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Robin Hood was a thief not a saviour

I quite liked Robin Hood on TV when I was young. After each episode, there were famous sword duals in backyards, with usually some oppressive older brother playing the role of the sheriff and the youngest least defenceless kids were “his men”. The rest of us were the outlaws and we hid in bushes and sharpened dangerous bits of wood and fired them from powerful home made bows at the oppressors. Mothers had first-aid kits constantly in use. Neighbourhood girls were usually attracted to the outlaws which was always a useful by-product that the sheriff and his “men” seemed to overlook, although most of the “men” were too young to gauge the significance of this. Yes, 1960s suburban Australia. Anyway, Robin is back in town but this time some do-gooders are invoking his name to solve the problems of the world. However, none of their “solutions” are viable and are based on faulty understandings of the way monetary systems operate.

I last wrote about the concept of a Tobin tax in this blog – A global financial tax? – and I would read that in addition to this blog for a full view of what Modern Monetary Theory (MMT) position might be.

Anyway, there is gathering support for an excise to be levied on financial transactions. Part of the push is coming from an increasing awareness that short-termism or high frequency trading is now becoming dominant in global financial markets.

The UK-based Robin Hood Tax group have published a very interesting paper – Financial Transaction Taxes: Tools for Progressive Taxation and Improving Market Behaviour – which attempts to trace through the incidence of the tax.

The Robin Hood report summarises some salient (sourced) facts of trends in global financial markets:

  • “High frequency traders now account for 70% of US equity market trading volume and account for between 30%-40% of the trading volume at the London Stock Exchange”.
  • “High frequency traders reportedly account for 50% of US future market volume, 25% of foreign exchange volume are becoming increasingly important in options markets”.
  • “Banks account for only 13% of the trading volume at the Chicago Mercantile Exchange one of the largest and most diversified exchanges in the world trading in commodity, equity, energy, forex, interest rate, metals, real estate and weather products. Much of the balance is attributable to hedge funds”.
  • “Hedge funds represent more than 30% of the volume in high yield debt, 90% in convertible bonds, almost 90% of distressed debt and emerging market debt”.
  • “Hedge funds are the dominant players in the credit default swap market accounting for more than 60% of market volume”.
  • “Hedge funds are responsible for between 55% and 60% of transactions in leveraged loans”.

High-frequency trades are driven by algorithms automatically programmed to follow rules that can generate a multitude of (usually small) trades per second.

The Robin Hood report notes that:

In surveys of traders in foreign exchange markets, two thirds of them say that for time horizons of up to six months, economic fundamentals are not the most important determinant of trading prices. Instead they point to speculation, herding and ‘technical trading’.

An interesting insight into the way in which financial markets have evolved was provided by the US-based Aspen Institute in their policy document – Overcoming short-termism – which was released in September 2009.

They argue that even from a corporate perspective, short-termism in financial markets is broadly damaging. It said that:

… high rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains.

… fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term …

… the focus of some short-term investors on quarterly earnings and other short-term metrics can harm the interests of shareholders seeking long-term growth and sustainable earnings, if managers and boards pursue strategies simply to satisfy those short-term investors. This, in turn, may put a corporation’s future at risk.

They recommended an excise tax be levied on financial transactions to discourage short-term strategies.

So the Robin Hood movement is correct in being motivated to curb this mindless and unproductive behaviour but imposing a tax is, in my opinion, not the way to go. More about which later.

The topic has received national attention in Australia in the last week. On the ABC national radio current affairs program PM the other day (March 30, 2010) they ran a story Aussies campaign for Robin Hood tax and a derivative article from the journalist Stephen Long was entitled – Robin Hood tax ‘could feed millions’.

The last title is telling because it demonstrates how we focus on financial dimensions when we should be considering real dimensions. It is food that feeds people not “revenue”. I will explain as I go.

The story demonstrated two fundamental things. First, those who mean-well should understand the way monetary systems operate before running spurious campaigns. Two, conservatives who claim to be experts on financial systems lie.

Neither is very helpful in attempting to unravel the complexities of the issues being discussed.

The ill-informed

The next quote is from the transcript of the radio segment. The interview is between journalist Stephen Long and well-known philosopher Peter Singer, who is no monetary theorist. He is progressive on ethics issues but plays into the hands of the mainstream economists in his sortie into monetary theory and policy. Long is speaking first and is summing up the message from the video that the UK Guardian is offering on Tobin Taxes featuring actor Bill Nighy.

Advocates say the tiny tax would raise hundreds of billions of dollars to combat global warming, reduce poverty and repair the battered finances of governments after the GFC.

(YouTube excerpt)

ACTOR: So let me get this clear, a tiny tax on the banks could raise billions of pounds every year to help save lives in the poorest countries, fund crucial action against climate change around the world and help avoid cuts to crucial public services in this country?

BILLY NIGHY: Gosh, well, yeah, that, that is about the um, um sum of it.

PETER SINGER: Look we’re talking about a really tiny tax. We’re talking about, not 1 per cent, not a 10th of 1 percent, but a 20th of 1 per cent.

STEPHEN LONG: The ethicist, Peter Singer, is among a number of prominent Australians who have joined the global campaign.

PETER SINGER: Obviously I’m most interested in the fact that it can raise funds from all the world to help the world’s poorest people and to help pay for the damage that we’re doing to them through climate change.

But there’s also an economic argument, that it will reduce the volatility of international markets. That is, instead of huge billions of dollars being thrown around the world for a few moments here and there to earn a tiny profit, a very, very small tax would have an inhibiting effect on that.

So misconception is at the heart of Singer’s major interest – raising “funds from all the world to help the world’s poorest people”. The intent is clearly sound notwithstanding the trends in modern development economics at present where people like Dambisa Moyo and Bill Easterly eschew aid to less developed countries. I am very critical of their arguments but will leave that for another time.

There are two separate points here. First, if you think the high income earners have too much purchasing power then a tax is one way of reducing that. Second, if you think that the low or no income earners have too little purchasing power then you can address that directly with government spending. I prefer spending that generates employment for those who are without jobs as the first step.

Further, if you think that it is the responsibility of the high income earners to feed the low or no income earners then you should say that at the outset. But the argument is rarely presented in this way. It is always presented as a scarcity of financial means and so the “high income earners” are the only source of “spare cash” because they have so much. It is an argument that is somewhat fraught.

Additionally, if you think that the government is the primary vehicle for improving the lot of the world’s poorest people, which is underpinning these proposals, then you don’t have to tax anyone to help the world’s poorest people.

MMT shows us clearly that sovereign governments have the capacity to eliminate poverty with one keystroke on their spending terminal without recourse to “funding” should they be motivated to do so and should there be enough real resources available such that the spending can be “effective”.

Effective means that the spending actually can purchase real goods and services that will be suitable for the purpose. This is an essential aspect of what I term fiscal sustainability – if a government wants to advance public purpose – and that should be its only goal – then it cannot just spend wastefully and advantage power elites.

So while public purpose requires the governments to sustain adequate levels of aggregate demand such that everyone can get a job at decent pay (even if some can only work at the minimum wage), it also requires attention to the form that the aggregate demand support takes.

As an aside, a topical example of where stimulus support is not sound is the current emerging issue in Australia about the Schools’ Building Program. Despite the government’s claims to the contrary, it has actually been paying significant (read: exorbitant) fees to construction companies to ensure projects were fast-tracked under its capital works’ stimulus program. The payments have clearly gone into the coffers of huge and wealthy corporates which has reduced the social return flowing to the rest of us.

Anyway, back to feeding the poor. The alternative scenario, which is not often rehearsed in these Robin Hood suggestions is that there might not actually be enough food to go around. I am using the descriptor “food” liberally here given our discussion recently about the state of food provision in advanced countries which is controlled by huge multinational corporations. One might forgive the statistician if they allocated food production to the plastics industry output results in this context.

But if you think that there is not enough food available overall to provide adequate nutrition to all the world’s citizens then you do have to redistribute real resources to avoid introducing inflationary pressures. Taxes are good vehicles for achieving this end. But would a Tobin Tax be the best tax instrument in this regard – I think not. For a start, what will be the incidence?

Economists use the term tax incidence to describe who ultimately “bears the burden of the tax”:

The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply. For example, a tax on apple farmers might actually be paid by owners of agricultural land or consumers of apples.

Who bears the incidence is complex but I doubt that Lloyd Blankfein will personally lose very much as a result of the tax. The cost will be shifted to those who use the financial products.

The Robin Hood paper noted above, attempts to trace through the incidence of a Tobin tax. They conclude:

Based on this analysis the final incidence of financial transaction taxes will fall on a number of actors, in particular

– High net worth individuals invested in hedge funds
– Employees of hedge funds
– Shareholders of investment banks
– Employees of investment banks

A much smaller burden of the taxes would fall on

– Institutional investors such as pension funds
– Corporate and retail users of financial services

This is an issue that needs more research.

However, if there isn’t enough food to go around, then this is not a Robin Hood exercise based on a lack of financial capacity. It is a straight-forward exercise of depriving access to real goods (food) for some (the high income earners) in order to give that same food (given the shortage) to the poor who would otherwise (and do) go without.

I also think the terminology is unclear. Robin of Locksley stole from the rich to give to the poor and garnered support, so the TV series taught me, because of the perceptions of the common-folk and some of the nobility, that the monarchical system at the time was oppressive and evil. So stealing was considered a “just” response to oppression.

I sense that a lot of the do-gooders now are feeling similar things but the Sheriff and his mean are the bankers and the Tobin Tax represents the merry men of Sherwood.

Popular emotions are hardly the basis for sustainable economic policy and in that sense I think we should not be thinking in Robin Hood terms. If we think the bankers are worthy of an assault then lets devise an economic policy response that gets to the nub of the issue.

The MMT solution does this. It clearly delineates (in concept) financial (speculative) behaviour that assists international trade in real goods and services – so counter-parties which allow a trading firm to hedge foreign exchange exposure.

But then the question that is begged in 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?

The answer is they serve no useful purpose. They clearly have made a small number of people fabulously wealthy. They have also 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.

The correct policy response is the make these unproductive transactions illegal. There is no need to gain revenue from them.

If the aim of the tax is to create disincentives for the high-frequency trades then why not just make it illegal.

The deceivers …

The ABS program also interviewed one Sam Wylie who is a senior fellow at the Melbourne Business School and claims to be an expert in financial matters. He told the interviewer that he was against a Tobin tax because “(i)t has the potential to do quite a lot of damage and very little good”.

The interview went like this, with Wylie initially referring to some of the prominent Australians who are calling for the Tobin Tax:

SAM WYLIE: Well, there’s certainly some great people involved. I know that Tim Costello and, and Peter Singer, for instance are tremendous Australians and powerful intellects promoting this idea. But they’re not finance people. You know, they’re great in their, in their own fields but I really feel that they don’t understand the complexity of the modern financial system …

Well, you know, most of what’s going on in transactions in financial markets is hedging and not speculation. If you’re a company like Qantas, Qantas faces a, a lot of risk associated with the oil price and so they put in place a set of hedges to, to control the oil price risk that they face.

You know a Tobin tax says if you want to adjust your hedging position, you have to pay for that. A Tobin tax says to National Australia Bank who, who borrow money overseas in US dollars, bring it to Australia and lend it to Australian households to build and buy houses, if you want to hedge your foreign exchange risk, which they simply have to do, if you want to change your hedging position, you have to pay for that.

So it actually has the potential to do a lot of damage. People think that most of what’s going on in, in these transactions is really to do with wild speculation. But that’s just not right.

Well it is clear that Tim Costello and Peter Singer are not finance people as noted above. But Wylie – by his own words is holding himself out to the public as a person who does “understand the complexity of the modern financial system” is totally deceiving the audience with spurious information.

Either he doesn’t know what he is talking about or he has deliberately mislead the public in trying to say that the financial markets are all about supporting trading in real goods and services.

The data shows (Source) that “the volume of foreign exchange transactions is almost 70 times higher than world trade of goods and services”. Further:

In Germany, the UK and the US, the volume of stock trading is almost 100 times bigger than business investment, and the trading volume of interest rate securities is even several 100 times greater than overall investment.

Whichever way you want to interpret the data, Wylie is completely wrong. The vast majority of cross-border financial transactions do not support trade in real goods and services.

Fortunately, Stephen Long the journalist who put this story together for the ABC also interviewed an “expert on banking and finance law and policy” from UNSW, Professor Ross Buckley, who challenged Wylie:

ROSS BUCKLEY: Well, that’s simply not true. I mean nobody hedges for two seconds, right? Nobody hedges for nanoseconds …

You know a substantial proportion of transactions in modern financial markets are for less than a second. The asset is bought, held and sold. The total time period is less than a second. That’s not a hedge, that’s a gamble, like at the race track.

Wylie should resign immediately or be sacked.

Digression: Was there a recession in Australia?

The Australian Bureau of Statistics began publishing their Job Vacancies data again today after suspending its collection over 2008/09 as a result of cuts to their budget by the incoming federal government. The latter, if you recall (or don’t as the case may be), came into power in November 2007 all geed up with neo-liberal zeal that they were going to run a bigger surplus that the conservatives and therefore prove they were more responsible.

Their number one enemy at the time was inflation and they claimed that a larger surplus would help fight it. So where better to start cutting spending than to reduce the quality of the data collection capacity of the national statistician. It was a total joke. Among other problems this stupidity caused was that the sample for the labour force survey was decreased which rendered almost all the regional level data useless. A related issue was that the ABS stopped collecting job vacancy information.

Anyway, by early 2008, the economic crisis has hit and Australia looked like going the way of the rest of the World and eventually as part of the stimulus packages the ABS had their budget restored enough to increase the labour force sample and to reinstate the Job Vacancies Survey. A major tick for fiscal stimulus!

However, as the ABS tell us today:

This is the first issue of Job Vacancies, Australia since May 2008 due to the suspension of the Job Vacancies Survey (JVS) in 2008/2009.

Caution should be used when comparing estimates from November 2009 onwards with estimates for May 2008 and previous periods, due to the changes outlined below.

To overcome the missing observations, I have done what I guess most users of the data will do and interpolate the 5 missing quarters between August 2008 and August 2009. The result doesn’t look to be in violating to what happened given that the suspension came just about at what would have been the turning point in the labour market anyway.

But when you plot the Unemployment to Vacancy ratio, which has been a popular measure of the “tightness” of the labour market (higher ratios = looser labour markets) the last year of so doesn’t look at all like our previous two recessions covered by the data (which starts in May 1979) in 1982 and 1991. The following graph is provided for interest (the red segment is where I interpolated the unavailable vacancy data).

So scholars in the future who didn’t live through this period would be excused for concluding that there wasn’t much of a downturn at all in Australia in the 2008-10. They would be wrong because the UV chart is unemployed persons per unfilled vacancy. There has been a fundamental shift in the way the labour market operates since 1991 and now underemployment has emerged as being a major problem.

In the current recession, firms adjusted working hours downwards without the commensurate adjustment in persons employed. While this sort of hours adjustment is typically associated with labour hoarding (keeping skilled or overhead staff on full pay but shorter hours) the current experience was not of this ilk.

Instead, employers took advantage of the rising precariousness of work which in recent years was accelerated by the pernicious WorkChoices legislation introduced as the final act of bastard madness by the previous conservative government which made casualisation of the workforce easier to achieve. Accordingly, firms can now force shorter-time without pay onto workers and that is what they did.

The implications of this shift in labour market behaviour has wider research implications. As one who has done a lot of work in the Phillips curve area (estimating wage and price adjustment functions) I now have to rethink that. In fact, we are working on a new model where the labour market tightness variable is broader. I published work on this about 5 years ago as the trend was becoming obvious and found then that underemployment disciplines the wage inflation process in addition to unemployment. The latter effect at that stage was stronger and we are now investigating what the situation is five years later.

The other interesting data series released this week by the ABS (as mentioned yesterday) was the Retail Sales data for February 2010. It showed that the recent slow-down in retail sales has continued with a 1.4 per cent decline (seasonally-adjusted) for February following a 1.1 per cent increase in January 2010 and a 0.8 per cent decrease in December 2009.

Of all the data series that demonstrate the influence of the fiscal stimulus packages, this one is fairly categorical. Have a look at the graph below. The right-panel is the monthly percentage change in retail sales for Australia while the left-panel is the turnover in $A millions. The blue line in the left-panel is seasonally adjusted whereas the green line is the trend. The sample is from January 2007 to February 2010.

The blue arrows depict when the two stimulus packages came into force. The first in December 2008 provided consumers with a hand out of $900 unencumbered. The second announced large capital works outlays and helped increase the consumer sentiment indexes that are published. And as the fiscal impact dissipated retail sales the effect is very noticeable.


It would be futile to deter speculative behaviour that assists international trade in goods and services even though from a MMT perspective the benefits of trade are evaluated differently.

The other 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.

So I don’t see any 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.

Solution: 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.

Further, as noted above all the revenue arguments used to justify the Tobin tax are spurious when applied to a modern monetary system.

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 .

That is enough for today!

This Post Has 22 Comments

  1. 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.

    It seems the strategy many developed countries have been following is to loose that part of the economy which suffers most from such transactions (the real economy) and to keep that part which benefits most (finance) and then to buy back real produce from the ‘losers’ at low cost. The crisis has shown to everyone willing to look that hardly any of the wealth accumulated by this shift has trickled down to those talked into voting for it. But what you are asking for is that those countries who profited most in aggregate sign a contract that would ban their holy cash cow altogether. My political antenna tells me this (sensible adjustment) is highly unlikely. The Tobin Tax on the other hand seems a well-meant but feeble attempt to have it both ways.

  2. Choice quote from an investment guru on CNBC today:

    “Our clients want to know how many minutes are left in the rally.”

    As opposed to – it’s too early to tell with respect to the impact of the French Revolution (Zhou en Lai).

  3. It is hard to overestimate the degree to which our (US) Supreme Courts metonymy in ruling money the equivalent of speech has corrupted our politics.

    As Keynes succinctly put it “when the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill done”. And yet the casino is where the money is and ipso facto where American political speech has gone. That is how we got here.

    It is a bit more challenging to see how to engage the resulting politics to effect positive change. I quite agree that outlawing gambling with the worlds real productive capacity should be obvious and essential, but real productivity has not produced cash flow that can compete politically with the casino operators in my lifetime.

  4. Peter Singer is “progressive on ethics issues”?!

    Well, I guess if you consider “monstrously evil” a synonym for “progressive”, he is.

  5. “Solution: 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.”

    Is this really feasible? I mean getting European and Latin American governments to agree on some basic rules governing banana imports/exports has taken more than twenty years. What would happen if some governments declared these speculative transactions illegal and others didn’t? The Argentinian experience seems to indicate that countries are not as dependent on foreign direct investment as some of the speculators would have us believe, but Argentina is a resource rich country. What about smaller, less well endowed countries? For example, countries in the Middle East like Israel and Egypt are highly dependent on their tradable goods sector to provide them with resources necessary to offset their lack of water. I’d be worried that if world-wide coordination was not possible the trade position of individual countries could be hurt. And realistically what chance is there of world-wide coordination? Related to this, who defines what transactions are speculative? It seems that unless a universal definition could be created coordination would be unlikely.

  6. It seems to me as a non-economist that there are several issues involved that intersect, namely supply, demand, and incentives. Good economic policy should balance these using fiscal policy to manage NAD, monetary (interest rate) and fiscal policy to manage productive investment, and positive and negative incentives to favor productive investment and sustainability over financial speculation, as well as to promote stability.

    Supply siders appear to be correct in claiming that productive investment creates good and services and the income to purchase them. demand siders are also correct in pointing out that government deficits are needed when the public’s propensity to save or the external account deficit results in a shortfall of NAD relative to real output capacity. Therefore, MMT argues that fiscal policy needs to balance NAD with capacity utilization, which also aligns full employment with price stability.

    There are two other factors that enter the picture from the financial side. First, banks control the endogenous money supply through credit extension, over which government has little direct control. Secondly, according to Minsky, stability breeds instability. Therefore, government needs to deign incentives for the financial system that encourage “good” behavior and discourse “bad” behavior in order to prevent excesses from disrupting the system. This involves using tax policy, legislation and regulation, and oversight and accountability.

    These are not only national needs but now international ones as well as globalization proceeds. This means that government must not only affect NAD in the underdeveloped and emerging nations, but productive investment, too, for the two work in tandem.

    Presently, the task is largely left to the “invisible hand” of free market, free trade and free capital flow capitalism. However, as Joseph Stiglitz recently remarked, “There is no invisible hand.” As he and Jeffery Sachs, as well as others both liberal and conservative, point out, this is not working globally. Poverty and its effects are rife, even though the resources are presently available to overcome this – as R. Buckminster Fuller and others asserted decades ago. This is an ongoing ethical travesty.

    I sympathize with Peter Singer since my field is also philosophy. Previous to learning about MMT, I also regarded a Tobin tax as a good idea ethically. Now, I can appreciate the counter-argument that MMT makes.

    However, this leaves the dimension of controlling the level of financial speculation relative to productive investment. One of the problems today is that the proportion of financial capital to productive capital is out of balance, with the result that real output and innovation are curtailed. HFT is one symptom of this syndrome. Another is the proportion of credit that banks are extending for financial speculation relative to production.

    I would like to see some comprehensive MMT approaches to integrating these needs of the developing global economy and financial system. Since MMT is politically neutral, there would be a number of ways of structuring such an approach on sound operational principles. While I generally agree with Bill’s approach, I realize that there are others that don’t. “Let a hundred flowers bloom,” as long as the proposals are operationally sound. Then, they can be debated intelligently based on political preferences, some people more suspicious of government than businesses and banks, and vice versa.

    However, I see no alternative to redirecting a great deal of financial speculation into productive investment through incentives, and even disallowing certain behavior that is deemed systemically unnecessary (inefficient and ineffective) and even dangerous to stability. I also see no alternative to government fiscal policy being directed toward productive investment as well as NAD, especially where nongovernment is unable or unwilling to make needed investment. There is also a critical need for an incentive structure that promote sustainability.

    This needs to be fashioned as a comprehensive economic policy for two reasons, economic and political. first, an integrated and operationally sound economic policy is necessary if the policy is going to work in a balanced way. Secondly, policy requires a political solution that can be enacted and implemented. Such a policy has to sold to the diverse interests involved. That means that it has to be win-win. By integrating supply side based on emphasis on productive investment and demand side with emphasis on full employment with price stability, both sides can come out ahead.

  7. It is not clear to me how one gets a smoothly operating currency market (and other types of capital markets) without some speculation. The two are intertwined and hard to tell apart. In the stock market, most IPO’s are highly speculative, not to mention corrupt, but remain a basic investment & liquidity conduit. So declaring it all illegal seems ham-fisted and impractical in addition to being utopian.

    I’d would suggest that MMT support the Tobin tax, but at a sufficiently high level (1%, 5%?) that would effectively differentiate between marginal and productive long-term activities. As Bill mentions, this has nothing to do with revenue needs, but should only be judged on its capacity to squeeze the casino of high finance.

  8. NKlien:

    “What about smaller, less well endowed countries?” Exactly, (although I would phrase it as “differently” endowed) this is why countries historically developed local cultures and why global finance wants them to adopt Western ways of living (as a side note – this is one theory describing the basis of the Middle East/Asia conflicts) – which drives those countries into developing a specialized export culture to obtain “necessities”. Also increases population beyond local sustainability, inequality, etc., etc. We might say that one function of the global super slums is to inject such a human cost to readjustment that appears no choice but to stick with the global economy (for short-term relief at the expense of long-term no fundamental change). This is the space of the neo-liberal.

    To the extent that countries are willing to take the risk to reject this (and to absorb the resultant pain), then they can adjust their living styles/requirements as needed. It is a political question and sounds very unlikely, but you never know, stranger things have happened. Humans are resilient.

  9. Bill, I don’t think this is one of your better posts. “Make it illegal unless a legitimate need can be shown,” may sound good, but stop and think about the implementation. Shown to whom? Every time two parties want to conduct a financial transaction, they have to write up a justification and send it to some government agency, then wait for approval? Or were you going to leave the law unenforced until after the system blows up, then try to figure out which transactions shouldn’t have been allowed, post-hoc?

    A Tobin tax in the financial system is like friction in a physical system. There are lots of physical systems that are unstable or chaotic (in the mathematical sense) without friction, but quickly settle down to small and staid attractors when even a small amount of friction is introduced.

    In finance, presumably very little legitimate business would go undone because it became unprofitable with a 0.05% tax. Yes, that friction is a cost, though I ‘spect it’s a smaller cost than the time/paperwork/uncertainty of trying to “show legitimate need”. (Could I purchase insurance against the regulatory risk that my application for a transaction would be denied?) But the great bulk of “high-frequency” trades are done with a profit expectation much lower than this. So a Tobin tax would disincentivize most high-frequency trading out of existence. And if someone uses algorithms to identify assets that they believe are mis-priced by more than 0.05%, I’m fine with that. There’s still a place for spotting outliers, but “surfing the noise” is no longer profitable.

  10. While we’re being patently unrealistic, what would be the down side of governments agreeing to only back deposits for individual humans and credit only for real world exchanges of goods and services? I know that “real world” definition, however written, could be gamed pretty well but in a pinch the government would mostly be keeping the real wheels of commerce greased while the roulette table spun off into the ether…

  11. Dear lilnev

    Thanks for your comment.

    The reality is that we ban a multitude of broad classes of activity all the time and we entrust regulative authorities to do that and enforce it. I can think of many financial transactions that are easily identifiable at present which are not the slightest bit related to enhancing productive activity.

    It isn’t as big a practical issue as you might think. The problem is that politically it is not possible. But my role as an academic is to lay out ideas not necessarily practical implementations.

    best wishes

  12. Dear Jimbo

    We could have a discussion about this but it would take us off into unproductive terrain where I would just be giving opinions as a citizen rather than as a profession. He is termed progressive in Australia. Whether he is or not is not the point – he is no economist.

    best wishes

  13. “As an aside, a topical example of where stimulus support is not sound is the current emerging issue in Australia about the Schools’ Building Program. Despite the government’s claims to the contrary, it has actually been paying significant (read: exorbitant) fees to construction companies to ensure projects were fast-tracked under its capital works’ stimulus program. The payments have clearly gone into the coffers of huge and wealthy corporates which has reduced the social return flowing to the rest of us.”

    Bill, I would not disagree that corporates have taken advantage of the governments sense of urgency for rapid delivery in order to gouge but I think we need to be cautious in describing this particular piece of stimulus support as unsound.

    As we know, the media see it as their patriotic duty to denigrate all stimulus-funded projects as ” a waste of taxpayers money” – those of us in favour of government shifting their focus to more active fiscal policy face an uphill battle trying to convince people of the potential merits while those who have ownership and control of the dissemination of most of the information that the public are exposed to are overwhelmingly negative on the issue. So it does not help to focus on the fact that delivery was not (and never will be) perfect in any sense.

    Firstly, gouging by unscrupulous private operators could no doubt have been minimised had the programme proceeded more slowly – but the perception was that we were facing clear and immediate danger and delivery needed to begin as quickly as possible. I witnessed large numbers of people here lose their jobs as construction projects simply shut down – the school building programme likely absorbed at least some of them (not enough, sadly).

    Isn’t it better that the programme offset at least some of the unemployment that was occurring? And allowed the normal flow-on of wages to other sectors (ie retail) to continue to some degree at least?

    Secondly, as a long-time employee of Education Queensland my experience has been that if it were not for the school building programme, the odds of us ever recieving the resources that we are now recieving before I finally retire (in 20+ years) would be somewhere in the realm of zero percent. They will be of GREAT benefit to the school community and once they are fully in place, more uses and benefits become apparent.

    In summary, while I think there has been price gouging – perhaps some of it quite serious – do we argue that this makes the creation of a partial safety net for construction workers jobs and the delivery of very useful school resources that would likely not otherwise be delivered in our time is fundamentally unsound?

    We should acknowledge the programme’s shortcomings (in the context of a government that felt that we were staring down the barrel of a possible economic meltdown at the time) and discuss how we can now make improvements while highlighting the benefits as an example of the positive attributes of fiscal activism.

    Leave the ignoring of the positive and wildly trumpeting of the negative to the media – they seem to feel that is their job, and they are pretty bloody good at it too!

  14. An ethical case for taxing the wealthy is that the taxation is required as a defense of financial wealth denominated in money units, and the wealthy are, by definition, the primary beneficiaries.

  15. Wylie should resign immediately or be sacked.
    Bill, if you were his employer you would sack him for getting things wrong? I doubt many people who have had the right to hire and fire would be sacking people for getting it wrong. Even when they are the expert. Sacking this way will result in a lack of ideas being offered. Your employees would be too scared to contribute. Better to make the error part of the discussion to find the best possible solution. I appreciate the guy taking a chance and sharing his ideas.
    On the subject: Using tax to redirect capital to productive sectors may have better effect and may gain more supporters. Personally I favour sliding scale tax starting high and diminishing over time on financial and capital gains profits to reward long term investors and redirect speculators excess wealth to productive (job creating) business ventures. The Goldman’s of the world are doing what buisness risk takers should do> take big risks for profit. Redirect this resorce to real production by intorducing tax dissincentives on non productive transactions. The goal may not be to collect any tax at all but to acheive a redirection of capital. Tax em high I say. .05 is not even a round of drinks.

  16. Bill –

    Yesterday you were advocating governments exercising power through markets. Now suddenly you’re advocating denying people the opportunity of using markets other than in the way you’d like them to.

    Could this be because your theories only work when people behave the way you want them to? A lot of economists do seem to have fallen into this trap!

    Remember, just because you can’t see an advantage to the presence of short term speculators doesn’t mean there isn’t one. And the financial crisis was caused by banks and insurance companies, not hedge funds.

  17. Dear Aidan

    Thanks for your comment.

    You said:

    Yesterday you were advocating governments exercising power through markets. Now suddenly you’re advocating denying people the opportunity of using markets other than in the way you’d like them to.

    In fact that is not a correct depiction of what I was advocating. My advocacy in both posts was to eliminate the market where it serves no public purpose which I define in terms of advancing the real economy. I imagine that the goal of advancing the real economy – more income and employment – is fairly broadly shared.

    Wednesday’s post on Operation Twist was also showing the options that the central bank has if the government continues to issue debt and the bond markets are undermining its pursuit of public purpose. I think it is important that people understand that the fact the central bank doesn’t take this option and that bond markets squeeze yields up is a choice of government not something intrinsic to the operations of the fiat monetary system.

    So that was education not advocacy.

    You then said:

    Could this be because your theories only work when people behave the way you want them to? A lot of economists do seem to have fallen into this trap!

    Not in the slightest. Modern Monetary Theory works irrespective of what I want. My advocacy is about how to take advantage of the possibilities that the monetary system offers in ways that are being eschewed at present to the detriment of all but a few. MMT is not my opinion but a operational model of what is. My opinion (advocacy) utilises the understanding that MMT provides to argue for specific policy options. The problem is that most people don’t even understand how the monetary system works but still advocate policy options based on false understandings.

    I would like to hear from you about what are the advantages to the real economy of speculative financial transactions that do not make it easier for the real economy to function. I cannot think of one!

    Finally, you say that:

    the financial crisis was caused by banks and insurance companies, not hedge funds.

    There is very little difference these days between all these institutions. Banks are more like hedge funds than banks. The problem is the deregulated structure of the entire financial system and the types of products that are allowed to be traded.

    best wishes

  18. Dear Lucky Punch

    Wylie is claiming to be an expert in financial markets and knows full well that the financial flows are some multiples of the trade flows (or total output flows). He would know that a vast bulk of speculative behaviour is not linked in any way to the real economy. Therefore he is misleading the listeners who probably do not know these things and will adopt a faulty understanding to these issues and policy options. I suggest you write to “my employees” at CofFEE and ask them what their workplace is like.

    On the question of tax versus regulation – they both have advantages and disadvantages. My preference is to regulate certain transactions out of existence and then the funds will have to go towards productive ventures. But I agree we need to redirect “capital” not raise funds.

    best wishes

  19. Dear Lefty

    We agree. I am not buying into the fiscal policy is dead argument that the conservatives want to mount. I think the investment in the schools will deliver benefits and overall is a good thing to do. But the problem for progressive economists is that this period is the first in a long-time that governments have been willing to stimulate their economies with expansionary fiscal policy. For years, unemployment has been persistently high because the overwhelming consensus among economists and policy makers has been that fiscal policy is error prone, wasteful, cannot be turned on quick enough, etc.

    Now we finally see it in action again and many of these “mistakes” are being made. It is heart-breaking to those who have argued for years for fiscal intervention. The lesson is that you have to have capacity within government and forward-looking projects always in store so that you can introduce a rapid new stimulus when needed. The neo-liberal years have eroded that capacity and of-course governments made mistakes – not in intent but in implementation.

    A good policy combines intent, scale, and the implementation.

    So while the costs are distributional (pushing cash into the hands of the wealthy corporates) the benefits have been substantial and the fact we avoided the recession (technically) is something we should be cheering about.

    best wishes

  20. 1. Regarding underemployment I want to make the following observations. Using my framework, we can distinguish underempoyment, for purposes of analysis, as the outcome of exclusion which means a) discouragement of labor force participation and b) rationing of employment hours by firms. On the other hand, involuntary unemployment is the vertical outcome of limited generation of employment of labor and hours, given the level of effective demand. Voluntary unemployment is the horizontal outcome of unemployment from allocation costs ( search, technical, other frictions, etc.). These are 4 sources of employment restrictions that we can analyze without theoretical confusion altough empirically there are many problems.

    2. Speculation is a character contradiction of a capitalist system operating with a privacy orientation( interest,competition) motivated to exploit complexity entanglements of behavioral response. Any particular prohibitions will lead to a search of alternative innovations (Minsky), functionalities, structured products and accounting procedures open for discovery and exploration that can by pass the regulations and prohibitions.

  21. Interesting indeed to see a post veer so closely to the heart of the matter. Since I’ve only been lurking for a short while, ‘finally’ would be an exaggeration. I confess ignorance of the principals of MMT (because I have theories of my own.) And this post displays a serious ‘red flag’ concerning the rules regarding money (pardon my eccentricity, but as I see them.)

    Ironically, this brings us full circle to the fore mentioned ‘opening’ for this comment. As you point out above, money is a ‘legal construct’, making it an ‘agreed upon’ object… What is left unsaid is how few of us got to participate in that process, a factor responsible for some gaping holes in the, er, definition and applications of what constitutes money (a phenomenon other commentors point to.)

    I interject only to pose the question of why bother with taxation at all? Some may counter with why bother with money at all, but I believe abandoning the ‘regulator’ would have serious consequences.

    Taxes only exist to satisfy (in most cases lavishly) the ‘middlemen’. Mother Nature doesn’t have a cash register, resources are free. I know you all are aware that the collection and processing of these resources are part of the, er, ‘owner’s’ income stream. so the (imaginary) ‘cost’ of processing the material is passed on (plus profit) to the end user.

    Arguably, taxes support the ‘common good’ (although they do some people more ‘good’ than others…) So abandoning taxes would require we abandon another, er, illogical construct…for profit enterprise. (Society does not need ‘profit’ to operate.)

    Um, I understand you discuss capitalism here, and there probably isn’t much room for ‘outside the box’ thinking.

    Sadly, there is no ‘half step’, either we learn to share what there is or we slit each other’s throat in the night. Not much of a choice but there it is…

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