Economics As Political Propaganda

The G-20 finance ministers’ meeting on 7 November in Scotland which heard, gobsmacked, Gordon Brown propose a global tax on financial transactions, with the dual purpose of reducing their size and volatility, and raising funds to finance investment and growth in less developed countries, must have wondered what century they found themselves in.

This kind of tax was first suggested by James Tobin in 1972: he originally envisaged a tax rate of 1% on all foreign exchange transactions, but later reduced it to from 0.1% to 0.4% (still a tidy sum considering that the volume of financial transaction is of the order of ten times world GDP). Forty years ago it might have been possible to introduce it effectively in economies that were relatively closed to financial flows. The United Kingdom still had a dual exchange rate, one for current transactions and one for investment carrying an investment premium; an individual or company based in the UK officially could only invest abroad by borrowing from the holders of investment sterling and paying them back in the same sterling. Global communications were costly, time-consuming and insecure.

Today, such a tax could only be global: it is sufficient for one country not to introduce the tax, for that country to attract the bulk (well, all) of global financial turnover thus offering the entire world a tax avoidance opportunity. There are no global governance institutions that could institute it or enforce it globally, and even if the tax were introduced as a genuinely global tax, it could be avoided by transactions taking place in cyberspace, for the argument that a tax levied at a small rate would be preferred to a tax-free but less secure transaction no longer applies. Financial transactions in cyberspace are so secure as to minimize any associated risk.

If the objective of reducing the size and volatility of financial transactions in times of turbulence is to be gained then much higher tax rates than a fraction of a percentage, higher than any conceivable insecurity premium of unofficial market channels, would be needed. James Tobin complained that his proposal had been hijacked; it has become, in today’s world, a laughable economic proposition, but as a political proposal it has its propaganda uses.

We know that Gordon Brown is a politician of little economic understanding, and that he is a desperate man anxious to look as if he really is saviour of the world, especially on the eve of high-level European appointments with handicapped 'British' candidates, and the sure prospect of electoral defeat next year.

The UK Treasury strongly criticized the Chairman of the Financial Services Authority, Lord Turner, when he was sent out to make the same proposal last August. Now New Labour economic commentators such as Will Hutton unashamedly pretend that this is a serious proposition, that "Gordon Brown has backed a truly radical plan to transform the world’s banking system", that he is "brave" and "radical". Were it not for the fact that Hutton always was a sucker for the Third Way, political propaganda might be mistaken for serious economic thought rather than a revisiting of the history of economic thought for any grist to take to Brown's mill.

As chief executive from 2000-2008 of The Work Foundation:

'a British not-for-profit foundation that provides Consultancy and Research to the UK business, governmental and not-for-profit community. It concentrates on improving both economic performance and quality of working life. It is based in London and has 60 staff. Formerly The Industrial Society, The Work Foundation - since 2002 - has shifted its business model away from being a training organisation towards being a think tank on research, consultancy and policy.'

Hutton is at least in part funded by a quango that swallowed up an earlier institution and now benefits from our tax-funded, obligatory charity. Not a position of any comfort if the New Labour links to high office in the european Union are not renewed; even worse if the quango hunters of the Conservatives are returned to power.