The excellent Tim Harford says “If that’s the Robin Hood tax, I’m the sherrif of Nottingham” and
I have been appalled by the campaign’s profound lack of curiosity as to whether this tax would be a good idea. Start with the claim on the Robin Hood tax website that this is a “tiny tax on bankers … the people who caused this mess”. First, it’s not a tax on bankers. It’s a tax on financial transactions. And it’s not necessarily tiny, because some worthwhile financial transactions have a very large face value, and a much smaller true value. For instance, I might buy car insurance which could – if I knocked somebody down and permanently disabled them – trigger a payment of £1m. My insurance company might want to reinsure that million-pound risk, a perfectly sensible, socially useful and non-speculative transaction. But at a “tiny” tax rate of 0.05 per cent, that’s a £500 tax on a face value of £1m. It’s hard to imagine such a tax wouldn’t somehow affect my premium.
Meanwhile, I would like in proof of my integrity to point out a piece by Simon Ward of Henderson, which if it bodes as he thinks it bodes, is bad for my chances of winning my bet against Guido. Which you may recall is about whether deflation is a-coming. Ward writes:
Sterling commodity prices are 55% higher than a year ago – the largest gain since 1974. Input price inflation – an annual 8% in January – may rise to 20% or more this spring. With output and orders recovering, the low level of sterling reducing competition from foreign producers and the Bank of England signalling no intention to tighten policy despite high inflation, manufacturers are likely to pass these increases on rather than absorb them in margins.
If right, I will be proved to be a numpty.
Finally, while I appreciate that fiscal and macroeconomic policy has many shades of grey, you occasionally come across views that seem plain wrong. John Cochrane seems to have them, when he uses the pre-War ‘thought’ that “Government spending can’t make a difference, because that money must come from somewhere”. This is wrong, and also very tricky to refute in a rage. Brad DeLong is your guide to how Cochrane is wrong.
Cochrane is working in a pure cash-in-advance economy in which the velocity of money has not only a technological upper limit but also a technological lower limit–that spending is by assumption proportional to the quantity of money and to nothing else. But even in that model fiscal stimulus will almost always alter the quantity of money: the Federal Reserve would have to take active steps to raise interest rates as an offset in order to keep it from doing so. And the Federal Reserve right now is not–as a matter of empirical fact–not in the business of raising interest rates to offset the effects of fiscal stimulus on demand.
Read all of it. Everyone – Friedman, Fisher, Keynes – are on the other side to Cochrane here.
UPDATE: in some tasty left-on-left action, Paul Krugman tuts Brad DeLong for even imagining Cochrane has a model. I think this post is worth reading to remind us that BDL does not say “stimulus, always, wherever”. It wouldn’t work for Greece. We’re not Greece.