Wednesday, February 17, 2010

Penny Wise on the Robin Hood tax

A guest post from economist Penny Wise.

Oh dear, Finlay MacDonald on economics and finance is even funnier than Chris Trotter. He should pause for a wee think before he types:
. . . since so much of the world’s total corporate profits now derive from unproductive speculative trades and other money-go-rounds. . .
Er, no, that cannot possibly be right. The major players in the financial markets – trading in foreign exchange, bonds and shares – are all trading one against the other, so if one wins on the so-called “speculative” trade, then the other loses. Therefore they cannot possibly all be making massive profits from such trades. Some are from time to time, of course. But therefore at those times some others will have a very bad year. So maybe they are in fact providing a useful service to others, in particular providing great liquidity in markets – i.e. when you want to sell, somebody is ready to buy.

On the idea of a Robin Hood tax, a tax on financial transactions such as the massive amount of trading on the world’s foreign exchange markets, Finlay writes:
One benefit of this – aside from curbing the sort of market panics that trigger major crises and ruin ordinary people’ lives – would be the diversion of investment back towards the productive sectors.
Well, in fact it is more likely to increase panics, because it would reduce liquidity. If there are fewer people willing to take the risk of buying when you urgently need to sell, you get bigger price fluctuations, not smaller.

As for the Robin Hood part of this idea, Tim Worstall reminded us that you may tax companies, but ultimately that tax is paid by consumers of their services.

Finally, Finlay on big bonuses:
. . . how else to explain a banking sector that could revive its morally obscene bonus culture within months of being bailed out with billions upon billions of public dollars?
I fear Finlay has no idea what he is advocating. These large investment banks have a remuneration system which makes most of the employees quasi-shareholders. Typically you will see base remuneration held down (still very high by most standards), but being topped up by a bonus pool that is about 50% of profits, before bonuses are paid. So to suggest that it is obscene to pay out these bonuses is simply to insist on even more “obscene” profits for the shareholders of these companies. You have to make the profit first, before you can pay the bonus.

It is amusing to find Finlay arguing in favour of the rich-prick capitalists and against the workers.


Paul said...

I am now feeling rather embarrassed, since - in a moment of rashness - I joined a Facebook group which advocates for a Tobin tax. Thanks to your arguments, I now realise what a silly idea is such a tax.

Stephen Stratford said...

Thanks Paul - I gather that you changed your mind in response to Penny's arguments rather than mine a day or so earlier, but I shan't hold that against you. She can be very persuasive.

Paul said...

It was a double whammy.