Social Policy in Ontario

Christine Lagarde, France’s guru of the free market, could never have imagined that she might find herself seated over fruit salad and tea on the Left Bank of the Seine, selling the merits of a scheme to rein in the forces of global capital and channel vast sums from the banks into the hands of the people.

But in the nearly three years since President Nicolas Sarkozy appointed her to bring U.S.-style market discipline to the creaky French economy, the world has turned upside down and radical economic ideas are no longer so outré.

“I am, economically speaking, a liberally minded person – I’m not a state interventionist, if you take my point,” the French Finance Minister tells me quietly, almost by way of apology.

And then delivers the pitch she is bringing to her fellow ministers at the G7 finance summit in Iqaluit this weekend: to get the world’s economies to place a tiny tax, of a small fraction of a percentage point, on all international financial transactions – there are millions every day – and use it to collect billions and trillions of dollars for collective use by the governments of the world.

Even a year ago, the Tobin tax – named after its inventor, economist James Tobin – was an idea from the fringes of political thought, the sort of thing that odd-looking people who corner you at parties talk about at length.

But the prospect of a total economic collapse concentrates the mind wonderfully. Long-abandoned ideas, such as the state takeover of banks and massive taxpayer support of private-sector employment, suddenly became mainstream policy among conservative governments. The risk of slowing down markets and raising the cost of finance sounded less serious. The unthinkable became thinkable.

Then, in December, British Prime Minister Gordon Brown abruptly announced at a G20 conference that a “microtax” should be applied to wholesale market transactions, with the funds used to create a global “insurance policy” to protect against future market failures.

Angela Merkel, the conservative German Chancellor, jumped on board, and the three countries are pushing the idea hard in Iqaluit today. It’s still a hard fight: U.S. Treasury Secretary Tim Geithner doesn’t like it. But former U.S. central banker Paul Volcker, the influential mind behind President Barack Obama’s dramatic banking-reform proposals, spoke in its favour.

It’s fitting that we end up discussing the mechanics of this strange new tax here, in the cavernous, baroque parliamentary office that was once the home of Jean-Baptiste Colbert, the 17th-century finance minister who virtually invented the use of government regulation as a tool to shape and secure the economy. He, too, was employed by a well-known conservative, King Louis XIV. The state and the market have had a long and intricate dance together, and this is its latest pirouette.

The Tobin tax may overcome the barrier of political resistance, but it faces other hurdles. The first – technological – is no longer so difficult: The micro-billing of minuscule amounts on millions of transactions is how the prosperous core of the online advertising industry now works.

The larger problem is that many international transactions do not go through central banks or exchanges but take place in informal over-the-counter markets, unseen by regulators. The world would need to design a centralized financial clearinghouse for all transactions. As it happens, this idea is popular elsewhere, notably among governments hoping to put an end to tax havens and other tax-avoidance schemes.

Even before those problems are solved, though, a fight has broken out over how to use the money.

Some would follow Mr. Brown’s lead and use it as a strict financial insurance scheme (what his Chancellor of the Exchequer, Alistair Darling, described to me as a “living will”). Others would hand it to the International Monetary Fund for larger economic development uses.

There is a strong desire, notably in Germany, to use the billions as a “green fund” to pay for carbon-reduction schemes and environmental defences. And, as a number of people have noted, it would raise enough money to lift the world’s billion poorest people out of absolute poverty, if spent on wise programs.

At mention of this, Ms. Lagarde recounts a famous fable by another 17th-century Frenchman, Jean de La Fontaine.

“The farmer walks to the market with big jar of milk on her head, and she thinks, ‘Once I sell my milk, I will buy a cow and I will buy this and that,’ and she gets so excited by all this that she starts dancing, and this makes the milk fall off her head and spill. And all the dreams are gone.”

The minister, ever poised, gives a wry smile. “And so we don’t even have the jar of milk at the moment!”

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