From this past weekend's Economist
The prime ministerâ€™s flirtation with an idea whose time never seems to come
IT WAS, veterans of economic summitry noted, the kind of idea a French minister would once have floated simply to annoy Gordon Brown. On November 7th the prime minister used the meeting of G20 finance ministers in his native Scotland to set out four options for building a sturdier financial system. The most eye-catching was the hoary idea of a global tax on financial transactions. The revenue would serve as an insurance fund in case the banks required costly government bail-outs in future. Mr Brown did not invoke the name of James Tobin, the economist who proposed a levy on currency dealings in the 1970s. A disbelieving media did that for him.
Unless a Tobin tax were implemented worldwide, trading would move out of any country that enforced it. Some in Europe are keen on the levy but Mr Brown must have known that the Americans and others would kill the idea. It was also an extraordinary reverse from a politician who not only described the idea as having â€œbig problemsâ€ and â€œvery substantial drawbacksâ€ when he was chancellor of the exchequer, but also showed no enthusiasm when Lord Turner, the chairman of the Financial Services Authority (FSA), raised it in August.
Yet there are two reasons why Mr Brownâ€™s suggestionâ€”which got short shrift from Mervyn King, the governor of the Bank of England, on November 11thâ€”may help him, even though it flopped. Firstly, there is widespread support for the aim of his proposal, if not for the specific means. The Americans would like banks to make some sort of insurance contribution. Hector Sants, chief executive of the FSA, wants a pool of â€œcontingent capitalâ€. Downing Street is quietly confident that senior British bankers will soon come out in support of measures to build such a fund. Mr Brown was acclaimed for leading the world in bailing out the banks last year. He now wants to be seen at the vanguard of the mission to design a new financial system. Posing as a bold outrider, as he did at the summit, may yet help.
Domestic political positioning is the other rationale behind Mr Brownâ€™s proposal. Having spent so much of his time in government cultivating the City of London, Mr Brown now fears being seen as too soft on bankers. George Osborne, the Conservativesâ€™ shadow chancellor, has recently sought to capture the public mood by promising curbs on bonuses in the financial sector. Tellingly, the Tories have only quietly opposed the idea of a transactions tax and have suggested other ways of raising money for an insurance fund.
A worry is that politiciansâ€™ zeal to outdo each otherâ€™s punitive line on bankers will go too far. Financial services remain a big part of the economy. Income and corporation tax revenues from the City paid for much of the spending splurge that Mr Brown began in 2000. Neither party has a persuasive vision of which non-financial sectors will drive growth in future, though both talk modishly of green jobs and yearn nebulously for Britain to start making things again. Common sense would suggest a calmer discourse on bankers. But there arenâ€™t many votes in that.