Wednesday, 6 March 2013

City bonuses pay for our schools

If Julia Llewellyn Smith is to be believed, the era of Loadsamoney triumphalism is dead, to be replaced by one of shoe-shuffling hypocrisy.  Perhaps it's a return to traditional British discretion.  Talking about money is so vulgar, after all, especially when you've got a lot (or when you've got none).  Maybe the rich (or just the comfortably off) wish to spare their friends and neighbours from feeling like losers in this time of austerity.  Or it's an attempt to preserve the illusion that "we're all in this together", when plainly we're not.  Do they even have a sense of shame, those bonus-rich bankers and hedgies, that having got the country - the continent, the entire Western world - into an economic death-spiral from which we may never escape it is they who are least likely to be suffering personally?  It would be nice to think so.  But perhaps they're just a bit worried about being the first people to be put against the wall and shot when the revolution comes.

Because we all hate rich people, especially bankers with their bonuses.  If anything's likely to restore the public reputation of the European Union, especially in this country, it's the latest move to restrict City bonuses.  The sight of George Osborne going into battle on behalf of greedy plutocrats while he's hammering some of the poorest people in the country for having a spare bedroom, even when there's no smaller property for them to move to, serves only to confirm prejudices about Tory priorities.  It may even convince people once again that the EU is a force for equality and progress, even while it's obsession with preserving the Euro pulverises and pauperises the whole of Europe south of the Alps.

Banker bashing is cheap and easy populism.  I'm not a great fan of the narcissistic and uber-Darwinian mindset cultivated by many of the City's bonus boys, as it happens, but I know a dangerous policy when I see one.  The new EU rules, which Osborne is powerless to resist, are a pistol aimed straight at the heart of the City of London, and at the British economy.  To most European leaders, who hate the City, or are jealous of its success, if reducing bonuses results in banks relocating to New York or Switzerland then the policy will have been a success.  From where they sit, the harm wrought by the Square Mile's financial buccaneering over the past two decades deserves exemplary punishment.  And the harm wrought to the British economy though lost jobs, lost tax revenues and lost economic activity is no concern of theirs.

But we should care.  To exult in the (marginal) impoverishment of some of the most overpaid people in the country is understandable, but it is also deeply stupid.  Bankers' bonuses keep much of London's service economy in business: the fancy restaurants, the car dealerships, the jewellers, the high-end travel agents, the private art galleries, the fashion business, traders in superior hi-fi, Saville Row and much else.  And these, in turn, keep other, humber businesses trading, and thousands of people in work.  Remove them, and you remove a major source of income for the British economy.

The undestand these things in China, where the initial fruits of prosperity and economic growth have produced obscene displays of conspicuous consumption.

Bonus money doesn't just benefit London, of course.  Many of those they support with their spending live outside the capital, while most obviously the tax levied on bankers' pay and bonuses is redistributed to other parts of the country.  Large parts of Britain no longer have a functioning economy: they depend on public spending, which in turn is heavily reliant on the revenue from the profitable parts of the economy.  The top 1% of earners contribute 30% of income tax paid in the UK.  Factor in the amount they are paying in VAT through their conspicuous consumption, in stamp duty through their property purchases, in capital gains tax and elsewhere, and it's clear that the rich are to a great extent funding public services in this country.   Needless to say, a high proportion of this 1% work in the City of London, and receive hefty bonuses.

Take that money away, and frankly we're screwed.  We're screwed even more than we already are, which is bad enough as it is.

There's an almost plausible argument for the EU policy that blames the bonus culture for encouraging risk-taking among City traders, and blames risk-taking for the mess we're currently in.  Restrict bonuses, the argument goes, and the result will be more cautious banking, no more crashes, no more bail-outs by taxpayers.  Allied to that are predictions that nothing much will change: banks will merely pay their top earners higher salaries and smaller bonuses, and the merry-go-round will continue much as before.

But risk-taking is inseparable from profit, and with lower bonuses there will be less incentive to chase profit.  There might be fewer disasters if traders were more risk-averse, but there will also be fewer jackpots.  This will soon make London-based banks, constrained to pay their traders and executives the same however well or badly they perform, less profitable than those based in New York or Switzerland.  London will steadily become a backwater.  The money to be made from casino banking will still be made, but it will not be made, or spent, or taxed, in Britain.  And we'll all be the poorer.

It's true that the UK economy has been far too dependent on the City, with the result that the financial crash has plunged the country into an era of permanent low growth.  Diversity is good, and the government needs to help stimulate other sectors of the economy.  But we are where we are, and you can't encourage wealth creation in other areas by taking away one of the few genuine sources of wealth that the country already has.  It's not good to have all your eggs in one basket, but the answer is not to smash all the eggs and throw away the basket.  The only viable solution is to hatch a few of the eggs and give the resulting hens some new baskets to lay in.