Friday, September 03, 2010

Reich's NYT op-ed must have a typo?

"Early childhood education should be more widely available, paid for by a small 0.5% fee on all financial transactions."

This is a sentence from Robert Reich's op-ed column in today's New York Times entitled "How to End the Great Recession". Much of the commentary details the wage inequality in the U.S. as it has progressed over the last 40 years and accelerated in the last 10. He suggests correctly that this insidious development inevitably has led to the dilemma of a consumer tapped out, no longer able to spend our economy into a meaningful recovery. Reich offers a number of solutions, some constructive, some extreme but worth considering in some form, and some that are grandstanding provocation. The quoted sentence is both provocative and close to nonsense, unless it is in fact a typo.

"A small 0.5% fee" - so a retail investor buys 200 shares of a $50 stock for $10,000 and pays Fidelity their commission of $8 and the government their fee of $50 - or the State of Wisconsin Pension Fund buys $10 million worth of a stock from Goldman Sachs and pays a 6 basis point commission of $6000 and pays a government fee of $50,000.

The fee "on all financial transactions" would quickly fund not only all early childhood education programs but also an infrastructure bank, five years of unemployment benefits, and "a chicken in every pot and a car in every garage" as Herbert Hoover said in his 1928 campaign. A half percent fee on every stock and bond trade would be enormous, and if he really means on every financial transaction such as interbank funding, fx trades, derivatives contracts, home loans, car loans, working capital loans etc., we could no doubt just do away with income tax for all but, perhaps, the top 3% of earners, a clear if only implied goal of the suggestion. Reich's tax proposal is the ultimate value added tax, charging fees that far exceed the profitability of most transactions.

This of course could not work. It would cause the U.S. financial industry to move into stall out style slow motion. Massive amounts of financial flows would move into foreign markets. At five basis points rather than 50 basis points this would be a startling proposal. As written it is preposterous.

In other parts of the commentary Reich wishes that the stimulus had not worked, or even been tried, so that the economy would have fully collapsed and allowed brilliant technocrats like himself to come in and make major structural changes that are needed. He's right that major structural changes are needed but what comes across as bitter arrogance is sort of unattractive.

This op-ed piece began as an insightful look at our economic dilemma that, while breaking no new ground, laid a framework for changes that need to be made. Reich's solutions, however, come from a rigid political mind-set that offers little that is new or creative or even possible.


Post a Comment

<< Home