Economists, activists weigh in on Tobin's tax

Lenin, step aside. Make way for James Tobin, the retired Nobel Laureate Yale economist who recently became an icon for left-wing activists across the U.S. and Europe. Groups ranging from Oxfam International to the AFL-CIO have championed the Tobin tax, which he first proposed in 1972 as a measure to reduce international market instability. The tax would be levied on international financial transactions in order to decrease unproductive currency speculation.

COURTESY NOBEL.SE James Tobin, a retired Yale economist, proposed the 'Tobin tax' as a means to prevent financial crises.

"I did not propose the tax in any ideological spirit," Tobin said. "The idea behind the tax is to prevent international financial crises, not to endorse any particular economic ideology." Yet his tax has received much of its promotion from groups whose globalization-wary stances make economists cringe.

For example, the tax's largest promoter in France is the Association for the Taxation of financial Transactions for the Aid of Citizens (ATTAC). The coalition of labor unions, non-profit organizations, and concerned citizens originally formed to advocate the Tobin tax—the two T's in the French version of the name stand for taxe Tobin.

Since its founding, the 27,000-strong group has broadened its stance on international trade to one few economists would support. The opening paragraph of their mission statement reads: "Financial globalization [puts forth] a logic that is purely speculative and only expresses the interests of multinational corporations and financial markets." This is a bold statement for any group, but it is especially so for one based on a tax policy drafted by an ideologically independent economist.

Consequently, and ironically, Tobin rejected a recent invitation to speak at ATTAC. "They invited me to come to France and speak at their convention," he said. "But I didn't go because I didn't want to be identified with their whole platform. It had a lot of planks that I wouldn't go along with."

His tax, he insists, has to do with bettering the world, not stifling foreign capital investment. First, it helps prevent international financial crises, such as the East Asian collapse of the mid-'90s, by penalizing currency speculation. Second, it creates a pool of tax revenue that can be earmarked for projects like education in Bangladesh or immunization in Africa.

Whether the tax achieves the latter is a topic of debate. "In principle the two issues are different ones," Yale economist Giancarlo Corsetti said. "You're not directly taking money away from foreign investment to give to the U.N." Moreover, the Tobin tax would have a negligible effect on long-term foreign investment. It couldn't decrease Nike sweatshops or discourage Unocal oil drilling in Burma.

Tobin thinks the tax will at least make progress towards its stated goals, though, because short-term transactions are completely unproductive. About $1.3 trillion changes hands each day in foreign currency transactions, but most of these transactions are reversed within the week—if not within the day. Placing a tax of a tenth to a quarter of a percent on these exchanges would theoretically keep countries from contributing to a volatile international economy, without hurting international trade.

The controversies surrounding the Tobin tax cast a light on the relationship between economists and many grassroots economic-issues-oriented activist organizations. "There's not a lot of communication between the two groups," Tobin said. "That's a real problem. I think there are a lot of people in the spectrum of ideology who are economic amateurs and don't think it's necessary to be fully knowledgeable in economics."

Additionally, some say academic economists themselves sometimes remain too distant from grassroots advocacy. "Academics writing on issues of concern to activists should make an effort to understand the activists' perspectives," T.N. Srinivasan, another Yale economist, said.

Srinivasan is on the steering committee of the Academic Consortium of International Trade (ACIT), a group of academic economists and lawyers formed recently to inform academic communities on matters of international trade. Recently, ACIT issued an open letter to university presidents, including Yale President Richard Levin, GRD '74, addressing the national United Students Against Sweatshops campaign to fight sweatshop labor.

The letter cautioned that efforts by the Fair Labor Association and the Worker's Rights Consortium to increase sweatshop labor standards could potentially hurt the workers they mean to help. Unsurprisingly, the letter's position has increased dialogue on the issue. "Decisions on these matters should be made only after careful research, discussion, and debate in a manner appropriate to informed decision-making," Srinivasan said.

But Yale Students Against Sweatshops member Stephen Osserman, DC '02, explained, "Many of our ideas, arguments, and solutions come out of many discussions with economists nationally. We have held symposiums and conferences for the sole purpose of discussing these issues."

Also, disagreement among economists can be more frequent than disagreement between economists and advocacy groups. Corsetti explained that in the case of the Tobin tax, "If anything, what is going on here is disagreement on how to reduce financial instability. I would say that the debate here is a result of disagreement among economists."

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