Last October (2011) we considered the case for a Tobin tax: also known as a financial transactions tax (FTT) or a ‘Robin Hood tax’. Since then there have been increased calls for the world to adopt such a tax.
It was promoted by President Sarkozy and supported by many other leaders at the G20 conference in Cannes on 3 and 4 November 2011. It has also been publicly supported by Bill Gates, the Archbishop of Canterbury and the Vatican, as you can see from the video clips and articles below. It is also one of the demands of protesters at St Pauls in London and at other places around the world.
However, the introduction of such a tax is vehemently opposed by many banks and by the US, UK, Canadian and Australian governments, amongst others. In the articles below, we consider the latest arguments that are being used on both sides. With such strong feelings it looks as if the arguments are not going to go away.
Update
On 29 January 2012, French President, Nicolas Sarkozy, announced plans to introduce a 0.1% levy on financial transactions. Naturally, by taking the lead, he hopes that other EU countries will follow suit. The final set of articles consider his move.
What is a Tobin Tax? BBC News, Andrew Walker (2/11/11)
Rowan Williams: St Paul’s protest has ‘triggered awareness’ BBC News (2/11/11)
Bill Gates explains his support for a Tobin tax BBC News (2/11/11)
Robin Hood tax: What is the Tobin tax? BBC Newsnight, Andrew Verity (17/11/11)
Q&A: What is the Tobin Tax on financial trading BBC News (2/11/11)
Head-to-head: the Robin Hood tax BBC News, Gemma Godfrey and Prof Avinash Persaud (9/12/11)
Time for us to challenge the idols of high finance Financial Times, Rowan Williams, Archbishop of Canterbury (1/11/11)
Gates says ‘Robin Hood’ tax has part to play Financial Times, Chris Giles (3/11/11)
Sarkozy Pledges Fight for Transaction Tax Bloomberg, Rebecca Christie and Helene Fouque (4/11/11)
Financial Transaction or Speculation Taxes: Not Quite What They Seem Forbes, Tim Worstall (4/11/11)
Is a Robin Hood Tax the Answer? Forbes, Kelly Phillips Erb (3/11/11)
Bill Nighy takes Robin Hood tax to the G20 Guardian, Patrick Wintour and Larry Elliott (3/11/11)
G20 tax moves disappoint charities Press Association (4/11/11)
Jamaica should support the Robin Hood Tax Jamaica Observer (6/11/11)
World Leaders Need to Agree to the Robin Hood Tax at G20 Huffington Post, Bill Nighy (3/11/11)
Obama, the G20, and the 99 Percent Huffington Post, Jeffrey Sachs (1/11/11)
Now is the moment to bring banks to heel This is Money, Jeffrey Sachs (3/11/11)
Note on financial reform from the Pontifical Council for Justice and Peace The Vatican Today
Tobin Tax would cost £25.5bn and cause job losses says think-tank London loves Business, Rebecca Hobson (4/11/11)
The Spurious Case Against A Financial Transactions Tax – Analysis Eurasia Review, Dean Baker (2/11/11)
Update
Sarkozy Says France to Impose Transaction Tax From August Bloomberg Businessweek, Helene Fouquet and Mark Deen (30/1/12)
Struggling Sarkozy unveils financial transactions tax Sydney Morning Herald, AFP (30/1/12)
Sarkozy announces French financial transaction tax BBC News (30/1/12)
French president announces unilateral financial transaction tax Deutsche Welle Spencer Kimball, Andrew Bowen and Nicole Goebel (30/1/12)
Questions
- What are the main arguments in favour of a financial transactions tax?
- What are the main arguments against a financial transactions tax?
- To what extent is the debate a normative one and to what extent could evidence be used to support one side or the other?
- What would determine the extent to which the tax would be passed on to consumers?
- Would a financial transactions tax impede growth? Explain.
- Would financial intermediation be made more efficient by the imposition of such a tax?
With the fall of communism in eastern Europe between 1989 and 1991, many hailed this as the victory of capitalism.
Even China, which is still governed by the Chinese Communist Party, has embraced the market and accepted growing levels of private ownership of capital. It is only one or two countries, such as North Korea and Cuba, that could be described as communist in the way the term was used to describe the centrally planned economies of eastern Europe before 1990.
But whilst market capitalism seemed to have emerged as the superior system in the 1990s, may are now questioning whether the market capitalism we have today is fit for the 21st century. Today much of the world’s capital in the hands of big business, with financial institutions holding a large proportion of shares in such companies. And the gap between rich and poor is ever widening
The market system of today, is very different from that of 100 years ago. In fact, as John Kay agues in his article “Let’s talk about the market economy” below, it would be wrong to describe it as ‘capitalism’ in the sense the term was used in the debates of the 19th and early 20th centuries. Nonetheless, the term is still used and generally refers to the market system we now have. And it is a market system that many see as failing and unfit for purpose. It is a system that coincided with the bubble of the 1990s and early 2000s, the credit crunch of 2007–9 and the recession of 2008/9, now seeming to return as a double-dip recession
With the political and business leaders of the world meeting at the World Economic Forum at Davos in Switzerland on 25–29 January 2012, a central theme of the forum has been the future of capitalism and whether it’s fit for the 21st century.
Is there a fairer and more compassionate capitalism that can be fostered? This has been a stated objective of all three political parties in the UK recently. Can we avoid another crisis of capitalism as seen in the late 2000s and which still continues today? What is the role of government in regulating the market system? Does the whole capitalist system need restructuring?
It’s becoming increasingly clear that we need to talk about capitalism. The following webcasts and articles do just that.
Webcasts and podcasts
Davos 2012 – TIME Davos Debate on Capitalism< World Economic Forum (25/01/12)
Can capitalism be ‘responsible’? BBC Newsnight, Paul Mason (19/01/12)
Capitalism ‘nothing to do with responsibility’ BBC Newsnight, Eric Hobsbawm (19/01/12)
Are there alternatives to capitalism? BBC Newsnight, Danny Finkelstein, Tristram Hunt and Julie Meyer (19/01/12)
America Beyond Capitalism The Real News on YouTube, Gar Alperovitz (27/12/11)
The future of capitalism CNBC, Warren Buffett and Bill Gates (12/11/09)
Capitalism Hits the Fan (excerpt) YouTube, Richard Wolff (2/1/12)
Panel Discussion “20 years after – Future of capitalism in CEE” Erste Group on YouTube, Andreas Treichl, Janusz Kulik, Jacques Chauvet, and media Adrian Sarbu (24/2/11)
The Future of Capitalism: Constructive Competition or Chaos? YouTube, Nathan Goetting, Tony Nelson, Craig Meurlin and Judd Bruce Bettinghaus (24/1/11)
Capitalism in Crisis Financial Times, Various videos (24/1/11)
Bill Gates: Capitalism a ‘phenomenal system’ BBC Today Programme, Bill Gates talks to Evan Davis (25/1/12)
Capitalism (See also) BBC The Bottom Line, Evan Davis and guests (28/1/12)
Articles
Meddle with the market at your peril Financial Times, Alan Greenspan (25/1/12)
The world’s hunger for public goods Financial Times, Martin Wolf (24/1/12)
When capitalism and corporate self-interest collide JohnKay.com, John Kay (25/1/12)
Let’s talk about the market economy JohnKay.com, John Kay (11/1/12)
A real market economy ensures that greed is good JohnKay.com, John Kay (18/1/12)
Seven ways to fix the system’s flaws Financial Times, Martin Wolf (22/1/12)
To the barricades, British defenders of open markets! The Economist, Bagehot’s Notebook (26/1/12)
Community reaction to doubts about capitalism in Davos CBC News (26/1/12)
Capitalism saw off USSR, now it needs to change or die The National (UAE), Frank Kane (26/1/12)
Words won’t change capitalism. So be daring and do something Observer, Will Hutton (22/1/12)
A political economy fit for purpose: what the UK could learn from Germany Our Kingdom, Alex Keynes (20/1/12)
Debate on State Capitalism The Economist (24/1/12)
Questions
- How has the nature of capitalism changed over recent decades?
- Can capitalism be made more ‘caring’ and, if so, how?
- What do you understand by the term a ‘fair allocation of resources’? Is capitalism fair? Can it be made fairer and, if so, what are the costs of making it so?
- Can greed ever be good?
- How does the ‘Anglo-Saxon’ model of capitalism differ from the European model?
- What do you understand by the term ‘crony capitalism’? Is crony capitalism on the increase?
- John Kay states that “Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital.” Explain what this means and what its implications are for making capitalism meet social goals.
- In what ways can governments control markets? Have these instruments and their effectiveness changed in effectiveness over time?
- What are the costs and benefits to society of the increasing globalisation of capital?
- To what extent was the financial crisis and credit crunch the result of a flawed capitalist system and to what extent was it a failure of government intervention?
- Why is it important for the success of capitalism that companies should be allowed to fail? Consider whether this should also apply to banks. How is the concept of moral hazard relevant to your answer?
The history of macroeconomic thought has been one of lively debate between different schools.
First there is debate between those who favour active government intervention (Keynesians) to manage aggregate demand and those who favour a rules-based approach of targeting some variable, such as the money supply (as advocated by monetarists) or the rate of inflation (as pursued by many central banks), or a hybrid rule, such as a Taylor rule that takes into account a weighted target of inflation and real output growth.
Second there is debate about the relative effectiveness of monetary and fiscal policy. Monetarists argue that monetary policy is relatively effective in determining aggregate demand, which in turn affects output in the short run but only prices in the long run. Keynesians argue that monetary policy can be weak in the short run if the economy is in recession. Quantitative easing may simply be accompanied by a decline in the velocity of circulation. It’s not enough to make more money available and keep interest rates close to zero; people must have the confidence to borrow and spend. Keynesians argue that in these circumstances fiscal policy is more effective.
Third there is the debate about the size of the state and the extent of government borrowing. Libertarians, following the views of economists such as Hayek, argue that reducing the size of the state and reducing government borrowing will create a more dynamic economy, where the private sector will expand to take up the slack created by a reduction in the size of the public sector. Their approach to policy involves a mixture of cutting deficits and market-orientated supply-side policy. Economists on the left, by contrast, argue that economic growth is best stimulated in the short term by increases in government spending and that supply-side policy needs to be interventionist, with the government investing in infrastructure, research and development, education and health. Such growth policies, they argue can be targeted on the poor and help to arrest the growing inequality in society.
These debates have been given added impetus by the global financial crisis in 2008 and the subsequent recession, slow recovery and possibility of a slide back into recession. The initial response of governments and central banks was to stimulate aggregate demand. Through combinations of expansionary fiscal policy, interest rates cut to virtually zero and programmes of quantitative easing, the world seemed set on a course for recovery. But one result of the policies was a massive expansion in government deficits and debt. This led to increasing criticisms from the right, and a move away from expansionary to austerity fiscal policies in order to contain debts that were increasingly being seen as unsustainable. And all the while the debates have raged.
The following podcast and articles look at the debates and how they have evolved. The picture painted is a more subtle and nuanced one than a stark ‘Keynes versus Hayek’, or ‘Keynesians versus monetarists’.
Podcast
Keynes v Hayek: The debate continues BBC Today Programme, Nicholas Wapshott and Paul Ormerod (23/12/11)
Articles
Von Hayek Revisited – Warts and All CounterPunch, David Warsh (26/12/11)
Fed up with Bernanke Reuters, Nicholas Wapshott (20/12/11)
Paul Krugman Versus Milton Friedman Seeking Alpha, ‘Shareholders Unite’ (6/12/11)
Keynes Was Right New York Times, Paul Krugman (29/12/11)
Keynes, Krugman, and Austerity National Review Online, William Voegeli (3/1/12)
The Madness of Lord Keynes The American Spectator, Samuel Gregg (19/12/11)
Central Bankers vs. Natural Stock Market Cycles in 2012 The Market Oracle, David Knox Barker (28/12/11)
Now is the time to eat, drink and be merry Financial Times, Samuel Brittan (29/12/11)
Questions
- To what extent is quantitative easing consistent with (a) Keynesian and (b) monetarist approaches to macroeconomic policy?
- What is meant by the ‘liquidity trap’ and what are its implications for monetary policy? Have we witnessed a liquidity trap since the beginning of 2009?
- What are the arguments for and against an independent central bank?
- Explain Milton Friedman’s assertion ‘that it was the Fed’s failure in 1930 to pursue “open market operations” on the scale needed that deepened the slump’.
- What are the implications of growing government deficits and debt for policies to avoid a slide back into recession?
The European Central Bank does not provide direct support to eurozone countries by buying new bonds. However, it can give indirect support by helping banks buy such bonds. In a move announced on 8 December, the ECB will increase the maximum term of its ‘longer-term refinancing operations’ (LTROs) from the current 13 months to three years. In other words, it will effectively provide three-year loans to banks by purchasing banks’ assets on a ‘repurchase (repo)’ basis, whereby banks agree to buy back the assets at the end of the three-year term.
The hope is that banks will use these loans (at an annual rate of 1%) to purchase new bonds from countries such as Italy and Spain. If banks are more willing to buy them, this should help reduce the interest rate at which governments are forced to borrow. Banks would benefit from the ‘carry trade’, whereby they borrow at a low interest rate (from the ECB) and lend at a higher rate to governments by buying their bonds.
To encourage banks to take advantage of these new longer-term repos,the ECB announced that the assets it was prepared to purchase would include securitised assets with a rating of single A (the highest rating is AAA). In other words, it would accept assets with a ‘second-best rating’.
But although the scheme would allow banks to make a clear gain from a carry trade, banks may be reluctant to use such loans to increase their holdings of sovereign debt of countries with large debt to GDP ratios, given concerns in the market about the riskiness of such assets.
Articles and podcast
ECB repo extension a fillip for sovereigns Financial News, Matt Turner (15/12/11)
Doubts over ECB move to boost bond sales Financial Times, Tracy Alloway (15/12/11)
ECB Chief Plays Down Hopes for Bigger Bond Purchases Wall Street Journal, Tom Fairless And Margit Feher (15/12/11)
Eurozone crisis ‘misdiagnosed’ BBC Today Programme, George Magnus (16/12/11) (second part of podcast)
Banks snap up €500bn in loans from European Central Bank Guardian. Larry Elliott (22/12/11)
Analysis: ECB cash to give indirect boost via banks Reuters, Natsuko Waki and Steve Slater (22/12/11)
Demand for ECB loans rises to €489bn Financial Times, Tracy Alloway and Ralph Atkins (21/12/11)
ECB’s rescue of eurozone banks is temporary BBC News, Robert Peston (21/12/11)
ECB Press release
ECB announces measures to support bank lending and money market activity ECB (8/12/11)
Questions
- Explain how repos work. What is the difference between repos and reverse repos?
- What is meant by the term ‘carry trade’?
- Why may banks be unwilling to gain from the carry trade possibilities of the ECB’s new 3-year LTROs by using them to fund the purchase of new sovereign bonds? What risks are entailed by their doing so?
- How do these new long-term repo operations differ from quantitative easing? Explain whether or not the effect is likely to be similar
- What are the arguments for and against the ECB engaging in a round of substantial quantitative easing?
The meeting of EU leaders on night of Thursday/Friday 8/9 December was the latest in a succession of such meetings designed to solve the eurozone’s problems (see also, Part A, Part B and Part C in this series of posts from earlier this year).
Headlines in the British press have all been about David Cameron’s veto to a change in the Treaty of Lisbon, which sets the rules of the operation of the EU and its institutions. Given this veto, the 17 members of the eurozone and the remaining 9 non-eurozone members have agreed to proceed instead with inter-governmental agreements about tightening the rules governing the operation of the eurozone.
In this news item we are not looking at the politics of the UK’s veto or the implications for the relationship between the UK and the rest of the EU. Instead, we focus on what was agreed and whether it will provide the solution to the eurozone’s woes: to fiscal harmonisation; to stimulating economic growth; to bailing out severely indebted countries, such as Italy; and to recapitalising banks so as to protect them from sovereign debt problems and the private debt problems that are likely to rise as the eurozone heads for recession.
The rules on fiscal harmonisation represent a return to something very similar to the Stability and Growth Pact, but with automatic and tougher penalties built in for any country breaking the rules. What is more, eurozone member countries will have to submit their national budgets to the European Commission for approval.
The agreement has generally been well received – stock markets rose in eurozone countries on the Friday by around 2%. But the consensus of commentators is that whilst the agreement might prove a necessary condition for rescuing the euro, it will not be a sufficient condition. Expect a Part E (and more) to this series!
Meanwhile the following articles provide a selection of reactions from around the world to the latest agreement.
Articles
EU leaders announce new fiscal agreement Southeast European Times, Svetla Dimitrova (9/12/11)
Eurozone crisis: What if the euro collapses? BBC News (9/12/11)
New European Treaty Won’t Solve Current Liquidity Crisis Huffington Post, Bonnie Kavoussi (9/12/11)
UK alone as EU agrees fiscal deal BBC News (9/12/11)
A good deal for the UK – or the euro? BBC News, Stephanie Flanders (9/12/11)
European leaders strengthen firewall Financial Times, Joshua Chaffin and Alan Beattie (9/12/11)
EU leaders push for tough rules in new treaty DW-World, Bernd Riegert (9/12/11)
German Vision Prevails as Leaders Agree on Fiscal Pact The New York Times, Steven Erlanger and Stephen Castle (9/12/11)
European Union leaders agree to forge new fiscal pact; Britain the only holdout The Washington Post, Anthony Faiola (9/12/11)
The new rules by EU leaders Irish Independent (10/12/11)
More uncertainty seen in wake of EU summit Deseret News (9/12/11)
EU president unveils raft of crisis-fighting measures The News (Pakistan) (10/12/11)
No rave reviews The Economist, Buttonwood (9/12/11)
Beware the Merkozy recipe The Economist (10/12/11)
Europe blunders into a blind, and dangerous, alley Guardian, Larry Elliott, (9/12/11)
As the dust settles, a cold new Europe with Germany in charge will emerge Guardian, Ian Traynor, (9/12/11)
Euro zone agreement only partial solution – IMF Reuters, Tova Cohen and Ari Rabinovitch (11/12/11)
Celebration Succumbs to Concern for Euro Zone New York Times, Liz Alderman (12/12/11)
In graphics: The eurozone’s crisis BBC News
Questions
- How do the latest proposals for fiscal harmonisation differ from the Stability and Growth Pact?
- How might a Keynesian criticise the agreement?
- What is the role of (a) the IMF and (b) the ECB in the agreement?
- Do you agree that the agreement is a necessary but not sufficient condition for solving the eurozone’s problems?