"If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit."
--Lord Adair Turner, Britain's chief financial regulator.
"The big disadvantage of most taxes is that they discourage some really productive activity. This [Wall Street transaction tax] would discourage numerous financial transactions. People flip their assets several times in an hour or a day. They make money but does it really add to the productive base of the United States?"
--Thea Lee, AFL-CIO Policy Director
Every working American knows the difference between going to work and going to Vegas... unless you're on Wall Street. There you can pretend that pure speculative activity (that produces no real economic value) should be the most highly rewarded activity in the world -- higher than any other occupation, ever. A year has past since this selfish fantasy crashed into a tragic toxic stew, sending nearly 30 million from full-time jobs to the unemployment lines or to part-time work. Yet, we still have failed to put a lid on fantasy finance.
We were fools to let the casino engulf nearly a quarter of our economy in the first place. And we'll be even bigger fools if we miss this moment to slap a tax on all financial transactions, the very best tool we have to reign in Wall Street's destructive excesses.
So far, very few of us seem willing to step out on this issue. But over the last week, there have been unexpected rumblings as Britain's chief regulator, an aristocratic Lord no less, along with the AFL-CIO issued nearly identical calls in behalf of a financial transactions tax. Maybe these strange bedfellows can wake us up from our stupor and ignite a serious discussion about the necessity of what was once called a "Tobin Tax".
James Tobin, the late Yale economist and Nobel laureate, originally proposed this tax to stifle currency speculation that he believed would engulf the world economy after the Bretton Woods financial agreements collapsed in 1971. Of course, that speculation returned with a vengeance, but nearly all economists and policy makers dismissed Tobin's proposal as a violation of our dominant dogma: free markets know best, always.
Since our all-knowing financial markets imploded last fall, I've been howling in the wind in behalf of such a tax for the same reasons suggested by Thea Lee and Lord Turner. (Forgive me for pointing you to Chapter 10 of The Looting of America).
First, unlike payroll taxes that can discourage businesses from hiring people, we're dealing with the fact that there's too much useless activity going on in the financial sector. Flipping all those assets back and forth does nothing to promote the productivity of the real economy and, in fact, creates a crash-prone system that causes massive unemployment. Flipping toxic assets is more like dumping toxic waste into our rivers -- it might be profitable for a few, but overall it's tremendously harmful. So we want to discourage too much useless financial activity, and a tax on financial transactions helps reign in the sector's excesses.
Second, we need to siphon profits out of the "swollen" financial sector and to put downward pressure on outrageous, unconscionable and totally unjustified Wall Street profits and pay. Even more importantly, if Wall Street didn't have so much money at its disposal, it would have less influence over our elected officials, and would not be able to skew the regulatory process with a multi-million-dollar revolving door between the financial industry and government agencies.
If the G-20 nations decided to bring the hammer down on this tax, it would raise hundreds of billions of dollars per year. (The estimated take for the U.S. alone would be at least $50 billion a year and almost all of it would come from the Wall Street firms and hedge funds that engage in repeated high speed trading.)
But this kind of bill will never see the light of day unless we build a broad populist movement to demand it. A poster-child for any campaign should be Andrew J. Hall, who hopes to waltz off with a $100 million payday from Citigroup, a bank which survives entirely because of taxpayer largess. Hall, a successful oil speculator and trader who produces no discernible value for the economy, has a contract that would be worthless had Citigroup gone under, as it certainly was slated to do before we bailed it out. Now he wants his lucre as if he had courageously sailed through the storm on his own. In fact, some view him as a hero to the taxpayer because his speculative profits are helping CitiGroup get out of the red. For me, it's hard to view this as anything other than financial insanity.
Instead of justifying this outrageous rip-off and the many more to come, we should support Representative Peter DeFazio's efforts to tax financial transactions. He has two bills in Congress that could help rebuild our economy. HR 1068 taxes financial transactions to repay us for TARP funds. A second bill just proposed calls for "a transaction tax on crude oil securities to pay for the deficiency in the Highway Trust Fund and to pay for the Surface Transportation Authorization Act of 2009." (link) But due to benign neglect by congressional leaders and the rest of us, these efforts have gone nowhere.
While Europe seems more willing to reign in its bankers, on this side of the pond Wall Street is regrouping rapidly. The higher the stock market, the more boldly Wall Street marches backward towards record profits and renewed sky-high salaries. Seeing no serious opposition, the banking community is using taxpayer support to fund lobbyists to kill any and all legislation aimed at curbing their powers. They will gut the proposed Financial Consumer Protection Agency. They will make sure that the most profitable derivatives will be exempt from controls. They will undercut any and all efforts to curb windfall profits. And of course they will undermine serious attempts to curb their obscene levels of pay.
Not only is this a missed opportunity and a travesty of justice, but it is an economic disaster in the making. Lord Turner and the AFL-CIO are calling for a transaction tax in order to help head off the next crisis which is inevitable unless the system is reformed. They know that if you let wealth accumulate in the hands of the few, you will get a fantasy finance casino. You can regulate all you want but that casino will continue to emerge through the cracks. The only stable solution is to move money out of the bulbous financial sector into the real economy, and to move money from the super-rich to the middle and the bottom of the income ladder. A financial transaction tax is an excellent way to accomplish just that.
It's hard to figure out why more of us aren't up in arms over this. Maybe we feel intimidated by the way banks work. Maybe we have a secret admiration for those who pay themselves tens of millions of dollars (using our tax dollars). Maybe we think the crisis is over and we can go back to business as usual. Or, maybe we think the tooth fairy will come and rescue us. I really don't know. But this is the best moment since the 1930s to do something about our obscene mal-distribution of wealth and our ruinous, bloated financial sector.
We fought a war of independence to free us from aristocratic rule. Now an aristocracy of wealth is taking over, again, even after we watched it wreck the entire economy. If a British Lord and the AFL-CIO can agree to take on this elite, maybe we do have a little something to celebrate on this Labor Day.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.