Gillibrand bets on Tobin

Gillibrand stakes out a brave and wonkish position.

A progressive group of Democrats, “We the People”, have just held an early beauty contest of five presidential hopefuls and possibles: Senators Cory Booker of New Jersey, Kirsten Gillibrand of New York, Kamala Harris of California, Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts.

In this report, I only saw one interesting position.

Gillibrand … in response to a question … said she supports a tax on financial transactions.

Presidential hopeful at work

A Tobin tax!  It’s a wonk’s dream, tailor-made to appeal to the all-important RBC reader demographic: something like 0.003% of the US electorate, concentrated in a handful of blue states where Ricky the Spider-raccoon on the Democratic ticket would be a shoo-in.

It has three other characteristics.
1. It’s a genuine policy proposal. Other countries have tried it (Sweden for equities and bonds). It’s tricky, but there’s a big literature. It isn’t handwaving like Sanders’ “break up the banks.”
2. Though the tax really does stick it to Wall Street, it won’t be easy to explain this to the Rustbelt voters. How many know there is a highly organised worldwide foreign exchange market, let alone that it turns over $5 trillion a day?
3. The tax is anathema to Wall Street, a huge lobby in Washington and in Gillibrand’s home state, and a major source of political donations. Maybe their counterattack will help with problem 2.

Any Democratic nominee in 2020, whether it’s one of this five or Ricky the Raccoon, will run on the same basic platform: joined-up honest government, expanded health care, fighting climate change, reversing tax cuts for the rich, rebuilding alliances, letting the Dreamers stay. But to get the nomination, the winner will have to mark out something distinctive, in character and policy. Was Gillibrand improvising or flying a kite? She does not strike me as an impulsive politician. Walking back the proposal would damage her chances as a “flip-flop”. It looks to me like a calculated risk, and a pretty brave one. Have any of the other contenders staked out comparable positions on anything difficult?

Note on the FX market. The $5trn a day is from here. The real total is higher, as not all trades are cleared through the New York clearing-house. Physical global trade is about $16 trn a year, or $44 bn a day.  Add services and long-term investment flows, and you might double that. What economic purpose is served by inflating this 50 times, with banks and dealers taking a cut – a small one, but a cut – on each artificial transaction?

Update one day later

The comments thread below confirms my point about the RBC readership. The Tobin tax is public policy catnip to you. Good, but nobody has picked up on the electoral politics. Gillibrand has moved the financial transactions tax from a nice academic speculation to live policymaking. She may well not become President, and may not prioritize the proposal if she does. On the other hand, a successful rival may take it on board – like Edwards’ health plan in 2008 that eventually became ACA. Folks, there is now a decent chance the Tobin tax will happen. Reporters should take an interest. Just who has Gillibrand been getting advice from? I’m sure Shiller, Krugman, Stiglitz, Arrow or deLong would take her calls.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web

16 thoughts on “Gillibrand bets on Tobin”

  1. Let's not be too harsh on dealers, speculators, etc. I have no idea whether it's reasonable for financial transactions to have 50 times the volume of physical trade, but a substantial multiple is certainly to be expected.

    The $5 trillion includes not just spot transactions but also trading in various derivatives.

    An awful lot of this is going to be hedging of exchange risk, cross-currency lending and investing, not all of which is connected to actual trade, and other things. Liquidity requires dealers, hedging requires speculators, etc. Things can multiply awfully fast.

      1. James,

        According to Wikipedia:

        The $5.09 trillion break-down is as follows:

        $1.654 trillion in spot transactions
        $700 billion in outright forwards
        $2.383 trillion in foreign exchange swaps
        $96 billion currency swaps
        $254 billion in options and other products

        1. Thanks, that's useful.

          It only changes my rough calculation a little. Start with $44 bn a day of physical trade. Double it for services and long-term capital flows. Assume all of these are hedged using one derivative or another – not at all likely for tourism (transactions far too small) or long-term direct investment in 30-year mines and wind farms (horizon far too long), but let that pass. We are now up to $176 bn a day. Double it again with enough speculation for liquidity. That's now $352 bn a day: 7% of the reported cleared FX transactions. What service are the other 93% providing? I admit I'm down from 50X to 14X inflation.

          1. James,

            Well, maybe, but I think you are overlooking some things. A lot of physical trade is denominated in dollars, even if there is no US firm involved. In those cases both partners need to deal in the spot market for dollars, as well as hedge the dollar/own-currency exchange rate.

            Long-term direct investment can also create extra FX transactions. The investment may be funded by a swap, and returns, if not reinvested in the host country, will need to be converted. I think companies sometimes hedge the long-term risk by doing something like taking out a loan in the host country currency, converting it to their own currency, and then using the returns on the investment to repay the loan.

            I'm not particularly familiar with the operations of speculators, but my guess is that they generate much more than twice the volume of the underlying physical trade. Remember, they are trying to keep the risks of their holdings as low as possible, which involves a fair amount of adjustment of currency and derivative positions even on a daily basis.

            Again, I have no idea at what point all this activity ceases to be useful, or justifies its cost. I can certainly believe that there is such a point, in all financial markets.

  2. "What economic purpose is served by inflating this 50 times, with banks and dealers taking a cut – a small one, but a cut – on each artificial transaction?"

    If you don't know, you probably should be careful about presenting taxing it as a great idea. Also, if you don't know all the possible consequences, like shifting trades to exchanges out of reach of the IRS and putting US exchanges out of business. Financial services is one of the largest US exports.

    1. Perhaps you should state your credentials, and then we can go dig up the credentials of the many, many well-regarded economists who agree & argue that the quoted text is pretty much right. And that for example HFT (high frequency trading) serves no good purpose, and is in fact a form of front-running.

      [Since Shitmidas has completely blown the NorK summit, I assume you're busy making posters for your next anti-Trump march, yes? That was your last straw, right? Now you're 100% down with the Resistance, yes? Yes?]

      1. I've was resisting since before there was a Resistance. But I don't know what that has to do with anything.

      2. "Shitmidas" turns out to be an overstatement. Kim Kardashian West went to the Oval Office and escaped with her dignity intact and a woman doing life on a BS charge freed. Turns out there are things he can't corrupt.

    2. The transactions tax in Sweden hit bond trading hard – much harder than equities, though the rate was much lower. Maybe the market just moved elsewhere. President Gillibrand would probably have to negotiate an international agreement at the OECD to prevent offshoring of the markets.

      1. Yes. This is a major problem with this sort of tax, especially when applied to FX markets. Even if you get major trading partners to agree there will be places that don't.

        A tax on equity trading might work, because, I suppose, there are forces that tend to keep it in the country, though I'm not sure what they are.

        But I don't know why Sweden, a small economy, did not anticipate a lot of problems with the tax.

        1. Offshoring the FX market looks difficult from its bloated scale, massive communications and security requirements, and its hierarchical structure with ten or so major banks that act as market-makers for smaller players and themselves clear through New York. Would they trust the hypothetical Global Settlement Corporation of Panama City in the same way? You could buy the whole country several times over with a fraction of the sums in play. An agreement among OECD countries would do the trick, plus coercion of the tax havens. That's how it worked for the crackdown on bank secrecy and money laundering.

          The FX market is a nice test case for advocates of blockchain. Compare the transactions costs of the multiply distributed blockchain ledgers they propose with those of a robust central counterparty and sparse duplication of ledger entries, which is what you have today. I'm not a fan of the oversizing, but the people running interbank FX today have an enviable record on security and low transactions costs.

          1. An agreement among OECD countries plus coercion of tax havens would do the job, I agree. Negotiating such an agreement is not a task for the faint-hearted.

          2. PS: it is a safe assumption that the people CLS hires for its computer security are the best in the business. They can afford to outbid the NSA for top geek talent, and have every incentive to do so.

          3. James, generally speaking, this is true -all- -over- the financial sector for well-established trading platforms. They're old, difficult-to-change, and very well-understood. So their -costs- are minuscule. Of course, their -prices- might not be minuscule, but that's a different matter. and this is *after* their legacy I/T vendors have extracted exhorbitant rents for hw/sw. Even *if* some blockchain-based solution came in under the price of (say) CLS, CLS could halve their prices without difficulty — that's almost certainly true for a number of other platforms, too.

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