The tax would discourage speculation without impacting long-term global investment decisions
Published on Business Standard, by Dani Rodrik, Sept. 19, 2009.
Something happened in late August that I never thought I would see in my lifetime. A leading policymaker in the Anglo-American empire of finance actually came out in support of a Tobin tax — a global tax on financial transactions.
The official in question was Adair Turner, the head of the United Kingdom Financial Services Authority, the country’s chief financial regulator. Turner, voicing his concerns about the size of the financial sector and its frequently obscene levels of compensation, said he thought a global tax on financial transactions might help curb both.
Such a statement would have been unthinkable in the years before the sub-prime mortgage meltdown. Now, however, it is an indication of how much things have changed.
The idea of such a tax was first floated in the 1970s by James Tobin, the Nobel laureate economist, who famously called for “throwing some sand in the wheels of international finance.” Tobin was concerned about excessive fluctuations in exchange rates. He argued that taxing short-term movements of money in and out of different currencies would curb speculation and create some manoeuvring room for domestic macroeconomic management.
The idea has since become a cause-célèbre for a wide range of non-governmental organisations and advocacy groups that see in it the double virtue of cutting finance down to size and raising a big chunk of revenue for favoured causes — foreign aid, vaccines, green technologies, you name it. It has also been endorsed by some French (predictably!) and other continental European leaders. But, until Turner mentioned the idea, you would not have been able to identify a single major policymaker from the United States or the UK, the world’s two leading centres of global finance, with anything nice to say about it …
… What the Tobin tax does not do is help with longer-term misalignments in financial markets. Such a tax would not have prevented the US-China trade imbalance. Neither would it have stopped the global saving glut from turning into a ticking time bomb for the world economy. It would not have protected European and other nations from becoming awash in toxic mortgage assets exported from the US. And it would not dissuade governments intent on pursuing unsustainable monetary and fiscal policies financed by external borrowing.
For all of these problems we will need other macroeconomic and financial remedies. But a Tobin tax is a good place to start if we want to send a strong message about the social value of the casino known as global finance.
The author, Professor of Political Economy at Harvard University’s John F. Kennedy School of Government, is the first recipient of the Social Science Research Council’s Albert O. Hirschman Prize. His latest book is One Economics, Many Recipes: Globalization, Institutions, and Economic Growth. (full text).
(The author, Professor of Political Economy at Harvard University’s John F. Kennedy School of Government, is the first recipient of the Social Science Research Council’s Albert O. Hirschman Prize*. His latest book is One Economics, Many Recipes: Globalization, Institutions, and Economic Growth):
- * Albert O. Hirschman Prize of the Social Science Research Council;
- Albert O. Hirschman on wikipedia.