Why do we need to lead?

First off, many thanks to NKW for permitting this little experiment. I would have made my first post yesterday but I was out of the house all day to, among other things, watch the really excellent, but dark, Swedish detective movie 'The Girl with the Dragon Tattoo.' Highly recommended.

A post by economist Dean Baker with regards to the dialogue over financial regulatory reform caught my eye recently. He criticized NPR for not presenting a free-trading perspective in a recent piece on the concerns of those who worry that increased regulation of financial derivatives will drive that industry abroad:

There is no more reason for people in the United States to be concerned about buying derivatives abroad than we are about buying shoes and clothes from abroad. If other countries choose to attract trade in derivatives with a more poorly regulated financial system -- implicitly having their taxpayers assume the risk of a meltdown (e.g. Iceland) -- then there is no reason that we should not simply buy our derivatives from these countries and concentrate our production on areas in which we enjoy a comparative advantage. NPR should have included the economist's position in this segment.

This insight struck me, partly because the general issue (the value of having a particular financial product brokered or sold domestically) seems to be present in some of NKW's reflections regarding the frequently proposed financial transaction tax (FTT or a 'Robin Hood Tax') and, indeed, in a lot of discussion regarding the impact of financial regulation in a globalized market. This is different than the, question of how much revenue a unilaterally imposed FTT could raise given the likely diversion of that business abroad. This capital flight factor strikes me as more important in setting the level of a FTT than whether or not to impose it; clearly there are reasons why many consumers of financial goods prefer to buy in hubs like London and NYC and there must be some appropriate level of taxation before deadweight losses and lost revenue eliminate those advantages and start to be counterproductive for society. I do not disagree with NKW that global implementation is preferable or that the taxation of financial goods is a complicated and delicate balancing act.

More generally, what Baker has here challenged is the value we as Americans associate with being the leader in the global financial industry, even as this requires taking on higher levels of risk and, potentially, future bailout costs, all despite the fact Americans might regardless benefit from the financial products offered by a foreign market.

The U.S. perception of the value of a strong domestic financial industry is the subject of a recent post by Ezra Klein (himself ruminating on Tyler Cowen's post critiquing the book 13 Bankers) who hypothesizes that the limiting factor in financial regulatory reform is not the partisan disputes going on now but the degree to which the U.S. government believes it needs a powerful Wall Street (in order, according, to Cowen, to maintain the dominance of the dollar and finance U.S. debt)

I am very skeptical of the degree to which regulating derivatives, granting the feds resolution authority and the other main issues addressed in the current financial reform bills will compromise our ability to finance government operations or jeopardize the American economy. I do see, however, that stronger regulation would be figuratively akin to taking away the punch bowl at the Wall Street party at midnight. I wouldn't personally cry much over more staid domestic financial markets- the major effect might just be that a particular, and not terribly vulnerable, portion of the NYC and Chicago labor pool would have to reinvent themselves professionally. Perhaps the societal benefits to being the leader in the world's casino economy outweigh the opportunity costs and the risk or more thorough regulation (like what Canada has) is incompatible with being an economic powerhouse.? I am interested in other people's general thoughts: In a globalized economy need America have the most lively and innovative financial industry in the world in order to maintain our economic position or way of life? Is the cost of doing this taking on the risk of serious future financial crises that require the use of taxpayer money?

One possible objection to Baker's implicit 'export the risk' argument is that the U.S. could end up bearing the burden of offshore financial crises anyway, through IMF bailouts or domestic economic losses, with less control over the consequences.