Wednesday, February 17, 2016

The Social Value of Economic Activity

Cost, risk, and growth

In an interview with NPR, the Tax Policy Center's Len Burman said:
These high-frequency traders ... make enormous amounts of money, billions and billions of dollars, and do nothing of any social value for the economy ... They're just kind of the modern-day equivalent of skimming pennies out of the till.
I met Mr. Burman once, and continue to enjoy his insights and analyses. However I must admit I'm struggling with the notion that making "enormous amounts of money" offers "nothing of any social value for the economy". If all income is taxed equitably there can be social value through revenue generated for publicly provided goods and services. I understand that's a big "if" given the preferences and exclusions embedded in our current tax code.

Traders are, by their nature, intermediaries or middlemen providing the conduit for a transaction between a buyer and a seller – an essential service for buyers/sellers that probably don't know each other. High-frequency trading (HFT) uses automation to enable faster trades and greater volume thereby reducing transaction costs. To me, that's a benefit even though I'm not a fan of middlemen.

Is there a risk that automated trading leads to greater volatility in asset prices? Absolutely. Andrew Haldane, executive director for financial stability at the Bank of England, said, "Speed increases the risk of feasts and famines in market liquidity." I guess that's a risk for frequent traders, but to long-term investors?

Do cars provide social value? They provide transportation and mobility but also require roads on which to operate and produce air pollution, water pollution from runoff, noise pollution, urban sprawl, fatal accidents, and other negative externalities. Cars also use natural resources in an unproductive fashion as they sit idle most of the time, not producing any benefit but, instead, just take up parking spaces.

Do houses and homeownership provide social value? Plentiful housing – whether owned or rented – provides shelter and a sense of community. And while homeownership is continually promoted as a tenet of the American Dream with numerous (though suspect) social benefits, it inhibits labor mobility and concentrates household wealth in a single immobile, illiquid asset with high transaction costs.

Look – I'm no expert in any of this. But if costs are lowered and risks are borne the participants, any efficient economic activity – even HFT – can lead to positive overall economic growth if all parties and gains are treated equally.