The Dean Baker Solution

Hmmm.

In the absence of a major regulator overhaul, there is one simple measure that would at least ensure that the public gets a cut of the action. A modest financial transactions tax could easily raise an amount equal to 1% of GDP, or $150bn a year at present. This is real money – enough to finance a 10% across-the-board reduction in the income tax.

A tax of 0.25% on a stock trade or 0.02% on the purchase of credit default swap will have no measurable impact on productive financial transactions, but will likely put a serious dent in speculative activity. For this reason, it is a win-win-win proposition. It reduces speculation, it takes a big bite out of Wall Street revenue and profits and it raises a bucket of money. If anyone has any better ideas, they are keeping them to themselves.

What Dean is suggesting is essentially that New York should impose a wider version of the Stamp Duty which London has on share sales. Which has two interesting corollaries. The first is that we\’ll of course see leakage of the market away from places which impose such a tax: just as the original Eurobond market grew in London after New York imposed a witholding tax, or the boom in contracts for difference in more recent years in London. The second is that there\’s a large movement in London to scrap stamp duty itself, as it makes the markets themselves less efficient….and the major losers over the years are those investors saving for their own pensions.

But hey, why not do it anyway? Drive more of the US markets to London to the enrichment of the UK, wouldn\’t it?

Oh, by the way, is there actually any reason why we would want to curb speculation? Isn\’t it in fact a rather useful thing, moving, as it does, risk around and prices inter-temporally?

10 thoughts on “The Dean Baker Solution”

  1. Speculation is of course useful and almost impossible to regulate effectively. But aren’t their dangers to the wider economy that need considering.

    Isn’t an important part of the sub-prime problems the moving of risk around in a way that was profitable in the short-term but disastrous in the long-term.

    The price of oil nowadays also seems to reflect not the simple demand and supply for oil but the increased demand for oil futures contracts as funds flee under-performing asset classes. Its very profitable in the short-term but at what cost to the world economy.

    Tim adds: Hmm, well my view of sub-prime is that in moving the risk around securitisation (which isn’t speculation, btw) did exactly as promised. It moved the risk around. That wasn’t, to my mind, the problematic part at all. What was was the mispricing of risk which took place at the same time. We’ve had (in the US market at least) the securitisation orf mortgages for decades without such problems. The mispricing wasn’t caused by securitisation: it simply coincided with an expansion of it.

  2. “The price of oil nowadays also seems to reflect not the simple demand and supply for oil”

    That word “seems”. I’d like to see that explored further.

    We don’t, as a rule, choke off bubbles as they grow (for fear of not knowing if they are bubbles or not), and we don’t burst them when they’ve grown (e.g. internet stocks, houses) so why should an oil bubble (if it is such) be any different? Are high oil prices doing more damage to the UK economy than the debt and housing bubbles have?

  3. I would argue that the damage from the dot-com and housing bubbles were more limited. If people are silly enough to buy houses at the peak of the market, or lastminute.com shares it is their own stupid fault. (I did both)

    The “bubble” in oil and some other commodities may have a far larger effect. The market should punish you for bad decisions – the problems are when it punishes others.

    I think reglulation would probably do more harm than good but it doesn’t mean there isn’t a problem.

  4. I’d have thought high oil prices are doing more damage to the US economy than the credit or dot-com bubbles. In both the formers I imagine the country as a whole gained, by selling bonds or equities to foreigners, and although obviously there were distributional effects within the country I don’t know if they were that large if you don’t compare them to the (largely) paper peaks.

    The oil price however at these levels, given the US imports something like 12m barrels of crude a day, is a direct transfer of $1.2bn a day additional from the US to foreigners.

    Tim adds: Dunno…..I always find it difficult to believe that voluntary exchage is damaging to an economy.

  5. RV,

    I would probably have phrased that the other way round, i.e.

    “it doesn’t mean there isn’t a problem, but I think reglulation would probably do more harm than good”

    i.e. Your proposed solution won’t help whether there is or isn’t a problem, so let’s not adopt your “solution”.

  6. BlacquesJacquesShellacques

    ‘sub-prime problems ‘ by which is meant that some people lost money. That’s not a bug, it’s a feature.

    It is not possible for all investment decisions to be correct and it is therefore necessary that there be a consequence to making bad decisions. What possible alternative to ‘losing money’ is there?

  7. Tim adds: Dunno…..I always find it difficult to believe that voluntary exchage is damaging to an economy.

    The credit and dot-com bubbles weren’t based on voluntary exchange?

    Anyway I’m sure the US gets more utility from its huge oil import bill than it does from the dollars that are being sent abroad to pay for it, but that doesn’t mean the rise in price from $30 to $130/b isn’t damaging, does it?

  8. The oil price however at these levels, given the US imports something like 12m barrels of crude a day, is a direct transfer of $1.2bn a day additional from the US to foreigners.

    An awful lot of this money ends up back in the west as investments and expenditure. If Brits and Americans are managing the vast wealth of Arabs and flogging them overpriced cars and properties, then Brits and Americans are making money too.

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