"Lessons from Sherwood Forest"

Sydney M. Williams

Thought of the Day

“Lessons from Sherwood Forest”

December 9, 2011

Robin Hood, a fabulist character first mentioned in ballads from the late 14th Century England, practiced the concept of redistribution. He, with his band of Merry Men, was portrayed in tales as an honorable outlaw who robbed the rich and gave to the poor. The lesson of Robin Hood has been well-learned by 21st Century American politicians, in whom honor is generally latent or missing. In the U.S., federal government expenditures have increased at a faster rate than receipts for several years. Much of that increase has not gone to help the indigent, but to feather the already opulent nests of the raptors that represent us in Washington. Everyone in that city seems to have the appetite of ‘Little John.’

Always in pursuit of new sources of cash flow, and as a reaction to populist anger against bankers, governments around the world are considering a coordinated financial transaction tax (FTT). In September, the European Commission proposed an EU-wide FTT. In late October, two Democrats, Representative Peter DeFazio of Oregon and Senator Tom Harkin of Iowa, proposed a similar tax for the U.S. It would be, as the New York Times described it on Wednesday, “a way to claw back money from the top 1 percent to help the other 99 percent.” The Times ignores the fact that, according to the Congressional Budget Office (CBO), the highest earning 1% paid 39% of all federal income taxes in 2009, versus 18% in 1979. The federal tax code is more progressive than it was thirty years ago when nominal rates were higher than today. “Debt-burdened governments,” Reuters noted on November 2, have a “need for new revenues.” Of course they do. Both sides of the aisle seem incapable of reducing spending, regardless of waste, and seemingly impervious to the debt they bequeath to our children and grandchildren.

It is true, as Dean Baker of the Center for Economic and Policy Research (CEPR) noted in a December 2008 piece, that the effect of an FTT would be felt hardest by High Frequency Traders, a group with whom I have very little sympathy. But, then, why not target them specifically? The rates proposed by the DeFazio-Harkin combination – 0.3 percent on stock, bond and derivatives prices – may seem small; however, for the last ten years returns on equities have been negligible, while the yields on many bonds are near historic lows. As a percentage of total annual returns, 0.3% is not insignificant. We are a country badly in need of increased savings and investments, especially for the middle class whose future looks about as rosy as spilt red paint, so doing anything that will hurt investments appears unwise.

The principal problem we face is debt overload. The answer is economic growth. Democrats would like to raise taxes. Republicans want to curtail spending. Both are wrong, as both would inhibit growth – Democrats in taxing job creators and Republicans by removing funds from the needy. The answer lies in two parts: First, tax reform that allows the economy to grow at its maximum, which will foster an increase in tax receipts, and, second, spending controls that will keep growth in outlays at a rate no higher than GDP growth.

Wealth, whether individual or it belongs to a state, allows more choices. At the moment, our nation is teetering on the edge of a chasm entitled ‘debt induced poverty’. The very size of our national debt – approximately 100% of GDP – is a drag on growth. There is much the Obama Administration would like to do to make life easier and more pleasant. But, what they want to do, we cannot afford, at least not at this time. Like a family caught in a financial bramble, we must earn our way forward. Bowing to the demands of a few environmentalists, for example, who would prevent (or even delay) the building of the Keystone Gas Pipeline, at a time when unemployment in the construction industry is 13% and high energy prices are impacting everyone, seems as selfish as it is foolish. Competition, whether it is in the classroom, on the factory floor, in the laboratory, or in the corporate boardroom, is intense and it is global. To do all the things we want to do, we must first address factors like taxes, regulation and unions that are holding back economic growth. We need to earn more money.

The FTT would be largely a Trojan Horse, inserted by Congress, allowing them to fund their favorite programs, while ignoring difficult spending choices. Any tax that impedes growth should be dismissed. The President and Congress appear to be living a Walter Mitty life, oblivious to the damage caused by debt – debt that is in fact mispriced, so is far more onerous than it seems today. Common sense tells us that had the Fed not intervened, rates would be higher by two or three hundred basis points – implying an increase in annual interest costs of $300 billion to $450 billion. At some point, if nothing is done, the dollar will cheapen and rates will rise.

The concept of an FTT also raises the question of what happens if one country opts out. For example, if the UK did not go along, London would benefit, as security trades, naturally, would be executed on those exchanges that are the least costly. The temptation to do so would be too great. New York City banks, which have already lost more than 100,000 jobs, would lose thousands more.

Taking from the rich and giving to the poor is the essence of a progressive tax code – an idea with which almost everyone agrees. But there is a limit to what any nation can afford. With federal debt nearing 100% of GDP, we are approaching that limit. We exceeded that level during World War II, but for far more understandable and necessary reasons than today. Congress and the President should put their collective heads together to answer one question: How do we grow this economy. Margaret Thatcher and Ronald Reagan, in this regard, are far more relevant than Robin Hood.