Financial Transactions Taxes and Logic 101 for Fred Hiatt

June 15, 2015

I’ve been speaking and writing on financial transactions taxes for close to a quarter century. Most people don’t find the concept that difficult to understand, but apparently Fred Hiatt does. In a column bemoaning the sidetracking of Obamanomics, Hiatt tells readers that Obama:

“has a targeted version of the left’s beloved financial transactions tax, too: a levy on the largest banks proportional to the riskiness of their liabilities.”

Actually, the bank tax has nothing to do with a financial transactions tax. The bank tax is intended to compensate for the implicit subsidy given to large banks that markets view as too big to fail. Since investors assume that the government will bail the banks out if they get into trouble they are willing to lend to them at a substantially lower interest rate than would otherwise be the case. The tax is intended to offset this subsidy although the size of the tax proposed by Obama is an order of magnitude smaller than size of the implicit subsidy, which the I.M.F. recently estimated at $50 billion a year.

In contrast, a financial transactions tax is intended to reduce the excessive amount of trading in financial markets. While this trading uses economic resources, it contributes nothing to the productive economy. A recent analysis from the Bank of International Settlements found that countries with very large financial sectors, like the United States, experience slower growth. A financial transactions tax would go far toward reducing the amount of excessive trading in the financial sector.


There are many other simple points of logic that Hiatt gets wrong in his piece. He tells readers:

“The Obama view, again simplified, would be that executives and hedge fund managers are indeed overpaid, but cutting their salaries won’t solve the country’s problems. Globalization and technological change are pressing on the middle class, and the only hope is to encourage economic growth — in part by keeping the government from squelching such growth — and positioning working people to share in it.”

Actually, reducing the incomes of those at the top would also reduce their consumption. This would free up demand in the economy. This should mean that the Fed can allow the economy to grow more allowing more people to be employed at higher wages than if executives and hedge fund managers were still getting high pay. (This assumes the economy is near full employment, which is clearly not the case presently.)

Globalization only puts downward pressure on the wages of middle-income workers because it is structured for that purpose. If we negotiated trade deals to put doctors and other highly paid professionals in direct competition with their much lower paid counterparts in the developing world, rather than manufacturing workers, then globalization would be an important force for equalizing wages.

Finally, it is cute how he refers to a financial transactions tax as being “beloved” by the left. I guess since we’re engaged in this sort of debate it is probably worth noting that Hiatt again made a push for his beloved cuts in Social Security and Medicare telling readers:

“entitlement payments are gobbling up more and more of the budget, leaving less for all other spending. That’s a challenge Obama and Republicans both promised to tackle and both gave up on.”

Anyhow, maybe Hiatt will one day study enough economics so that he will understand the proposals that he is criticizing, but not this day.


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