Adam Smith and Robin Hood: why the ASI is wrong on FTTs
It’s often said that Adam Smith would turn in his grave if he knew what was argued in his name, and the latest Adam Smith Institute attack on the Robin Hood Tax would certainly be enough to make his skeleton blush crimson. In just eight pages it manages to be confused, exaggerated, dishonest and illogical, and if that’s the best the ASI can come up with their (already anonymous, which must save some blushes) funders should be asking for the money back. As it did get coverage in the Daily Mail, although no other print journal that I can see, here’s a brief point by point rebuttal. A longer one really wouldn’t be worth the effort!
Here are the six main arguments in the ASI report together with my rebuttal:
1. The European Commission’s own impact assessment projects a 1.76% hit to long-term (20-year) growth across the EU, and cost the UK economy £25.58 billion (or £1.28bn a year), which the ASI say would “ruin” or “cripple” the economy. This is dishonest: the EC impact assessment suggests a 0.5% to 1.76% impact over 20 years, so the figure quoted by ASI is the worst case scenario (and CUPE economist Toby Sanger has explained why we – and the EC themselves in all probability – don’t actually accept these figures, which are based on a ‘Dynamic Stochastic General Equilibrium’ model. which assumes that all markets clear, there is no unemployment and a host of other highly unrealistic assumptions). It’s also exaggerated: even if they were right about the impact – which as I’ve suggested, they so aren’t – does anyone really believe that a £1.28bn a year cost to the City of London would “ruin” or “cripple” it, given the amounts paid out in bonuses every year?
2. The EC impact assessment projects up to a 90% decline in derivatives trading: “this would adversely and disproportionately hurt the London economy, and would destroy a socially-valuable financial activity that is integral to the modern British economy” – or, as Financial Services Authority chair Lord Turner has variously described it, “socially useless” or “economically useless”. Some derivatives trading, some hedging, is useful. But the vast majority, the algorithm-driven High Frequency Trading which now accounts for 56% of trading in the US and 38% of trading in Europe is just gambling.
3. FTTs would increase market volatility. The ASI report is deeply confused here, or really dishonest. In a single paragraph, they go from stating that FTTs would increase volatility, to accepting that there is evidence both ways (and the ITUC has argued in its evidence to the IMF last year that the evidence for increased volatility is older – and applies to markets that no longer bear much resemblance to today’s – than the evidence that FTTs would reduce volatility). I would accept that we don’t know the answer to the question of whether volatility would increase or reduce, but it is highly unlikely that FTTs, by reducing the sort of trading that did not exist twenty years ago, would create greater volatility than existed then. And it wasn’t fatal then, so why would it be fatal now?
4. The FTT would reduce market liquidity in all securities markets and markets’ ability to incorporate new information into asset prices would be undermined. I would argue that the ASI are just wrong here, about how useful the information revealed by algorithm-driven, High Frequency Trading is. In fact, I would argue that it actually produces information that could be dangerously false, because what HFT does is actually to confirm prejudices, rather than reveal truths. Acting without judgment on market movements, at such speed and volume, HFT makes its own evidence, and shouts louder than the facts.
5. Unemployment would rise if an FTT was introduced. Some of the ASI’s argument for this is the impact of FTTs on investment, although as argued above, what FTTs will actually tax is speculation, not investment, and the vast amounts of capital (as much as 80% of some banks’ capital) which would be pushed in the direction of investment instead of gambling would actually increase the amount of capital available for investment even if the cost went up (but marginally, if such investments are long-term). However, the full ASI report also implies that there will be massive job losses in the financial sector itself as a result of FTTs, citing the 1.6 million people who work in the sector in the UK. But the vast majority of that 1.6 million work as branch bank tellers, or insurance salespeople, not derivatives traders and speculators. Some of the people employed in those jobs may well have to find better things to do with their time (although if they are so creative and highly skilled, experience suggests they will be able to find other jobs very swiftly). So, once again, the report is exaggerated.
6. The FTT would lead traders currently operating in the UK to relocate. This old chestnut no longer even convinces the Financial Times, who have argued that such threats should be faced down as the bullying hyperbole that they are (for a start, if they can migrate so easily, how come the opponents of FTTs claim they will be jobless?) The City of London, too, is more worried by uncertainty in tax regimes than the actual structure of them. But to sustain the argument, the ASI report makes one totally illogical argument. It dredges up again the Swedish case of a tax that was so easy to evade that people did just that, before arguing that the UK stamp duty proves nothing because of the sort of trransactions it covered (pretty much the same ones as the Swedish tax, which apparently is conclusive proof!) I am not one of those who argue that because the UK has a functioning FTT, that proves that FTTs are a good thing – but what the Swedish and UK examples do prove is that a well-designed FTT works better than a badly-designed FTT, as the IMF have explicitly accepted.