Nicholas Stern’s new paper on Climate Change: 8/10 on economics; 3/10 for politics (and the science is pretty questionable, as well)

December 9, 2008

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December 9, 2008

Why my wife is half-right on the Tobin Tax

December 9, 2008
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I’ve always been a bit of a Tobin Tax sceptic, which made for interesting domestic dynamics when my wife Cathy was director of War on Want, one of the main TT advocates in the UK (she’s since moved on to become a psychotherapist – I say it’s a natural progression from NGOs; she doesn’t think that’s funny). Now, however, even Dani Rodrik is weighing in on the issue, so it’s time to have another look.

The Tobin Tax, just to remind you, was first advocated by economist James Tobin in the 1970s, and consists of a very small tax (typically something like 0.1%) on the huge number of currency transactions that take place every day on global markets. And I mean huge – the latest figure from the Bank of International Settlements is that the daily global turnover on currency markets in 2007 came to $3.2 trillion – 90 times the volume of global trade. Even a small tax on that large a volume could raise significant amounts of cash ($3.2 billion a day in fact, except that the amount would probably be less than that since the tax should reduce arbitrage – large, short term capital flows seeking to make a profit from tiny anomalies in exchange rates).

The trouble is, Tobin Tax advocates claim it would ‘kill two birds with one stone’ by also damping down currency speculation and that’s the bit I don’t buy. A  0.1% tax is not going to deter a George Soros-type speculator who scents a massive windfall from a speculative attack on a given currency, (Soros made an estimated £1bn on ‘Black Wednesday’ by forcing the pound out of the European exchange rate mechanism in 1992). It really is very hard to kill two birds with one stone (try it sometime). Some Tobinites have refined the proposal to provide for a much higher second tier tax (the so-called Spahn tax) which kicks in when a speculative attack is under way. But that’s really just suspending currency transactions by imposing a prohibitive penalty during periods of speculative attack, and dressing it up as a tax.

Back to Rodrik. A recent piece on his blog arrives at the Tobin Tax by a very different route. He argues that an emergency injection of cash into the US economy by the government will not generate US jobs and investment (but will merely lead to increased imports and a deteriorating trade balance) unless one of two things happen: either the US government has to increase trade barriers so that the cash stays in the US economy, or there has to be a simultaneous fiscal stimulus across all the globe’s major economies. How to pay for it? You guessed it – step forward Prof Tobin. And while we’re at it, a Tobin Tax could pay for some of the other big bills that are falling due, like the $50bn a year needed to help developing countries adapt to climate change that is not of their making.


  1. Dear Duncan,
    you seem to mix a bit of the British humiliation by Soros in 1992 into the argument :) You are right that a TT would not deter Soros-like speculators who go for a big kill based on some unsustainable fundamentals (good old macro mess like UK’s double deficits in 1992).

    However, I think the TT has a potential to reduce the speculative arbitrage that is driven by mathematical/financial models. This tries to identify small discrepancies in global markets and benefit form them. It is not really related to any ‘fundamentals'; just discrepancies. The discrepancies are small so the small tax can make them unattractive.
    This would be a great benefit to emerging market countries with small, but open, financial sectors. The hot money pursuing small discrepancies, can easily destabilize their finances and turn small ‘nominal’ discrepancy into ‘real’ financial shock with impact on the main street.
    I think TT deserves a real try. Moreover, we know that it is feasible, because we have technology to trace terrorist financing (which is harder because it needs to identify few transactions in a huge pile, rather then tax all transactions).

  2. The previous comment is correct, i believe. The objective is to reduce volatility rather than eliminate speculators. The TT may or may not be effective, and there’s a significant scholarly literature that discusses this question, but to assert that it would not work because it would not stop events like the run on the pound reveals misunderstanding of the TT (and also financial markets).

  3. Hi Duncan,;

    Tobin Tax seems to be the way forward if nothing else for creating the $50bn a year needed to help developing countries adapt to climate change that is not of their making.

    Thank you
    Dawn Pugh

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