Sunday, October 31, 2010

EconomicsUSA: Biz-generated Agendas: Money Morning, and MarketWatch both suggest alternatives to Obama policies

First off,  MarketWatch has bundled 4 articles under the heading "Jobs and the Economy: Here's how Washington coud get us back to work" (MW frontpage, Oct31,2k10).  The 4 articles may be found at these locations:

•  Nutting: Stimulus worked, but not that well.
       Sea of debt, h+ productivity undermined job growth
•  Gold: White-collar recession, blue-collar depression.
       Loss of Manufacturing jobs hollows out the economy
•  Powell: US ret+rment system ranks 10th -- out of 14.
       Netherlands tops list; China comes in last
•  Delamaide: Report from a parallel political universe.
       Getting our country back from the banksters

Secondly, there's this morning's email newsletter from Money Mornings in a blog-entry entitled "An Open Letter to Washington: How to fix the deficit and end the Bush-Tax-Cuts" (Oct28,2k10):

MARTIN HUTCHINSONContributing EditorMoney Morning

Dear Mr. President and members of Congress:

In the months that follow Tuesday's 
midterm elections, and into the New Year, you all face three very significant challenges. You must: 
  • Find a solution to the Bush-tax-cuts controversy.
  • Rein in the huge-and-growing U.S. budget deficit.
  • And better police Wall Street, which got us into this mess in the first place.
You can solve all three of these problems with a single, simple proposition. And you can do so without having to ask U.S. taxpayers to dig into their wallets or savings.

Let me explain.
-- EconoMix

Click the time-stamp below to Read more ...

A Single Solution

On Dec.1, just one month after Tuesday's midterm elections, the National Commission on Fiscal Responsibility and Reform will propose spending cuts and tax increases to reduce the nation's dangerous budget deficit. 

As taxpayers, we hope that the majority of those recommendations will involve cutbacks in wasteful public spending, which has grown excessively in the last decade and is a dangerous cancer on the national economy. 

That's because the other option is for the government to increase taxes. 

There's an unfortunate reality here: Most of the tax increases that would help slash the dangerous deficit - including some of the Bush tax cuts (those relating to dividend taxes, for instance) - would also damage the fragile U.S. economic recovery.

But there is an exception.

There is one tax increase that would generate substantial revenue, help knock down the deficit, and even
produce major improvements in the operation of the capital markets in both the United States and abroad.

It wouldn't increase taxes to U.S. households or most U.S. businesses, meaning it also wouldn't harm the U.S. recovery.

I'm talking about a "Tobin tax" on financial-market transactions.

Tobin Tax Basics

The Tobin tax, proposed by Nobel laureate James Tobin in 1974, would tax transactions, whether on the stock market, in foreign exchanges, in the derivatives market, or potentially in the ordinary transfers we always use to make an income and pay our bills.

We do not propose instituting a broad-based 
Tobin tax at a high rate such as 1%. A tax at that rate would be hugely damaging to economic life in general, as it would suck appreciable amounts of money out of every transaction we undertake (at that rate, we'd be talking about taking $3 out of a $300 grocery bill, for example). It would drive everybody back to using untraceable cash, a huge boost for the illegal "black economy" and a major loss in efficiency and security. On Wall Street, it would force the derivatives and other businesses offshore, or close them down entirely.

That's certainly not our goal.

However, a Tobin tax at a low rate - perhaps 0.01% or 0.02% per transaction - is a different matter, entirely. Even if that tax were extended to all transactions in the economy, it 
would have only a small effect on day-to-day transactions

For instance, someone with an after-tax income of $70,000, receiving pay-slips net of tax, would have total annual transactions - including credit card spending, withdrawals of cash and other expected transactions - of less than $100,000. With a Tobin tax, a person in that financial situation would incur an annual tax of no more than $10 to $20, which could be painlessly extracted by computer. It would also be possible to exempt "retail" banking and credit-card transactions from the tax.

A More-Tightly Controlled Wall Street

The Tobin tax would play out very differently for Wall Street, however. Most affected would be the "high-speed trading" business (also known as "high-frequency trading"), in which investment banks set up powerful computers in the same building as the stock exchange. This enables these institutions to get the "tape" of trades more quickly than their competitors, and then use this information via computerized "algorithms" to execute very fast trades, profiting from the result.

The margins on this business are very slim - perhaps as little as 1 cent to 2 cents per share on a $20-per-share trade. So even a 0.01% tax, costing 0.2 cents per share, would reduce those margins substantially. At the same time, this business is very profitable, making Wall Street more than $20 billion in 2009, with the leading firm, Goldman Sachs Group Inc. (NYSE: 
GS), reaping perhaps $5 billion of this profit. Thus, the Tobin tax at even 0.01% would tax 10% to 20% of this profit, producing $2 billion to $4 billion in revenue from this tax alone.

However, a Tobin tax would also have a similar effect on 
the massive derivatives market. The total current nominal value of derivatives contracts outstanding was $542 trillion as of December, the most recent figures available. Since most of these are short-term in nature, we can assume that annual trading volume totals at least this amount, with netting of contracts between the major houses probably increasing it further. 

A 0.01% Tobin tax, which would have to be imposed in all the major financial centers to catch the full flow, would thus yield about $54 billion per annum in tax revenue, of which perhaps $15 billion to $20 billion would accrue to the U.S. government. 

The most beneficial effect of a Tobin tax - beyond the revenue it raises - would be its effectiveness in cutting down on the so-called "
rent-seeking" activities of Wall Street.

Both high-speed trading and derivatives operations are insider markets, in which the majority of profits are derived from knowledge of the trade flow of transactions in the market. That knowledge is not available to ordinary investors; indeed, in the case of high-speed trading, it is not even available to those with marginally slower or more-distant computer systems. High-speed trading and most derivatives operations are distortions of the free market, artificially enabled by modern computer technology.
tobin tax us economy
While the derivatives market can provide a useful hedging function, only a small proportion of the $542 trillion of derivatives outstanding can possibly contribute to that function; there simply isn't that much risk exposure to hedge. 

As for high-speed trading, the liquidity it provides is of very poor quality. Indeed, systems such as this frequently produce "
flash crashes" - like the one that hit the U.S. stock market back in May - as well as other pricing anomalies. And they are generally shut down in a one-way market, when liquidity is most critical. 

Removing Wall Street's "rent" profits from these sources is thus pure gain for the rest of the economy - and for the general public.

If a Tobin tax cut down derivatives and high-speed trading activities by two-thirds, it would contribute maybe $10 billion in government revenue, or $20 billion if a 0.02% tax was imposed. And that isn't the whole story. By cutting down these counterproductive activities, this new levy would release several times this amount in profits from Wall Street to the rest of the economy, generating jobs and productive economic activity at a time when the country needs it most.

We hate taxes. But the reality is that a "Tobin tax" - in addition to producing needed federal revenue - will level the playing field between Wall Street and the U.S. general public. And for the reasons we just mentioned, it will also pave the way for healthy economic growth - and productivity enhancements that will restore the United States to its rightful place as one of the most competitive economies in the world.

Given those projected bullish outcomes, this is a tax we can live with.

Martin Hutchinson
Contributing Editor Money Morning

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