With the recent attention garnered by the “Occupy Wall Street” movement, even the slow world of epidemiology has started to pay attention to the idea that the behavior of banks may be a significant factor in human health. Banks have critically affected the availability and pricing of food, and precipitated the mortgage-backed security crisis and subsequent economic recession that has resulted in significant joblessness and associated loss of health insurance. One idea that’s caught on internationally is the idea of discouraging risky transactions made by the banks–the kind of transactions that precipitated the global economic recession–and also raise money for “the 99%” who have been harmed by the actions of bankers. In this week’s post, we analyze the workings of such a “Robin Hood Tax“, and analyze what implications such a tax might have for public health.
In theory, international banking, just like other forms of international trade, should help spur economic well-being. That would be true if the world of trade followed Ricardo’s “theory of comparative advantage“, which tells us that if two populations each specialize in what they produce (like China producing electronics and the French making wine), then they will both be better off trading between each other (focusing all of their production on their area of specialty) rather than trying to both make electronics and wine domestically. But like any economic theory, Ricardo’s theory–which has been the basis of free trade arguments for decades–is based on a series of assumptions, many of which are violated in today’s modern trading environment. Ricardo assumed that capital did not move between countries (oops), that trade would take place just between companies (not within companies, double oops), and that markets are totally competitive (triple oops in today’s political work of subsidies, trade sanctions and oligopolies).
Perhaps more serious are the inherent limits of the idea that economic prices adequately reflect the value of goods or services for humans. Market prices often fail to reflect the downstream health or environmental costs of a given product or activity, thereby sending misleading signals about the benefits and risks of a particular economic decision. And those companies conducting the activities that damage public health or the environment do not have to pay the consequences of the damage, leaving the cleanup job to the rest of society.
Some of today’s international banking transactions appear particularly problematic to public health. There is increasing evidence, for example, that banks speculating on basic food commodities (like wheat or rice) have sparked another famine in the Horn of Africa and elsewhere. Many people blamed increasing consumption from India and China for the spike in food prices that has taken place, or the subsidization of biofuels (diverting staples like corn into oil production rather than food). Those factors may lead to gradual increases in food prices due to higher of demand, but can’t explain sudden spikes. In addition, both aggregate and per capita consumption of grain have actually fallen in India and China, and the population growth and total demand from those countries can’t numerically explain the food price spikes. Natural disasters related to global warming also don’t seem to fully explain the sudden spikes in prices that have lead to the famine.
Some component of these spikes seems to be the result of a new form of “speculation” from banks. Speculation wasn’t always a negative force (and could be a positive one in some circumstances); here’s how it used to work: farmers protected themselves against natural disasters or other risks by “hedging”, or agreeing to sell their crop in advance of the harvest to a trader. This guaranteed the farmers a reasonable price for the crop (even if lower than a future price that the trader might get), and allowed the farmer to plan ahead and invest in infrastructure for the future. Some years, farmers get a better profit than they would have otherwise, while in other years, traders get a higher profit. Under tight regulations, this process might even help stabilize the food market, and the process is controlled by real forces of supply and demand.
That form of speculation was dramatically altered in the mid-1990s. After heavy lobbying, numerous regulations on commodity markets were removed. Contracts to buy and sell foods were turned into “derivatives” that could be bought and sold among traders who had nothing to do with agriculture, producing a sort of “unreal” or false market so that food could be sold like corporate stocks and oil, bundled into complex financial packages and traded to make small profit markets off of market volatility (sounds like the mortgage crisis, no?). When the US sub-prime mortgage disaster happened in 2006, the banks and traders moved billions of dollars from pension funds and equities into “safe” commodities, especially foods. The resulting spike in demand for these commodities caused prices to skyrocket, precipitating massive suffering among people of the world who could no longer afford wheat or rice or other basic foods. The UN report on speculation and the banks has captured the problem in great detail, as have further reports from The Oakland Institute and others. A global campaign to curb food speculation has begun.
But while the relationship between speculation and food prices remains controversial in some economic circles, it is more clear that banks also affect public health in a number of other ways. There is increasing evidence that numerous people have lost health insurance in the economic recession that was incontrovertibly started by bank misbehavior (in particular, by doing with mortgages what they are now doing with food), and the subsequent unemployment and health insurance losses have led to increases in morbidity and mortality. The corporate tax subsidies and cuts negotiated by the banks also relate to the budgetary shortfalls at the state and country level, resulting in cuts to social welfare and social protection services that are a critical determinant of public health outcomes.
The question is: what can we possibly do about it?
The “Robin Hood Tax” is a type of financial transactions tax (FTT) that is essentially derived from Nobel Prize-winning economist James Tobin, who proposed years ago to tax foreign currency exchanges. The Robin Hood Tax would go further to place a 0.05% tax (that’s right, very small) on the purchase and sale of certain types of stocks, bonds, commodities, unit trusts, mutual funds, and derivatives such as futures and options. It’s been endorsed by everyone from French President Sarkozy to economist Paul Krugman (another Nobel Prize winner, accompanied by 1000 other economists including Joseph Stiglitz, Ha-Joon Chang, Jeff Sachs and Dani Rodrik), but how and why would it work?
The group of non-governmental organizations who collectively proposed and endorsed the Robin Hood Tax idea in 2010 suggested that it be placed on financial commodities that are most related to volatile international transactions–the kind of transactions that banks make money from by buying and selling commodities with each rise or fall of the stock market, but that destabilize the rest of the economy and that don’t usually constitute meaningful long-term investments. The idea was to split the tax evenly between domestic social welfare program (e.g., food stamps, among countries collecting from their own domestic banking industry) and international aid. The best estimates suggest that around $400 billion would be collected from such a tax each year. The idea is that the small tax would not accumulate among long-term investors who are truly interested in putting their money into real goods and services, but would accumulate upon and therefore discourage the high-frequency traders who are speculating on derivatives and trying to make a quick buck off of market volatility (probably reducing such trades by about 14% according to recent estimates).
Naturally, the idea has garnered criticism–mostly that it will adversely impact the banking industry, negatively impact overall employment by depressing the economy, and be a “stealth tax” that is transferred over to consumers rather than really being paid by the bankers. Few people are terribly concerned about the impact on the banking industry, given that it is 26 times more profitable than the average business and continues to doll out expensive bonuses for its executives. The consequences for other sectors of the economy have been highly controversial, as arguments have been made about whether sectors of the economy that are dependent on high-frequency trading are really producing meaningful goods and services, or simply employing e-traders and i-bankers who have negative consequences on the rest of us. Some calculations suggest that at the 0.05% rate, the tax is unlikely to affect retail banking, which includes savings and mortgages. It will instead introduce a micro-tax on short-term, casino-style trading which employs a small number of highly paid bankers in a few urban centers (New York, London), not the tens of thousands employed in main street financial services. It may be a stealth tax on consumers, but mostly on consumers who are involved in high-frequency trades, which we wish to discourage anyway. And bankers would not receive commissions and other profits from that kind of trading, creating further incentives for more value-driven investments. In fact, studies of who ends up paying transaction taxes have concluded the Robin Hood Tax would in all likelihood be “highly progressive”, meaning it would fall on the richest institutions and individuals in society, in a similar way to capital gains tax (in contrast to VAT, which falls disproportionately on the poorest people).
There are also alternatives to the Robin Hood financial transactions Tax. The two most common are a bank levy and a FAT tax. A bank levy involves a flat-rate charge imposed on large financial institutions (which is currently employed ni the UK, France and Germany). But at the rates they have used, these levies haven’t raised much money (being commonly offset by reduced income taxes to the banking sector) and don’t seem to discourage the heighest-risk transactions. The financial activities tax, or FAT tax, is equivalent to a VAT tax on the financial sector; it may work but might be easier to circumvent and cheat than a financial transactions tax.
Progress on implementation
Is the tax just a pie-in-the-sky idea, or does it have political promise? In the middle of this year, the European Commission reversed its earlier opposition to the Robin Hood Tax, proposing an EU financial transaction tax be adopted within the 27 member states of the European Union. In August, French President Sarkozy and German Chancellor Merkel affirmed their support for the proposed European implementation. Great Britain’s prime minister Cameron remains opposed to the tax unless it can be implemented globally, meaning that a European implementation would likely have to be confined to the Eurozone not the whole EU. The White House also remains opposed. But in September, Bill Gates endorsed the tax the 2011 IMF and World Bank meeting and suggested that the tax apply to the entire G20, which would raise between $48 and $250 billion per year. His endorsement was followed by one from the Pope, but we haven’t heard further yet from the White House about whether Obama will reconsider his position.
While it may seem critical for a financial transactions tax to be implemented globally, as banks could hide in the Cayman Islands. But surprisingly, while the UK hasn’t implemented the full Robin Hood Tax, it has put in place a stamp duty of 0.5% on all share transactions, and this did not precipitate a run from London. The UK’s major competitors do not have this duty but the UK raises around £5 billion pounds each year from it. There’s further interest into whether this duty was sufficient to discourage riskier transactions, but it certainly seemed that London life was attractive enough for bankers that few would want to live or work elsewhere simply because of a less than 1% tax. Regardless, once the major set of European countries are on board, most commodities will end up having the tax applied to them, as it would be hard to stay in business as a bank while ignoring mainland Europe (as the banks involved in Greece can testify to).
Whatever happens next to the Robin Hood Tax proposal, it’s important to look back on this year and recognize that the campaigners for the Robin Hood Tax proposal have made incredible strides in just 12 months: moving from an idea on paper to a real proposal being debated by world leaders, hitting headlines across the globe, and gaining endorsements from the most powerful economists and public figures. Let’s hope the momentum continues into the New Year…