How Financial Speculation Can Help America
Some good paragraphs from Professor Krugman:
But speculation based on information not available to the public at large is a very different matter. As the U.C.L.A. economist Jack Hirshleifer showed back in 1971, such speculation often combines “private profitability” with “social uselessness.”
It’s hard to imagine a better illustration than high-frequency trading. The stock market is supposed to allocate capital to its most productive uses, for example by helping companies with good ideas raise money. But it’s hard to see how traders who place their orders one-thirtieth of a second faster than anyone else do anything to improve that social function.
What about Mr. Hall? The Times report suggests that he makes money mainly by outsmarting other investors, rather than by directing resources to where they’re needed. Again, it’s hard to see the social value of what he does.
And there’s a good case that such activities are actually harmful. For example, high-frequency trading probably degrades the stock market’s function, because it’s a kind of tax on investors who lack access to those superfast computers — which means that the money Goldman spends on those computers has a negative effect on national wealth. As the great Stanford economist Kenneth Arrow put it in 1973, speculation based on private information imposes a “double social loss”: it uses up resources and undermines markets.
Not all market activity is useful market activity. This is not useful market activity. It's parasitic market activity. And therein lies an opportunity. The government needs more in the way of revenue if it's going to continue to fund important basic services. But we don't want to tax things we want more of right now, like work. We want to tax things we don't want more of, like high-speed financial speculation. This sort of speculation might not be good for the market, but since firms find it profitable to do, and estimates are that a small financial transactions tax could raise $100 billion a year, its existence might yet prove good for the country.
August 3, 2009; 11:39 AM ET
Categories: Financial Regulation , Solutions , Taxes
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