Why a Tobin Tax would not work

This from a Leader in Today's Times:

As bad economic ideas go, a European financial transactions tax is hard to beat in any circumstances. When the continent is mired in a crisis of indebtedness and weak growth, in which the inflexible monetary arrangements of the eurozone render any solution far more difficult, its irrationality possesses a particular grandness.

Yet EU policymakers, with President Sarkozy and Angela Merkel principal among them, are seriously considering just such a scheme. The British Government should respond that if the tax proceeds, the UK will assess dispassionately the economic benefits of belonging to the EU against the economic benefits provided by the City of London, and unhesitatingly choose the latter.

The principle of a tax on financial trading, as the European Commission envisages it, is that it might deter disruptive short-term speculation while raising money to ameliorate Europe’s budgetary needs. The reality is that it would not work. By raising the costs of trading, its main and entirely foreseeable effect would be to drive securities business out of Europe to other financial centres. Ill-judged financial regulation has a long history. The very success of London as a modern financial centre partly derives from it.

In the 1960s, the City was in relative decline in common with the rest of the British economy. The US Government then introduced legislation that limited the amount of interest payable on dollar deposits by banks in America. Investors promptly moved their dollars abroad and London became a magnet for international banks. More recently, in the 1980s, Sweden introduced a tax of 0.5 per cent on equity purchases. It raised far less revenue than its proponents had predicted, and within a few years more than 50 per cent of Swedish equities had moved to London.

A financial transactions tax applied in the EU would do the same on a bigger scale. Traders would avoid paying it by booking deals in other financial centres. Even if, with magnificent improbability, the tax were agreed also by financial authorities in the US, China and other leading economies, that would still leave offshore tax havens, which would have a huge incentive not to follow suit. Even then, the tax would have to apply to every transaction without exception, or traders would reclassify one type of deal to something else — a bond transaction might, for example, be reclassified as a foreign exchange deal. The ease with which a tax can be avoided is not always a conclusive argument against levying it. The problem with an EU transactions tax, however, is not primarily its futility but its destructiveness. Securities business would migrate from Europe to other parts of the world.

George Osborne, the Chancellor, has rightly described such a predictable outcome as economic suicide for Britain and Europe. But he is too polite. There is an implicit but unmistakable aim in the proposal to erode the importance of London as a financial centre. Mr Sarkozy has made no secret of his aversion to the “free-wheeling Anglo-Saxon” model of financial markets. This is an economically damaging aim, but most particularly for the UK. The City accounts, among much else, for more than a third of global foreign exchange turnover. Its earnings are crucial to Britain’s economic recovery. If European leaders push this tax, they are simply pushing Britain out of Europe.

Alice in Euroland

What are we to make of the financial crisis? I am not an economist but my view is that the attempt to form a financial union without a political union was doomed to failure. The entry requirements for a currency union were deliberately fudged so as to admit Greece to the union, and even France and Germany have had to bend the rules in order to stay within them.

The only countries that have kept their finances obeying the rules have been those who didn't want to joint the Euro and the UK made the sensible decision not to join because its finances never met the entry criteria. At present, not only Greece, but Ireland, Portugal, Spain, Italy and Belgium are vulnerable to fractions in Euroland and even France is not safe.

The blame for this crisis falls squarely on Germany, which having absorbed East Germany at extravagant cost, thought it could do the same for the rest of Europe. As with its 20th Century ambitions to control Europe, Germany has over-reached itself and found that its desires are too great for its population to carry. In Cannes we have seen the two leaders of the largest European countries desperately asking the Americans, the Chinese, the Brazilians, the Japanese and the British to bail them out when the European Central Bank (aka the Bundesbank) refuses to do so. Fat chance.

I have some respect for Greece. All this chit-chat about a referendum at least shows that they have some backbone and aren't going to be pushed around by the French and Germans. Of course they have been living beyond their means for the past 10 years because the commitment to the Euro has not allowed them to sell their greatest asset, sun and sand holidays at their true value. Outside the Euro they would be profitable but with a gradually sliding exchange rate.

The Lucky generation.

The postwar generation has enjoyed a seemingly unbroken run of good luck, from free university education to the house price boom. Even in retirement their good fortune continues, with many enjoying generous final salary pensions. The facts speak for themselves. More than 80% of the nation's £6.7 trillion in wealth is owned by baby boomers (those born between 1946 and 1964). Collectively, the country owns £2.6 trillion in shares and savings – and those aged 50 to 64 own £1 trillion of this. A third of the £1.8 trillion held in pension funds is owned by this age group (and a further quarter is owned by those aged between 45 and 50). And they own 40% of the £2.5trn tied up in property. In fact, property has been such a staggeringly good investment for this generation that one in five baby boomers owns a second home.

As Will Hutton of the Work Foundation – and a baby boomer himself – pointed out: "Having enjoyed a life of free love, free school meals, free universities, defined benefit pensions, mainly full employment and a 40-year-long housing boom, the baby boomers are bequeathing their children sky-high house prices, debts and shrivelled pensions. A 60 year-old today is a very privileged and lucky human being."

The question is how much we owe to future generations. Having benefited so much from our circumstances, I believe we have a duty to care for our children and our children's children. Which is why I approve of the austerity packages being introduced in Europe and America. To spend even more on our ease and comfort and load the bill (as debt) on future generations seems to me to be wickedly selfish. In particular, our 10-year extra longevity should be paid for by us, not our children and pensions must be adjusted accordingly. Neither should we be 'ski-ing' (spending the kids' inheritance). All that wealth accumulated in property should be passed on.

How are you making out?

The worldwide financial crisis continues. What started as a scam to bundle sub-prime mortgages into packages that were worth less than the sum of their parts has undermined tho investment banks which over the whole world have been bailed out by the taxpayer. It became an illustration of the old saw - If I owe the bank $100 that's my problem: if I owe the bank $100 million that's the bank's problem. The banks were simply too big to be allowed to fail. It turned out that the banks were undercapitalized and in recapitalizing themselves, they could not afford to lend to small businesses. The credit crunch has slowed down the global economy.

In addition it turned out that governments, thinking that the boom could never end, ignored the prudent course of repaying debts when the economy boomed, instead took on yet bigger debts.

In Europe there was an extra dimension. Politicians, keen to deliver a United States of Europe tried to introduce a single currency. Without a uniform fiscal policy there was no way that countries like Greece and Germany could make a once and for all unification of their currencies. Rules were set and rules were broken. Countries, quite frankly, lied about whether they were meeting the conditions. Honest countries like the UK and Scandinavia stayed out of the Euro, dishonest ones like Greece, Portugal, Ireland, Spain and Italy joined. Now when their desperate need is to devalue their currencies they are unable to. The Euro cannot possibly be sustained and the fall of the Euro, which is inevitable is suppressing the markets by about 10%.

My finances have taken that 10% hit, like anybody else's, but paradoxically have benefited by profligate spending of the last Labour government. Healthcare spending has delivered me first rate care for my cancer at no direct cost to me. Education spending has meant that all four children have received an excellent education at no direct cost to me and all are in well paid employment. We have excellent local authority services including weekly refuse collection and waste recycling, a safe environment with excellent policing, good social services and wonderful amenities.

I guess I have been one of the lucky ones.