Many members of Congress and other political leaders have been bellowing against speculators who they blame for the high price of oil and petrol. According to their story, speculation is the main factor behind the run-up that pushed the price of oil above $145 a barrel and petrol to more than $4 a gallon. They have proposed a variety of measures to rein in speculators and presumably bring petrol prices back down.
There almost certainly is something to the speculation story. Large movements in the price of commodities, in either direction, are almost always exaggerated by speculation. In fact, we may already have seen the reversal of some or all of a speculative bubble in oil prices, with the price of a barrel of oil now hovering in the range of $118. While there may be room for oil prices to drop further, those waiting for the days of oil at $40 a barrel, or even $80 a barrel, are likely to be disappointed.
Furthermore, cracking down on speculation is likely to be more difficult than it sounds. It is not hard to hide a speculative bet as a hedging bet. If a trader wants to make multi-billion dollar bets on the future price of oil, she can find ways to make it look like the bet came from a company that buys or sells oil. Restrictions can make speculation more inconvenient, but they won’t stop it.
From the standpoint of blowhard politicians, restrictions on speculation also have the advantage of being difficult to administer. At the end of the day, the rhetoric on speculation is likely to prove emotionally and politically satisfying, but economically meaningless.
For those who actually want to crack down on speculators in a meaningful way, there is a much more practical solution: tax it. A modest tax on all financial transactions will impose a serious cost on those who actively speculate in oil futures, or any other commodity, while having almost no impact on those who use these markets for hedging. It can also raise an enormous amount of money.
A 0.02% tax on the sale or purchase of commodity futures, and a comparably sized tax on options and other derivatives, the tax could easily raise more than $10bn a year, even assuming large declines in trading. If a comparably small tax were applied to all financial transactions, including stock and bond trades, the revenue could exceed $150bn a year, a take that is equivalent to 10% of the federal income tax.
Such a tax would be extremely progressive because the overwhelming majority of trading is done by the wealthiest people. While middle-class families would bear some of this tax, the cost to the typical family saving for their retirement or kids’ education would be almost invisible.
Essentially, a transactions tax would be treating gambling by the wealthy in the same way that we now treat gambling by ordinary working people. Bets placed in casinos, horse races, or state lotteries are subject to taxes as high as 30%. Why shouldn’t we tax gambling on oil futures at a rate of 0.02%?
There is another benefit to a tax on financial transactions. The biggest winners in an economy that has produced mostly losers over the last three decades have been the Wall Street crew. In 2006, before the housing bubble began to unravel, the financial industry accounted for almost 30% of all the profits in the economy. In the last year most of the biggest firms in the sector, such as Citigroup, Merryll Lynch, Fannie Mae, and Freddie Mac, have taken huge write-downs on bad loans and seen their stocks plummet. But their executives still collect tens of millions in compensation and there is little reason to believe that they have changed any of their predatory practices.
A financial transactions tax could change this story. It would bring the sector down to size by taking much of the profit out of creating exotic financial instruments that are not fully understood even by the whiz-kids who create them.
In this way a financial transactions tax could hugely increase productivity in the financial sector by restoring it to its proper function as an intermediary between borrowers and lenders. That would be great for the economy and the country, but really bad news for the Wall Street crew.
For this reason we are not likely to see the politicians pushing financial transactions taxes. The problem for politicians is that we actually could actually impose a financial transaction tax. The big Wall Street contributors would kill to prevent a financial transactions tax. For that reason, we can expect to hear lots more bellowing from politicians about speculation and no serious discussion of a speculation tax.