Give Us 0.01 Percent

A "Tobin tax" would stabilize the global economy
and help the poor. So who's against it?

by David Moberg

In These Times magazine, April 2002

The poor nations of the world came away from the March U.N. conference on development in Monterrey, Mexico with little more than modest pledges of increased aid. Worse, through both the conference declarations and the conditions Bush will attach to future j.. aid, the United States continues to impose the discredited "Washington consensus" of deregulated trade and finance on all developing countries.

This one-size-fits-all strategy is precisely what Harvard economist Dani Rodrik warned against last October in a report to the U.N. Development Program. Local development strategies, he argued persuasively, are more important for growth than adhering to free trade dogma, and integration into the global economy is an outcome of successful development, not its prerequisite.

In the run-up to the conference, some citizens groups and governments had proposed alternative strategies for development that the United States shot down. One of the most promising was an idea first proposed 30 years ago by Nobel prize-winning economist James Tobin, who died in March. Tobin was concerned, even back then, about growing short-term speculation in the value of currencies, and about the corrosive effect of currency trading on the ability of governments and central banks to set broad economic policy. He proposed imposing a tiny tax-perhaps one-hundredth of a percent-on each transaction to discourage much of the buying and selling of various currencies to profit from small discrepancies in prices in the global money market.

The idea initially got little attention from economists. But as currency trading exploded, and global financial crises grew more frequent and damaging, interest renewed in the "Tobin tax." Advocates for poor countries envisioned that revenue from such a tax could be used to finance sustainable development. But legislation first pushed through Congress in 1996 by Republican

Sens. Jesse Helms and Bob Dole would prohibit U.S. contributions to the United Nations if it were to impose a tax on Americans. That threat, added to Washington's considerable clout at the international financial institutions, has kept the Tobin tax out of international policy debate. In Monterrey, the only mention of it came from Fidel Castro.

Yet the idea of a currency-transaction tax has inched into the policy mainstream. After the 1997 Asian crisis, a broadbased French movement for alternatives to corporate globalization-ATTAC-originated with support for a Tobin tax and has since spread throughout much of Europe. Even in the United States, which lacks an ATTAC equivalent, Tobin-style taxes have been endorsed by a few think tanks, development advocates, the AFL-CIO and assorted academics. Rep. Peter DeFazio (D Oregon) and Sen. Paul Wellstone (D-Minnesota) introduced a congressional resolution endorsing a Tobin tax in April 2000.

The Tobin tax also has been endorsed by French Prime Minister Lionel Jospin, the French and Canadian parliaments, and hundreds of economists and legislators around the world. The European Parliament came within one vote of approval, and a new multi-party resolution of support was recently introduced in the British Parliament. A February study prepared at the request of the German development minister concluded that the tax could be feasibly implemented. Opinion polls, from Finland to the United States, show strong popular support for the idea.

The development of the global economy over the past three decades has given credibility to Tobin's idea. Daily trading in foreign exchange has grown by more than 15 times to nearly $1.5 trillion a day (even more when currency futures and other related financial derivatives are included). To put that in perspective, the volume of all trade in goods and services in a year is equal in dollar terms to just a few days of currency trading. Roughly 80 percent of that trading is short-term, with currency bought and resold within a week, often within minutes. Very little of this serves international trade. Nearly all of it is speculative, or else it involves hedging-that is, seeking protection-against the currency instability that the trading system itself exacerbates.

This is a huge waste of time and resources. More important, as the volume and ease of trading grow, the market becomes less rational and efficient. A herd mentality takes over. As Thomas Palley of the AFL-CIO notes, much of the short-term trading is based on "noise" in the system-not solid fundamental analysis-that can trigger larger trends that feed on themselves. Currency values swing far out of relation to underlying economic fundamentals. Central banks and governments are easily swamped in efforts to defend currency values or to maintain macroeconomic policies-such as setting interest rates or budget targets-against this electronic herd.

As a result, a growing number of major financial crises-like the 1997 Asian meltdown that spread to Russia and beyond- have devastated hundreds of millions of poor people. Bailing out banks and international investors in these crises to avoid even greater damage to the global financial system has been costly to citizens of richer nations. And to protect themselves from speculative attacks, central banks have held onto increasing reserves of hard currencies, depriving governments in poor countries of resources they need for investment in development.

Since speculative activity involves many large-scale, short-term trades that focus on extremely small differences in currency prices, even a tiny tax could make such trading uneconomic without interfering with the currency trading needed for normal business. Yet even as it depresses speculative trading, a tiny tax could still generate substantial revenue-well over $100 billion a year globally, roughly double all current development aid.

Could such a global tax be imposed? Could it be easily evaded? Would it work?

Over the past few years, a burst of new research has demonstrated that a Tobin tax is quite feasible. Bowing to national sovereignty, most proposals now assume that individual countries would impose the tax on transactions in their own currencies, and they would collect the revenue. Since the currency-trading regime has become increasingly computerized and centralized, especially in its system for settling trades, L it has become much easier to impose and collect the tax, regardless of where the trade takes place. (Transactions by a currency trader, whether in London or the Cayman Islands, would still have to be settled through a centralized system.) Furthermore, beyond the baseline small tax, the system could also be set up to trigger higher taxes whenever the. volume or volatility of trading increases beyond some normal level. This second-tier tax would give countries another tool, besides raising domestic interest rates to astronomical levels, to counter speculative currency attacks.

Ideally, this system would be set up as part of a global, coordinated action, but recent research concludes that not every country needs to participate for a currency transaction tax to work. It would be most important to involve the few countries that dominate the global currency markets (and which would also reap the greatest revenues). In this model, there would have to be an additional political battle, domestically and globally, to steer that revenue to progressive ends, such as sustainable development. But if countries move toward more broad-based taxes on financial transactions, such as futures and stock trading, it might be easier to argue that global currency trading taxes should be targeted toward reducing global inequality, which-besides being unjust-depresses economic growth and fosters political instability.

What difference would a Tobin tax make for the global economy? It would dampen short-term speculation in currencies and reduce the likelihood of financial crises. As a result, global development would be more steady and capital flows more oriented toward long-term investment. It would give national governments more independence in managing their economies, which would help both rich and poor countries alike. It also would provide new revenue raised in a progressive fashion, with at least some ideally going to redress global inequality.

But a Tobin tax by itself would not remake the global economy. Since the cost of trading has plummeted over the past 30 years, the taxes under discussion might only restore trading volume and volatility to the level of the '80s, which had already surpassed the level that initially worried Tobin. It would not protect national economies from all external financial pressures nor from their own mismanagement. "It's best not to think of the Tobin tax as the only solution," argues Rodney Schmidt, a Tobin tax expert formerly with the Canadian government. "I prefer to think of it as an additional instrument in the government tool kit."

What's clear is that, as a tool, the Tobin tax could work. The only things standing in its way-and these are no small obstacles-are the overwhelming power of the global financial industry and the lack of both a popular political movement and the political will of governmental elites to do what's right for the world.

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