Krugman: Financial Transactions Tax/ David Sirota: Lost Pentagon $2.3 Trillion


Few economists have done as well as Paul Krugman in voicing accurate predictions and policyadvice to the political process. Unfortunately the President has not often seen to take his advice and gone with the same Wall Street advisors who got us into this mess. Here is Krugman’s latest column from 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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From David Sirota’s regular column,

Colbert Conservatism

Pop quiz — name the political leader who said the following:

“We must be willing to pull the plug before sinking more dollars into weapons that do not provide what our warriors need.”

Now name the leader who said this:

“(W)e cannot track $2.3 trillion in (Pentagon spending) … We maintain 20 to 25 percent more base infrastructure than we need to support our forces, at an annual waste to taxpayers of some $3 billion to $4 billion … There are those who will oppose every effort to save taxpayers’ money … Well, fine, if there’s to be a struggle, so be it.”

I’m willing to bet many self-described “conservatives” guessed Ralph Nader and Dennis Kucinich. I would make that wager based on the enraged response to my recent column about government data showing that our waste-ridden, $600-billion-a-year defense budget will cost about seven times more than the health care legislation currently before Congress.

In e-mails, letters and website comments, right-wingers didn’t vent anger at Pentagon profligacy, but at the criticism of Pentagon profligacy — as if brazenly throwing away billions on outdated weapons systems and obsolete military programs is now a “conservative” value. Notably, the vitriol didn’t include contrary numbers disproving the figures I referenced (none exists) — the responses just used Fox News-ish slogans like “the cost of freedom” to deride all criticism of Pentagon spending as unpatriotic ultraliberalism.

Of course, if that’s true, then Stephen Colbert’s refrain that “reality has a well-known liberal bias” is now less a laugh line than a devastatingly accurate commentary on the deranged terms of America’s political discourse. I say that because here are some objective, nonpartisan, non-ideological facts:

— The 2010 Pentagon budget means “every man, woman and child in the United States will spend more than $2,700 on (defense) programs and agencies next year,” reports the Cato Institute. 

“By way of comparison, the average Japanese spends less than $330; the average German about $520; China’s per capita spending is less than $100.”— “(The Pentagon budget) dwarfs the combined defense budgets of U.S. allies and potential U.S. enemies alike,” reports Hearst Newspapers.

— “President (Obama) is on track to spend more on defense, in real dollars, than any other president has in one term of office since World War II,” reports National Journal’s Government Executive magazine.

— In 2000, the Pentagon admitted it has lost — yes, lost — $2.3 trillion. In 2003, the San Francisco Chronicle reported that a subsequent Department of Defense study said it was only $1 trillion. To put such numbers in perspective, contemplate what those sums could finance. $1 trillion, for instance, could pay the total cost of universal health care for the long haul. $2.3 trillion would cover universal health care plus the bank bailout plus the stimulus package.

Obviously — obviously! — these points are no cause for alarm and certainly no cause for defense spending reductions, right? All they must prove is that the archconservative Cato Institute, William Randolph Hearst’s newspaper chain, National Journal employees and Pentagon officials are secretly America-hating liberals. And — obviously! — so are two of the most aggressive neoconservative hawks ever to hold government office, Sen. John McCain and Defense Secretary Donald Rumsfeld. After all, they’re the ones who issued those scathing statements about wasteful defense spending in the pop quiz above. That means they’re actually terrorist-appeasing lefties, right?

Really, how could anyone other than traitorous communists see the data and then consider backing the mildest Pentagon spending cuts? I mean, come on — in a country whose paranoid conservative movement now makes a dead-serious ideology out of Stephen Colbert wisecracks, how dare any red-blooded American even think of pondering basic budgetary facts?

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