Roger Bootle says it’s wrong to argue that bankers’ bonuses are the price we have to pay for economic success
The smart thing to say — indeed, Allister Heath said it in last week’s issue — about bankers’ pay is that it doesn’t really matter: it’s a distraction from more serious concerns about regulation or the structure of the financial system. Supposedly, people who express amazement and disgust at what bankers receive are motivated by feelings of envy, and they just don’t understand the way the City works. If a bunch of bankers makes a few hundred million pounds or dollars — it hardly matters which currency the amount is denominated in — by trading options on the volatility in the dingbat, that’s fine. In fact, so much the better for the rest of us because this creation of wealth will benefit us all. Extra taxes will be paid and extra demand created. Supposedly.
Of course, where banks and bankers have been saved with public money — and that means just about all of them — there is a perfectly obvious and legitimate reason for resentment. The taxpayer has provided the funds without which the business could not carry on, and yet the taxpayer has not benefited from the return of the good times, while the bankers have. Even those who seek to defend bankers’ pay feel obliged to admit that taxpayers have got a raw deal. But you could say that this is due as much to the incompetence of those organising the rescue packages as to the greed of those being rescued.
Yet I think the problem goes far beyond these narrow limits. Bankers’ pay does matter. There is such a thing as society. What holds it together is a web of bonds of mutual trust and support, a sense of commonality. What separates the law of the market from the law of the jungle is the sense of society.
This feeling is not perfect and it certainly does not overwhelm the normal feelings of loyalty towards family or others close to us. But it is there — or at least it is there in all developed civilised societies. And where it isn’t there at all, chaos ensues. It is difficult for this sense of commonality to survive the onrush of unbridled greed which spews forth from the financial markets. It makes those who work for modest rewards and who are concerned for the common interest feel stupid and naive.
Lord Griffiths of Fforestfach is a former adviser to Margaret Thatcher, an academic economist, a well-known Christian and now a vice-chairman of Goldman Sachs. He says that the public should accept the huge bonuses at Goldmans and the like — and the subsequent inequality that this creates — as the price to be paid for overall economic success, from which we all benefit. How comforting — for some.
Yet the issue is not about inequality as such, but rather about how the money has been got. People accept that some people earn more than others. Few would expect bus drivers to earn the same as brain surgeons. And within hierarchies such as the army it would not be seriously questioned that a general should earn several times what a private earns. Equally, people readily accept that some individuals become fabulously rich as a result of chance — by winning the lottery for instance. But for society to organise a massive lottery covering several percentage points of GDP to the benefit of a certain small subset of society is beyond the pale.
The public has a strong suspicion that the money ‘earned’ by investment bankers has somehow or other been filched from the rest of us. I reckon that in many cases they are right. There are two ways in which people can make money. They can add to wealth and they can take wealth from someone else. Because we live in a market system that is superficially competitive, the prevailing view is that when an individual or organisation makes money, within the law, then it must be in addition to the total wealth for all.
But not so. Much of what goes on in the financial system is purely distributive in character. What is earned by X is lost by Y — and in the middle stand the investment banks taking their huge turns. Ordinary people end up less rich as a result of the lower returns made by their pension funds and insurance companies, and through the higher costs incurred by the companies that produce the goods and services, which they buy at prices higher than they would otherwise be because of the huge sums paid to bankers for their ‘services’.
In other words, it isn’t right to see the fortunes ‘earned’ by bankers as representing a net gain to society, because the market in financial services does not work very well. There are three key areas of failure. The first is the setting of pay in general, which is subject to a ratchet effect and operates in the opposite way to a normal market. This problem extends well beyond investment banking.
The second is the structure and behaviour of corporate boards, which are supposed to act in loco parentis for the ultimate owners, but which in fact act like kids let loose in the sweet shop. And the third is the behaviour of the investment institutions that are supposed to protect the interests of the ultimate owners, you and me, in our capacity as prospective pensioners or the beneficiaries of various savings policies. But in practice, the institutions behave like bystanders. The result is too high a level of merger and acquisition activity, too much trading and too much ‘investment management’, all remunerated at far too high a level.
A major consequence of all this is that too many resources are drawn into the financial sector, where they produce scant return for society as a whole. The rewards to the individuals involved do not correspond to the gains to society from what they do.
It’s funny the way that we are encouraged to accept grotesque rewards and huge unfairness resulting from the job market in a way that would seem preposterous in almost any other respect. Imagine if our tax treatment were a matter of arbitrary luck. Suppose that two individuals of similar earnings were subject to hugely different tax rates, with the result that one was twice as well off as the other. We wouldn’t think that this was fair. But if someone earns ten or a hundred times what someone else earns, because they happen to work for a particular financial institution well positioned in the financial jungle, then that is supposedly OK. Well it isn’t. People won’t wear it.
As to the solution, the detail is for another day but the general principle is clear. Governments should not be in the business of setting pay and bonuses. That is for ‘the market’. But in this case reverence for the market does not imply doing nothing. Quite the opposite. The scale of rewards for financial activity which is of scant benefit tells you that the market is not working very well. That is where public effort should be directed: breaking up the financial conglomerates and making markets in financial services work better.