ECONOMICS: Tobin’s Nobel Ideas

The ideas of Nobel prize-winning economist James Tobin, who died on March 11, are bound to live on for much longer than the Alliance Party, which embraced some of them and built them into its policies. At the time of Tobin’s death, the Alliance was tearing itself apart, keeping political pundits busy musing on which bits would survive this year’s election and in what form.

Back in 1971, the Yale professor conceived the Tobin tax, small levy on foreign-currency trades. His aim was to shield poor countries from the vagaries of financial markets, by stopping speculative short-term capital flows which can destabilise countries’ economies by throwing their exchange rates out of whack. The revenue would be used to help under-developed countries.

The Tobin tax, applying only to foreign exchange transactions, is dependent on worldwide application to be effective. Even so, significant support for the idea remains. The French newspaper Le Monde has been championing it editorially.

As an obituary in The Economist explained, though flawed in practice, the tax’s ultimate goal was clear: to help bring the benefits of free trade to the world’s poor. “To his great dismay,” the magazine lamented, “radical groups some time later tried to turn his tax against his own free-trade ideals.”

A modified form of the concept was given expression in the Alliance’s financial transactions tax. The difference is that the FTT would be applied to all financial transactions in this country only. International foreign capital flows would be caught only if they went through the banking system here.

The Economist obituary also noted that today’s environmentalists are in debt to Mr Tobin. Working with colleague at Yale, William Nordhaus, he was among the first to adjust GDP figures to reflect the true costs of environmental degradation as well as of traffic congestion and crime.

This thinking is reflected in Alliance policies, too, although it was more robustly advocated before the last election by Green co-leader Rob Donald. Donald challenged Labour’s conventional approach to the economy and proposed instead “an eco nation framework” for New Zealand. The starting point would be deciding how progress should be measured.

“Both National and Labour are fixated by the gross domestic product,” Donald said, “but GDP distorts reality. It only counts those activities where money changes hands, so spending time with your kids instead of working second job has no value. Even worse, GDP doesn’t discriminate between activities which add to our well-being and those which detract from it, such as crime and pollution.”

In policy document, “Thinking Beyond Tomorrow”, the Greens expanded on those ideas. Essentially, they want modified set of national accounts, which distinguishes between “good” and “bad” economic activity, set of social indicators running alongside these to provide measure of how well off we really are as society, and national resource accounts to ensure there is reduction in the rate at which resources are consumed and wasted.

Work on developing accounts of this sort is under way at Statistics New Zealand, helped by funding for the project won by the Greens when the Clark Government was preparing its 2000 Budget.

Internationally, at time of writing, manual called the System of Environmental and Economic Accounts (SEEA) was about to be published after several rounds of discussion among international experts. Ultimately the manual will go to the United Nations Statistical Commission for verification by all UN members to set an international standard. The manual won’t suggest our GDP measure should change but will set out ways of providing alternative measures for integrating environmental dimensions into economic accounts.

Accounts tracing changes in natural resource stocks would start with an opening balance sheet value for country’s fish, coal reserves and so on. The account would record additions from the discoveries of new stocks or from price rises which make the stocks more valuable and worthy of extraction, or depletions of the resources. The net effect of discoveries and depletions would show on the bottom line.

Statistics New Zealand also is involved with several government departments in developing set of indicators for sustainable development. The Ministry of Social Policy has suggested battery of indicators that could be used, such as crime levels, income distribution, longevity, measures of air quality, and access to education.

Business people should anticipate the inevitable consequences of these developments. Once you can measure something, you can tax it. Thus government could tax the use of resources, for example, or slap carbon tax into place.

These applications have won respectability overseas. The OECD, for one, reckons it’s smarter to tax something you don’t want, such as polluting activity, than something you do want, labour, which is heavily taxed through the income tax system.

Bob Edlin is regular contributor to Management magazine.

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