By William Pfaff
It seems plausible that payback time has arrived for the international financial community. The principal obstacle to this happening is, at the moment, the Barack Obama administration's Treasury Department, which thus far in the financial crisis has been mistaken for the executive committee of Goldman Sachs in disguise. It has opposed every proposal to force the financial institutions whose reckless behavior has been responsible for a crisis that wiped out the jobs, homes and savings of millions to assume financial accountability for what they have done.
What they can do is pay back the public funds that rescued the international economy by paying off part of the enormous debts now assumed by the major nations. All or nearly all the EU states are now over the deficit limit imposed by their Stability Pact-or way over as in the Greek case. U.S. external debt is 94.3 percent of GDP and rising.
Politicians talk about the supposed need to raise taxes now that the emergency funds injected into the world economy are drying up. But how do higher taxes pay for economic recovery? U.S. Treasury Secretary Timothy Geithner's solution is growth. But where is this growth to come from when the stimulus ends, as all agree that it must?
Let the bankers give back what they have been given. A proposal rapidly gaining international political support and a grudging acceptance in the financial community is to place a very small tax on international financial transactions to pay back what governments gave the banks.
The proposed tax rate has ranged from .002 percent to 0.4 percent of the transaction's value, depending on the nature of the transaction.
Estimates of the amount this tax could bring in annually go as high as $650 billion. In Washington, Democratic Rep. John Larson has proposed 0.25 percent on such innovations as over-the-counter derivative transactions.
Others in Congress have proposed that same rate for ordinary stock transactions, but with individual retirement accounts and educational and health savings accounts exempted, as well as all transactions under $100,000. The seven Democratic representatives who are co-sponsoring this bill say that half the revenue would go to pay down the federal deficit and the rest into job-creation programs. They claim that their bill would raise some $150 billion a year.
However, single-nation proposals are not taken very seriously because of the competitiveness issue. Bankers insist, not very plausibly, that the entire international financial industry will flee from country to country to stay ahead of any taxes, just as American corporations flee from one tax haven to the next to avoid contributing anything to their nation's well-being. Any financial-transaction tax would have to be uniform internationally, or at least incorporate the principal exchanges.
However, it may be necessary to go beyond exchanges since big financial operators increasingly trade directly or through unregulated mechanisms. While still in office in September, former German Finance Minister Peer Steinbruck argued the following: "A global financial-transaction tax, applied uniformly across the G20 countries, is the obvious instrument to ensure that all financial-market participants contribute equally."
German Foreign Minister Frank-Walter Steinmeier and I suggest the G20 take concrete steps toward implementing a tax of .05 percent on all trades of financial products within their jurisdictions, regardless of whether these trades occur on an exchange. Retail investors could be exempt.
Steinbruck adds: "There is a clear-cut case for a global financial transaction tax: It would be just, would do no harm, and would do a lot of good. If there is a better idea for fair burden-sharing, let's hear it."
The reason for Treasury Secretary Geithner's skepticism (the tax, he has said, is not something the U.S. would support) has not been made clear, but could simply be evidence of the inveterate hostility of America's financial community (whence Geithner comes) to taxes in general, and a particular dread of the precedent of an international tax.
However, Larry Summers, director of the Obama White House's National Economic Council, has written in favor of a securities transaction tax. Britain's Prime Minister Gordon Brown is for a tax. So is France's Nicolas Sarkozy.
The idea is not new. It was given renewed attention in 1971 by the economist James Tobin as a way to curb currency speculation, and was taken up by many, particularly on the left, as an all-but-painless way to generate development funds for poor nations. It has been advocated for many years by a private economic adviser, Carolyn Cleary, as a noninflationary way to generate for new uses the equivalent of the "Brady Bonds" of 1989, which restored sovereign debt liquidity in Latin America.
The conceiver of the idea was John Maynard Keynes, the author of neoclassical economic theory and the man who more or less invented the modern international economic structure at the Bretton Woods Conference in 1944. Keynes suggested the transaction tax during the Great Depression as a means to supply needed liquidity. Like many of his other ideas, it is being resurrected amid the wreckage of monetarism and neoliberal capitalism that surrounds us today.
