Having just blogged about the comments by Adair Turner, chairman of Britain’s Financial Services Authority, reminding everyone that financial liberalisation doesn’t seem to have delivered the goods, I will now turn the specific problems he identifies, and how to deal with them.
He identifies the problem, in large measure as being a problem of the financial services industry being in a position to earn large economic ‘rents.’ These rents are what the Scottish economist Adam Smith described as the income of men who “love to reap where they never sowed.’ This is, in effect, windfall money – it’s not the result of hard work, but of some kind of free gift from nature, or fortune. Oil money, especially amid high oil prices, contains a large amount of economic rents: it isn’t through the oil drillers’ hard work that the oilfield produces two million barrels per day or that the oil price is at $100 per barrel: it’s the bounty of nature, and the whims of the oil market. The money that squirts out obligingly is, by and large, pure windfall.
Economists since Smith have been very clear about how to deal with rents: tax them, and at very high rates. And this brings us back to the financial services industry. Turner sees the rents coming in four main forms:
- Banks helping others dodge tax. “Tax management activities, which benefit the financial service sector’s clients, but also, through fees earned, the industry itself” (and he adds that “a depressingly large proportion of what is labelled ‘innovative product structuring’ is based on tax management activities”.)
- Rent extraction via ferociously complicated products that bamboole investors: “exploiting deep asymmetries of information and expertise.”
- Activities such as market making, which are “likely to be characterised by naturally arising oligopolies and opportunities for super normal returns.” Systematically making profits, while customers systematically lose.
- The encouragement by agents (fund managers or banks) of valueless increased trading activity
He doesn’t believe that structural remedies will necessarily solve the problem, and notes that “if there are super normal returns which are unamenble to structural remedies, economics teaches that taxation is the appropriate response.” And he adds that the existence of such rents:
“could justify financial transaction or other financial activity taxes.”
The progressive tax blogs discusses the detail, and comes out in favour of a supplementary bank levy – noting that the current levy structure in place almost certainly falls woefully short of capturing all the bank rents – as well as a Tobin tax. It finishes on this stirring note:
“What is clear is that banks are making profits from activities with no social or economic value. However we do it, now is the time to increase tax on these activities for the benefit of society as a whole.”