In today's New York Times, Paul Krugman endorses a Tobin Tax on financial transactions (FutureOfCapitalism.com readers read about it here first on Wednesday) as "part of the process of shrinking our bloated financial sector." How's that process going? Well, even without a Tobin Tax, employment in the financial sector, which includes insurance and real estate, has shrunk to 7.697 million, down from a peak of 8.362 million in December 2006. That's a loss of 665,000 jobs. Each of those lost jobs has a human impact. The question for Mr. Krugman (he doesn't answer it in the column) is how many hundreds of thousands, or millions, more jobs would he like the financial sector to lose before it is no longer "bloated" in his estimation? And, some follow up questions: How is it possible for a politician or a regulator to know whether a sector is "bloated" or not, and to impose taxes on the sector just until the point at which the sector is no longer bloated? Would this assessment be made for all industries that make up the American economy -- newspaper columnists? Ivy League economics departments? -- or just politically unpopular industries? And why would such an assessment by a regulator or a politician be more accurate or effective than the aggregated wisdom of the individual choices and decisions that make up the overall economy? Right-sizing, in other words, has a way of happening on its own without a lot of help from politicians. What's more, it'd be particularly ironic if the same politicians who, through the Troubled Asset Relief Program and the TGLP, tried to protect the bloated financial sector, turned around and then imposed a tax with the aim of shrinking that same sector. Better to have no bailouts and no Tobin Tax than to have a Tobin Tax imposed to try to undo the effects of the bailouts.
Cutting the Financial Sector Down To Size