Tag Archives: Zucman

The Case for a Financial Transaction Tax

The financial industry is a behemoth. Over the past 150 years, it has grown dramatically as a share of GDP. And entrance into its ranks has become a great way to enter into the top 1 percent of earners. (According to recent data, financial professionals have nearly doubled as a share of Americans in the top 1 percent.) At the same time, Wall Street is one of the most reviled institutions in the United States, with a recent study finding the lowest trust in finance recorded over 40 years.

Here are three good reasons to be distrustful of Wall Street, followed by one policy that would address all of them.

1. The Financial Industry Engages in Rent-Seeking

In economics, rent-seeking is the practice of making money simply by moving money around and collecting the resulting fees, rather than by facilitating profitable investment. The latter role is necessary for functioning markets; rent-seeking, however, is not.

There is now a strong literature suggesting that at some point, finance largely becomes extractive, while remaining at the same efficiency level. Thomas Philippon finds that the cost of financial intermediation has not fallen in 30 years. As Gautam Mukunda writes in a recent Harvard Business Review article, “Creative work increases a society’s wealth. Distributive work just moves wealth from one hand to another. Every industry contains both. But activity in the financial sector is primarily distributive.” Other studies come to the same conclusion:

  • Ozgur Orhangazi finds a negative relationship between real investment and financialization. The author proposes two channels to explain the relationship: “First, increased financial investment and increased financial profit opportunities may have crowded out real investment by changing the incentives of firm managers and directing funds away from real investment.”
  • Stephen Cecchetti and Enisse Kharroubi examine a sample of developed and emerging economies and find that financial development is good for emerging economies, but is detrimental to productivity growth for advanced economies.
  • Jean-Louis Arcand, Enrico Berkes and Ugo Panizza find that when private sector credit exceeds 110 percent of GDP finance begins to become a drag on growth, a situation the U.S. is currently in.

This rent-seeking has increasingly starved the public sector across the nation. The Financial Times reports that “public investment in the U.S. has hit its lowest level since demobilization” after World War II.

2. The Financial Industry Makes Inequality Worse

The International Labor Organization’s (ILO) Global Wage Report finds that the financialization of the economy has been the most important factor in the decline of income share accruing to labor in developed countries. This is because the financial industry primarily distributes wealth upward.

A 2011 study examining the U.S. finds that, “financialization accounts for more than half of the decline in labor’s share of income, 10 percent of the growth in officers’ share of compensation, and 15 percent of the growth in earnings dispersion between 1970 and 2008.” In a paper published this year in the British Journal of Political Science, Christopher Witko finds, “financial deregulation was one policy translating the political power of these actors into economic outcomes.” That is, the rise of finance was a money grab by the 1 percent.

Because relatively few low-income and middle-income families own financial assets, they largely haven’t benefited from the rise of finance. Instead, it’s enriched the wealthy while saddling the middle class with debt. A recent study by Emmanuel Saez and Gabriel Zucman finds,

The key driver of the declining bottom 90%  share is the fall of middle-class saving, a fall which itself may partly owe to the low growth of middle-class income, to financial deregulation leading to some forms of predatory lending, or to growing behavioral biases in the saving decisions of middle-class households.

The charts below show how finance has enriched the top, whose wealth came from equities, while sucking money from the middle, whose wealth consisted of housing and pensions:


Those who had no assets at all saw their incomes shrink while wages remained stagnant for decades. As Matt Yglesias notes, in 2013, 25 hedge fund managers took home more twice as much as every kindergarten teacher in the country combined. This while hedge funds have failed to perform better than the market.

3. The Financial Sector Is Increasingly Engaged on High-Frequency Trading

One particularly negative form of trading that the STT could reduce is High-Frequency Trading (HFT). HFT is a useless and distortionary practice that allows investors to make money off of millisecond-quick trades. (HFT recently attracted attention in Michael Lewis’ book “Flash Boys.”) The practice has been derided by Nobel laureate Joseph Stiglitz as a sophisticated version of front-running (buying a stock shortly before a pending order to take advantage of the price increase).

The problem is that instead of channeling money toward profitable investment, HFT is a prime example of making money off of moving money around. A recent study finds that a one millisecond advantage can increase a firm’s earnings by $100 million a year. Ironically, while bridges are vulnerable to collapse across the country and infrastructure in general is sorely undercapitalized, high-speed traders spent $2 billion on infrastructure in 2010 — for high-speed cables to NYSE. HFT does nothing to benefit markets, but instead makes them more volatile. 

The solution: A Financial Transaction Tax

When an industry has negative impacts on the broader public, economists call these effects “externalities.” It doesn’t mean we should destroy the industry, but rather, limit the harmful behavior. In much the same way that we should tax carbon dioxide — and do tax cigarettes and alcohol — we should also tax financial transactions.

The idea for a financial transaction tax has been around since John Maynard Keynes’ “General Theory.“ However, the idea began to gain traction in the late ’70s and ’80s with the rapid growth of the financial sector. In 1989, Lawrence Summers and Victoria Summers proposed a U.S. Securities Transfer Excise Tax, arguing that it could raise some $10 billion annually. Recently, the International Monetary Fund (IMF) hassupported a financial transaction tax as well. A metastudy by Neil McCulloch and Grazia Pacillo finds that a Tobin Tax (a type of FTT) would be “feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions.”

From 1914 to 1966, the United States levied a 0.02 percent tax on sales and transfers of stock. Federally, Speaker Jim Wright pushed for a renewed tax in 1987, proposing a fee of 0.25 percent to 0.5 percent on the buyer and seller of each securities transaction, highlighting the tax’s progressive aspects. More recently, the “Wall Street Trading and Speculators Tax Act” was proposed by Sens. Harkin and DeFazio, which would assess a tax of 0.03 percent on trades of stocks, bonds, futures, options, swaps and credit-default swaps, and would generate $352 billion over 10 years.

Such a tax would not be unprecedented. On May 6, 2014, 10 European nations issued ajoint statement that a financial tax will begin in 2016 as a means to reduce speculation and raise revenue. The initial tax will focus on the trading of stocks and some derivatives, even though the initial proposal included taxing most financial products. The European Commission estimates that a broad tax could raise $39 billion (31 billion EUR) in annual revenues.

Further, there was a Stock Transfer Tax (a type of FTT) in place in New York from 1905 to 1981; revenue from the tax was split between the city and state (in the 1960s the full revenue reverted entirely to New York City). Because of a quirk in its phase-out, the STT remains technically legal in New York, though it is automatically rebated to the trader at a rate of 100 percent. Reducing this rebate would be a great way to boost revenues for New York and show the viability of a more expansive tax.

Finance is an important part of any economy. But the unprecedented rise of finance has harmed the real economy, propelled inequality and created opportunities for rent-seeking. To rein in Wall Street and prevent another financial crisis, and to give governments much needed money to invest, we should levy a modest tax on financial transactions. Right now, the financial industry subsists on monetizing privilege. It needs to shrink so we can grow.

This article originally appeared on Salon

The ultimate guide to shutting down conservative anti-Piketty hysteria

Thomas Piketty’s wildly popular new book, “Capital in the 21st Century,” has been subject to more think pieces than the final episode of “Breaking Bad.” Progressives are celebrating the book — and its unexpected popularity — as an important turning point in the fight against global wealth inequality. This, of course, means that conservatives have gonecompletely ballistic.

Rush Limbaugh, for example, has come out guns a-blazing: “Some French socialist, Marxist, communist economist has published a book, and the left in this country is having orgasms over it,” he exclaimed during a recent broadcast.

When the right drops the C-bomb, the M-bomb and S-bomb all at once, you can be certain a book is having an impact. And “Capital” may well be the “General Theory” of the first half of the 21st century, redefining the way we think about capitalism, democracy and equality.

This, of course, means that the right-wing attacks have only just begun. That in mind, here is a handy guide to navigating the more absurd responses:

Claim: Piketty is a dirty Marxist

There are two Marxes. One, a scholar of capitalism of repute, put forward testable hypotheses, some of which you may accept, some of which you may reject. The other is a conservative boogeyman, the human representation of all they find evil. If they dislike something, it must be Marxist.

James Pethokoukis, a formidable writer, went full hack for his National Review review,

Thanks to Piketty, the Left is now having a “Galaxy Quest” moment. All that stuff their Marxist economics professors taught them about the “inherent contradictions” of capitalism and about history’s being on the side of the planners — all the theories that the apparent victory of market capitalism in the last decades of the 20th century seemed to invalidate — well, it’s all true after all.

How to respond: Most times someone drops the M-Bomb, he is intending to be provocative. With enough effort, you can make almost anything Marxist. While Marxists don’t agree on everything, and the term is very nebulous (Marx once said he wouldn’t describe himself as a Marxist), there are some pretty established rules for determining if someone is, indeed, a Marxist. First, he generally doesn’t write things like,

  • “Marxist analysis emphasized the falling rate of profit — a historical prediction that turned out to be quite wrong” (“Capital in the 21st Century,” page 52)
  • “Marx usually adopted a fairly anecdotal and unsystematic approach”. (“Capital in the 21st Century,” page 229)
  • “Marx evidently wrote in great political fervor, which at times lead him to issue hasty pronouncements from which it is difficult to escape. That is why economic theory needs to be rooted in historical sources …” (“Capital in the 21st Century,” page  10)
  • “… Marx totally neglected the possibility of durable technological progress and steadily increasing productivity.” (“Capital in the 21st Century,” page  10)

These are not the words of a Marxist, but rather a reasonable scholar, investigating the truth of the claims written by the greatest political economist who ever lived. The fact that Piketty abstains from the vitriol and misrepresentation that typify most writing on Marx are to his credit.

Piketty certainly does argue that capitalism will not inevitably reduce inequality, as economist Simon Kuznets had famously claimed. As to whether capital will accumulate without end, as Marx believed, he is more nuanced.

Piketty argues that capital will accumulate in the hands of the few when growth is slower than the rate of return on capital and dis-accumulate if not (This is the now famous “r>g” formula). As growth slows, companies can replace workers with machines (written by economists as “substitution between capital and labor”), but only if there is a high elasticity of capital to labor (higher elasticity means easier replacement). This means that the share of income going to the owners of capital will rise, and the distribution of that capital will become more unequal.

Piketty does not hold to a labor theory of value, he does not believe that capitalism is founded on the exploitation of the proletariat, and he does not believe the system will inevitably collapse on its own contradictions. But critics who call Piketty a Marxist don’t actually mean, “Piketty subscribes to a collection of propositions generally accepted by Marxists”; they mean it as a verbal grenade. Step over it and move to more substantive criticisms.

Claim: The social safety net has already solved the problem

In order to somewhat compensate workers for voluntary unemployment and the ludicrously low wages that “markets” pay them, modern societies have developed transfer systems, or social safety nets of various levels of robustness, to bolster the incomes of low-wage workers. Some conservatives argue that these transfers have solved the inequality problem.

Scott Winship, the lovable but irksome economist dedicated to upsetting the inequality consensus, writes in Forbes,

Most importantly, in the United States, most public transfer income is omitted from tax returns. That includes not just means-tested programs for poor families and unemployment benefits, but Social Security. Many retirees in the Piketty-Saez data have tiny incomes because their main source of sustenance is rendered invisible in the data.

How to respond: There’s not enough room to give his data claims a full airing. For our purposes, it suffices to say that, while America does have a transfer system, it’s far less robust than that of other developed nations. (See chart below, from Lane Kenworthy.)

Government revenues are far lower in the U.S. than in other countries, making redistribution more difficult, and thus our safety net is far more frail. (See chart below, from Sean McElwee.)

Far more interesting is what would happen if conservatives made this their line. After all, if transfers are what is preventing inequality from skyrocketing then the rising share of pre-transfer income accruing to the wealthy capital owners means we need more robust transfer system. Because few, if any, thinkers on the right have argued for a stronger transfer system (and are, in fact, attempting to violate it), they must accept the logical conclusion: Their policies will set off skyrocketing inequality (or, more likely: They don’t give a shit).

Claim: Inequality isn’t a problem because look at consumption!

There are lots of ways to look at inequality. You could look at income inequality by examining how much a person takes home every year from their labor, income from assets and transfers. You could also look at wealth inequality by figuring out how many assets they own, in the form of stocks, bonds, property, and subtract from it their debts. Or you could look at how much they are able to consume.

Some conservative economists argue that an increase in income inequality has not been mirrored by an increase in consumption inequality because the wealthy save or invest their income. Kevin Hassett, a former Romney economic adviser, illustrates this point, arguing:

From 2000 to 2010, consumption has climbed 14% for individuals in the bottom fifth of households, 6% for individuals in the middle fifth, and 14.3% for individuals in the top fifth when we account for changes in U.S. population and the size of households. This despite the dire economy at the end of the decade.

Although he initially made this argument against Piketty in 2012, he has revived it recently in a lecture on the subject.

How to respond: In large part, this is a common trope on the right — the “but they have cellphones!” argument. The empirical literature on this subject is still very much in flux, and there is not a consensus. Some recent studies find that consumption inequality has increased with income inequality. But even if we except the consumption inequality argument, conservatives have some explaining to do. After all, if income inequality has been rising while consumption inequality has stayed the same, where is the spending coming from? Debt. Which means that wealth inequality is increasing, as the rich save more and the poor fall further into debt. Research released this week by Amy Traub of Demos finds that the recent increase in credit card debt hasn’t been driven by profligate spending, but unemployment, children, the declining value of homes and lack of health insurance. Recent research by Emmanuel Saez and Gabriel Zucman show how the bottom 90 percent simply haven’t been able to save their incomes and thereby build wealth. (See chart below.)

Claim: We need lazy rich people

Tyler Cowen is one of the more honest of Piketty’s critics, and there is certainly a lot to like in his review. However, this section is a head-scratcher:

Piketty fears the stasis and sluggishness of the rentier, but what might appear to be static blocks of wealth have done a great deal to boost dynamic productivity. Piketty’s own book was published by the Belknap Press imprint of Harvard University Press, which received its initial funding in the form of a 1949 bequest from Waldron Phoenix Belknap, Jr., an architect and art historian who inherited a good deal of money from his father, a vice president of Bankers Trust… consider Piketty’s native France, where the scores of artists who relied on bequests or family support to further their careers included painters such as Corot, Delacroix, Courbet, Manet, Degas, Cézanne, Monet, and Toulouse-Lautrec and writers such as Baudelaire, Flaubert, Verlaine, and Proust, among others.

How to respond: It’s very true that in the past, many artists, writers and thinkers benefited from familial wealth (or rich benefactors). This, however, is not to be celebrated! It means that marginalized people are frequently removed from mainstream discussion. It’s also a dreadful defense of inequality. As theologian Reinhold Niebuhr writes,“The fact that culture requires leisure, is however, hardly a sufficient justification for the maintenance of a leisured class. For every artist which the aristocracy has produced, and for every two patrons of the arts, it has supported a thousand wastrels.”

Poverty and oppression can also create other powerful types of art, from boheim to the blues. More important, there are far better ways to fund the arts than throwing money at rich families and hoping they cook up something nice. For instance, the National Endowment for the Arts has funded arts education, dance, design, folk and traditional arts, literature, local arts agencies, media arts, museums, music, musical theater, opera, theater and visual arts. In the aftermath of the Great Depression the Works Progress Administration had an arm devoted to funding the arts that supported Jackson Pollock, William Gropper, Willem de Kooning, Leon Bibel and Ben Shahn. The CIA has even gotten into the game.

As Niebuhr notes, “An intelligent society will know how to subsidize those who possess peculiar gifts … and will not permit a leisured class to justify itself by producing an occasional creative genius among a multitude of incompetents.” It’s a wonder that conservatives want the wealthy financing art and philosophy — Marx, after all, would have died of penury without the beneficence of the wealthy Engels. Given that his economist friends have been impressed by Piketty’s cultural depth because of his ability to cite Jane Austen, I wouldn’t put much weight on their cultural defense of privilege.

Claim: Piketty is French, and we saved their asses in World War II

This is true. You’ve lost the debate.

Originally published on Salon.