Monday 10 October 2011

Not all jobs are worth saving

This specific story is a couple of weeks old now, but the question of a tax on financial transactions is one which will be around for a while.  The Sunday Times referred to it again yesterday, but that’s hidden behind their paywall.
The UK Chancellor has already said that the UK will veto the tax unless it is agreed worldwide rather then in Europe alone, although those EU countries keen to see such a tax imposed are already trying to work out how they can find a workaround for any UK veto – perhaps by restricting the tax to the Eurozone.
The UK’s objection is based primarily on the potential job losses which might follow such a tax, amid concern that the activities will simply be relocated elsewhere.  And, if the effect of such a tax were to be solely the relocation of the activities taxed, then such a concern is perhaps understandable; but what do we mean by ‘relocation’?
The FT story said that such a tax would “wipe out or displace up to 90 per cent of derivatives transactions”; and there are two parts to that statement.  That mirrors the fact that those seeking the imposition of such a tax have two objectives, and for me the second, that of discouraging excessive risky behaviour, is the more important. 
As the EU’s impact assessment puts it, the term ‘relocation’ in this context “reflects both the move of activities elsewhere outside of the taxing jurisdiction and the disappearance of some types of activities … Such disappearance could be seen as positive if the activities targeted are considered as harmful”.
Certainly, it is true that some of the jobs would be relocated elsewhere, but many of them would simply disappear if, as the study predicts, “the volume of EU derivatives trades will plummet by 70 to 90 per cent”.  That looks like a good result to me, not the disaster as which those involved paint it.  These trades are part of what causes volatility and instability as speculators and gamblers play the markets; they add nothing to the movement and allocation of real capital.
It comes back to a subject I’ve touched on in other contexts in the past.  There are some forms of economic activity which, overall, do more harm than good, and supporting them because they provide jobs is a short-sighted view.  Those of us who want to rebalance the economy away from damaging activities have to accept that there will be job losses in the process – the challenge is to plan for the alternative future, not to protect the status quo.


Anonymous said...

On a slight tangent, when shares were sold off by the gov't e.g. Gas, those shares could not be traded for some months. So why can't all shares when traded on the stock market be treated similarly?

Unknown said...

Anon - the straight tradig of shares are not the problem - and a re in any case subject to stamp taxc (wich invalidates Osbone's argument that taxes have to be applied worldwide to work. The problem is with exotic derivatives (which have little or no actual economic value), naked short selling of sshares (where people ssell shareds they don't own in order to drive down the price, so that they can buy them at less than they sold them - this making a profit. That should just be outlawed. Also, Foreign exchange trading, where maxzive amounts of cash are moved tfom one currency to another thousands of times a day to attain a very small return each time. This is purley speculative, and has no function in servicing trade (or business as we now call it). A tax of %0.005 on those trades would wipe out a huge swathe of people who make a lot of money while adding no value to the economy. That can't be a bad thing, can it?

Glyndo said...

It's all a gamble and as my dad said, "you can't shuffle the horses" The problem is that they are gambling with our assets with no apparent risk to themselves. That's why it stinks. "Something must be done"

Unknown said...

Glyndo - the problem is these 'Assets' have no intrinsic value - that's why cash flows to Gold in times of crisis - it is deemed to have an intrisic value (though I am not sure why).

The other think I forgot to mention is that derivatives are trades Over the Counter, so there is no exchange to exercise control - only and external regulator can do that.

Spirit of BME said...

Speaking up derivative trading is the same challenge as giving Judas Iscariot a PR make over, but here goes.
Clinton Administration gave very clear green signals that poor families should have their own properties, so subprime was born, banks and rating agencies committed the crime of giving them a low risk rating – I know all pretty crazy when you look back, but a good idea at the time and it made Bill a happy man.
The packaging and trading of these derivatives expanded the flow of money and reduced bank exposure to the risk and stock markets boomed and money supply increased.
Now, if you want this market instrument to end completely, including the bits that worked very well over many decades and make banking more restrictive, you should be more up front and state how much you want to see public and private pensions fall and how much you would see unemployment rise as a result of the reduction in money supply.

Unknown said...

BME - Pension funds do not trade in these instruments - in fact the mitigate against the stocks and sovereign debt that pension funds do invest in. Short trading especially - and some forms of derivatives actually have the effect of driving down the value of long term investments.

Spirit of BME said...

Sionnyn, You are quite correct there are no direct trading ,but what I pointing to was the increase in money supply over heated stock markets , which gave excellent pension provisions for companies and individuals.

John Dixon said...


I agree with the first part of your first comment - speaking up for derivatives trading is indeed akin to giving Judas a PR makeover. And I'm not convinced that you've been any more successful at the former than you would have been at the latter.

The derivatives to whch you refer seem to be a selective subset of the whole field; there's a good deal more to the issue than merely the parcelling up of debt.

You may well be right that derivatives trading freed up the market, and increased the apparent money supply, but to what extent was the apparent increase underpinned by a real increase, and to what extent was it ever sustainable over the longer term? I'd accept that this is not a straightforward question, but surely it eventually became apparent that this was a 'bubble', and that the lack of underpinning in the 'real' economy was a fatal flaw? And that's without even getting started on the way in which it effectively privatised the upside and socialised the downside...

Growth in pensions value is certainly a desirable objective, but if that growth is neither real nor sustainable, it ends up causing difficulties in the longer term, rather than really increasing the value of people's pensions. Certainly, the bursting of the bubble has hit some hard, but rather than trying to reinflate the bubble, we need to udnerstand that believing that we can really get something for nothing is delusory.

And that, ultimately, is the problem with the markets in complex instruments not directly underpinned by real assets; they appear to generate something for nothing in the short term. A sustainable economy needs to be anchored in the real world, where such magic is understood to be illusory.