opinion with the dissenters being byron white and william rehnquist. three of the four justices were in the majority. that really tells you a lot about where the republican party was in the 1970's. the change began in 1980. with the election of ronald reagan. people said, luck. -- look, at the supreme court for a long time. we need a conservative agenda, too, and he brought someone who i think is a very underrated figure in american history, someone who i think is the most important person regarding the supreme court who did not serve on the court, and that is that when -- and that is edwin meese.

1981, the year ronald reagan was inaugurated, was also the hear that the federalist society was founded. a lot of liberals talk about the federalist society as it is something secret, scary. there's nothing secret about it. it is a conservative lawyers group, and it was founded as a conservative movement was building here in washington. it was all part of this new conservative agenda. what was that agenda? expand executive power, and racial preferences, speed up executions, welcome religion into the public's fear, and above all, reverse roe vs. wade and allow states once again to ban abortion, another big part of what some people call the

reagan revolution was the arrival in washington a group of young, vigorous, highly intelligent, highly motivated conservative lawyers, who were two of the best john roberts and samuel alito. no coincidence that that is who they were then or who they are now. the republican party of today was not the republican party of 1981 either, and the example of that is what happened in 1981? potter stuart unexpectedly announced his resignation, and ronald reagan made a campaign crowd -- a promise, where he said, if i have the chance, i will nominate the first woman to supreme court. when stuart left, he said his people, finding a qualified

woman. there were not a lot of republican women in the pipeline for supreme court justices. reagan had to go all the way to the intermediate appeals court in arizona to find the extraordinary figure who was an turn out be sandra day o'connor. it is worth noting that reagan did not say finding someone who will overturn roe vs. wade, find the social security of -- finding a social conservative . that was not do justice o'connor one, and that was not the kind of justice she turned out to be. 1986, warren berger resigned, ronald reagan nominated william rehnquist, and named antonin scalia to his seat. 1983, a key turning point in the history of the court, because that was the year that lewis

powell resigned, and at that point basically since the nixon years, there was in a term that the justices really do not like her much, a swing justice. a justice who was in the middle between the liberals and conservatives, and it was very much the was powell at the perth. -- at that point. his departure was keep for the court. ronald reagan nominated robert bork to that seat. something very important had happened between the confirmation of scalia and rehnquist in 1986 and the nomination of bork in 1987. in the midterm elections of 1986, the senate had changed hands and the democrats were in charge. instead of strom thurmond, the new chairman of the jewish erie -- of the judiciary committee was joseph biden. biden turned those hearings into

our referendum on bork's engagedd bork really with the senator about those views. bork was brilliant, honorable, and he was very, very conservative. he was someone he said the right of privacy does not exist in the constitution. the senate said by a vote of 58- 42, too conservative. howard baker said we cannot get someone that conservative through. we have to appoint someone ideologically different. that is when his seat went to anthony kennedy, and i do not think kennedy is a liberal, but he is certainly not robert bork. the court has reflected that over the years. the appointment of bork --

kennedy set the stage for the rehnquist years on the court. that is what my book was about. was inspired to write "the nine " buy a book called "the brethren," the first behind the scenes look at the court, published in 1979. if you recall, the theme of that book, the theme of that book was how all the justices, without regard to politics, could not stand warren burger. they thought he was a pompous jerk. i get to report about all -- about how all the justices did not get along and they do not like the chief justice. to my disappointment as a journalist, i learned that was

not all the case. chief justice rehnquist was a very popular figure around the supreme court, that regard to political affiliation. he really learned a lot from i would submit the-example of warren buerger, and one of the things he learned and one of the things rehnquist did was he engineered a tremendous reduction in the court's workload. the justices might this very much. in the 1980's, the court was deciding about 150 cases a year. but the time renquist died, the court was deciding about 80 cases a year. think about that. almost in half. during the 1980's, there was a a serious proposal to have a super appeals court to the circuit

courts and the supreme court to help the supreme court with its workload. and like a lot of these ideas, it went to the white house counsel's laws, and the council at that time was a guy named fred fielding, and he gave this proposal to a young member of his staff to write -- and analyze it. the young member was named john roberts. this is what roberts wrote in a memo about a proposal -- "some of the tales of woe emanating from the court are enough to bring tears to the eyes, it is true only supreme court justices and some school children are expected to and take the entire summer off." the chief justice does not talking this way anymore. the entire summer off looks pretty good, of venice,

florence, it is one of those places where he is teaching. they are often teaching in italy. and i do not begrudge that. i think it is great, but it is also true that the work load has gone down a great deal, and it s thato true under robert ts the court remains a congenial place. you can see that in oral arguments. in a group like this, many of you have had the opportunity to see the supreme court in action. if you have not, i recommend it. it is one of the great free shows in washington, d.c. i mean that sincerely. it is a fantastic thing to seek a supreme court oral argument. there is of course one very well known fact about supreme court oral arguments, and that is that there are eight justices who are very engaged and very prepared

and put a lot of hard questions, and clarence thomas does not ask any questions at all. there was an important anniversary this year, the fifth year in row, of justice thomas not asking a question. i do not go into that many arguments, but a lot of my colleagues -- bill goes to a lot arguments, and he cannot help but sit there when you watch these oral arguments and think yourself, will this be the day? will this be the day that the streak ends it never is. the thing is if you go to the argument, you see that justice thomas -- and this is true -- he is not an isolated figure. he is someone who chooses not

ask any questions. and the court remains a congenial place. in looking at the request years, it is useful to divide it between 1986 and 2000 and 2000 to 2005, and the dividing point in the history of the rehnquist court -- in many respects the dividing point in the history of our country who is the court's decision in bush v. gore. he is a great public speaker, and he takes questions, or as i heard him say once, i agreed to take questions. i cannot agree to answer questions, but he often gets a question about bush v gore. he says the same thing -- get over it.

just speaking for myself, i am not over it. i am an obsessive. my last looks was a book called "to close the call," and it ended with the election. one of the things i tried hard to do and writing "too close to call" was interview out war. i tried everything. i wrote, i call, i worked every connection i had, and he would not talk to me. by coincidence, while working on this other book, i met al gore at a social occasion, and he had met -- read "too close to call. i am writing another book where bush v gore is the center of it. he said, you may be second. [laughter] i think you got to get some

point on that theory -- on that. the curious thing was its aftermath at the supreme court. here was the famous 5-4 decision which gave the court -- a word of the presidency to george w. bush, but in those five years afterwards, the court moved to the left. 2000 to 2005, no question about that. that is when they ended the death penalty for juvenile offenders, mentally retarded. the case that said people could not be prosecuted for having consensual sex. of course, in case after case, they rejected the bush administration's position on guantanamo bay. why did the court moved to the left? it goes back to what i say

about the evolution of the republican party, because center day o'connor, who was at that point the swing justice, saw that the current republican party was not her own a republican party. she did not like john ashcroft. she did knocks lot -- she did not like the war in iraq. when i think of history of the last eight, this will loom pretty large, and that is terri schiavo case, a case about a sick woman in florida he should make the medical decisions, an issue of judicial independence, but it was also about a very sick person and who should make decisions for her, her family or the government. this was the kind that justice o'connor's husband was slipping into alzheimer's disease, so it

was not an abstract issue for her either. we have now seen the last three justices to leave the court, justice o'connor, justice souter, and justice stevens./ three more different people you will never meet, justice o'connor, former majority leader, dominates every room she walks into, justice stevens, a widely antitrust lawyer from his chicago, david souter, the reclusive, eccentric bachelor from new hampshire. so little in common, but what do they have in common? they are all republicans and they all left the supreme court deeply alienated from the contemporary republican party,

and they were replaced by -- or the two who left, rehnquist and o'connor -- were replaced by representatives of the more contemporary republican party, and justice alito and justice roberts reflect a more conservative party. in the last five or six years of the supreme court, whether striking down the gun control law, ending school integration in seattle, and the signature decision, the roberts court at this point, citizens united, which is the beginning of the end or the beginning of the total deregulation of all came -- of all campaign finance law in this country. stephen breyer, who is hardly a hysteric, i think was right when he sat on the day the seattle and louisville decisions came down, it is not often in law so

if you have quickly undone so much. president obama has had two appointments to the court. they reflect the obama presidency, just as i think -- there used to be a myth that justices are surprised by how their justices turned out. it largely goes back to the eisenhower administration with warren and brennan. if you look at the last decade the supreme court appointments, i think you see precisely the justices turning out as expected. go back in your head, kagan, sotomayor con la roberts, alito,

breyer, ginsburg, thomas -- all of them. i think we are getting a pretty much what we expect from these justices. but i think it is worth thinking about that what we see is what we get, and presidents, to an extent we journalists do not fully acknowledge, presidents tell the truth about what they want in supreme court justices. president george w. bush said he wants to appoint justices in the mold of scalia and thomas. obama spoke of his admiration for justices ginsburg and breyer, and come next november

-- i do not think there will be in need between now and then -- but we should listen to what the presidential candidates say, and that is likely what we will get in our next supreme court. with that, i look forward to taking precautions and answering them. [laughter] estion?ot a qu [unintelligible] that is a great question. could you repeat it so it goes into the microphone? >> sure. with respect to justice souter, when he left the court it marked the first time in modern american history where the court did not have a member within the state court experience.

do you think that fact matters? >> i think it is terrible. i believe in diversity, but it is not just about race and gender. there are eight former federal appeals court judges, and only elena kagan is not, and she was the dean of harvard law school. similar. the accord decided brown v. board of education, eight of the nine justices had never been just as before. think about how different that is. i think it is terrible that there are no state court judges on the court. i think it is terrible there are no former elected officials on the court. there used to be a long tradition of appointing people with political experience, and you see that. justice breyer -- he writes a

formative experience of his life, when he was chief counsel to the judiciary committee, and he saw hal calls -- how laws were made, and he thought that was a good process, something that the court needed to take seriously. the rest of the court, and this is hsu of justice scalia, have a lot of contempt for how the sausage is made. on one level it is hard to blame them, but the lack of diversity in terms of professional background is a loss for the court, and state court experience, political experience, and another, i would add, and just as sotomayor is a valuable addition, is a trial court experience, knowing how

trials work in the real world when you are sitting up there with juries and witnesses, that is something there should be more of on the court. >> along the same lines, and since you mentioned it, do you feel any similar views her with regard to the religious issue, the protestants versus a number of jewish folk? >> as my dad used to say, to make a long story unbearable kamal that is a question that i have heard before and i have a long answer to it, but bear with me. one of the great things about studying the supreme court is the membership of the court reflects what matters in the

country at large. in the early part of our republic, there is a big difference. everybody was effectively protestants. the regional differences or what mattered at the supreme court. that is what mattered in the country. it is very important there be a new york justice, a massachusetts justice, a virginia justice. that reflected the controversies of the day. now not very important. we have two justices from arizona for a long time. so what? the country started to change. in the late 19th century, immigration was changing the country, so you started to have that be important to the supreme court. you had the first catholic justice. the guy who wrote dred scott --

i am i blanking on his name? chief justice tawney was the first catholic justice on the court. turn-of-the-century, he started adding jewish caucasuses, justice bandeis. the country starts to be -- the big issues in the country, civil rights, thurgood marshall, a very important milestone in the country. 1981, the first woman on the court. 2009, sonia sotomayor, the first hispanic justice. as an overlay to that, you have the abolition of six catholics and 3 jews. i think that is not very important and significant, because john roberts and samuel alito were not up with it

because they are catholic, but they were appointed because they're conservative, because the real divisions in our country now are ideological war than religious or racial. president obama did not appoint someone your -- sotomayor because she was catholic, but because she conform to his ideology. that is my reaction is, so what? >> state courts are grappling with cameras in the courtroom, and we know from kathy that there are -- there is not likely to be cameras in the supreme court anytime soon. >> my friend, justice souter -- over his dead body.

>> keep you think it would help the public's perception in understanding of the supreme court, or do you think not? >> i think it is ridiculous there are no cameras and the supreme court. i think there are reasonable arguments can be made. i am not persuaded by them, but reasonable arguments that in trial courts where you have civilian witnesses, jurors, cameras could have 75. in appellate courts, where you are dealing with professional lawyers, professional judges, i think it is absurd there are no cameras in the court. i was amused to see that justice ginsburg gave a speech a couple weeks ago where she plucked out funny and vaguely embarrassing comments that the justices had made during oral arguments and said -- and then

conclude by saying, as you can see, we are not going to be allowing cameras in the courtroom any time soon, because it would be embarrassing to have this stuff on camera. it imagine if you can to the supreme court in a first amendment case, and said, the reason we kept this from the public as we thought it was embarrassing. they would laugh you out of court. is there candy store, and i think the court is and institution that works very well the way it is, and i understand they are reluctant to tamper but it, but i think this day and defense -- event is public into the 11 because of the five people or whoever it is can tropp in there and watch, that is unduly limited reading of the word "public." i do think the court has done

well or better on the issue of audio, and i really do -- the rule now is that the audio recordings are released every friday, which is two steps forward and one step backward, because they used to release the important cases the day of. now they release them at the end of the week. that is an improvement. i would not be surprised if in 10 years the arguments were streamed life over the web, because that would require no disruption at all of the supreme court tossed building, of the architecture, the microphones in there now. no one would see anything different, and with younger justices, but justices sotomayor and just as they can, were much more receptive to the issue of cameras.

audio i think is on a march in the right direction. video is a different story. he would have to put cameras in the court. the justice are appropriately and understandably cellist and protective of the supreme court's building. you might have to change the lighting. i can see why they would possum that, but still, it is the public's business, and it should be open to the public, but it ain't going to happen anytime soon. >> and other hand over there. are we done? >> ok. thank you for having me. >> the motion to concur in the amendment is agreed to. >> with the debt ceiling bill

now in law, watch the debate and see what you're elected officials at and how they inally voted, with c-span's congressional chronicle, a video of each session, and when members return, follow more of the appropriations process. >> this evening, a debate from ralph nader and the study for response of all at 6:00 eastern on whether there should be a financial transaction tax. such a tax would be on trades from stocks, derivatives, and other instruments. later, senior retired military officers participate in a simulated destruction of the global oil supply. among those participating, stephen hadley, and former director of national

intelligence dennis blair. this is part of the national summit on energy security at 8:00 p.m. eastern >> republican candidate some are gathering in iowa for a grass- roots politics, state fair festivities, starting thursday. we will interview candidates and take your phone calls. saturday, we will go to ames for the straw poll. road to the white house in iowa, this week on c-span. >> arne duncan speaking at a conference today, maintaining conditions for learning. he was joined by representatives from the field of mental health, substance abuse, and

emergency preparedness. this is just under 30 minutes. >> thank you. the difference you are making in schools in districts around the country today is absolutely extraordinary. i know the amazing challenges you face every single day as you help our nation's children get a great education have the opportunity and support and guidance to fulfill their potential. the challenges our young people are facing today are staggering. rates of poverty we have not seen in a long time, rates of homelessness, rate of unemployment. i do not know if there is a district in this country where title i counts are going up, not down.

was -- levels of violence in schools -- sometimes homes, communities can be devastating. this is the toughest challenge i face. i managed chicago public schools, and we made our schools much sicker, but what the experience was horrific, and we had one student shot and killed every two weeks. i cannot tell you that told that took on me personally, try to the classrooms and talk to classmates about their friend they lost and make sense of it, trying to gut the homes and tell the parents of children who were on a roll students who were doing nothing wrong, who were playing basketball, or sitting in their living room and got shot. you guys are dealing with these tough issues every day. bullying art students face is at unprecedented levels. the easy accessibility of drugs

and alcohol at younger and younger ages. since talking to me about the temptations they are facing. then there two sides of the same coin, where you have both obesity and real hunger, and often on the same block, in the same committee. the challenges you guys are facing, are huge. at that time when you are facing this challenge is, our students getting a great education -- that task, that imperative has never been more important. we know the international competition, we know we have fallen from first to ninth. other countries are passing us by. there is no chance for them to get a good job when that

happens. as i look across the globe and look at the competition we are facing, places like south korea, where the president talks to president obama, and obama asks what is your biggest educational challenge? he says, my biggest challenge, parents are too demanding. even my poor students demand a world-class education. south korea over the next five years is going from print book to all digital. no more textbooks in 2015. that is where the competition is these days. we have to think how we can prepare students for that. you guys are facing immense challenges, our young people are facing challenges, the importance of integrating education, with fewer resources. we have for too many leaders at the local level who are

attacking public a education, who do not believe in it. collectively we have to continue to challenge that mentality. we have to educate our nation cost young people. nafta educate our way to a be tter economy. -- we have to educate our way to a better economy. these are tough budget times, but budgets reflect our priorities, and where we fail to invest, fell to make a of a commitment, we do our children and our country a grave disservice. [applause] we have to continue to fight that battle again in districts, committees, cities, states, at the national level every single day. it has been amazing to see how

many public officials want to dismantle the public education system in this country, but those beliefs will not help our country get to where it needs to go. [applause] we will give them real opportunities every single chance we have. what do we do at a time of huge needs, smaller resources? we cannot stop. our children get one chance. we have to keep moving forward, putting together, and use each other, relationships and do some things differently in order to make sure our children have those opportunities. we are trying to partner with other agencies across the administration to work in different ways, and i know for far too long, different

departments at the federal level have not spoken to each other. i have been pleasantly pleased to see my colleagues in other places, willingness to cooperate, and my answer is if we can lead by example here, we will see similar partnerships start to emerge in the state a local levels. a quick example, my good friend eric holder, which are working together to think about how we have much more positive school discipline processes across the country, and i am concerned we are expelling students when far too many of our children are going to incarceration. that has to stop. this is a personal one for me. i ran the chicago public schools, and i became alarmed at the number of young people who were being arrested, so i met with the police chief and said we have to do something better. you have to help us here. he looked me right back in the eye, and said, you are the

problem. i said, what are you talking about? you are the problem. we looked at the d-day, and it was an eye opener for me. we were a big part of a problem. the vast majority are breasts were not happen -- happening at 6:00 in the evening. they were happening from 9:00 until 3:00 when our children work in school. what we found was that 7% of our schools work leading -- were leading to 55% of the arrest. some schools where they were arresting hundreds of german teacher, and some they were zero. we have to look ourselves in the eye, and train school staff.

the first response cannot be to call 911. it should be how do we help this child? we were able to drive down the number of arrests. it took some honest soul searching to do that. we have to do this work across the country. many of you saw the data out of texas, and i commend texas for putting that day that out, and it is staggering. over half the young people in texas get suspended or expelled at some point during their educational career, and the fact -- 15% of young people who go to school in texas are suspended or expelled 11 times while there are in school. the fact that 75% of african- american children are suspended or expelled in texas, 75% of special education children are suspended or expelled. that is it right there. we have to challenge ourselves in every community where we can

figure positive practices that do not push students into jail, but give them the resources to be successful in class. other strategies we know work to restore justice, that has become the norm. we're working hard to make that happen. kathleen sebelius at hhs has been a wonderful partner. best practices that people are using, to reduce bleeding. please access that. we are working closely with her to create basic health care clinics, and if our children are not healthy, their needs are not being met, they will not be successful in school. we were pleased to get $95 billion in grants did create health care clinics across the country.

those clinics are going to help 1 million young people stay in school, get the support they need. this is the first half of the funding. we are pushing very hard there, and in chicago we had two dozen health-care clinics, and it was amazing to hear the stories of young people, horrific things they were dealing with in their committee, but because they have quality to health care, they were staying in school. we are working hard with her now around better access to high- quality early childhood education. there is no better investment that we can get our babies off to a good start. we are going to invest $500 million together to increase access, particularly in disadvantaged committees, and make sure that is high quality,

so kids will be ready to enter kindergarten and get ready to read. we are working with -- [applause] we are also working across agencies to make sure we have strong communities, and we are pushing hard on our promises to build up on extra network in new york. i do not think it had a strong neighborhood anywhere in this country if we do not have great schools at the heart of that. these things are inextricably linked. we are continuing to work very hard across agencies to help to revitalize those most distressed communities and make sure great options are available for our young people so they can be safe just not in school, of walking to and from school and their

families have the support services they need to help them be successful. these are tough economic times. i wish it was much easier. we cannot let that stop our work and let it stop our collaboration. we cannot stop doing everything in our power collectively to give young people the chance to be successful. one final thing, i grew up working as part of my mother's after-school project, in the inner city, and i do not know if there is one child who went to college. because they had caring adults in their life, because they had a safe place to go to school and after-school, and people were doing extraordinary things. despite the challenges we face, despite what i call the adult dysfunction, right here in washington, i am actually very hopeful because i know we can get our children real

opportunities and support and guidance and we work together and partner, they can do amazing things. we have to continue to work together in good and tough times to make sure our children have these opportunities. thank you, i will stop there. i will take any questions you have. [applause] there are a couple microphones. >> i want to applaud you for all the things you have listed that you are overseeing in your department. i am hoping you can add more thing. the school districts such as the one i come from that are trying to compete with the rest of the world by not making, but

encouraging and pressuring kids to take a.p. classes, geometry before their brain development has reached a place where they can understand the concepts, out of rot in eighth grade -- i know there are prodigies who can handle that, but i think the majority of our kids cannot, and they will sign up for these classes, by pressure, peer pressure, and they do not really learn copperhead, and retain. they start with a test, they move on, they are not learning and therefore not been prepared in the world. they are sharing their adhd prescription stimulants so they can stay up and study and the wealth, not for the high, for academic reasons. i am hoping he will oversee

something in your department to stop that kind of competition, because it is counterproductive, and it does a number on the kids' self-esteem when they feel stupid because they cannot do something that their brains will not be ready for a couple years the road. >> i hear the concern that we do not want children sharing a prescription medicines. let me challenge you. one of the things i worry about in your country is the lack of access to high-quality opportunity, and one of the things i saw in chicago was a huge disconnect between the number of white students taking a.p. and the number of latino and african-american taking the classes. in a couple years, we were able to double the number of students not just taken, but classes.those

in four years, they were not twice as smart. we were simply creating an opportunity that did not exist before. the low expectations, the lack of live tv to take college level classes is a hindrance to young people. there is a balancing act there. i want college opportunities for children to take college level classes, sophomores, juniors, seniors to take a class on a college campus or a committee college to be part of that environment. so many of our students have to feel not intellectually they are ok, but they can be confident in that higher education environment. i want to caution you. there is a balancing act there. i think far too many students in our country did not have access to those opportunities. that is something we have to work on.

[applause] when their brain is that the proper level to of sword -- to absorb.bso >> i have a two-part question. there has been dramatic reduction in school violence issues since the mid 1990's, and many of us to be that of the policies that were done in title iv. recently the funding behind that has been eliminated, and many wills like california, ho that be put it in the reauthorization is my first question? we hope so. the second question has to do

with the fact we are at war for 10 years, and there is 2 million kids who have had their parents serve. we know the kids are suffering based on studies coming, and we know the schools are also seeing the effects of the academic and social climate. are there plans to actually include supports for those kids and families in public schools? >> two great questions. let me take the second one first. i have tried to spend a disproportionate amount of my time at schools on military bases, around military bases, where he had family members who have been deployed, not once, but 4, 5, 6, 7, eight times. i cannot imagine as a child what that is like. i try to be gone no more than one or two nights. there was one little girl whose dad was gone over a year.

whenever we can do to be helpful for those children, that is the least we can do for our troops. it is amazing to me as i talk to folks who have deployed, what can i do to be helpful? they say, help take care of my kids. help take care of my children. this is one where i think collectively there is a level of trauma, fear, worry that we have not seen in a long time in this country. whenever we can do in terms of mental health services, school- based, community-based, to keep this of people focused, or the parents -- we have some parents were both parents have been deployed. whenever we can do collectively to -- cannot imagine as a child -- give the resilience to stay focused in school, we have to do that and put resources behind

that, and we are trying to work closely with military families. fy11 wefirst pointt, took a very big hit, and we have a significant budget request in for fy12. you read the papers like i did, this is a tough budget climate and we're pushing congress to the right thing. i cannot promise we will get a significant increase. the kind of surveys you have done, a california, we did in chicago, they were helpful adding real data, asking students, are you safe, what do you think? they're called wag indicators. i do not worry about students. those trends are going south, i get worried. if you look at the foot print for authorization, we emphasize this in a big way. we're asking for $265 million. i do not know if we are getting

that or not, but we will push very hard. what i fundamentally think is if children are not safe, they cannot learn. if they cannot see the blackboard, they cannot learn. if they're not fed, they cannot learn. there are fundamental building blocks of emotional health that we have to put in place, and when we do that, our children in the communities can do extraordinarily well. if we never do that, we will never get them to do what we need them to do academically. this is a huge ephesus for us here. it is tough times, but please keep up the fight. >> that you. -- thank you. >> thank you for the opportunity to ask questions. i appreciate all the things you are saying about the importance of learning conditions and work we're doing.

safe schools, helping students is an incredibly healthy partnerships, and you talk about the new partnerships that you are looking at the linkages. this is a partnership with a 12- year history. i have heard rumors that there is will not be continuing. now we will continue everything that is making a difference, and the more you can demonstrate we are increasing education rates, attendance rates, all of this has to be driven by the evidence. things are not working, we need to invest up. we need to try not maintain that commitment, but increase those commitments when we can. i will take one last one. >> thank you. my question to you is, i travel

across the country, and i speak to schools in rural communities, and very affluent communities. overall, the same question comes -- how are they dealing with the situation from the top to bottom regarding bullying and cyber bullying? it filters down to the schools, and half the time the superintendent did not know what is going on, and then we expect schools to take care of the situation. you find one system doing amazing things, and another system does not even know what to do. i find that very hard. >> that is one of the huge challenges. for all the problems we face, there are examples of extraordinary success, but we do not do another job collectively in replicating them. we are trying to do a number of

things to address it. the website i talked about will consolidate the best practices, where we are making the difference to make that transparent. that program is not on our website. please make sure it is. our office of civil rights has been much more active than it has been a long time. that clarity and guidance is leading to better policies in states around the country. those policies have to translate into practice. we need to continue to push hard there. we will do that with a number of some months. we had a summit at the white house recently. we're trying to do everything to shine a spotlight, and if children are worried about going to and from school, cyber bullying, they cannot be assessed academically.

we're trying to get the word out and make sure that children are growing up a climate free of fear. >> fayed you. -- thank you. >> that you for all your hard work. thank you for having me here today. >> thanks, arne. let's give a round of applause. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> at 9:50, ron reagan talks

about "my father at 100." >> tonight, a simulated destruction of the oil supply. stephen hadley, a former shell ceo, and dennis blair. that is at 8:00 p.m. eastern on c-span. >> we think good things come in twos. >> live coverage of the house. >> live coverage of the senate on c-span2. >> we dance on c-span3, export

american history tv. >> follow us on twitter. >> it is washington your way. >> wednesday, tavis smiley and cornell west discuss their recently launched poverty tool ur, then jules droll on the role of credit rating ages. then the relationship between the private sector and government in creating job growth. plus emails, phone calls, and s >> next, a discussion on whether there should be a financial transaction tax on trades of stocks, derivatives

and other financial instruments. it's hosted by the center for study of responsive law and it's close to two hours. >> right now it's ok. all right. welcome. my name is ralph nader. today the center for the study of responsive law presents the second in a series of debates on generally taboo subjects in both political, legislative and mass-media arenas. the topic today is variously called "the wall street trading tax," the securities transactions excise tax or the financial transaction tax. tabuse exist in all cultures, and our society is rife with them. it is remarkable that with all the current pre-occupation of the major political parties and their governmental representatives, with deficits and debts, spending and revenue, a major form of public revenue from financial

transactions is hardly on the screen of their consideration. it was not always so. until 1966, our country did have a transfer tax of 0.2% of all sales or transfers of stocks. it reached that level in 1932 under franklin del notice roosevelt to boost financial recovery and job creation during the great depression. after 1966, discussion of the tax went cold. though as trading volume skyrocketed here and abroad, there was considerable discussion in foreign countries and some adoption of financial transaction taxes there. my experience in speaking around the country about what is essentially a sales tax on the buying and selling of financial instruments is that people, once it's brought to their attention, sometimes make a comparison with the sales

taxes they pay when they buy furniture, clothing, hardware, services and sometimes even food. why, they ask, do they have to pay a 6% or 7% or 8% sales tax on the necessities of life, yet wall street traders, no matter how much they buy, pay zero sales tax? to be sure, there are bills filed on imposing this tax on financial transactions by a handful of members of congress now, but they've been ignored by both the leadership and the committee chairs and the president and thus can be considered dormant, ignored by the mass media as well. last month the fast-growing california nurses association and its affiliates in other states have adopted the "walt tax for main street" as a major initiative that started with a rally opposite the new york stock exchange.

the wall street traders looked out on the ralliers with curiosity, but it appears they were not amused at all. discussion of a financial tax can radiate in many directions. it can be elaborated with endless variations and steeped in infinite dimensions. today's debaters and moderators are so knowledgeable about this subject that they will be able to identify and clarify the points they wish to make or prod others to do so in understandable language. nonetheless, the subject is not simple, especially when it is contested. the audience and the national audience reached by the presence of c-span and other media here may need their better concentration on the details as they think about the more general principles of fairness and equity in our tax laws. once the debaters make their

presentations and responses, the moderators will expand the discussion. then the debaters will be given an opportunity to question each other, followed by written questions from the audience, which include over 30 students visiting from other countries. and if you're going to write your question down on a card, please write very, very ledgebly and even try to print, if you can. the debate will close with final comments by the debators. now to introduce the participants and the moderators. for the affirmative in, favor of a securities transaction tax is professor robert pollin from the department of economics at the university of massachusetts in amherst. mr. pollin's research centers on macroeconomics, conditions for low-wage workers in the u.s. and all over the world. the analysis of financial

markets and economics in a clean-energy economy in the u.s. his books include "measure of fairness -- the economics of living wage," and "minimum wages in the united states." and an employment targeted economic program for kenya and a similar one for south africa. he's written the book "contours of dissent -- u.s. economic fractures in the language of global austerity." and the book of which he is an acknowledged expert on the living wage, building a fair economy. more recently he co-authored the widely debated study, green recovery, the economic benefits of investing in clean energy. and also another mono gravel called green pros period of time, exploring the economic benefits of large-scale

investments in building a clean energy and economy in the united states. he's currently consulting with the u.s. department of energy and the international labor organization. he has in the past worked with the joint economic committee of the u.s. congress and as a member of the capital formation subcouncil of the u.s. council. in the negative, opposed to a financial transaction tax is professor james angel at georgetown university. coming from the california institute of technology, where he earned his b.s. degree, he got a ph.d. at the university of berkeley in finance and an m.b.a. from harvard business school. i might add that professor pollin got his ph.d. from the new school for social research in new york city. professor angel began his

professional career as an engineer for pacific gas and electric, where he worked on regulatory issues. he is an author of many books and is often quoted in the major press on financial issues. he is a visiting -- he served as a visiting academic fellow and resident at the national association of securities dealers. he has visited over 50 stock exchanges all over the world. even was an advisor to the shanghai stock exchange. and he now is on the nasdaq economic advisory board and a member of the o.t.c. bulletin board advisory committee. he currently serves on the boards of directors of the direct edge stock exchange.

we have two moderators who also have a particular points of view and i thought it would be good to have a knowledgeable moderator, even though one is against and one is for, rather than have a not-knowledgeable moderator, and allow the debate to sag a bit. opposed to the transaction tax, but moderating half of the time here is gus sauter, who's a member of the advisory board of the journal of investment management conference series. but in his day job, he is the chief investment officer of vanguard, and as chief investment officer, he's responsible for the oversight of about $1 trillion, managed by the vanguard fixed income and quantitative equity groups. he got his b.a. from dart mort and his m.b.a. from the

university of chicago and finance. he's a member of the investment company institute and he also has served on the trading committee of the securities industry association, securities industry and financial markets association, and the aimr best execution task force. so you can see all these participants are very much into the details of this subject. dd >> in favor of the tax on financial transactions, dean baker is a widely quoted economist here in town. he got his ph.d. in economics from the university of michigan. he is presently co-director of the center for economic and policy research in washington, d.c.

he has his own programs on the internet. his blog, "beat the press," features commentary on economic reporting, and his analysis appeared in many major publications, including the "atlantic monthly," "the washington post" and the london financial times. he's written several books, one called "taking economics seriously." it's really an attempt to clarify the principles of economics, and, as he put it, to take away the ideal logical blinders off of basic economic principles. he's the author of "false prophets." one of the earliest economists to predict the housing bubble collapse. and he walked the walk. he sold his house and rented an apartment here in washington, d.c. before the collapse.

he also predicted the market meltdown. he's the author of a book that needled the other side called "the conservative nanny state -- how the wealthy use the government to stay rich and get richer." as well as the book that he co-authored called "social security, the phony crisis." he is also the author of "getting prices right, the debate over the consumer price index." he's worked as a consultant to the world bank, the joint economic committee of the u.s. congress and the oecd's trade union advisory council. so we'll start now with the debaters and we'll lead with

moderator dean baker. >> thanks, ralph, and thanks everyone for coming here. i don't know if we had a coin flip or some random assessment, but we're going to have bob start out with a brief case arguing for a financial transactions tax and jim having the same amount of time, five to six minutes, arguing in the opposite direction. so, bob, are you ready to go? >> yeah. well, thank you, ralph, for organizing this. we were talking before the event. we had actually done one of these about a year and a half ago, so this is like the ali-frazier fights. so this is the second one. wait for the third one. we're going to do it in manila, for those boxing fans. ralph gave a lot of the interduckses that i was going to give, -- introductions that i was going to give, so i can speed over that. the financial transaction tax is a small fee paid on every

financial transaction. for example, if you set a tax on stock trading at 1/2 of 1% and you could divide that among buyer and seller, so it would be 1/4 of 1%. if you have a $100 trade, then each trader would pay 25 cents. now, dean and i have actually worked with a financial transaction tax at that level for stocks, and then we scaled the values. and we can get into details later, if you want. for bonds and all derivative markets, including options, futures swaps. and what we've calculated is you could raise $175 billion in today's financial market per year, assuming that you cut trading by 50%, an implausibly high level of trading. now, we may be off a little bit with our calculation, but the

basic numbers are there. and i'll give you some evidence on that in a little bit. $175 billion would be enough to fully cover the entire deficits of all the states that are now facing austerity budgets today. fully cover for fiscal 2012, so that rather than hearing news stories about cutting teachers' pay, cutting nurses' pay, cutting health care, shutting down the state of minnesota and maybe shutting down the united states, we could talk about expanding opportunities and services. and on top of that, we could fully pay for it and we would still have $90 billion left over to expands investments in, say, for example, the green economy, strengthening small businesses and job creation. now, as ralph said, the tax is equivalent to a sales tax or a

gambling tax. in this city of d.c., the sales tax is 6%. so if you spend $100 here in washington, if you go to home depot and do something useful, like buy caulking equipment to retrofit your windows, you would pay $6 tax for the $100 of expenditure. but if i buy $100 in stocks tomorrow, i pay no tax, zero. if i go gamble on wall street -- in las vegas, i'd pay $6.75% to the owner of the casino. the tax can be used for two distinct purposes. it can be used to raise revenue, as i just described, and it can be used to reduce the size of the speculative financial markets. now, the beauty of the tax is that if you are in the market to buy and hold -- if you have a long-term perspective, the tax is negligible.

so if you buy $100 in stock and hold it for a year, you pay 25 cents in the way i've described the tax. if you buy $100 in stock and turn it over -- turn over your portfolio every week, you're going to pay $12.50. so this tax does become onerous if your strategy is to keep trading all the time. now, you can design the tax, make it higher or lower, according to whether your primary purpose is to raise revenue or to discourage speculation. you can also try to kind of hit a sweet spot between the two. the tax is very flexible in that sense. now, why are we talking about the tax now other than that ralph nader had the idea to organize it? obviously as a result of the massive financial crisis of 2008 and 2009, which left the economy in the most severe recession, and we still really

haven't gotten out of it. i just heard the new unemployment statistics, 9.2% for the narrow measure, if you include underemployed. it bee 16%. that's about 25 million people. 25 million people. and it sounds like a number, but imagine all the entire population of the biggest 10 cities of the united states, that is new york, los angeles, chicago, houston, phoenix, philadelphia, san antonio, san diego and dallas. imagine all of those people. that's less than 25 million people. that's how many people in this country are unemployed or underemployed. in addition, we, of course, know about the massive bailouts to the financial markets, who created the mess in the first place. the international monetary fund estimated, even after the money -- the banks have paid back a considerable portion, there's

still about $500 billion that has been unpaid. now, i don't have much time for this initial statement, so i'll just make a couple of quick points. the crisis that we've experienced is no aberration in terms of financial markets that are unregulated having created multiple crises over the last generation tied to the deregulation of the financial markets. other countries are running financial transaction taxes. the u.k. has a financial transaction tax now. roughly in the way i've described it. japan operated with a tax until 1989 and raised about 4% of all their revenue. ok. and -- ok, i'll stop there and we'll come back. thank you. >> thanks, bob. now jim angel is going to tell you why bob is exactly right.

>> or not. >> or not. >> well, i want to thank everybody for coming here for this very interesting and timely debate. first of all, let me get a sense of who's in the audience here. how many of you have a mutual fund or a retirement account? >> how many of you have a credit card, financial product? how many of you have a bank account? i see almost everybody in the room here is a consumer of financial product. you're the people who are going to get hit by this ill-proposed tax. but this is a tax proposal, so let's start at the beginning by asking ourselves, what do we want from a tax system? now, if you look at public finance publicly cagses, there's always a section on how you evaluate tax alternatives.

first of all, you want a tax that's going to raise revenue. i mean, that makes sense. but you also want one that's easy to administer, that does not impose enormous compliance burdens on the government to try to check it and the people you're trying to collect it from. you also want one that minimizes the economic distortions that a tax causes. so, in other words, when you tax something, people try to avoid the tax in some way, or people stop doing whatever you're taxing, and you want to avoid distorting the economy. furthermore, you want something that's fair, where people are paying their appropriate share of the tax burden, where the pain is distributed appropriately to the people who should bear the pain. and we can always debate on that. because everybody always wants somebody else to have the pain. and there are other goals as

well. some people want to use the tax system to redistribute wealth. some people want to suppress undesired activity, like smoking or taxes on tobacco. sometimes you just want to punish people we don't like, or just make other people pay. so this is what some of the goals of taxation are all about. and when you look at this proposed tax, what you see is it fails in virtly every single one of -- virtually every one of those dimensions. it will not raise hundreds of billions of dollars. what it will end up doing is not hitting wall street. it's not going to get the people who brought about the financial crisis. they're not the people who do the most trading. turns out the people who do the most trading actually are some of the most beneficial players in the markets. they're not frothy speculators causing excess volatility. no. when you study financial

markets and actually look at the people doing most of the trading, most of them are doing very small technical things, very small profits, and they're doing things that help you and me. so the problem is this tax misses its target. it doesn't really get the fat cat. what it does is it is going to be passed right on through you and me, and that's one the reasons why i just don't like the tax. there are plenty of other problems with the tax. we used to have a financial transactions tax, much, much, much smaller than the one being talked about here. the one being talked about here is roughly 10 times larger than what we got rid of in 1965, and 20,000 times larger than the current s.e.c. tax. and let's look back at the lessons of history. back in 1965, congress looked at the old tax and in an

overwhelming bipartisan vote they said this kind of taxation is a bad idea. and they weren't really in a big tax-cutting mood either. if you go back and reread the congressional debate, the congressmen were well aware of the impending funding needs of the vietnam war. but they still looked at the tax and said, it's a bad idea. when you look at other countries that have put in such a tax, like sweden, they put in such a tax, and, whoa, all the financial activity went offshore and they didn't get nearly as much money as they thought they were going to get, so they got rid of the tax. so t is a bad idea that we got rid of before. even though each generation should think about takesation, there are plenty of better -- taxation, there are plenty of better ways to raise government revenue. >> you have one minute. >> so when you talk about the reducing speculation, again, the people who trade the most are not speculators.

and if you look back in the past when transaction costs were higher, and when we did have these kinds of taxes, there was plenty of speculation. if you look in our recent history, where did we see the worst speculation? in the housing industry, where transaction costs are enormous. typically when you buy or sell a house, the cost of doing that eats up about 10% of the value of the house. did that stop people from speculating? no. the speculators aren't going to be sopped by a tax of 1/4 or 1/2 of a percent. what you're going to do is you're going to get rid of all the beneficial trading that make things work more smoothly. so the transaction tax is a bad idea. it misses its target. it won't raise the revenue they say it's going to raise and it's not going to punish the people they want to punish. all it's going to do is mess up the good things that the financial markets do for the economy. thank you.

>> ok. gus will lead a round of questioning back and forth. >> a few responses. jim said it won't raise hundreds of billions of dollars. but we have evidence that it does. we have the evidence from the tax in the u.k. that's operating right now that's raising about what would be the equivalent of about $40 billion in the united states, only taxing stocks. the tax is actually easy to design and administer. the i.m.f. recent paper on the issue acknowledged this point. economic distortions. i want to cite some quick

numbers here. the decade 1970 to 1979, for every $1 of productive investment by non-financial corporations, there was $1.30 worth of trading. this number zoomed up in the 1980's. for every dollar of productive investment, there was $4 of trading. the year before the financial crest, 2007 -- so we had a jump from $1 to $4. guess what it was in 2007. for every dollar of trading -- for every dollar of investment there was $36 of trading. we went roughly 1-1, 36-1. there's been a massive, massive -- and that's just the stock market. so trading, what jim is talking about, huge turnover in trading has overwhelmed the financial markets and it has not contributed at all to any increase in productive activity. the rate of growth of productive investment is actually lower over the decade in the 2000's than it was in the 1970's.

congress said it was a bad idea. well, congress also said that deregulating financial markets was a great idea. remember that? that is democrats and republicans. we got rid of a regulatory system that was working reasonably well and we ended up with two decades of financial crises culminating in the 2008-2009 case. >> jim, you have two minutes. >> yeah, you mentioned the u.k. tax. i think that's a classic example of how not to do a tax. and, yes, it does raise some revenue. but simple and easy to administer? i downloaded off the internet the manual -- the compliance manual for the u.k. stamp tax. it's 320 pages of dense fine print. it is certainly not what i would call a simple or easy to administer tax. and you know what?

it exempts motion of the financial professionals. the folks in the u.k. aren't dumb. they realized that finance is a big industry there. so it basically is all designed to tax the end user, the end investors, people like you, the people who have your retirement savings in a retirement plan. you're the folks who end up paying a tax like this. so if you want a u.k.-style tax, you're not screwing wall street, what you're doing is you're screwing the consumer. so i would say that the u.k. tax is a really bad example of it. and by the way, the proposals that have been put forth in the u.s. congress look nothing like the u.k. tax. >> i would like to thank ralph nader for sponsoring this presentation today and thank you all for coming and well -- welcome you to the debate. i do come from the mutual fund

industry, and there was some confusion initially when this tax was being described that perhaps mutual funds were exempt from this. investors investing in a mutual fund do not pay the tax, but the funds themselves, when they buy a security, buy a stock or sell a stock, they would pay the tax. so 90 million investors in mutual funds would be indirectly paying a rather substantial tax. if applied in 2008, it would have been about $35 billion worth of tax that individual investors would have paid through their mutual funds. so there are three stated objectives of this proposed bill, this transaction tax. the first is to tax wall street. the second is to curb financial market speculation, and the third is to raise revenue. and i'd like to tease out each one of these issues. some of them have been described already. but first, i'd like to start off with, is this a tax on wall street? so who does pay this tax? is it investors or is it the

stock broker, is it wall street? and if it is wall street partly, if it's levied directly against them partly, is there any reason to expect that they're not going to pass that through, pass their costs through? so, bob, do you want to take that first? >> the tax, like any tax, has ramifications beyond the immediate payment. now, the actual payment of the tax -- for example, as jim mentioned, there is a tax already. there is a securities transaction tax administered to finance the securities and exchange commission. and the actual payment of the tax is done by the exchanges. the exchanges pass the tax back to the brokers, and the brokers may incorporate into the fees they pay -- that they charge their clients. so there's pass-through. we could say that there's going

to be pass-through when there's a financial transaction tax, then the dealers, the brokers, might charge it back to their clients, who then might put it into the -- their business expenses. but that's also true with any other kind of tax. like we say, when we say a 6% sales tack at home depot or at mcdonald's, mcdonald's is calculating that tax rate. they may decide to try to pass it through to you. they may try to absorb it. now, the immediate point, though, is who is actually paying for the tax? it's the people who are doing financial transactions. that is mostly -- yes, there are small-scale investors. a lot of them. but mostly, who is -- who is trading on wall street? where is the big money? the big money is wealthy individuals, big businesses, and pensions. and you say, yes, pensions are middle-class people and so

forth. that's true. but the biggest holders of pensions are the wealthiest people. so it falls disproportionately, as it should, on the people operating big-time and financial markets. do we know how much the pass-through will be? you don't have evidence on that and neither do i. thank you. >> jim, would you like to address this? >> sure. the people who do the most trading are the people who make the markets work. and that is the basic misunderstanding of the proponents of the tax. so i'm going to get probably a little technical here to describe who's doing the most trading, ok? these are people who generally have their computers programmed to look at the prices of different related instruments. that's something we call arbitrage. and when they get out of line shall they buy something that's cheap and sell something that's

expensive and that pushes the prices of related instruments back where they should be. for example, in my retirement account i buy a thing called an e.t.f., which is a basket of stocks. it's the vanguard total stock market fund, ticker symbol d.t.i. it's my standard recommendation for everybody. [laughter] ok. now, what it is, it's basically represents the whole u.s. stock market, so i don't have to think about what's good, what's bad, it just gives me the whole market, ok? now, that trades on an exchange like any other stock, but it represents every stock in the country, more or less. now, there are people out there, they have their computers programmed, they look at the price of that d.t.i. and they look at the price of the stocks that go into it, and when they get out of line, they buy the cheap thing, pushing up its price, sell the expensive one, pushing its price down, and they hope to make like a half a penny a share profit on that.

now, that means that when i go to buy some d.t.i. for my retirement account its price reflects the price of all the stock that go into it. that's a good thing. that arbitragor, who is sort of going in and out, trying to make a little bit of money off those differences in prices, making sure that i get the fair price for the thing that i'm buying for my retirement plan. to be continued. >> so i'll ask another question -- if investors are actually going to pay this tax to some extent, if not largely, how big is this tax to investors? we know that it's .25%, or 25 basis points -- >> he just said 50. >> well, on the other side. >> on both sides. 25 for each side. >> yeah. >> so it's a direct tax to the investors about .25%. the average mutual fund turns over about 100% a year. so that means that the mutual

fund will lose about .25% in performance. but then there's also a secondary effect as well. the proposers of this bill indicated they thought transaction costs would increase back up to the levels they were 20 or 30 years ago. that's an increase of about 1%. so another increase of costs for the mutual fund on 100% turnover, that's another 1%. jim, do you want -- can you discuss what you think the costs might be? >> sure. investors expect a certain level of return. so what's going to happen is if you raise transaction costs up to where they were 20 years ago by 1% and if you figure the average mutual fund turns over their portfolio about once a year. these are the people who are investing on our behalf, trying to make the right decisions for us, so that's 1% a year. so if you think about it, 1% a year, compounded over 20 or 30

years to retirement, that's basically 20 or 30% of your retirement savings going to this tax. so it actually is a big hit when you compound it over time. so the -- and it's going to hit long-term investors, mom and pop investors, people in mutual funds, or if you've got a pension plan, you know, an old defined benefit plan, it's going to affect the returns to those plans. >> bob? >> well, first of all, the tax that we proposed is .25% on stocks and we then scale it down for other types of assets, including bonds, swaps, options and futures, an our work on this is fairly common. so it's not actually an accurate calculation that he made, because your entire portfolio is not just going to be stocks, of course.

so the number is actually much smaller than what jim just described. but be that as it may, i mean, the notion that there are costs that people will actually not have as much money because they pay their tax is obvious. i mean, there's really nothing to debate around that. but by the same token, again, why should we pay a sales tax? you know, if i go to home depot, i would rather spend $106 for things that i want rather than $100. now, let's compound that over time. that's going to be a lot bigger than your compounding exercise, because that's a 6% tax, not a 0.25% tax. so we have to compare apples to apples here. >> ok, thank you, bob. i would note that if the fund itself is going to incur taxes of about 1.25% either through transaction costs being higher or through the direct

imposition of the tax, that a saver or an investor -- and i'll use mutual funds as an example all the time, because that's where most of america does save. 90 million savers. if they were saving at 9% and all of a sudden -- or i'm sorry, if they were earning 9% in their equity investments, and it were reduced by 1.25% down to 7.75%, 30 years later their investment would be worth 30% less than it would have been would it that tax. so it is a game-changer for millions of americans who are saving for retirement. bob, what are your thoughts on that? is this still a small tax? >> the point is that your assumption is that financial markets operate efficiently on their own and that all this is is an imposition on an otherwise efficient process. >> he never said that. >> what? >> he never said that. >> i said the assumption. so the fact is our society,

economy, has just paid a gigantic cost because we operate hugely inefficient financial markets. the process of the word "describing" or the short-term trading does not create any social benefit. i mean, the notion of people sitting around and trying to guess an hour ahead of everyone else and having experts to tell you what you should be doing two hours ahead of everyone else does not enhance the long-term productivity of the economy. moreover, the kinds of things that we are deprepared of doing, because we don't have revenue coming in, for example, that we're having to cut education budgets, that we're having to cut health care budgets, that we're talking about breaking pension funds for state workers throughout the country. that state of minnesota is out of cash. these are the kinds of tradeoffs that one has to think about. a tax is a tax. it doesn't impose costs on the

people that pay the tax. but this tax is disproportionately on the people who are better off. it engages with the activities on wall street and only sets them at a level comparable to what one sees when you buy anything. in fact, it's not comparable, it's a much smaller tax. the tax does have to be scaled relative to existing transaction costs. i agree on that point. in fact, a lot of the research that we've done is to try to understand how to do that and to set the tax at a level consistent with transaction costs, and that's what we've done in this paper. and that's why,, as i said, the tax rate should be lower for bonds. it should be lower for options, futures, swaps. >> thank you, bob. jim? >> so you've raised the issue of we pay sales taxes, so why shouldn't we pay taxes on

transactions? well, in general, we have several different levels of taxes. we tend to tax wealth with things like property taxes. we tax profits with income taxes. and we tax consumption with things like sales taxes. now, we don't have a federal sales tax for one thing, and i kind of like that. but the argument for consumption taxes is that basically you want people to produce more, consume less. now, trading is actually an intermediate good. it's not like we wake up and say i'm going to consume five stock trades because i get this joy of moving electrons around. well, maybe some people do, but i don't. once again, what he's missing the target, is because most of that high-frequency trading is actually the most beneficial trading around. these are people who support the ecosystem. now, you might say how could it

possibly be the case that someone is buying one second and selling the next is doing a service? i'm a long-term investor. i buy my v.t.i. once and it sits in my account for decades, i hope. and guess what? the person i'm buying it from is probably one of those real short-term traders who makes sure that the gap between the buy and the sell price is really small. because at any time in the market there are people trying to buy, just like e bay, and there are people trying to sell. oftentimes there's a gap between the price at which the buyers are trying to buy and the sellers are trying to sell. what those high-speed traders do is they try to go in-between and they narrow that gap so that it's now razor thin. if you put on a tax, you know, thousands of times higher than current transaction costs, what you're going to do is drive a big wedge between the buy price and the sale price and every

time -- ok. to be continued. >> i'd like to turn to a topic that has been discussed already. speculation. the second goal of this proposed legislation is to curb speculation. i'd like to first talk about what speculation is. speculation is taking a non-trivial amount of risk, typically higher than ordinary risk, to make a higher than ordinary rate of return. jim has described something where people trade high-frequency traders, they trade one second and trade another second. they buy and then they turn around and sell, maybe to make a fraction of a cent. is that speculation? so really, two great he cans of speculation, would be speculation in the housing market that we saw through 2007 and speculation in the stock market in 1999. i'd like to ask, will a transaction tax actually curb true speculation? jim, you want to take that first? >> no, because, again, the people who are doing the most

trading are not speculators. these are people who are taking very small trades for very short periods of time, and they're doing things that help the market. now, you might say, ooh, some bacteria are bad, so let's eliminate all bacteria on the planet. that's what i think i hear here. now, oh, trading is evil? no. sure, there are some speculators out there, but they're not doing the most trading. most of the trading is done by the beneficial players on the market. so if you eliminated all bacteria on the planet, you'd be eliminating the ones that help ferment cheese, beer and bread and things like that, as opposed to -- as well as getting rid of the ones that cause disease. so we need to make sure that we are not missing the target, which you are. you're missing the target. most trading is actually done by people who do things that help long-term traders, people

like me, people like us here. he has a very low turnover in his funds and yet, his -- when he goes to trade, the fact that there's an ecosystem of people out there willing to trade with him at a good price means it's easier and cheaper for him to trade. so a transaction tax is not going to really deter the speculators because they're in it for the kill, you know, a quarter percent, a half percent won't help them. what the decrease in transaction costs have done is it helped create that ecosystem of people who make trading work better and people who make sure that price of my -- when i go to buy that exchange-traded fund, it's properly priced, that when gus goes to buy stocks for his customers, you know, that the gap between the buy and the sell price is really small.

that is a beneficial activity. >> thanks, jim. bob, do you have a comment? >> i'm not clear as to why we assume that increasing the level of trading on stocks alone -- and, again, stock trading is actually a small proportion of overall trading. but just thinking simply about stocks, of increasing it 36-fold relative to productive investments. the things that drives the economy forward, jobs and innovation, is productive investment in equipment, machines, computers. so increasing the level of trading 36-fold relative to the 1970's, i don't understand why that has been such a great benefit to the economy. i don't see any evidence. in fact, the evidence is that it has led to excessive focus

on these exact -- these short-term differences, which i see as actually a net loss to society, because we're waste ago lot of time on trying to exploit these tiny differences, as opposed to achieving some long-term benefit to the economy. and we've talked a lot about the vanguard fund, and i want to quote from john vogel, who is the founder of the vanguard fund. and maybe at some point your colleague. here's what he says about the securities transaction tax. "i support a transfer tax on securities transactions primarily as a way to slow the rampant speculation that has created such havoc in our financial markets, but also for its revenue-raising potential in this time of staggering government deficits." that's john vogel, the founder of the vanguard mutual fund that you two have been referring to. >> well, thank you, bob. [laughter] >> he was your boss, right? >> i worked with jack for a

little bit more than a decade, until he retired. i continue to have contact with him. and there are a number of things that jack and i don't agree on. >> apparently. [laughter] >> and i'll leave it at that. so if this transaction cost is going to definitely take return away from investors in the form of the direct tax that investors will pay and also, in the form of higher transaction costs, what's the impact on the cost of capital, raising capital? businesses need to raise capital in order to build their businesses, in order to hire more people. what's the impact on the cost of capital? bob? >> yeah, cost of capital, now, again, let's not think in technical terms so much. so we're talking about interest rates, taxes and so forth on businesses that want to invest or consider investing. at one level, of course, it has to have some impact on increasing cost of capital. probably by a small amount.

but the effects on the cost of capital of this tax are going to be overwhelmed by other things. for example, right now the interest rate on short-term borrowing by banks set by the federal reserve is effectively zero. the federal reserve has the ability to determine the short-term interest rate and will do so no matter what happens with the securities transaction tax. now, what about rates on longer-term activity? now, right now in the economy -- and this would be a topic for another debate -- the spread between this zero rate that banks can get and the average business borrower is at almost unprecedented levels. that's due to rift perceptions in the economy, the perception of excessive risks brought on by the wall street crash and its aftermath so. if we run an economy that is operating at a higher level of stability, out does not focus

so obsessively on these tiny differences that interact day to day, minute to minute. if we operate an economy that is more focused on productive activity and productive investments, we lower the level of risk and risk perception, and that way you have a longer term and more stable effect lowering the cost of capital than you would through the effect of the transaction tax alone operating on the cost of capital. >> thank you, bob. jim? >> the problem is the tax misses the target. as i pointed out, most of the trading is not done by speculators, not done by people who are adding volatility, but by people who are stabilizing the system. as i said, you've got byers with low price, sellers with a high price. a lot of these traders come in between and actually absorb some of the shocks in the system. they're the ones doing the most activity. they're the beneficial players that would be driven out of the

business. now, let's talk about the rolling financial markets. i see a lot of nurses here and i want to thank you for taking such good care of my son when he was in the hospital. but where do you think the money comes from to build the hospitals? generally speaking, most hospitals go to the financial markets, sell bonds and investors want to buy those bonds. well, investors are more likely to buy those bonds if there's a market where they can sell them when they want to cash out. and that secondary trading afterwards makes it much more likely that people will buy those bonds in the first place. so the -- what good is -- and the fact that people buy one second, sell the next, what they are doing is they are providing a service that help the long-term investors when they want to come in and buy and sell. so that's where you're totally missing the boat with this proposal, because most of the trading is done by people who

are doing things that help investors, that help long-term price stability, that putting this tax on really won't stop the speculators. it won't stop the people who are hearing reverberations from the planet mars and saying, oh, i'm feeling lucky today, i'm bullish on google. no. those people won't be stopped by this tax. those are the people that add the volatility, the uncertainty, that what you're going to do is you're he going to cause so much collateral damage that you're missing the target. >> well, time flies, and unfortunately, mine is gone. hopefully the discussion around raising revenue will be picked up, and there has been some discussion about that already. >> thanks, gugs. there's an old sport in washington, where when we talk about tax increases, you always finds the most sympathetic person. for example, there's been a big debate on extending the bush

tax cuts for the wealthy and the cutoff that president obama put there is $250,000. so naturally the poster children and "the washington post," which we know here is fox on 15th street, had a front-page piece about this woman who's supposedly earning $260,000, she's going to be paying the higher tax. people say, oh, that's horrible. she's not really rich. her tax bill is going to be $300 a year. if she's making $260,000 and can't figure out how to get $300 a year, she has more problems than the tax. and i think that's kind of the story here, you know. guaranteed that if we have this tax some people who are not wealthy will be paying that. that's the world. but the fact is that the vast majority of people who do pay the vast majority of the taxes will be wealthy. that's straight arithmetic. there's another part of the argument that's important to understand. i don't think we'll get a difference between jim and bob on this because it's well-known principle. people respond to the tax. so we impose the tax and let's

say that we double the cost of trading. as jim pointed out, trading is an interests mediate good. you don't wake up in the morning and say i want to do a lot of trading. you might say i want to buy a new suit. those are end goods. we get value from that itself. what we care about with trading, the whole point is that at the end of the day we care about our investment income. if we get the same income but we have less trading, what's the problem? ok, we care about the investment income. now, mrs. a lot of research -- there's a lot of research or some research that bob and i -- i'm sure jim is familiar with it as well -- have looked into and examines the elasticity. how does trading respond to an increase in the price? most of us put it around one. what does that mean? suppose we double the tax of trading. the amount of trading you would do would be cut roughly in half. let's take some numbers here. let's say that i have $100,000 in my mutual fund with

vanguard. great fund, good choice. $1200,000 and let's say that it turns -- $100,000 and let's say it turns over 1% a year. that would be $1,000. now, let's say bob and i take over the government. we put in the tax. we double the cost of trading, ok? well, we got smart people here. you say it costs twice as much to trade. we'll cut our trade roughly in half. that's what the data shows. so it costs them twice as much to do the trades. he's doing half as many trades. ok, jim, give us the arithmetic. how much did the costs increase if i had $100,000? gus' fund? >> it's a lot more. not only is the tax going up, but by driving out, you know, the people who are making trading cheaper, you're going to raise the spread. so you're going to raise transaction costs not only by the tax, but also, the knock-on effects, in that you also have the wider trading costs.

now, that's going to increase costs of capital for businesses, and what that means, it's going to be harder for people to raise capital in the first place and, you know, that's going to have a knock-on effect on the economy in terms of things like, you know, fewer jobs, less economic growth, more unemployment. >> ok, bob? >> interesting that -- i mean, that you would say such a thing amid the financial crisis caused by financial excesses on wall street, which we now have, we're experiencing now. that's the reality today. excessive speculation brought the economy down, and we haven't recovered yet. dean is exactly right. if we think about transactions costs, if you lower the total number of transactions through the tax, yes, the cost per transaction is higher. but if you reduce your total number of transactions, then

there's no increase in total transactions. none whatsoever. now, you could say yes, but there's all these negative effects, and jim just mentioned them. that hospitals won't be able to raise any money to build hospitals. that unemployment is going to go up and so forth. well, he, of course, has no evidence to support any of those points. we do know that hospitals are closing now. we do know that nurses are getting laid off, that we do know that pensions are getting attacked. why? because we don't have enough revenue, because of the financial crisis brought on by wall street. the financial crisis brought on by wall street devastated state and local governments. and we were talking about raising funds for municipal bonds like hospitals. the crisis dropped revenue for state and local governments by 13%. there hasn't been anything even close to that in -- since the great depression. in 1981-1982 recession, the most severe one prior to this

one, state and local government revenues fell by 1%, 1.5%. now we're at 13%. and that's what's causing all this, you know, destructive politics in minnesota, which was supposedly a very civilized place, up until the crisis. so that's the reality we're dealing with today. >> ok. i just want to go on -- we've had this back and forth about finance being good and that's an important concept. the idea of an interests mediate good, it's not providing us well-being, whether misunderstood, cigarettes obviously we might say someone is mistaken if they're buying them. people don't typically think of stock trades or financial trades as doing that. when we think about it as a whole in principle, we'd like it to be done as efficiently as possible, meaning as small a sector as possible. if you look -- and here i'm talking very narrowly, the sector devoted to stock trades,

trades of commodities, trades of options, futures, that segment ss as a share of the economy has increased roughly five-fold from the 1970's. i'm talking relative to the size of the economy. currently that's a narrow segment. i'm not talking about going down to the bank and your checking account, i'm talking about commodities trading, security brokers, invest banking. that's increased five-fold. so it's now about $180 billion a year. now, i think the way i would at least think about that is that that's similar to the trucking industry. suppose we had the number of truckers had increased relative to the size of the economy five-fold over the last 40 years. my guess would be that most people would be inclined to say, what's wrong with your trucking have i? are we getting -- is there some evidence that the goods are getting from point a to point b quicker? we're getting our meats fresher, our foods fresher? are we getting something from that? i look at the financial sector and i go, ok, it oo increased

five-fold relative to the size of the economy. my first guess is it looks like $150 billion, it would be $30 billion if the states share in the economy. that looks like $150 billion of waste. what do you think, bob, is it? >> yes, this is a level i made before. the letter has exploded as a result of financial regulation, and the outcome, as we talk about basic outcomes in terms of financial stability, we are much worse off, much worse off, and i am not just talking about the most recent crisis. remember, there was the.com bubble that burst and created a recession. before that, we have the savings and loan crisis, which cost bears -- taxpayers hundreds of

dozens of dollars. we had a collapse due to the east asian crisis. long term capital management was supposed to be the the thing that two nobel laureates cooked up, because they, like jim, supposedly knew where those hidden pennies were, and they knew the market better than anyone else, but that take the economy, as well. -- tanked the economy, as well. we had a new head of the fed reserve, alan greenspan. and alan greenspan subsequently himself has talked about the imposition of irrational exuberance in the market, infectious agreed in the market, infectious agreed and -- infectious greed.

this is earnings off of tiny differences that are not going to last any way, and there is no reason why we have to assume that the level of trading has to be hundreds of times today in what it was only 15 to 20 years ago. in order to obtain employment and well-being, things we actually care about. >> jim? >> well, you said the financial sector is bigger than it was a few decades ago, but so is the computer sector. one of the reason the computer sector has gotten bigger is that we had a technical revolution, and we can do a lot of things we could not do before. the same thing has happened in financial services. we have new services that allow us to do things which could not do before, in particular with risk management, so, for example, say you're a farmer,

wrote and you are thinking of planting a field, but because the new prices are fluctuating, you do not know that you can afford to do that, because if the price drops at harvest time, you could go bankrupt, but you could enter into a financial transaction called a derivative of/youtube locked in the price of what you will get for your crop when you sell it. now that you know you will get a fair price for the crop, you can afford to plant. you have laid off the risk. you have transferred that risk to somebody else, even if that somebody else is a speculator. the market developed new risk- management tools, and we can now do a lot of things. are they perfect? no. does every new technology work correctly? no. sometimes planes crash, bridges fall, airplanes get into a wreck. no doubt about it.

do we need better regulation? yes. it is not a question of more or less. it is a question of smarter regulation. and, by the way, the government has not fixed it with dodd- frank. there is a lot of work that needs to be done there. that does not mean that when a plane crashes that we need to get rid of airplanes. instead, what it means is we have to find out why it crashed and make sure it does not happen again. >> you kind of took my breath away with the reference to the farmer. the derivative market, the futures market has been around, so this is not a new invention due to technological change, and you are describing what has also been described in the bible, where farmers are able to get a fixed price, and they can plant their crops, and they do not

have to worry about it when their crops are ready to harvest. that really has nothing whatsoever to do with what is going on in the speculation in the commodities futures markets for food, where in the prices in 2008 and 2009 doubled, causing, according to the united nations, 130 million more people to become ill nourished, because there livelihoods', their spending is 50% on food, so when you double the price of food, you will increase hunger throughout the world, and that is exactly what happened as a result of the unregulated rampant speculation on the commodities futures market. we are experiencing the exact same thing again, and, by the way, we are experiencing it also with petroleum, oil prices. i have a new report that just came out last week. as of may, we are paying $3.96 per gallon on average, and i

cannot give it with my colleague that 83 cents of that was speculation, and i have been in debates about that. i can defend that position. there is no reason why we have to have a commodities futures market 300 times bigger than it was 20 years ago. >> a quick response? >> yes, trading is not leading to speculation. that, yes, if you look at markets, even where there are no organized commodities exchanges, we still saw a price spike in 2008, so for markets where you did not of futures, you still have the same kind of bobble occurring, and guess what? we have had these going back to the times of the bible. sometimes people acting in crabs go crazy. markets are not perfect. they have a strong incentive to get it right. they generally have an incentive to do it.

sometimes make mistakes. the question is, do you want -- you point and all of these problems -- problems in the market. your solution does not cure the disease. all it does is cause a lot of collateral damage. >> jim, you mentioned the financial markets, comparing them to health care and computers. it is clear to me what the benefits have been with increased spending on health care and the computers. in a little less certain about this. i realize most of you probably were not doing much saving 20 years or 30 years ago. that is really at the end of the david preston to be asked. kibler one of the point here, and i think it is important to put in context, we are talking about raising the cost of financial transactions. we're not talking about age and history.

we're not talking about this huge tax. it obviously is huge, that is a valley statement. when you're talking about race in the cost of these transactions roughly where they were in the 1990's, the mid- 1980s. we would have to look a bet that more closely, but that is roughly the target. the point that jim is making, yes, we care about our triage. they are not evil. but it is useful bringing these into line, but arbitrage is not new. i was in grad school in the mid- 1980s, and we talked about arbitrage, and many of the papers that greeting dated back to the 1960's. in fact, and james tobin, one of the first papers he wrote about this was back in 1971, when trading costs were considerably higher than what they would be but the tax, and, of course, john maynard keynes made a comment about it.

even with any sort of tax that bob and i might propose, so i guess what i want to ask, and jim, we had transaction levels at this cost in the past. you talk as if there would be new arbitrage, but they were there. the arbitrage person jumps in. three tenths of one percentage point in the price may be in revenue, one-tenth of a percentage point in price, and if that is the case, who cares? >> the question is, who cares when prices get out of alignment? well, i care in that when i go to buy the exchange traded fund for my retirement account, i want to make sure the price reflects what is going on in the underlying stock. well, on may 6, 2010, we had a big glitch in the market. a long technical story is that there were all kinds of problems that occurred, but one of the things that happen is because of the technical glitches in the market, those in arbitrage got

to the sidelines, and we saw what happened when they are not there. the prices fluctuate wildly, band 1 mar when all the way down to 15 cents. it is usually a much more expensive item. that tree was a bust after the act. koran you get rid of this ecosystem, you're going to have less resiliency in the market, and in this computer-driven age, you may wind up with more volatility, not less. >> i would just say, in terms of the ecosystem, we want the ecosystem that is there. the 1950's, 1960's, 1970's, when we had higher transition costs. i will let bob jump in. >> you are a good moderator. >> i tried to be. >> the basic point is what is the feature of an economy and

economic policy that will enhance productive activity, decent jobs, stability. now, the kind of things that jim warthogs and about actually have absolutely nothing to do with these long-term agendas. what they do is act at best as a distraction, but more specifically, what they really do fundamentally is we are assuming that traders in the market really have full information, and eventually are going to get to the right point through this arbitrage. well, what we really know is that bubbles get formed, because you have a bubble momentum where the upper price movement, at least other people think prices are going up, this is what is behind the increase in food prices. this is what is behind the increase in the oil futures markets now, is the fact that things going up does not mean that a speculator is going to say, "ok, the prices of relative

to the fundamental value. i am going to drive it down to " the speculator may say, "the price has gone up, and i can move it up further," so there is no reason to assume that just having more trading is going to drive the price to stability. the prices are out of alignment precisely because there is excessive speculation, so much so that is frequently the case that we cannot even observe fundamental values. again, look at the oil market today. if you look at the supply and demand relationships, supply and demand come actual supply and demand are growing together. libya did not change supply. libya did not change in demand. libya changed what people think supply is going to be in the future, and that led to the increase in speculation. that is not a net benefit to society for the price of oil to be 83 cents more than it should

be due to speculation. >> i would just get in one last word and then switch to the next phase. just to emphasize the point, the way i see the point, and you will get the question in a second, but the way i see the point is we're talking about increasing the spread somewhat between the buyer and seller, and that clearly is what i think no one would dispute is one of the problems with this tax. the early 1990's, mid-1980s, and jim made a good point about liquidity. if i own a share of stock, i would like to think if i would like to sell it tomorrow, i can do it, and in a different market, you are less likely to do that. one of the features of this tax is the proportion their increase in taxes, transactional costs, will be less, so what i mean by that is suppose i and shares in general electric's stock become a huge company, you know, hundreds of millions of shares, maybe billions outstanding. if i want to sell this, i could

probably sell this with my broken within seconds and know exactly the price i am going to get. on the other hand, there are other stocks that are less liquid. say i have an over the counter startup industry. i cannot just call the broker and say, "ok, sell the stock for me," and he has a price for me. what this means is that the taxes that bob and i want will be a smaller share and will have much less of an effect of the liquidity than the hugely large stocks, general electric, so i will let him take the first shot and ask questions. >> by, which you have done is you have talked about many of the problems in the financial sector, and you have proposed this tax, et basically for a number of reasons. basically, as i see it, you want to raise money for good causes

and punish bad people who brought about financial ruin, and also shrink the financial sector, which you and understand what it does. how much collateral damage are you willing to accept to reach your goal? because you will not hit the target. the people who do the most training or xp the beneficial people. the people who have committed the excesses you have talked about are the low frequency traders. they are not doing the most trading, so yours is not going to meet the target. how much collateral damage are you willing to accept to reach your goal? >> well, thanks for the question. i do not agree with the premises. i do not a city that is not going to hit the target. i think there are trade-offs in

any economic policy intervention. and this one will impose costs, just like any other tax. and, by the way, i do not think that the people on wall street are evil. there are some of my best friends. many of my students, and many more people would like to be on wall street. ebel is up to wall street to set the terms under which the market operates. i also do not have a problem, as been described, with having markets that provide liquidity. of course, i do not. i never said i was opposed to that. the only really interesting question is when we have excess of liquidity, excessive trading, to the point that it distorts economic activity and well- being. i want to cite a study by larry

summers, who was the chief economic adviser for obama. >> and he works on wall street. >> and frequently works on wall street, and james, the president of a leading research institutes, a professor of economics at mit. the pair did a very interesting study that was published in 1995 on the effects of excessive trading and speculation on a long-term decision making a financial managers, and the study was actually an interview. they interviewed managers in the u.s. and other countries, and the managers in the united states, according to them, said they would invest about 20% more in productive activity if they did not have to have, be worrying about the day-to-day fluctuations in the market and high and to achieve some performance on a day-to-day basis and get punished on a day-

to-day basis, so collateral damage, in fact, i think the securities transaction tax is by no means a panacea, but what actually enhance long-term productivity in the economy. >> ok, i will give bob a moment to formulate a question. we do have a model of the u.k. here. a pretty robust financial market, and the london stock exchange i believe, we should get the of the rest of the tax code. we have to lifted. bob is not big enough. they have the equivalent of $40 billion relative to the size of their economy. i know roughly about their wealth distribution. i do not know everything, but assuming it is comparable to the u.s., they could not possibly give up from mom and pop people. unless they are traded every day, there is no way this could come from middle-income

stockholders. a good chunk of this has to come from where the wellesley, some of the people we want to pay the tax. >> ok, if we assume, if we assume that the tax, let's assume, economists like to say, "assumed this, assumed that," let's assumed that the tax could raise $150 billion per year, let's assume that the level of trading went down, and then let's say that the funds generated by the tax would, as they would be fully capable of doing, supporting education and health care, public safety of the state and local government level, part of the environmental protection, and and part of that, we can throw in a middle- income tax cut.

would you be opposed to the tax. >> yes, because i think there is a better way to raise needed government -- revenue. what do we need proof -- what do we need? we are addicted to oil and carbon based fuels. the amount of money that we're sending out side of the country is enormous. it is jeopardizing our economic security and our national security, so one of our biggest problems is we have got to stop our dependence on carbon-based fuels, and the best way to do that is to have a carbon tax, basically make people pay for using a non renewable resources, petroleum. it is not popular, but think about what it will do. it will give us an incentive to conserve precious resources. it will give an incentive to

develop clean alternative fuels, so for economic security, national security, climate security, we have got to stop a puzzling oil. so we put on the carbon tax, what that will do is force us to conserve oil. it will force us to develop clean alternatives, and it would generate more than enough needed revenue for all of the things we need to do. >> bob wants to tax, and jim wants to tax, i want to tax everything. jim, do you have a question for bob? >> you mentioned economist assumptions, and you have named a lot of names of people, but one of the things i have noticed as a specialist who kind of wallows in the bowels of the financial system and hanging out on trading floors and watching

what people do as opposed to sitting in my ivory tower and thinking about economics -- the one >> that is what i do. it is not an ivory tower though. >> there are a lot of people who call themselves economists, and in their models, they tend to assume away transaction costs. so is it not true that in many economic and many financial models, transaction costs are ignored? >> yes. [laughter] >> so what? have you read my paper? about 7% of it is the transaction costs. i will speak to myself -- for myself. we spent a long time trying to understand transaction costs. here, you can have my paper. if i must do my horn, a new

survey paper, of all the papers that have been written on this subject, there are a few others, but one actually came to me through the mail last week from somebody i do not know from the university of sussex. i do not see -- know if you have seen his paper. he basically says they take most seriously the issue of transaction costs, so sorry if i cannot speak for the whole profession, but i take transaction costs series lay- ups and i have spent time looking at transaction costs across a variety of markets. hog bellies and on and on like that. by the way, i was also on the new york stock exchange trading for about 2.5 weeks ago. >> i would just say a comment, the second difficulty we had in finding out about transaction costs, because, jim, you are

right. a logistics of a general point about economic data. the reason bob and i had such difficulty try to find out about his transaction cost is that much of it is proprietary, so the government would put up the new data on unemployment, and we could just go to the bureau of labor statistics and download a ton of data. they make it user-friendly. if you like to play with data, you can do what you want. if you want to get transaction costs, and we have got to get a guy like jim, maybe get him to give us something he is not supposed to give us. it is not just the financial industry. go and find out about drugs. across the board, it is one of the many problems that i think people trying to do good policy, do good research phase, is that it is very expensive, and if you come from someone who has got very deep pockets, he wore for

the financial industry that has deep pockets, you can get this data. on the other hand, if you work for a small think top -- think tank, like me or bob, at a university, it is hard. it is not just the financial industry. it is across the board. it is just something to keep in mind. >> how i was very interested in your discussion on the carbon tax, which i support among other initiatives to build a green economy. ralph nader was nice enough to mention some of my own research and consulting for the obama administration on this issue so my question is, do you see any analogies between have a carbon tax and financial transactions tax? if we accept, as you seem to a firm also, that markets do not always operate efficiently, that they do not always operate with

information and to act on in accurate information, stampede, not that we would shut down the market, just what we are not going to stop people from buying fossil fuels, but we will discourage, and we will have funds that can be used, for beneficial purposes. do you see and the analogy? >> i see analogies with all taxes, and they need to be considered carefully in light of the broad tax system, and once again, i think you are missing the target. if you look at what the traders are actually doing, most of the trading is not done by speculators frothing at the mouth, going on rumors and got hunches. most of the trading is done with people with computer models who are basically doing that smoothly now that i said. now, maybe what prices to be more volatile, more jagged. i think that is your opinion, but you are missing the target.

that is the big problem. even if you look in markets which had higher transaction costs, people are still people. the personal things that they are going to buy a social networking company at $80, and it is going to go to $500, you are not going to stop them with a transaction costs. putting a 50 basis point tax on is not going to stop that. what it will do it is not curbed the beneficial activity. there are better ways of achieving your goals. >> ok, i would just quickly some of a couple of things, and then i will let us come in with some questions from the audience. i think one of the things to focus on is what this does to transaction costs. we're just talking about increasing the back to the levels of the early 1990's, mid- 1980s, somewhere around there. i think we would differ with jim

and does on this, but what does the need to have higher transaction costs. to me, there is no doubt that there would be somewhat higher wages, so the gap between these would be somewhat higher than it would be with lower transaction costs. that is by definition, but whether that leads to greater volatility, it might mean that we see the price of the shares go from $60 to $60.50, then back to 60. we may see some moves like that, but whether it leads to the greater volatility than most of us would care about, and my model here is the flash crash that we saw last year, where we saw prices fall for 15% for no reason whatsoever. what it was was you had program trading that was taking advantage of the fact that you could do these trades at virtually no cost, so you could do these programs, and it led to the spiral downward. i think you would see less of that volatility.

i think that is a question, but had that is at least my view. he can disagree. i think you will see less of that volatility, which does impose a cost. i will let blogger.com in. >> >> i have a slew of questions. i do not believe we can get to all of them. the first two, adjusted statement of fact, so i will answer those myself. did not the bills introduced in congress include exemptions from the tax for regular middle-class investors? there was a proposal to exempt of them a certain amount of trading, $100,000 worth, i believe, so, yes, for a small amount of trading, you would be exempt, but i would note that most investors have said they

invest through other vehicles, like mutual funds. 91 investors in their 401k plans and other investments are investing in mutual funds, and there, you really cannot administrator, you really cannot figure wrote who has what money and what part of the fund should not be subject to paying this tax, it said that would be administratively impossible to figure out how to do. here is a question for jim. professor, even if he were convinced that the tax misses its target, would you agree that it would still provide a sufficient reserve to be able to tackle the next financial crisis instead of having to bird in the regular taxpayer again, or would you argue that trading would decrease so much that it would be an important in the future. >> well, i have actually taught a class on financial crises at

georgetown university, and at the heart of every financial crisis is debt, borrowing. people borrow too much to speculate. people borrowed too much to buy houses. people borrow too much money to buy bonds. again, a financial transaction tax really would not hit those people. some of the worst of the players would not be hit by that tax, so there is a lot we need to do to shore up our financial structure. we need to overhaul and have deep structural reform of our regulatory agencies. we need to have a much smarter regulatory system. the details, but the revenue raised from such a tax would basically go into the general funds, and it certainly would not be used as a buffer for the financial system. >> but, do you want to? >> well, there is no reason that

it should be. if you read the imf study, which proposes a variation of financial activity tax, the proposition their is first and foremost, the financial sector needs to be taxed in order that they themselves cover-up and pay for their masses rather than the general taxpayer, so there is no reason why some of the revenue from a financial transaction tax could not be there to help finance whatever future bailouts might be necessary, and such bailouts, the probability of them being smaller would be enhanced to having the financial transaction tax because he would have led speculative trading. >> another question here. this is regarding the traders to, quote, unquote, stabilize the system. jim, you described them as trading the most, the arbitrage that trades on tiny margins.

are those not the same people who created the flash crash? >> i am--- glad you asked that question, because i am the guy who warned the sec five times in the year before the flash crash that our markets were vulnerable to exactly that kind of a glitch. now, what happened that day is there was a very large trade that came in from a traditional mutual fund into the futures market. they sold a big basket of stocks in a sloppy way that pushed prices down. but now, then, you know, use of a spouse of 500 stocks really quickly, and, hey, we had flash crashes long before we had computerized trading, even when we had higher transaction costs. you can go back to the newspapers from the early 1900's and read story is just like the flash crash. markets break and then recover. now, what happens, this caused

such a flood of data but the information processing systems in the markets were overwhelmed. this led those in arbitrage to step aside, so what happened is that the people who were looking at is very tiny differences said wait a minute. i see a price in this market and that market, they are normally this thing, and they are dollars apart, my computer must be having a connection. i do not believe the data i am seeing. so the hyper rational traders, the ones who normally stabilize things, stepped to the sidelines, and that is when the market really fell apart, because the people who were not doing a high frequency trading kept on trading. and the stabilizers were not there, and we saw accenture go up. $100,000 per share, mainly because there was a big glitch caused by a big order which

caused problems in the system. so if we why but those in arbitrage, we see bad things happen. >> but, do you want to? >> well, i appreciate, and i know, i have read some of your commentary on the flash crash, and i appreciate your calling it a glitch, and these things happen. the only problem is they have been very frequently, and each time, it is some kind of a glitch. the crisis of 2008, 2009, that was called the 1000 years storm. that was by the head of goldman sachs -- goldman sachs which caused it -- called the 100 years storm. look at what happened. it actually happened. 1997, 1998, long-term capital management. but arbitrage experts out there almost brought the entire global economy down because of their futures as to their thinking that they could out does the

market better than anyone else is out guess in the market, and they are competing, and these people are not evil people, so stop saying that i ever said that or that i am suggesting that in any way. they're people operating within the framework set by public policy, and it is the public policy to deliver financial stability. now, if you study the history of capitalism, a classic books called "mania, panics, and crash as," if you look at that book, we have had throughout the history of capitalism in a chronic problem of excessive instability, excessive trading, crashes, with excess of social cost. we did have a period where those problems were largely cured. that was a period where we have a significant regulatory system in the united states and the

glass-steagall system of the united states. we need a regulatory system, and it includes control of low transaction costs, putting sand in the wheel, as the professor, the nobel laureate proposed with respect to transaction costs. we need those things. it doesn't mean that we shut down the market or that people are evil. >> ok, bob, if you have your wind back, i'll ask you another question. what has happened to the savings rate but? if people are getting this great weight, where is the evidence in media and net worth -- median net worth? >> median what worth -- median net worth shot up and the collapse. by the way, measuring network is not the same thing as savings rates, if we want to get a little technical here, but maybe you do not. savings rates is supposed to be your total income minus selling your amount of consumption.

that number is very very low, historically lowe, and a big part of the reason is that people thought they did not need to save other than come because they thought their net worth kept going up, especially with the real estate bubble. they saw their net worth go up, because there was a bubble, so they saved less, and that created a distortion in the economy. the savings rate has to be tied to what happens in the financial markets, and so the interaction between changes in net worth due to bubbles create another distortion in that regard, as well. >> and the savings rate has shot up to 6% in the last -- >> by the way, the level of reserves, the savings by commercial banks is at an unprecedented level, $1.50 trillion, but that does not mean, that is money sitting there that also should be out

there in the spending stream creating investment, so having a higher savings rate does not in itself benefit the economy. what benefits the economy is people wanting to put money into productive activity that creates jobs. >> do you have a comment? >> no comment. >> ok, i will go to the next question. i agree with the urgent need to curb speculation, but if it is not of the international level, the g-20, the financial sector in the u.s., a job was outsourced to other countries, so, jim? >> yes, we live in a global world. on my smartphone, i can tie into a brokerage account and trade almost anywhere in the world right now, .so that is absolutely true, but if we try to squeeze the financial sector too much in the u.s., it will not be here in the u.s., and we're going to get rid of beneficial of activity, and will

push the other activity offshore. we will divert people away from other productive activities in to try to figure out how to get loopholes into another complicated tax system to try to avoid paying the tax. >> well, first broke, we know, however bigger tax -- your stack is -- >> 120 pages. >> we have not seen the collapse of the u.k. financial markets. there may be some movement out of the market, but obviously, it has not been significant. secondly, the seventh most rapidly growing financial markets in the world, including china, south korea, hong kong, indonesia all have a financial transaction cost. the all have a financial transaction costs. that is an interesting phenomenon if we think that

having a financial transaction tax is going to lead people out of your financial market. it is not happening. third, most important. there is a very simple solution in our paper, so i look forward to getting your comments on our paper. the solution is, with respect to the u.s., if you do not pay the tax, your transaction does not have legal title. who is not going to pay the tax? who is not going to pay the tax if they do not have legal title for the assets they want to purchase? so that will be able to control the outsourcing of trading up of the united states, because you can trade, but you do not own it until you pay the tax. >> i would like to make one clarify comments. there has been an awful lot of activity trying to avoid the u.k. 50-basis-point stamp tax.

most of the etf created have gone to a derivative-based approach in order to avoid having to pay that 50-base-point tax. >> and that is because it is only a tax on stock traders, so, yes, you do need to have uniform taxation that applies to all forms of taxation. the swedish case was brought up earlier. the swedish case was an example of an absurdly designed tax. it only apply to brokers in sweden. ok, so you go to the foreign broker down the street. why not? that is the equivalent of saying, "there is a sales tax in washington on mcdonald's but not when these," so you go to wendy's and avoid the tax. that is what happened in sweden. >> next question. it increased transaction costs or mutual funds are passed on as higher fees to investors, i

would say they are not passed on as these. they are not in the expense ratio that you pay, but they are in the performance you receive. they are just not in the expense ratio. when investors not just substitute to a fund that has lower fees and which is historically having comparable returns one of the systemic risk is curved? of course, i love this question, but the index funds are still going to incur the transaction costs, as well. in 2008, transaction costs would have been 0.40% for index funds it had been levied, and that is just the direct fee. that does not include higher transaction costs. here is one for both of you. bob, do you want to take this first? how many trades to speculator is due in comparison? how much of the trading is

actually a speculator is verses those in an arbitrage? >> this is an excellent example, as jim brought out. i do not see any problem whatsoever in having a derivatives market, haute a less fancy term, an insurance market. let's say you are a farmer, or you are an airline. you are in airline, and you know you will be consuming a lot of petroleum over the next year, so you want to log in the price to save money for your business. i do not have a problem with that at all. that market, specifically as regards petroleum for the airlines, that has been around since the airlines have been there. not a problem. they are shifting the risk. the person selling the derivatives is selling an insurance policy. that is all it is. the issue is that the market has been overwhelmed.

over the last decade, i think it has gone by 400% relative to the level of the physical commodity, oil, and has been dominated now by -- we do not even have to call the speculator is. -- speculators. they have an interest in moving the market by having the capacity to move the market. what the exact number is, we do not know, but that is what you have regulations, including increasing the transactions costs and earnings revenue, but not only that. the dodd-frank log, i heard your negative, and about it. it has problems, but it also has some good features if it were actually implemented, including, including, the phrase that the commodity futures trading commission has the ability to

control excess speculation, and they need to control that. >> jim, do you have any comments? >> yes. if we look in the equity market, the so-called equity traders, they generally do probably about 50% to 70% of the trading, so these are the people who would be pushed to the sidelines if we put on a financial transactions tax, so it is hard to get a sense of who are the manipulators, which i think you are really getting at. we all believe that manipulation is wrong, and that is why we need good regulation, but a good transaction tax will not slow down the manipulators, because they're going in for the big kill. they are not going in for the penny. they are going in for the $10, $20, $30, and for them, that is

nothing. >> we are out of time for the q&a session. let's just wrapped up. jim, would you leg to take two minutes to summarize your views? >> when we look at this time the lens of good tax policy, a financial transaction tax will fail. it will have dilatory its effects, and there are better ways to generate the revenue, so this was a good -- a bad idea. congress carefully thought about this, and got rid of it, and for very good reason. now, paris the financial sector of the economy has grown because we can do a lot more good things. yes, we have always had commodity markets, but we have also developed ways in the last couple of decades for companies to manage their interest rate

risk through the swaps market, for banks to manage their credit risk with the ability to buy credit insurance in the market, so we have developed new products that allow people to do new and better things, et so, yes, we have had problems. markets are not perfect. you have got a problem with your car, and sand and the engine is not really going to fix the car, so putting sand in the gears of our financial system is not going to achieve the objective that the proponents say that it will. >> thanks, jim. bob? >> what about our cars? if our cars are designed to go at to wonder m.p.h., and people are going to wonder miles per hour, we would probably want a law that says, "let's reduce the speed, the capacity, and to, i do not know, 60 m.p.h.."

new york had a tax. i think ralph may be mentioned it. i think they have a tax nominally, and then it is rebated. we actually have data by how much revenue is generated, which applies to the new york stock exchange. last year, the amount was $14 billion. if that tax had not been rebated, the state of new york would not be in a financial crisis at all right now. in fact, the level of the new york state budget deficit is $10 billion, so we could fully pay off all of the issues, and we would not be facing cuts in education, health care, public safety in the state of new york. plus, we would have $4 billion left over. now, the idea that these taxes are so harmful to the operation of financial markets has obviously escape to the financial markets that are growing the fastest in the world right now. each and everyone of them has a

financial transaction tax. china, for example, is using revenue from its financial transaction tax to finance infrastructure in the green economy. i think that would be an excellent idea for this country. yes, markets are far from perfect. markets do useful things. the financial markets as useful things, but only when regulated. when not regulated, i think it is disastrous. we have experienced an economic disaster in this country which would be far worse if the financial markets were not bailed out by we the taxpayer, so what we need is controls on financial market activity. the financial transaction tax is not a panacea. it is one measure among many. among the many, it is the one through which we can generate revenue and help cover the deficits that we face and not experience the kinds of things that are going on, for example, in minnesota, with the state

shutting down. >> , mentioned in the new york transaction tax, and i believe if it had not been rebated, it would have been zero. the reason they rebated it was that all of the jobs were leaving and going to new jersey, and they had to stem the flow of people going in new jersey, so much is in new jersey city, new jersey. they were trying to save the jobs. >> that was my final statement, and maybe i will get a little rebuttal here. the new tax is based, as i said, just on the stock exchange, so therefore, yes, it is not well designed, so it should apply across the board. that is the way that you design taxes so that they are comparable, even across the board, fair to everybody, and if we can do it in new york, we can do it in the united states. >> with that, i want to turn it back over to ralph nader. thank you all for coming today.

[applause] >> i want to thank our participants, robert pollin, jim angel, gau sauter. i also want to think the audience. they are very patient, very interested in the subjects, and the audience around the country through c-span. when this event is relayed to millions of people. i want to ask anyone who is interested to stay in touch with us. there will be future debates on taboo subjects. the website, as you can see

here, is debatingtaboos.org. we would like your reaction to the overall subject of opening up more and more tavis subjects, which once zero but allowed democracy to kick in -- opening up more and more taboo subjects, at least to allow greater understanding of what is happening to us. there is a lunch out there for those of you interested. this lunch has no transaction cost whatsoever. [laughter] and today, there is such a thing as a free lunch. thank you all for coming. [applause] [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> thank you very much for being

with us here on c-span. first of all, your reaction to the fed announcement today? >> it was not terribly shocking. they said instead of keeping interest rates very low for an extended period, as they have been promising for the last 2.5 years, they instead gave a specific date, which is the summer of 2013, so for the next two years, we will have that low-interest rate policy in place. that was not a shot. what was a shock is that they said growth is weaker than they expected to be, and it is clear that they are nervous and ready to act if things deteriorate further, and it is not a question that you will see further action from them. >> just part of what the fed announced today, and, by the way, it is on our website at c- span.org. residential structures still weak. the housing structures still weak. what does this tell you? >> it tells me that we are a

very weak economy. it does not appear that we are shrinking yet, it does not appear that we are not in another recession, and the fed does not expect a recession, but we have seen very weak numbers on job growth in gdp and output, and even consumer spending has come off, as the fed statement mentions, so we are right on the brink, and we are on the brink of an economy that is growing rapidly if not worse than that, so we hope we can stay on the positive side of the ledger. >> at one point, the market was up to a hundred points. it dropped after the announcement, but it closed the day up more than 400 points. it was a wild day on wall street. >> yes, the markets are not really being driven by fundamentals and the steady analysis that people do. they are being driven by fear and uncertainty, and what we are seeing are these wild swings as all of these possible states of the world flash before people's

eyes, so we saw an 11-point drop on friday, monday, tuesday -- thursday, friday, and monday, and now we are seeing the opposite of this, a rise in the dow at the end of trading. >> all right, in "the washington post," you point out in your piece that since 1992 and under the leadership of ben bernanke since he has been the chair, three of the members were descending on today's decision. explain what all of that was about. but there is a strong contingent within the fed leadership that does not want to see more steps to try to prop up the economy. they think that any further bond purchases or any further efforts to ease monetary policy will not actually help the economy or jobs but will create risks of inflation and a rapidly declining dollar and higher energy prices and all of that sort of thing, so that contingent's does not want to see more efforts to pump money into the economy. if you what ails the u.s.

economy is not about a lack of money supply, not about a lack of liquidity. it is about fundamental problems that need to be fixed, not monetary policy. >> so once again pointing fingers of the president? >> they have fled to the economy with money. they have taken all of these extraordinary measures. they would like to see less volatile decision making out of congress and the white house, and they would love to see a kind of long-term dubs it reduction plan that phases in slowly so does not suck too much money out of the economy in the near term. i think it is implicit that they do not love what they are seeing out of congress and the white house. >> so is the fed essentially out of any policy tools to jump- start the u.s. economy? >> they are getting to and of the quiver. there is not a whole lot left. last year, they launched an effort of quantitative easing, billions of dollars in bonds,

and they could do another round of that. they could do another $500 billion, $1 trillion. piss we saw those three dissents. they feel about expose the economy to this risk of inflation and may not do too much. we still have a terrible growth trajectory in the first half of the year. miggy monetary policy is not as powerful as it would be at any other time. >> the headline that came out of today's meeting is interest rates staying low for the next two years. you pointed out on your piece on line that this was for an extended period, and some read into that "only a couple of months." by beyond the 2012 election? >> what has happened is the data has gone a lot worse since the last meeting in june. we have had two very weak jobs report adds. we have numbers for gdp for the first half which were much worse

than we thought. spending with industrial production. some of these numbers come into that suggest we are not growing as quickly as we are. therefore, the fed thought, we need to do something. we need to pledge to keep rates low for a long time. hopefully this money will trickle out and support that kind of growth. >> neil irwin, his piece a little on-line, we appreciate your time. >> wednesday on "washington journal," tavis smiley and cornel west. they are going on a tour to poor communities across the u.s., and then, jules kroll on rating agencies. after that, martin regalia about creating job growth.