Financial transaction taxes are getting some attention again, and Megan McArdle is against them:

Myself, I don't really see the charms. Tiny taxes on high-volume transactions raise a lot of money, but they also cost money to record, collect, and audit, which is why few jurisdictions have 0.25% sales taxes. And I'm not clear on what problem taxing financial transactions is supposed to solve. It's not as if our woes were caused by legions of high-frequency traders wrecking the markets with their tiny, tiny spreads.

I'm going to take this opportunity to write something potentially really ignorant. But hey — how else do you learn new things aside from putting yourself in a position to get viciously called an idiot in the blogosphere?

So then: when we talk about FTTs, the usual topic is, as Megan implies, high-frequency traders who make money by executing millions of computerized trades that each produce only a tiny profit. Introduce an FTT and they'd become unprofitable and high-frequency trading might go away. I'm perfectly fine with this, since I'm on record as having a dim view of high-frequency trading, but by itself I agree that it isn't enough of a reason to mount an FTT. Besides, if we really think high-frequency trading is dangerous, we should just ban it and move on.

So here comes the possibly ignorant part. One of the most dangerous aspects of the financial system of the aughts — not the only one, but one of them — came from the virtually frictionless nature of modern money flows. That prompted traders to follow a strategy similar to the one that blew up Long Term Capital Management in the 90s: seek out trades that are only barely profitable, and then lever them up enormously. Even a spread of a tenth of a percent is a money spinner if you can lever it up 30:1 or 100:1 with mountains of cheap money.

My question, then, is whether an FTT would slow this down. Basically, any trade with a spread of less than 0.25% would automatically be unprofitable. There would still be plenty of marginally profitable trades, of course, but they'd tend to be a little less exotic. Lots of people can spot an arbitrage opportunity of 0.4%, so they wouldn't last long. The real problem lies in the clever, minuscule trades that stay hidden long enough to be profitable at high levels of leverage but that blow up spectacularly when they go bad. If we had fewer of them, the entire system would be a little more stable.

I can think of several reasons why I might be wrong about this. I don't know, for example, how this would affect big banks, or how it would affect the construction of rocket-science securities like the subprime CDOs that brought down Wall Street in 2008. Maybe the small-spread trades I'm thinking of aren't really as widespread as I think. Or maybe the danger would simply get transferred wholesale from trades with 0.1% spreads to trades with 0.35% spreads.

Hopefully someone who actually knows how high finance works will see this and provide some kind of definitive answer. I've long thought that aside from limiting leverage, which is clearly Job 1 for a more stable financial system, we also need to throw just a little bit of sand in the gears and slow things down slightly. Capital controls, for example, might be a good idea for a lot of countries if they're kept small: just enough to prevent massive hot money flows but not big enough to seriously affect capital formation. An FTT seems like something along these lines.

But I'm open to being swatted down. I'm looking at you, Economics of Contempt.

Over at The Corner, Andrew Stiles recounts a conversation he overheard this morning about the Occupy Wall Street protest. The speaker wasn't especially lucid and ended up explaining that he was just generally opposed to greedhead capitalists:

Sure. Because we all know splendidly greed- and corruption-free socialist government is, and how "the 99 percent" of Americans are just clamoring for it. Certainly, this one fellow doesn't speak for all the protesters, but being familiar with how a (frighteningly) large portion of my generation thinks—and in many cases, has been taught to think—this seems like a fairly accurate distillation of their collective mindset: vague, incoherent, idiotic.

Funny, isn't it? Conservatives sure get plenty offended when people use language like this to talk about tea partiers. But find some guy in a coffee shop who dislikes bankers but can't really articulate a fully fleshed out worldview to explain it, and suddenly an entire generation is a bunch of morons.

I'm going to continue to allow other people to follow OWS more closely than me—Andy Kroll has a good piece about union involvement here, and Michelle Goldberg has another here—but I do find it sort of fascinating. The lack of a clear message has never bothered me, any more than the lack of a clear message in the early days of the tea party bothered conservatives. If OWS continues to grow, messages will start to germinate organically. Some of them will spring from the anarchist roots of the founders, but they'll become fringe issues pretty quickly and shouldn't scare off the rest of us—sort of like tea party demands to repeal the 17th amendment. Others will be more mainstream: repeal of the Bush tax cuts on the rich, stricter financial regulations, more stimulus spending, etc. These will become the equivalent of tea party demands for lower taxes and reduced spending.

And just like the tea party, mainstream logistical support will be key. The tea party movement thrived partly because of genuine grass roots anger, but also because it got lots of publicity from Fox News and plenty of money and organizational support from national conservative groups. Likewise, on our side, union support is key because, even in their current emaciated state, unions are still the only big, institutional pressure groups in America focused almost entirely on economic issues. Jon Cohn puts it pretty well:

During my lifetime, the activist left has gone through several incarnations, focusing on a series of different causes. For much of the 80s and 90s, very generally speaking, the focus was largely on identity politics. Then attention moved to globalization and then, during the Bush presidency, to wars abroad.

As far as I can tell, this is the first time the activist left has focused seriously on issues of economic opportunity at home. In fact, I think it's the first time such issues have been front and center since the 1930s, although I'll defer to the historians on that one. Either way, this movement has a chance to help shape the debate over economic policy in this country—not merely about the financial industry, which is the object of protests right now, but also about inequality generally.

This is a point I was trying to get across in my article earlier this year about unions and plutocracy. My main takeaway was: With unions in a state of decline, what will take their place as a big, organized, persistent source of left-wing pressure on economic issues? I didn't know the answer then, and I still don't. But Occupy Wall Street has a chance—a fighting chance, anyway—of becoming that.

Andrew Sullivan reacts to Jon Stewart's evisceration of Mitt Romney's flip-flopping:

If Romney's shifts were connected to new facts, or new arguments, they would have some punch. But what's amazing about him is that all of them seem clearly caused purely by opportunism in a party lurching toward fundamentalism in religion (the Bible), economics (no revenue increases ever) and politics (the Constitution, as viewed by someone in the late eighteenth century).

OK, sure. Point taken. Romney is a shameless panderer. He'll do whatever you want him to do as long as you'll promise to vote for him.

It's not a pretty sight. But it also makes him the perfect tea party candidate. Don't they see this? With a guy like Rick Perry, you never know. The right person whispers in his ear and suddenly he decides that he hates cancer so much that he doesn't care about conservative principles. Cancer is more important. Do you think Mitt Romney would ever do that? No siree. He'd run that baby dispassionately through the Computron 9000 that passes for a brain and then he'd do exactly what you want him to do. Because he wants you to vote for him. So as long as you keep the pressure on, Romney will never disappoint you.

Romney's big problem, of course, is that tea partiers won't necessarily figure this out on their own — they just think he's an unreliable flip-flopper — and it's hard to figure out how to get the message across to them. It's not like he can give a speech saying he doesn't care about principle and will just abjectly do whatever the tea party wants him to do, so help him God. Still, good politicians always figure out how to get messages like this across with a wink and a nudge in just the right place. Romney can do it too if he devotes enough CPU cycles to the problem.

Sorry for the late start this morning. Here in the third-world city-state of Irvine the power went off yet again last night, and this morning my computer was corrupted in some strange way. I have since tossed some garlic at it, shaken some oracle bones in its vicinity, and used my ISP's web interface to delete a bunch of email. This has produced conditional success. If everything continues working after a restart later today, I'll declare victory over Windows and Southern California Edison. Wish me luck.

Anyway. Speaking of online education — isn't that what we were just speaking about? — Matt Yglesias makes a point so obvious today that I've long wondered why I so seldom hear anyone acknowledge it:

There’s just a basic problem with the general incentives-focused view of the world. Investing some time during the years 15-22 to equip yourself with a quantitative analysis toolkit is something that’s definitely rewarded in the marketplace. And you can find all the relevant textbooks, lectures, information, etc. online already. And yet the number of people who’ve self-taught calculus is tiny. 

Right. Professors lecturing in front of whiteboards may not seem very whiz bang in the era of Facebook, but the medium is definitely not the message here. Aside from the social virtues of a physical college campus, its real virtue is that it sets up a commitment structure: you feel obligated to go to class, and once you're in class you feel obligated to do the homework, etc. Even at that lots of students don't go to class and don't do the homework, but lots do. But if you're studying online, you have to self-motivate at a much higher level. And it's a level that, frankly, most of us just aren't capable of.

I'm sure that eventually someone will come up with a solution to this. Until then, though, this is really the key issue, not the quality or widespread acceptance of online learning. We have to figure out a way to make even average students willing to sit through hours and hours of instruction alone in their rooms. That's not something the human brain was really evolved to do.

Ramesh Ponnuru says that David Brooks is right to suggest that Mitt Romney is a perfectly fine Republican candidate:

In particular, I agree that the programmatic differences among the major candidates are small and not especially important: The party has reached a consensus on most issues. He’s right as well about the general-election appeal of a solid-citizen candidate. But there are several important questions Brooks does not address.

1) How much of that consensus would Romney actually act on? That question has to be asked about any candidate but for various reasons it has to be asked especially of Romney.

2) Can Romney mobilize public opinion behind the Republican program? Brooks describes Christie as someone who could do that, then drops the subject.

3) Is that consensus correct? If not can Romney supply what it lacks?

4) When new issues come up for which the consensus has no answers, what would President Romney do?

I suppose these are the kind of questions I'd be asking too if I were a Republican, but from an outside perspective they all seem like pretty small beer. It's true that the policy differences between Romney, Perry, and Christie are pretty tiny, but I also suspect that the differences in temperament and affect, which seem bigger, really aren't. The whole thing reminds me a lot of the Obama-Clinton primary, which involved a stupendous amount of sturm und drang over two candidates who, frankly, probably would have ended up being mostly the same in office.

As it happens, my preference for Romney isn't due to the fact that I think he's secretly more liberal than Perry. He probably is, but I doubt that would make any real-world difference, and liberals are kidding themselves if they think it would. My preference is based solely on the fact that in a crisis, I think he'd be pretty likely to act soberly and sensibly. I don't have the same confidence in Perry.

As for Ponnuru's questions, I think he's on the wrong track. In 2008, both Obama and Hillary Clinton had ambitious agendas that they had a legitimate chance at passing. The Republican Party had imploded, the financial meltdown provided a crisis atmosphere, and Democrats were likely to win big majorities in Congress. Neither Romney nor Perry has any of that working for them. The battle lines are drawn, neither side is likely to back down much, and even in the best case Republicans aren't going to win anything close to a filibuster-proof majority in the Senate. A Republican president just flatly won't be able to get an awful lot done. Conservatives are kidding themselves if they think otherwise.

So if Romney is elected president: (1) He'll act on whatever he can get the votes for, which probably won't be a lot. (2) He won't be able to mobilize public opinion any better or worse than anyone else. It's mostly set in stone on the big issues. (3) The conservative consensus isn't going to change, regardless of whether it's right or wrong, so that's not something to worry about. (4) What new issues? When was the last time that something so new cropped up that the conservative movement didn't quickly coalesce around a fairly limited set of correct responses? Even 9/11 and the financial crisis were swallowed by the prevailing conservative consensus pretty quickly.

Romney is an analytic tactician, but that should make Republicans feel good, not uneasy. He knows the base is suspicious of him, and he'll do everything he can to assure them of his conservative bona fides. He's sort of like Richard Nixon but with a different environment. Nixon didn't care much about domestic policy, so he was willing to do whatever Congress and public opinion favored. Romney doesn't care all that much either, but in 2013 that means he'll be willing to do whatever the tea party and the Republican leadership favor. Similar temperaments, different incentives. He'll be the most reliable conservative president imaginable. So instead of Ponnuru's critieria, Republicans should instead be focusing on (1) electability, (2) electability, and (3) electability. And Romney is clearly the most electable candidate in the Republican field.

From my perspective, that's not good. At the same time, I'm pretty sure Romney won't panic and do something really stupid just because the tea party is getting restless. At the moment, that's about the best I can hope for from these guys.

Here's the latest poll average from Real Clear Politics. Apparently, the more they see of Rick Perry, the less Republican voters like him.

From Ben Bernanke, in testimony before Congress today:

The recovery is close to faltering.

It's good to see that someone is noticing. In Bernanke's prepared remarks, after noting tight credit, slow consumer spending, financial stress in Europe, and other problems likely to hurt the economy, he got to this:

Another factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector. Notably, state and local governments continue to tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain....In setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal sustainability....A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery.

This isn't really new. But every time Bernanke says it, he edges slightly closer to calling GOP members of Congress idiots for obsessing about short-term austerity and spending cuts when they should be obsessing over how fast they can shovel money out the door. What's more, he's being as clear as he can that if Congress does this, the Fed's monetary policy won't get in the way.

But poor old conservative Ben Bernanke is now, in the view of most current Republicans, a dangerous radical lefty hellbent on debasing the currency and getting his Kenyan pal in the White House reelected. I wonder if he ever sees any humor in this?

Austin Frakt read my defense of debit card fees on Friday and says today that it all makes perfect sense. But he's still annoyed by them. "That I feel this way is irrational, but I don’t care....The irrational, feeling part of me wants things to go back the way they were, even as the economist in me knows things are better now."

Right. Even though we won't admit it, most of us are far more likely to accept hidden costs than transparent costs. After all, they're hidden! We don't really know about them. Austin says there's a lesson here for healthcare:

Many policy experts and economists think it’d be far better if people knew the cost of health care, if they were aware what their full, employer-sponsored premiums cost, etc. I agree. Transparency is the right way to go.

But make no mistake, people will be annoyed. No, that’s not right. A $5/month debit card use fee is annoying. Suddenly learning that your income is lower than it would otherwise be by $10,000 because of your “employer-paid” premium is not annoying. It is enraging.

What will Americans do when they finally recognize the full cost of health care?....I think many people will be furious at how much of their paychecks are, effectively, being piped into the pockets of health insurers, health care providers, drug manufacturers, health IT gizmo creators, massive radiology machine developers, other device makers, and government programs. Some will think the return is worth the price. Many will not, particularly those who think insurers are wringing them dry.

Once you start thinking about it, you'll be surprised at just how addicted we all are to hidden costs. There are all the hidden bank fees, of course, which become enraging when they turn into transparent fees and we realize just how high they actually are. There's the hidden cost of healthcare that Austin points to — hidden because, in the American system, employers pay for most of it and most of us never really realize just how much we're really paying.

There are hidden taxes, too. If we want to reduce greenhouse gases, the single best way to do it is via a carbon tax. But that's transparent and produces a gigantic political battle. So instead we end up with direct EPA regulation, something that every economist in the world agrees is less efficient, less effective, and ultimately more costly than a tax. But the cost is hidden, so we all put up with it.

Ditto for tax expenditures, all those subsidies that we give people via breaks on their taxes. They don't seem like government spending, but they are — and they're less efficient than simply flattening the tax code and then making the subsidies directly.

Or there's Matt Yglesias's favorite hobbyhorse, zoning and construction regulations that hide the actual cost of keeping neighborhoods the way current residents like them. Or the hidden cost of supermarket "loyalty" programs, which fool us into providing retailers with valuable information in return for the mere illusion of lower prices.

We hairless apes have a seemingly infinite capacity to enjoy being fooled. But it's worth reminding ourselves every once in a while just how the high the cost really is for preferring inefficient hidden costs to the more efficient transparent kind.

Our Persecuted CEOs

Ezra Klein is in Cleveland at a conference filled with corporate CEOs. He reports back:

Business types really hate Barack Obama. Everybody sort of knows that, but it’s hard to get a sense of it if you’re not in the room listening to them laugh bitterly at questions like, “Does Obama understand the damage regulations are doing to business?”

....These folks really, really feel persecuted and unappreciated. The common response to this, of course, is that corporate profits have hit record levels in recent years and the top 1 percent has never been richer. But if you need more evidence that money doesn’t buy happiness, you should sit with some CEOs for an hour.

The fact that lots of blue-collar workers gave up on Democrats long ago and now vote mostly on cultural issues has been the subject of dozens of books and magazine articles. It's even easy to understand: In FDR's day, Democrats really did do a lot for these kinds of workers. Today, Democrats don't really do that much at all for them. So why shouldn't they just forget about economic issues and vote for the pro-gun guy?

Corporate CEOs are a different story. For decades, Republicans were the pro-business party and it made sense for business executives to vote for them. But what about now? Republicans are formally dedicated to blocking anything that might even remotely have a chance of improving the economy and thereby improve business prospects as well. And yet, CEOs show no sign of wavering loyalties. Just the opposite: they've largely bought the austerity/regulation/deficit fable hook, line, and sinker even though it makes not the slightest sense.

There's nothing really new about that, I guess, but it's still sort of freshly gobsmacking every time I see it in action. These are, supposedly, some of the smartest folks in the country. But they don't have a clue. You can't even say they're slaves of some particular defunct economist, as Keynes suggested. They're just slaves of folk economics at its folksiest and most vacuous — and most damaging. And they have every intention of taking the rest of us down with them.

Ezra Klein says it's not the protests themselves that have caused him to take Occupy Wall Street seriously. It's a Tumblr called, “We Are The 99 Percent,” full of personal stories of people who have, seemingly, done everything right but are still struggling with debt, unemployment, and a stagnant future:

This is why I’m taking Occupy Wall Street — or, perhaps more specifically, the ‘We Are The 99 Percent’ movement — seriously. There are a lot of people who are getting an unusually raw deal right now. There is a small group of people who are getting an unusually good deal right now. That doesn’t sound to me like a stable equilibrium.

The organizers of Occupy Wall Street are fighting to upend the system. But what gives their movement the potential for power and potency is the masses who just want the system to work the way they were promised it would work. It’s not that 99 percent of Americans are really struggling. It’s not that 99 percent of Americans want a revolution. It’s that 99 percent of Americans sense that the fundamental bargain of our economy — work hard, play by the rules, get ahead — has been broken, and they want to see it restored.

I haven't followed OWS super closely, but I started taking it seriously when the right-wing media started sounding a little scared. That was sometime last week after several unions joined the movement, and while I can't point to anything specific, it felt as though the tone at Fox and its allies changed a bit from lighthearted mockery to something a little more serious, as if OWS was a real threat that needed to be put in its place.

Anyway, we'll see. To be truly effective, OWS will have to get a lot bigger and lot more persistent. It's still not clear if this is something that can grow to a million+ people and stay active for multiple years. Because that's what it will take. For more, Lauren Ellis and Tasneem Raja have a roundup of OWS activities, coverage, and an interactive map of ongoing and planned protests.