Stephen Nickell
Economist James Tobin first proposed a tax on cross-border currency transactions in the 1970s. The financial crisis has revived the idea of a “Tobin tax” and it was endorsed by Adair Turner, chairman of the Financial Services Authority, in Prospect’s September issue.
A Tobin tax would need to be applied more widely than merely on currency transactions, which could be easily disguised in derivatives trading. A recent study by the Austrian government estimated that a 0.05 per cent Tobin tax imposed on all financial trades in Britain would raise £100bn a year—even assuming a two-thirds drop in transactions. This is an enormous sum, more than 6 per cent of GDP.
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David Goodhart
Amid the din of the party conference season it is easy to forget the dirty little secret of British politics: that the underlying differences in philosophy and even policy between the three main parties remain narrower than at any time in the modern age. All parties, reflecting majority public opinion, want a regulated market economy flanked by decent, tax-funded public services (with the state spending 40 to 45 per cent of GDP, once normal economic service is resumed), and all parties—following the Tories’ leftward shift—lay claim to the term “progressive,” aiming to improve the life chances of those at the bottom and even narrow the gap between rich and poor. After Labour embraced the 1980s (the turn to the free market) the Tories have recently made their peace with the 1960s (race and gender equality, environmentalism and so on). The Tories talk grandly about transforming the British state (see Julian Glover’s cover story, p32), but any party needs an election-time myth, and in reality their plans amount to a few small adjustments to the New Labour settlement. There is little that David Cameron would disagree with in Gordon Brown’s testament of belief published in this issue, p24. If Labour loses the election, as most people expect, it will not be because the electorate have tired of its centrist politics but because they got bored with the people implementing them. And the idea that the recession, or the retrenchment in state spending that it calls for, is opening a new divide in British politics is also false—is it such a big deal if we halve the deficit in three years rather than five?
This is no cause for regret. An intelligent, unideological, technocratic politics is what is required to solve the many serious problems facing Britain and the world. One of those problems—what to do about Britain’s overmighty finance sector—earned Prospect a deluge of publicity last month when Adair Turner, our leading technocratic public intellectual, confronted high finance with some uncomfortable truths in these pages. The big idea this month seems to be Amartya Sen’s 20-year-old notion of “capabilities”—a more subtle version of the old left-wing idea of positive liberty. Several writers, including the prime minister, cite it as a guiding light for rethinking the centre-left. Nothing wrong with using new words to describe perennial themes, but the idea of capabilities is too easily bent to very different agendas. Most of these writers also agree that Labour has failed to renew British democracy. But perhaps in a post-political age the problem lies less with the apathetic masses and more with the unrealistic expectations and hyperbolic language of the political class.
Alex Crossman
Above: Adair Turner’s interview in the September issue of Prospect hit the headlines and caused a furore in the City
The City takes too big a share of our economy and is bloated by doubtful profits from dubious activities. Not the allegations of placard-wielding demonstrators but of Adair Turner, chairman of the Financial Services Authority (Prospect, September), and of Lloyd Blankfein, chief executive of Goldman Sachs (to a German banking conference in September), respectively. Suspicion inevitably accrues both to an embattled regulator talking tough and an emollient investment banker. And neither Turner nor Blankfein seems comfortable in their role as Jeremiah. But is either right? Is the City too big?
Britain faces an estimated bill of £130bn for shoring up its banking system, a higher proportion of GDP than any other country. This alone should put the issue of the “right” size of the finance sector on the agenda. Unfortunately, the question yields no easy answer. There is no consensus on a relevant measurement, or even on whether the statistics—especially those in Britain’s national accounts—are reliable. Britain has a historic comparative advantage in finance, so one would expect it to have a relatively larger finance sector than some other countries. No one thinks it odd that Germany has a big car industry.
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Tom Streithorst
City limits: the sector must shrink
The outcry at proposals recently floated by FSA chief Lord Turner in Prospect suggests that the City knows they would be effective. The City does not fear “regulation”; regulations can always be circumvented. But a Tobin tax, an infinitesimal levy on all financial transactions, would squash the profitability of much of the short-term trading which swells investment bank profits without doing anything to create value in the real economy.
For the past 30 years, the economics profession has been in the grip of a dangerous delusion, namely that all financial transactions are intrinsically beneficial, in that they create “deeper, more liquid markets.” The credit freeze that began on 9th August 2007 tells us that this liquidity is more apparent than real, that in moments of danger, when markets really need liquidity, it just evaporates. Without the liquidity “fig leaf,” the rationale of social and economic benefits for much trading activity becomes impossible to maintain.
The current financial crisis gives us a chance to return to an earlier understanding of the purpose and function of financial markets. Finance exists in order to most efficiently transform societal savings into productive investment. It is a deal between the present and the future; forgoing consumption now in order to invest in capital goods which will spur productivity, thus allowing greater consumption at a later date.
The explosion in the size and profitability of the financial sector since the early 1980s has almost nothing to do with the creation of capital goods. Real investment as a share of GDP has declined even as financial sector profits have gone through the roof. Arbitrage, intra-day trades, short term purely financial self-referential transactions, which do nothing to create real investment and do nothing for the real economy, would all be priced out of business by a Tobin tax.
The financial sector has grown too big. It needs to shrink. The Tobin tax will do that, without hurting the rest of us. That’s why the bankers are getting apoplectic in the Financial Times. Finance needs to stop being a parasite on the real economy and once again return to its traditional role of creating capital goods and so increasing worker productivity. That is how finance can make all of us richer.
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