achieve an overall progressive impact of the fiscal system.
Further, it is better to deprive the non-government sector of purchasing power using taxes that are simple to administer, difficult to evade.
3. Allocative effects – as above. It is possible that the introduction of a financial transactions tax would reduce but not eliminate some short-term capital flows, which raises the question, why allow them at all?
From an Modern Monetary Theory (MMT) perspective, the merits of the Tobin Tax should only be assessed in terms of its capacity to prevent destabilising and damaging financial market behaviour rather than ‘raise revenue’.
Tobin thought a small tax (below 1 per cent) on financial transactions would be biased against short-run speculative flows. For long-term investment, a small tax would be relatively minor compared to the total scale of the project.
But short-term speculators who are moving in and out of a currency sometimes within hours of taking their positions would be more exposed to the tax, given the number of transactions they make.
As noted above, if you really want to stop the damage from unproductive activity then the best way is to stop it (regulative decision) rather than discourage it (price system).
In the case of speculative or hot capital flows, short of declaring them illegal, a nation can impose capital control, which clearly discourage short-termism in foreign capital investments.
Iceland has demonstrated clearly that a small nation can take on the banksters using capital control. Please read my blog – Iceland proves the nation state is alive and well – for more discussion on this point.
A financial transactions tax would not have achieved the stability that the imposition of capital controls was able to accomplish for Iceland when its banking system collapsed in 2009.
The controls in Iceland (as in Malaysia in the late 1990s) certainly helped them stabilise the economy and put it back on a growth footing.
Which then raises the question is any speculative financial activity desirable.
In the blog – A global financial tax? – I outline how some speculative behaviour is desirable and can deliver productive outcomes.
The case I give is when a financial speculator is willing to hedge against the currency exposure of say a manufacturer who either has revenue or costs in a foreign currency.
So when a financial institution insures a manufacturer (or agent) against exchange rate movements, which are unrelated to the manufacturing firm’s business but impacts on it, then this insurance (speculation) can be beneficial.
I give an example in the blog cited above.
But the overwhelming volume of financial transactions are not in this category and fall into the undesirable and unproductive bin.
This raises the obvious question, that is begged by the discussions about the Tobin Tax is: why do we want to allow these destabilising financial flows anyway?
If they are not facilitating the production and movement of real goods and services what public purpose do they serve?
It is clear they have made a small number of people fabulously wealthy. It is also clear that they have damaged the prospects for disadvantaged workers in many less developed countries.
More obvious to all of us now, when the system comes unstuck through the complexity of these transactions and the impossibility of correctly pricing risk, the real economies across the globe suffer. The consequences have been devastating in terms of lost employment and income and lost wealth.
We have been lured into a system that privatises the gains and socialises the losses.
The introduction of a financial transactions tax will not eliminate that vulnerability.
From a Modern Monetary Theory (MMT) perspective there is no public purpose being served by allowing these trades to occur even if the imposition of the Tobin Tax (or something like it) might deter some of the volatility in exchange rates.
The solution is clear: All governments should sign an agreement which would make all financial transactions that cannot be shown to facilitate trade in real good and services illegal. Simple as that. Speculative attacks on a nation’s currency would be judged in the same way as an armed invasion of the country – illegal.
This would smooth out the volatility in currencies and allow fiscal policy to pursue full employment and price stability without the destabilising external sector transactions.
The proposal to declare wealth-shuffling of the sort targeted by a Tobin tax illegal sits well with the other financial and banking reforms I have discussed in these blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks .
And to bring us back to the earlier point, Stephany Griffith-Jones compares financial taxes to carbon taxes:
Like taxes on carbon emissions, taxes on financial transactions such as the UK stamp duty aim to curb socially dangerous behaviour
This is the problem: progressives have been lured into the ‘market frame’. That we need to address these great problems using the price system, which is a neo-liberal frame.
We can simply use the legislative capacity of the national government to outlaw things we think are damaging to well-being and serve no other function.
Reclaiming the State Lecture Tour – September-October, 2017
Here is the schedule for my upcoming book promotion and lecture tour in Late September and early October through Europe. As I get more specific details I will fill in the blanks below
- Thursday, September 21: Kansas City – International Conference of Modern Monetary Theory – see program for details.
- Friday, September 22: Kansas City – MMT conference, as above.
- Monday, September 25: Brighton (UK) – I will be speaking at a fringe event – Economics for a Progressive Agenda – associated with the British Labour Party Annual Conference.The venue is The Brighthelm Centre, North Road, Brighton, BN1 1YD and will be between 14:00 and 17:00. All are welcome.See – RSVP page.Also – The fringe event that promises to empower Labour’s Progressives against neoliberalism – for more details and background.
- Tuesday, September 26: London – Formal Book Launch of – Reclaiming the State – Newington Green Unity Church, 39a Newington Green, Stoke Newington, London, N16 9PR.The event will run from 18:30 to 20:30. All are welcome.Please see – Ticket Page (entry free).
- Wednesday, September 27: Berlin – Reclaiming the State launch combined with German language version of my 2015 book Eurozone Dystopia: Groupthink and Denial on a Grand Scale.Speakers:Prof. Dr. William Mitchell Author, University of Newcastle Prof. Dr. Heiner Flassbeck Former State Secretary for Economic AffairsDr. Dirk Ehnts University of Chemnitz Thomas Fazi Co-Author of “Reclaiming the State”, JournalistTime: 19:00Place: neues deutschland, Franz-Mehring-Platz 1, 10243 BerlinAll are welcome.
- Thursday, September 28: Madrid – details coming.
- Friday, September 29: Madrid – details coming.
- Saturday, September 30 Rome – details coming.
- Sunday, October 1: Ferrara – Presentation at International Writers Festival – details coming.
- Monday, October 2: Milan – Presentation at Milan Culture Festival – details coming.
- Tuesday, October 3: Helsinki – Meetings with activists etc.
- Wednesday, October 4: Helsinki – Dual Book Launch – Reclaiming the State (William Mitchell and Thomas Fazi, Pluto) and Exits and Conflicts: Disintegrative Tendencies in Global Political Economy (Heikki Patomäki, Routledge).Location: PIII in Porthania, University of Helsinki, City Campus.Time: 11:15 – 12:45.
- Thursday, October 5: Helsinki – Bill Mitchell Public Lecture at University of Helsinki, Main Building on Oct5 Oct at 16:00, in Lecture hall 5 of the main building of the university.
- Friday, October 6: Paris – details coming.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved