That Robert Shiller paper...

...that I mentioned previously is well worth a read. Shiller seems to have become a popular economist amongst lefties, presumably because he criticises the efficicent markets hypothesis and presents a behavioural take on markets. That's all well and good.

Therefore I recommend folks on the Left having a look at this paper, even though it's an oldie, because if you take him seriously you should also consider his views on speculation (necessary, and often socially beneficial) and attempts to deal with it. He writes very clearly about the problems in trying to tackle speculation (and indeed indentify exactly who counts as a speculator). These are not the easy questions that are sometimes supposed.

As a side issue it's been interesting going back and reading things like this, the Paul Marsh paper and Margaret Blair from the 1990s. It hammers home the fact that these questions about ownership and long-termism being discussed currently are nothing new, and actually they were discussed in more detail previously. And I don't see many new policy ideas either.

Bits & bobs

1. An Independent Commission on Ownership chaired by Will Hutton has been launched. This sounds like it could be right up my street.

2. Dumbest banker quote of the week (on the bonus tax): "We would expect this in Stalinist Russia but not here."

There must be some sort of Godwin's Law equivalent for bankers making this kind comment.

3. Great post from Hopi Sen that has generated some amusing irate comments.

4. It had to happen.

Con-gate: the financial crisis and climate change

Interesting to see the way that Righties like Iain Dale have leapt on "climate-gate" to starting "asking questions" about the whole issue of climate change. Despite the way that the Cameroons have positioned the Tories publicly on climate change it is very clear that much of the membership isn't convinced.

I've never been entirely clear why there is such an obvious left-right split on climate change, but it's obviously there. Righties seem to have a tendency to see the whole thing as a con dreamt up by scientists in the pay of Big Government and politicos trying to use the environment as a way to smuggle in an anti-capitalist agenda. There doesn't seem to be much science behind their scepticism in most cases.

As such, you can see that "climate-gate" has given Righties who could never really be bothered to learn about the issue in any detail an easy way out. If you always thought it was some sort of con the revelation that some of the scientists working on the issue were indulging in some shady behaviour is all the evidence you need. It doesn't really matter what the specifics of the "climate-gate" emails were about, there's been some foul play and so that means the whole thing can be considered rotten, and let's start posting up some graphs we don't understand to link the emails to a broader scepticism.

Funnily enough I think we on the Left have sometimes done exactly the same thing in respect of the financial crisis. A prolonged period of growth and the obvious failure of centrally-planned economies forced us to face some hard truths, but recent events make it clear that a lot of lefties were never really convinced of the need to re-calibrate their approach. Then - whammo - the financial crisis and similarly it can look like the whole "neo-liberal" era has been a giant con. Again attention isn't really focused on the specifics - because there have been failures the whole of the last 30 years has been repudiated. And again people start putting together bits they don't understand, or aren't really linked, because they want to blow the previous consensus away.

In both cases I think this reflects (and I speak from experience) an unwillingness to properly learn about the issues. Therefore when an opportunity comes along that both allows us to both rehearse our existing prejudice, and tell ourselves that actually we didn't need to put the effort in to learn about the issue because it was a con all along, we leap on it.

HMT doc on financial services

The Treasury report on the future of financial services (here as a PDF) has a few pages in it looking at the introduction of a Tobin tax. I have to admit I've been taken by surprise by how quickly the UK seems to have swung behind the idea.

The HMT doc is interesting as it sets out some of the headline issues that need to be considered if such a tax is introduced. This is includes potential negative or unintended consequences. The section titled 'minimal distortionary impact' addresses issues like tax incidence for example:

4.24 The incidence of a financial transaction tax must also be considered. Generally speaking, increasing the tax burden on the financial sector must either impact on its shareholders, its employees or its customers. If a transaction tax is to be targeted at the financial sector because of specific characteristics of that sector, then it needs to be clearly ascertained that the incidence of the tax will not in practice fall on end users of financial services within the economy at large.

4.25 Full analysis of the potential economic implications of introducing a transaction tax will help determine the desirability of such a tax, the level at which it should be set if it were introduced and the likely consequences. Clearly a very low rate would have much less distortionary impact than a higher rate while still potentially raising a significant amount of finance.

What interests me is that there is very little in there about economic benefits (as opposed to revenue) from such a tax. Maybe it's the way I'm reading it, but it comes across like the principal attractions are to ensure that the financial sector stumps up and, by extension, that extra revenue is raised for other areas. It doesn't seem like there is a belief that a tax of this sort would result in positive behavioural changes (less volatility or whatever). Fair enough, but that means that a lot of attention will need to be focused on who actually ends up paying the extra, and it implies that a tax would be sets at a low level.

Robert Shiller vs transaction taxes

From Who’s Minding the Store in The Report of the Twentieth Century Fund Task Force on Market Speculation and Corporate Governance (1992)

It appears to be impossible to tax – or otherwise discourage – harmful speculative behaviour directly. One cannot impose a tax on just those who buy or sell stocks for purely speculative motives or as the result of theories of how other people will buy or sell stocks. The tax authorities cannot reliably distinguish them from other people who have “good” reason for buying and selling. Nor can tax authorities reliably distinguish those speculators who are helping keep prices close to their true investment value from those who are effectively moving them away.

Any government policy measures aimed discouraging speculative trading (such as transaction taxes, capital gains taxes with holding period requirements, the short-short rule, or margin requirements) are blunt measures which might work by reducing the number or the kind of people trying to make speculative profits. But while these policy measures might promote the cause intended by their framers, the might just possibly do the opposite of what is intended – moving prices even further from where efficient markets would put them. Even many years after they are instituted, one will not be able to say with any assurance that these measures were helpful…

…People spend considerable time and thought trying to predict what markets will do, and they act with purpose. Policy measures that discourage trade to reduce speculation will be greeted by investors as obstacles to get around in their efforts to maximise returns on their portfolio. These policy measures may lead investors to de-emphasise speculative considerations when they buy or sell, but the outcome is not assured.

Stock-lending snippet

spotted this on page 50 of the PBR:

The FSA has been reviewing the governance and risk management of stock lending in the market. The Government welcomes this work and will work with the FSA and market participants as necessary to help develop thinking in this area.

Union reaction to the PBR

There's a load on Touchstone, Nigel's post on pensions is useful.

GMB reaction here, Unite here, Unison here.