CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Wall Street Journal Turns News Section Over to the Financial Industry

Wall Street Journal Turns News Section Over to the Financial Industry

Wednesday, 10 July 2013 04:25

Everyone knows that the Wall Street Journal has a strong pro-rich perspective in its opinion pages. Its guiding philosophy is a dollar in a pocket of a poor or a middle class person is a dollar that could be in the pockets of the rich. But its news section is mostly reasonably fair.

That may no longer be the case. The financial industry is on the warpath against a financial transaction tax in Europe. The proposed tax would be 0.1 percent on stock trades (one fifth the size of the tax that has been in place for centuries in the United Kingdom) and 0.01 percent on transfers on most of options, futures, and most other derivatives.

Since the price of trading has plummeted over the last four decades due to developments in computer technology, this tax would just raise trading costs back to where they were ten or twenty years ago. That would not seem to be too horrible on its face, since Europe certainly had a well-developed and active capital market in 2000 or even 1990.

But the financial industry needs to scare people in order to discourage Europe from going the route of the tax. So it put out a study that calculated the cost of the tax to some active traders on the assumption that no one changes their behavior in response to the tax. This is of course absurd since part of the point of the tax is to reduce trading by raising the cost. The frequent flipping of assets provides no net gain to the economy, even if it can provide some individuals and corporations with large profits.

In reality, frequent traders would cut back their trading a huge amount if the cost were to rise as a result of this tax. There is considerable research on the response of trading to changes in costs or elasticity. Most find that trading is relatively elastic. In fact some research, such as this analysis published by CATO, found that the elasticity of trading for many types of assets is greater than 1. This means that the percentage reduction in the volume of trading is larger than the percentage increase in costs.

In that case when the cost of trading goes up, as a result of a financial transactions tax or for any other reason, people will on average actually spend less on trading. They will cut back their trading by enough so that even though they pay more on each trade, they spend less in total on trading. This is a simple story. If the cost per trade doubles, but people reduce their trading by 60 percent, then they will spend less money on trading. 

The financial industry's study completely ignored both the most basic principle in economics (demand responds to changes in price) and the extensive research on the elasticity of trading. It assumed that no one reduces their trading in response to the tax. This would be like calculating the cost of a tax on e-mails, under the assumption that the volume of e-mail messages would not change.

It is understandable that the financial industry would try to push out a study like this. After all, a financial transactions tax is money right out of their pockets. They will spend a fortune lobbying, buying politicians or doing whatever is necessary to keep such taxes from going into effect.

But the key question is why would the Wall Street Journal write up such an obvious joke as a serious study in its news section?  That's the question millions are asking.

Comments (9)Add Comment
When Lying About First Best Pricing, It is Necessary to Lie About Second Best Pricing as Well
written by Last Mover, July 10, 2013 5:59

Compare this:
They will cut back their trading by enough so that even though they pay more on each trade, they spend less in total on trading.

To this:
It assumed that no one reduces their trading in response to the tax.

Then consider the notion of second best pricing as a standard practice in the past of regulated monopolies designed to raise prices on the most inelastic components in order to prevent distortion of use regarded as economically inefficient.

In other words, the assumption is that first best pricing = marginal cost pricing = economic efficiency, and in order not to disturb that condition, second best pricing is applied to inelastic components since the underying quantity of use is not affected.

Guess who supported phony second best pricing for decades in order to force price increases on customers of market power who could not avoid them by using less?

Guess who doesn't support second best pricing of economic rent like land which cannot be avoided by using less because it's fixed?

Guess who reverses their opinion on economic efficiency and pricing when it comes to a financial transcations tax by characterizing trade volume use as fixed and unavoidable?

In other words, if the financial industry was correct about trade volumes being efficient and inelastic at the same time, that's exactly where the tax should be to maintain efficiency.

Dean Baker turns the whole thing on its head to show that current first best pricing is highly inefficient at the margin in the first place, so taxing it to result in less volume to avoid corresponding unnecessary cost is actually an efficient outcome.
written by jonny bakho, July 10, 2013 6:33
Daytrading is little more than legalized gambling. People gamble with their 401K money. That gambling should be taxed at a high rate and maybe added to the SSTF to protect the idiots in their retirement.
The credit companies extort taxes on business and that should be stopped. Currency has passed from paper currency to electronic currency and currency should not be privatized. There is too much room for corruption and abuse.
this is an incredibly regressive tax..., Low-rated comment [Show]
Hedge fund managers do far better than break even
written by Dean, July 10, 2013 9:40

you have to think what you said through more carefully. You're exactly right that most people are not making money by trading. This means that if they cut the number of trades in half, but pay twice as much for each trade, then they are not harmed. The people who are harmed are the people who collect the fees from trading.
written by fuller schmidt, July 10, 2013 11:45
Trading profits are already taxed as ordinary income. Why is that not sufficient?
When News Corps bought the WSJ...
written by Richard, July 10, 2013 1:18
Murdoch promised that the WSJ would "maintain it's editorial independence" Since the WSJ has always had a right wing editorial stance, that was an easy promise for him to make.

Murdoch was not asked about having the WSJ maintain its reporting integrity which is how the WSJ can:

"write up such an obvious joke as a serious study in its news section? That's the question millions are asking."
sorry, restricting trading is simply silly...
written by pete, July 10, 2013 6:12
Irrationality built upon irrationality. Hedge funds transfer wealth from wealthy individuals to edgy MBAs. This should not be anyone's concern, this is redistribution. Active trading is to be frowned on, but the slippery slope of identifying who should trade, etc., is very dangerous. Increasing the cost of raising capital will trickle down to investors and consumers. It will not reduce Wall Street "profits" in so far as these are returns on capital. Ask anybody up there, it is a fiercely competitive industry, with slim margins. Trading will not halve if price is doubled, instead it will come out of stock returns.
Trading will be cut by roughly half
written by Dean, July 10, 2013 7:23
Sorry Pete -- there's a lot of research on this one. You can find some of it here http://www.peri.umass.edu/file..._Brief.pdf

And no one is deciding who trades -- can't imagine why you would think that. It just raises the cost -- just like a gambling tax raises the cost of gambling. It doesn't decide who gambles. It's really pretty simple.
written by jamzo, July 11, 2013 7:13
we pay sales taxes on all kinds of things and financial transactions seem to be a "no-brainer" new source of revenues

are politicians that afraid of the financial sector?

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.