The Merry Men & Economics

This is an old post, originally published on my LiveJournal.

So lots of people are talking about this Robin Hood Tax, which is related to the Tobin tax, but different in many ways.

First off, a disclaimer: I’m not very strong in this area, I don’t have much specialist knowledge or much experience of analysing the effect of taxes. However there are a few things I’d like to say.

The Tobin tax was mooted by the excellent James Tobin, who was fairly left-wing by economist standards (it’s extremely rare to find an economist who’s completely anti-free market). The aim was to reduce “hot money” flows. “Hot money” is money that enters and leaves a country very quickly and easily, taking advantage of small differences in exchange and interest rates, that sort of thing. It doesn’t go towards long-term investment, which is what drives economic growth, so while it may play a part in arbitrage, which improves overall economic efficiency (by making sure that prices/returns reflect the fundamentals), it can have disastrous consequences (see the 1997 East Asia crisis). Several economists (e.g. Stiglitz ) think that the instability that hot money can provoke is worse than the efficiency is may encourage, so want countries to be able to impose a tax on these flows, if not permanently then at least when the financial system is fragile. I’m not 100% sure but I think I remember reading that one of the East Asian countries did this and also suffered much less than the others, but I’d hesitate to put that down as causality because I think they also did other things differently (like ignoring the IMF completely! And good for them for doing so – See Globalisation & its Discontents by Stiglitz).

The Robin Hood tax is a slightly different beast, as, according to the campaign, its aim is to raise revenues and punish the bankers who bear a large responsibility for the current state of the world economy and financial system. Here are two excellent responses from economists who are left-of-centre politically (the first one is an easy read, the second two are more technical):

Tim Harford @ the FT
The Freethinking Economist (Giles Wilkes) Part 1
The Freethinking Economist Part 2

I would love to know who (if anyone) did the economic analysis for the Robin Hood Tax campaign, or if it’s all based on wishful thinking. I know on the website they link to an interview with Stiglitz in the Evening Standard, but Stiglitz’s reasons for the tax are the same as for the Tobin tax, rather than to raise revenue, and Stiglitz these days is a little problematic.

Stiglitz has been recommending the Tobin tax in times of financial near-crisis for a long time and is based on his witnessing of the East Asia crisis. I have a lot of respect for Stiglitz as an economist and for his older stuff (hence why I’ve mentioned him above), but I’m worried here because his comments smack of marketing. He’s got a new book out and if he allies himself with the Robin Hood campaign then people who support the campaign might buy his book. Is that too cynical of me? I don’t think so. He’s got his Nobel prize, he’s getting on a bit, so he can make the most of his reputation by saying populist things that don’t necessarily stand up to thorough economic scrutiny, because he no longer needs his reputation among economists (I doubt he’s planning to publish much in the way of economic research -looking at his website it looks like he’s either publishing more comment-style pieces in lesser known journals or working with a lot of co-authors), and if he is planning to publish more stuff, he can probably rely on the economics community judging it for its quality rather than his reputation. As a game-theorist he’ll probably know that’s exactly what he’s doing. (If you’re feeling brave I recommend skimming Tadelis, S. “The Market for Reputations as an Incentive Mechanism” – the link is for JSTOR so you’ll need access – if you’re desperate I can email you a copy).

So to conclude, I’m very sceptical about the benefits of the Robin Hood tax and would love to see the analysis done by the campaign. I’d take Stiglitz’s comments with a pinch of salt as I think he’s got vested interests. I’d love to know what Krugman thinks, I suspect he’d say similar things to Wilkes and Harford, as he usually bangs on (in a good way) about proper reform of the financial system, and the tax certainly is not that.


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