As Richard argues in typically forthright manner, it is not clear that liquidity to the n-th degree is always a good thing – something that Krugman has pointed out, and Lord Turner – the inspiration for Richard’s post – as well.   However, this does not prove that you can attack liquidity to any amount and have no consequences at all.   I am utterly convinced that the 50bps stamp duty in the UK (a) falls on pensioners and (b) increases cost of capital for companies, for example.  Abolishing it would improve welfare, and not introduce dangerous destabilizing speculation.

There is an important balance to strike. How much is ‘any amount’?  Well, a billion or so out of global FX might not hurt much.  $100’s of billions out of every area of finance – as the Robin Hood People want – would surely be devastating.  Utterly insolvent banks – you would have thought that the last 3 years has taught us something about that having consequences.

So the point should be to move the debate over to where it is conducted along grown-up evidence based lines, as I think Lord Turner is capable of.   Not everyone involved in this debate is so capable.  So instead of:

“How much shall we take from Evil People to do Good Things, given that there are No Bad Consequences and that the people who disagree with me are clearly evil and corrupt or stupid?”

we move to:

“Transaction taxes can raise money and lower liquidity.  At what level could they be set so that the liquidity lost is not harmful or if harmful is made up for by the money raised?”

Much more boring.  Not sure it will attract the quantity of luvvies that the Robin Hood Tax campaign has…  But, as a brilliant young friend of mine has shown in a Hume quote (private email):

“There is not a more effectual method of betraying a cause, than to lay the stress of the argument on the wrong place, and by disputing an untenable post, enure the adversaries to success and victory”

Incidentally it would also help if some of the people in the debate recognised that Corporations are not People.  The tax on Corporates then fall on employees, shareholders, and so on.  Read Tim’s post on this.

I am off for personal reasons today, so argue amongst yourselves ….

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14 thoughts on “The right sort of liquidity ….

  1. Giles

    Patronising as ever, I note.

    But let’s get to the real nub – since you clearly can’t / won’t address the issues on liquidity – and deal with incidence

    As you know I have discussed this at length with Tim and he could not disprove the arguments I presented – indeed – he agreed they were logical is my assumptions held – he just disagreed with the logic

    So why don’t you address incidence instead and answer these questions:

    a) On whom does the incidence of churning costs fall in pension funds?

    b) Does stamp duty reduce churning?

    c) If so is stamp duty beneficial in welfare terms assuming your answer to (a) is pensioners?

    Then answer the same question on where the incidence of the costs of City trading in forex, derivatives, etc fall and then suggest why that incidence is beneficial

    Then follow through and suggest why reducing the incidence of those charges would harm society

    Arguing about the incidence of the tax – as you on the right like to do (sorry, but true – that’s an accurate description of your position on this) is a mere side show

    Address the issue of the incidence of the charges the tax is designed to reduce – that’s the elephant in the room

    If you can do that then there is a grown up debate – but right now you’re wanting to squabble in the wings

    It’s not you as a result whose got the high ground – you’ve not even entered the arena of discussion until you do this

    Richard

    1. Sorry Richard, but while I don’t agree with Tim Worstall on much stuff – particularly his hatred of the European project, and greater backing of tax evasion than I would support – I have never, ever, ever read an argument of yours that managed to refute an argument of his. As an objective reader who sits somewhere in the middle of you both, politically, that is my honest opinion.

      (I appreciate that you have a need to say that anyone who disagrees with you is ‘on the right’, which is your ad hominem way of dismissing the need to address their arguments properly. Given the content of my publications and contacts, I have little need to address that absurd claim …)

      And I am yet to read a weaker argument for a massive charge on equity trading than ‘it reduces churning and therefore saves the investor money’. Stamp duty reduces trading, undoubtedly, by making many less trades economic. So would tripling commissions – in fact, it is functionally the same as a commission, except the person to take it is the government, not one of the participants in the trade or a broker. Do you think that homeowners would benefit from an increase in estate agent fees? Would they benefit from the government increasing stamp on home sales? Would we all be better off if stock brokers charged 1% commissions instead of 10 basis points?

      What an extraordinary view – you could do me a favour by linking me to anyone else, anywhere, that believes this. I remain as open minded as ever, and perfectly willing to consider some sort of transaction tax in these fiscally straitened times – just not terrible arguments that end up weakening the case.

      Your (a) (b) and (c) are a conclusion desperately hoping for a justification – and weaken the argument for a measure that could still make sense – if well argued for (read that Hume quote again). I have common sense on my side here: increasing stamp duty inevitably affects the person buying shares, just as VAT increases the cost for the person buying clothes, putting a tax on cinema tickets would increase the cost of going to the cinema, and so on.

      Oh, and http://www.oxera.com/main.aspx?id=5938
      http://www.investmentuk.org/press/2007/20070502.asp

      “The report finds that stamp duty, a government levy of 0.5 per cent on purchases of shares of UK listed companies:

      * Reduces a typical occupational pension scheme fund at retirement by between 1.52 per cent and 2.38 per cent (between £6,441 and £11,538 in today’s money);
      * Hits Government schemes such as Stakeholder Pensions (by £7,540 to £10,389) and will similarly impact on the proposed system of Personal Accounts;
      * Also hits Child Trust Funds, reducing the funds at the end of the saving cycle by up to £202 for equity based portfolios;”

      This paper in particular might help you out:

      http://www.ifs.org.uk/comms/comm89.pdf

      but only if you want to deal with empirical research rather than made-up ‘I hope the following happens because that helps my conclusion’ arguments.

      A good day to you. Incidentally, don’t be so sure that I am not coming into the arena …

    2. Richard,

      You have just responded to a post that says the right question to be asking is whether (when, where and by how much) reductions in liquidity could be a good thing or an worthwhile trade-off for revenues raised, by writing “since you clearly can’t / won’t address the issues on liquidity”.

      Actually, I quite like your rhetorical move of asking what the “incidence” of various practices in the City is, and it’s a reasonable point that any incidence of taxation upon consumers* could more than compensated for if it results in a reduction in the “incidence” of harmful goings on within finance. Of course if you had any comprehension of mainstream economic, you’d recognise both considerations could be subsumed into standard welfare analysis. Of course again, this doesn’t mean you get to ignore the side of the story you don’t like, the “mere side show”, as is your wont. And of course Giles is right about your hilarious idea that stamp duty makes pensioners better off.

      I don’t see that question of whether the transaction tax would reduce the “incidence” of harmful finance practises is an “Elephant in the Room”, because I’m sure Giles sees the question of whether a transaction tax would harmful finance practices as central; he just doesn’t share your confidence it would.

      I suppose if you hold the loopy belief that merely making financial transactions more expensive, thus reducing liquidity all over the place, will magically transform the City into a safer place with less fall out for the rest of us, then your position at least has some sort of internal coherence. And of course it helps that you don’t really see the benefits in speculation, hedging etc. in the first place.

      * are you still vainly trying to deny such incidence exists?

      1. Chaps, all of you.

        I have some experience from my Motley Fool days of dealing with people like RIchard, who lose their tempers and go all ad hominem* at a moment’s notice. As I have noticed that it makes me lose my temper and waste time, I think I will pull back from this one. What also bothers me is that there may be some very good arguments for some transaction costs – and by happening to focus on the very weakest ones that are available – those found in Richard’s report – I risk giving a bad name to a cause that may be much better than its weakest proponent.

        I’ll reiterate – I don’t oppose all transaction costs – just bad arguments for them. Lord Turner, who has near-genius level intelligence and is described by a friend as ‘far out ahead’ of the debate, has written a reputedly fine speech about this and many many things. I think my time is better spent reading and reviewing that speech, than demolishing very bad arguments for possibly good causes. Hey, I hope my next opponent in debate is Tim W. That’d be much more satisfying.

        So: thanks for the participation. Let’s spend our weekends doing something more constructive than winding up strangers ….

        *given that most of the time I find myself being attacked for supporting Keynesian spending, and increased intervention in credit support to the economy, I find the label ‘libertarian’ particularly asinine.

  2. Giles, did you ever do a post on that stamp duty report? Reading the shortened version the magnitudes do seem suspiciously high – if a 1% stamp duty creates such a huge distortion then presumably when trading costs were much higher 10 years ago the value of shares must have been much lower than they are today. Or is the point trading volumes were much lower too? And if it stamp duty was cut by half what would happen to trading volumes and hence costs etc?

    Not sure any of these points are conclusive I just wonder sometimes about the industry reports – it seems that every tax ever levied reduces economic activity by enormous amounts and yet GDP/capita across the developed world seems quite uniform, which seems unlikely (given differing tax regimes) if everything was so distortionary.

  3. This is, dare I say it, a really interesting issue. A couple of random thoughts specifically on pension funds and equities..

    I think we can safely say that stamp duty on shares hasn’t reduced churning since the turnover in portfolios has continued to edge up. But at the same time increased trading has pushed up pension funds’ costs (investment fees have gone up too) without any apparent pay-off in performance. There’s good stuff from both Watson Wyatt and Mercer on these kinds of issues.

    Summink doesn’t seem to be working properly but personally I don’t think a transaction tax is the answer to any of this. If the issue is the level of costs incurred, then arguably more pressure from pension funds as clients of asset managers would be more effective. I geuinely don’t understand why trustees have tolerated an increase in fees without commensurate performance.

  4. On that stamp duty report, i could be wrong but the estimated cost to people’s pensions seems to based on saying you lose x%, and given share prices grow by y% on average each year that magnifies to a much larger figure. Is this how others read the report? If so I’m not sure I consider that legitimate.

    1. I’ve no doubt it needs much updating for stock movements. But I doubt it is much defence to say that since you don’t make much money, the amount ripped from the shareholder through transaction fees (whether by gov or commission) is any less important.

  5. That’s a good point, but it wasn’t mine! If share prices fall does stamp duty save pensioners money? Interesting idea. My point I guess could be better expressed by – if the government subsidised share transactions by the same amount as it currently taxes do we think it could painlessly boost GDP?

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