Efficiency vs. Resiliency
The arguments for and against an FTT are best understood as part of a much larger debate – one that Fullerton characterizes as an effort to balance efficiency and resiliency. “Both efficiency and resiliency are hard to define, but basically efficiency is the ability of a system to grow and expand and process throughput, while resiliency is the ability of a system to recover from a shock,” he says. “Economics has tended to focus on maximizing efficiency, but resiliency is only now getting widespread attention.”
He advocates a tax because he says the financial system has not only become efficient and fragile, but it has remade the global economy in its image by trimming fat wherever it goes. For him, an FTT is something like fire insurance – it pulls money out in fat times, but offers a cushion in lean times.
HFT: Collateral Damage?
An FTT would, however, hit high-frequency traders the hardest – and it’s not at all clear their activities are the ones causing disruption, as we saw in “High-Frequency Trading: Good, Bad Or Just Different?” Indeed, spreads have never been narrower, and the real threat to economic resiliency arguably comes from unregulated over-the-counter markets than from exchange-traded markets.
Fullerton concedes the point, but argues that the pennies we save from tight spreads aren’t worth the resources being devoted to high-frequency trading.
“If someone is truly investing, then the impact that this will have on their returns is so minimal that they really shouldn’t care, and by definition it will shift a lot of capital out of this high-frequency trading stuff and into real activities,” Fullerton says. “Efficiency in secondary markets is the flea on the back of an elephant, and not the elephant itself.”
Fullerton is, obviously, in the minority among his financial-sector peers – but it’s a minority populated by hitters like John Bogle, founder of the Vangard Mutual Fund.
“I support a transfer tax on securities transactions, primarily as a way to slow the rampant speculation that has created such havoc in our financial markets, but also for its revenue-raising potential in this time of staggering government deficits,” wrote Bogle, on the Wealth for the Common Good web site, which Fullerton also supports.
On the other side, you have people like Harvard Economist Ken Rogoff who argues that an FTT will have knock-on effects throughout the economy.
“Higher transactions taxes increase the cost of capital, ultimately lowering investment,” he wrote back in October. “With a lower capital stock, output would trend downward, reducing government revenues and substantially offsetting the direct gain from the tax. In the long run, wages would fall, and ordinary workers would end up bearing a significant share of the cost.”
It’s difficult to find studies that support either side, and those that have tried to calculate the cost of an FTT, like a recent report issued by the Ernst and Young ITEM Club, have focused on losses in the financial sector only.