Here’s a letter that I just sent to the New York Times:
Paul Krugman supports a “Tobin tax” as a means of reducing speculation (“Taxing the Speculators,” Nov. 27).
Bad idea. Speculators buy assets only when they predict that these assets’ prices will rise; speculators sell assets only when they predict that these assets’ prices will fall. And speculators profit only when they predict correctly. So speculators who predict correctly help move asset prices more quickly to these assets’ ‘true’ values.
For example, a speculator who buys 10,000 shares of Microsoft believes that Microsoft’s stock is currently undervalued; the speculator’s purchase of this stock raises its price closer to what the speculator believes to be its ‘true’ value. If the speculator is correct, his speculation raises that asset’s price closer to where it should be. This ‘truer’ price – by more accurately reflecting market fundamentals – makes investment less risky for others and makes the allocation of capital more efficient.
But if the speculator is incorrect, he loses. That is, the market already ‘taxes’ harmful speculative moves while it rewards beneficial ones.
Sincerely,
Donald J. Boudreaux
Share
Podcast RSS Feed
Full EconTalk Text
{ 22 comments }
How does a Professor of Economics get away with teaching a disdain of/for markets?
How does a Professor of Economics get away with teaching a disdain of/for markets?
Prof. Damodaran has a fine response to Krugman at his blog. http://aswathdamodaran.blogspot.com/
It must be said. Krugman is a moron beyond all comprehension. Providing liquidity is a socially useless activity only if you're a communist idiot seeking to head up your own commissariat of asset prices.
As Marcus points out, such a tax would suck liquidity out of the market and widen bid/ask spreads (the cost of buying and selling financial assets).
Lower liquidity and higher transactions costs will increase the cost of capital for all firms. This means fewer projects will be economic and there will be less economic activity.
Investors in either publicly traded bonds or stocks are willing to accept a lower rate of return than they are willing to accept on an investment in a private firm because they can easily monetize those investments by selling them in the open market.
At least Tiny Tim, for what ever reason, is against this bit of stupidity.
As I have said before, Krugman may understand banking somewhat, but he has absolutely zero clue about trading mechanics and financial markets overall.
Marcus hits on the best reason against this tax: liquidity will dry up. Spreads will also widen, further increasing transaction costs.
Most of this tax will also be passed thru to the end customer, so they'll wind up paying even more, so it's really a tax on mom & pop investors, not “financially hyperactive” institutions and hedge funds (the intended target).
And yes, I’m still calling him a liar, because he should know, or have reason to know (or at the very least be able to ask someone who does know) about capital markets and trading concepts like these. Also, Krugman fails to mention the real reason behind the tax: it is union-driven and meant to fund jobs, so Krugman is dishonest about this as well.
Paul Krugman is “socially useless.”
“This would be a bad thing if financial hyperactivity were productive. But after the debacle of the past two years, there’s broad agreement — I’m tempted to say, agreement on the part of almost everyone not on the financial industry’s payroll — with Mr. Turner’s assertion that a lot of what Wall Street and the City do is “socially useless.”
What incredible arrogance. Who the hell is Krugman to think he has the right to define productive or useful, or to speak for society.
“That is, the market already ‘taxes’ harmful speculative moves while it rewards beneficial ones.”
But, that's the point! The government doesn't get a piece of the action, and the incorrect speculator can deduct the losses from his tax liabilities. How un-American! We need to tax the good and the bad speculators in the same way that we tax good and bad gamblers. (Good gamblers: winnings are taxed. Bad gamblers: losses cannot be deducted, and the casino's winnings are taxed.)
I have a counterproposal:
Perhaps we should tax Al Gore’s “green” investments, such as Amyris Biotechnologies:
“Amyris is currently focused on two major projects:
• The production of the drug artemisinin to fight malaria in developing countries
• The production of renewable biofuels to help reduce global warming
Or Amyris and Crystalsev Join to Launch Innovative Renewable Diesel from Sugarcane by 2010“
Rather careless for someone who invented the interwebs….
I have a counterproposal.
Perhaps we should tax Al Gore’s “green” investments, such as Amyris Biotechnologies:
“Amyris is currently focused on two major projects:”
• The production of the drug artemisinin to fight malaria in developing countries
• The production of renewable biofuels to help reduce global warming
Or Amyris and Crystalsev Join to Launch Innovative Renewable Diesel from Sugarcane by 2010“
Oh, wait, they don't exist, so we wouldn't have to tax them out of existence.
If I were the SEC, I would possibly look into these non-existent websites, touting non-existent companies, backed by Al Gore.
CORRECTION: IT DOES EXIST!
What do all 4 of these entities have in common?
<a href=” http://www.amyris.com/index.php?option=com_cont..., General Electric, Azul, and Amyris Announce Renewable Jet Fuel Evaluation Project
Dr. T, you're thinking of taxation too narrowly.
Of course the government already taxes each transaction. You pay SEC fees for each transaction already.
HERETIC!
If he's behind this sort of tax, I'd like to see Krugman post about what sort of tax increase he wouldn't support and why. Or are all taxes a good idea to Krugman?
If he's behind this sort of tax, I'd like to see Krugman post about what sort of tax increase he wouldn't support and why. Or are all taxes a good idea to Krugman?
Your view of speculation, while correct, is simplistic. I agree with your view as long as the speculator risks his own money, which is almost never the case these days. If a “speculator tax” is indeed already paid it does not affect the incentive of the speculator.
Markets are rife with manipulation. Pump-and-dump or using OPM to push markets up so that a leveraged bet will pay off elsewhere, are common. Do you really think that the PhilBro trader who “made” $100 mil trading oil really made markets more efficient? He probably schemed with a commodities fund manager to use shareholder funds to push markets up, burn the shorts or whatever. Meanwhile you and I paid higher prices at the pump, 'cause well, it takes time to adjust to high prices and everybody has to buy gas.
If you want to defend speculators explain the efficiency of “pump-and-dump” with OPM, will you?
One of the problems is the speculator is borrowing to speculate. If you want to cut speculation, raise the margin requirements.
I think people are confused about “other people's money”. There's OPM where investors willingly hire others to speculate with their money and then there's government owned institutions like banks who speculate with the money of the unwilling. The two are not the same.
OPM in the first sense is not a problem for anyone other than the people putting up the capital and it's nobody's business but theirs. The other OPM is a huge problem.
why do you want to cut speculation? Every time I've invested in a small mom and pop start-up business, I was speculating. You want that to stop?
I think people are confused about “other people's money”. There's OPM where investors willingly hire others to speculate with their money and then there's government owned institutions like banks who speculate with the money of the unwilling. The two are not the same.
OPM in the first sense is not a problem for anyone other than the people putting up the capital and it's nobody's business but theirs. The other OPM is a huge problem.
why do you want to cut speculation? Every time I've invested in a small mom and pop start-up business, I was speculating. You want that to stop?
I think people are confused about “other people's money”. There's OPM where investors willingly hire others to speculate with their money and then there's government owned institutions like banks who speculate with the money of the unwilling. The two are not the same.
OPM in the first sense is not a problem for anyone other than the people putting up the capital and it's nobody's business but theirs. The other OPM is a huge problem.
why do you want to cut speculation? Every time I've invested in a small mom and pop start-up business, I was speculating. You want that to stop?
Comments on this entry are closed.