Over the last 24 hours, President-Elect Obama has announced five top members of his new economic team.   What do they have in common?   

• Retreads from the Clinton Administration?    Rubin protégés?   No, not all.                  

• Scholars from leading universities?     No, not all.                  

• Friends of mine?    Well, yes, though that is not my point.    As it happens, they have been friends, for 12-to-30 years.    (god forgive me.   There are few greater turnoffs than a columnist who thinks it’s “all about me.”    On the other hand, this isn’t a newspaper column.   It’s just my personal blog.  So what the hell.)    Here is the list:

• Yesterday, President-elect Obama formally introduced Larry Summers as his choice for Chair of the National Economic Council and Tim Geithner as his choice for Treasury Secretary.  Both of these excellent choices held positions in the Clinton Treasury.

• At the same time, to my delight, our new president introduced Prof. Christina Romer as his choice for Chair of the Council of Economic Advisers.    Christie was my colleague for 10 years in the Economics Department at the University of California, Berkeley (1988-1997).  She and her husband David Romer form a team who were my favorite daily lunch companions during that period.   (David would be a great pick for one of the open Governor slots on the Federal Reserve Board.)    They have also been my colleagues on the Business Cycle Dating Committee of the NBER.    The Harvard Economics Department voted to hire Christie last year (and the Harvard Kennnedy School voted to hire David), but unfortunately in the end it did not work out.   Although the CEA position is Christie’s first major government job, she is another excellent choice for the team.   She is smart, well-organized, and even-keeled.  Christie together with Fed Chairman Ben Bernanke have the added bonus of being among the world’s top experts in the monetary history of the Great Depression, an expertise that is of unexpected benefit at the current juncture.

• Today, Obama also announced Peter Orszag as his choice for Director of the Office of Management and Budget.   In 1996, when I arrived at the Council of Economic Advisers, Peter was a Senior Staff Economist at CEA, working on international economics.  Even then his extraordinary abilities had made him indispensable to top officials.   He was the sort of person who rises very quickly in a merit-oriented government:  not just extraordinarily smart, but able to get lots of things done very fast and very well.  When Peter returned from a quick spell at the London School of Economics (finishing his doctoral degree), he moved to a key position on the National Economic Council staff.    More recently, he has been director of the Congressional Budget Office.  This position at the Capitol Hill end of Pennsylvania Avenue is the counterpart to the OMB Director job at the White House;  thus Orszag will on January 20 truly “hit the ground running” with respect to the budget, in the same way that Geithner will with respect to the financial crisis.   

 Irrelevant gossip:    At the height of the East Asia crisis in 1998, I hosted a party in honor of Peter Orszag.    The party is mentioned in Paul Blustein’s The Chastening  (which remains the best blow-by-blow account of the East Asia crisis), because Joe Stiglitz took Stanley Fischer outside on the doorstep to voice in person the critiques of the IMF’s management of the crisis that he had been making in public.    The reason they went outside was so that Larry Summers, who had been managing the crisis from the Treasury, could not hear them inside.

• No, Obama did not choose this team because they are Clintonites or top scholars or my friends.   He did not choose them because economists (leaving aside, as always, the far left and the far right) consider this a dream team.   He chose them because they are The Best and Brightest and The Least Arrogant.     As the President-elect says, the American people want effective leaders, not primadonnas.

• The phrase “The Best and the Brightest” comes readily to mind because their IQs are so high.    After 8 years of the current President and his appointees, I hope that the American public, despite anti-elitist feelings, understands that intelligence and ability do actually matter.  

• But IQ in an academic sense, by itself, is a very incomplete qualification for higher office.  Many university professors are famous for lacking social skills, managerial competence, personal organization, ability to communicate, unflappability, openness, and humility.  These other skills are just as important in policy making as is intelligence.   Indeed, the phrase “The Best and the Brightest” comes from the famous book by David Halberstam, where the title was meant ironically since the orignal Kennedy brain trust screwed up so badly in Vietnam.   The McNamaras were arrogant in the same sense as the Cheneys and Rumsfelds:  when reality diverged from their pre-conceptions (whether in Asian wars or other policy areas), they were too sure of themselves to process the discrepancy mentally and too stubborn to adjust course.   But the Obama team is different.   It is The Best, the Brightest, and the Least Arrogant.    With one possible exception, these people have no ego, no sharp elbows, no rough edges.   They are not close-minded or stubborn.   They are not ideologues.  They will scoop up facts and arguments, on all sides of a policy question, before making a recommendation; and even after a decision has been made, they will monitor new information as the situation develops and adjust course when necessary.    These traits, more than anything, have been missing from government in recent years.
  • Many will object to this description of the team with the observation that Larry Summers is famous for being arrogant.   Summers’ arrogance is a little overdone, compared to some others I could name.  But it is true that Larry’s personality is not ideally suited for the traditional job description of the Chair of the National Economic Council, which is to be an “honest broker,” in the classic phrase of Roger Porter’s early description of the proto-position.   The NEC manages the decision-making process in the White House.  It must make sure that every agency feels that its views have been heard and fairly represented to the president.  (“Agencies” here means not just cabinet departments like Treasury, State, Commerce, Labor, Agriculture, HHS, etc., but also White House agencies such as CEA, OMB, NSC, etc.)  It is evident that Larry was given the title of NEC Director so that he could have the status of Principal, which means he gets a seat at the table in cabinet-level meetings, as opposed to having to sit in the row behind, where the principals’ top aides sit.   I am sure that Obama wanted direct access to Larry’s views because he is off-the-charts smart  (“one of the great economic minds of our time”).  I am also sure that Obama realizes that Larry is not perfectly suited to the honest broker role.   (The same was true of Larry Lindsay, who was fired from the NEC Director position by George W. Bush — not just, as often reported, because he correctly forecast that the cost of the Iraq war would be much higher than the official line.   He did not have a lot of interest in running the policy process, and was rather more interested in expressing his own views to the President, as compared to his more bureaucratically inclined successors.)  
  • Not to worry.    The Wall Street Journal has evidently reported that the NEC will have Jason Furman as Deputy Director.  Jason, who has been Obama’s Economic Policy Director during the national campaign, could not possibly be better suited to the job of running the policy process as an honest broker.   He is a young version of the others:   brilliant, tireless, non-ideological; no ego, no rough edges, a team player.   I know.  He worked for the CEA in 1996-97.

• There you have it.   The Best, The Brightest and the Least Arrogant.   Current conditions are so bad it would be foolish to make an optimistic prediction about economic performance over the coming years.  But I will make the prediction that this team will function like clock-work, and give the country the most capable economic policy making it has had in many a decade.

I propose that the Congressional leadership re-introduce the Trouble Asset Relief Program accompanied by a major new policy: a small tax on securities market transactions. This will accomplish the political goal of aiming a silver bullet into the heart of the (understandable) popular outrage that blocked passage of the TARP bill on Monday. It will simultaneously accomplish the fiscal goal of raising revenue in the future. This is revenue that the federal government would have sorely needed even before the bailout arose and will need even more if the taxpayer is to be protected against the risk of heavily subsidizing the financial sector.

A tax on securities market transactions might sound like a wild populist policy that would damage the functioning of the economy. But in fact it is far more sensible than such populist measures as banning short sales, which has already been tried (to no avail).

Proposals for financial transactions taxes have a distinguished pedigree, going back at least as far as Keynes.  Best-known is the Tobin tax proposal, by Nobel Prize winner James Tobin, which was specifically aimed at volatility in foreign exchange markets. More relevant to what I am proposing are two articles by the pre-Treasury Larry Summers: “A Few Good Taxes” and “When Financial Markets Work Too Well: A Cautious Case for a Securities Transactions Tax” (1989).   Add to the list of proponents another Nobel Prize Winner, Joe Stiglitz.

There is extensive experience with securities transaction taxes (STTs), especially in other countries.  There have also been quite a few studies of their effects. Often the motivation for such proposals is to reduce short-term speculative turnover:   a tax of 0.1% means nothing to a long-term investor, but is a strong disincentive to those traders who hold their positions for only minutes or hours.  The idea is that reducing short-term speculation will reduce volatility.  On the other hand, defenders of unfettered financial markets often argue that such a tax will reduce liquidity and thus hurt the customers who depend on the market.

The general historical experience seems to be that there is no discernible effect on volatility (though a couple of studies find effects on volatility, either upward  or downward).   In other words, the tax might not help the functioning of the financial markets — the original motivation – but neither does it hurt, according to a majority of the studies.  In some cases the volume of trading within the country is affected.  But what the tax does does usually do is raise money for the Treasury.  

The UK long had a securities transactions tax, known as a stamp duty, which was set at 0.5% in 1986.  Sweden introduced a 0.5 per cent tax on the purchase and sale of equities in 1984 — prompting some financial trading to move offshore – and kept it until 1991.  (Froot and Campbell, studied these two examples in a 1994 book that I edited.   The Swedish case is particularly relevant to the current US context because the popular motivation there was to “take down a peg” high-earning speculators.)    Japan, Korea, Taiwan and Hong Kong have a long history with securities transactions taxes, and India introduced one in 2004; in these cases there were not significant reductions in either price volatility or market turnover.  Other countries that have had financial turnover taxes of at least 0.1% include Australia, Austria, Denmark, Finland, France, Germany, Malaysia, and Singapore.  (Germany abolished its turnover tax in 1991, and Japan in 1999.)   In addition there are other countries that impose smaller fees.

Even the United States had a STT until 1965, and to this day imposes an SEC fee of .0033%.  Thus we have already lost our virginity !

An important potential drawback, if the US were to impose a more substantial transactions tax alone, is that it might drive financial business offshore.   There is an answer to this point.  As noted, many countries already have taxes on financial transactions. Furthermore, lots would love to cooperate with the United States in an international program to harmonize such taxes internationally. This is precisely the sort of project in which many abroad have long asked Americans to participate, but which we have not hitherto wanted to do.

The level and longevity of the tax might be adjusted to achieve the goal of Section 134 of the TARP bill: that the taxpayer recoup the costs of the bailout. A 2004 study by the Congressional Research Service reported that an 0.5% tax on stock transfers could raise $65 billion a year.  Others have produced higher revenue estimates.   A tax extended to bonds and derivatives (especially derivatives!) would of course raise more.   Remember that one does not compare this annual revenue to the $700 billion headline cost of the bailout.  Rather, one compares the present discounted value of the annual flow of revenue to however much of TARP’s $700 billion is left over after the government (we hope) collects something on the troubled loans and also recoups something on warrants obtained from the participating banks.

The tax might on the margin contribute to a shrinking of the size of the financial sector; but this shrinking needs to happen anyway, as Ken Rogoff has pointed out. And most important politically, it would give expression in a non-damaging way to the blood lust that the public feels toward Wall Street, a venting that needs to take place if the bailout bill is going to be approved.

[To any readers who wish to post comments:  I suggest you go to the RGE version of this post.]