Dealing with Britain’s overpaid bankers

By Felix Salmon
January 13, 2011
Bagehot has a very odd column this week. He diagnoses a key problem with the UK and its oversized financial sector:

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Bagehot has a very odd column about Britain’s overpaid bankers. Part of it is spot on:

One shorthand description for the New Labour boom years is: Gordon Brown let a deregulated City rip, then used the tax revenues to fund a dramatic expansion of the state.

He’s quite right about this. If a government starts seeing tax revenues from banks rise sharply, it should worry: that’s a sign of a dangerous financial bubble. The exception to that rule, of course, is when a government deliberately tries to cut the financial sector down to a more sensible and sustainable size by taxing it more.

But that’s not the way that Bagehot sees it. For him, the question of whether bankers are paid too much is exactly the same as the question of whether, if they were paid less, they would move to some other country.

That’s silly. An overpaid banker in Hong Kong or Sao Paulo is still an overpaid banker. And the UK must make its own determination as to whether or not it wants to be home to a large contingent of overpaid bankers.

Bagehot might be right that if London’s contingent of overpaid bankers were to shrink, then its financial-sector tax revenues would probably shrink as well. But if you’re addicted to the fiscal crack cocaine that is City taxes, that’s a reason to give up those taxes — it’s not a reason to keep on going back for an extra fix, even after bitter experience has taught you how damaging your addiction will prove to be in the long run.

Bagehot writes:

Yes, Britain’s economy is dangerously dependent on revenues from the financial sector. It is equally worrying that the City of London offers one of the few claims Britain has left to global prominence. But rebalancing the economy by whacking the City with a mallet is surely rather an imperfect solution: is it too much to hope that Britain might achieve a better balance by building up other sectors of the economy or regions of the country?

The problem here is that so long as the City remains dominant in the UK economy, other sectors of the economy and regions of the country will never be able to attract the smart labor it desperately needs.

The answer to the question of whether bankers are overpaid can be seen not in a hypothetical exodus of bond traders to Frankfurt, but rather in the fact that far too many of Britain’s brightest graduates end up in the financial sector, instead of building up the rest of the economy. So long as the Pied Pipers of the City keep on playing their siren tune and luring the cream of Britain’s future to a dense and dangerous square mile of London, the rest of the country, bereft of its native talent, is certain to continue to underperform.

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Comments
10 comments so far

“The problem here is that so long as the City remains dominant in the UK economy, other sectors of the economy and regions of the country will never be able to attract the smart labor it desperately needs.”

I find this an incredibly strange attitude. We’re in the middle of a period of globalisation: the international division of labour. And just as last time around, at the end of the 19th cent, the UK’s comparative advantage is in finance, just as Germany’s both last and this time seems to be in capital goods production.

Why would anyone at all bemoan the movement of smart people into such an area of comparative advantage? It would be like moaning that the German machine tools industry is getting that country’s bright graduates, that Silicon Valley is getting the bright Yanks or mining clever Australians.

Getting the smart locals into the sector where there is such a comparative advantage is generally known as a “good thing”.

Posted by TimWorstall | Report as abusive

If it becomes unattractive to work in finance in Britain, the bright people will not go to work in other industries in Britain, they will go to work in finance in other parts of the world.

Seriously how many Brits are there even in the finance industry in London? Per my personal experience they are a minority. You really think they are here because they love living in London per se? horrible weather, horrible transports, ridiculously expensive… you get my drift.

If the finance industry migrates elsewhere, even the smart locals will leave (just like I left Switzerland to come here).

The only way this could be done is if it’s a globally coordinated effort, and good luck with that…

Your argument about finance sector = crack is also interesting. Do you really believe, even factoring all the bailout costs, that over a 10 year period finance sector contribution to the UK economy has been negative???

Posted by tiger4 | Report as abusive

Laurence Copeland in his article: http://blogs.reuters.com/great-debate-uk  /2011/01/12/bank-bonus-season-again/

appears to completely disagree with ‘tiger4′s assertion that the banks contribute more to the economy than what we’ve put into them.

He says “bear in mind that in the last two years they have cost us far, far more than they will ever provide in tax revenue, and that will still be true even if we are able to avoid another systemic banking crisis for the rest of the century”

Posted by TocoToucan | Report as abusive

I find the bankers pay debate to be off topic as it is an agency problem more than anything else.

Shareholders do not have the clout they need to deal with the sky rocketing pay packages, whether they be bankers or incompetent is irrelevant.

Posted by chris12 | Report as abusive

“Do you really believe, even factoring all the bailout costs, that over a 10 year period finance sector contribution to the UK economy has been negative???”

Andrew Haldane does: http://www.bis.org/review/r100406d.pdf. “Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK … assuming that a
crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.”

Posted by Greycap | Report as abusive

The period at the end of Pdf URL has been imbedded, so you need to remove it to open the link.

Interesting read. I see the English are as fond of analogies as the North Americans.

One said that this financial crisis left a scar and TBTF banks and the systemic risk have to be fixed to ensure it doesn’t happen again. A more correct analogy is there is a gaping wound and in order to heal, the systemic risk that can again effect world economies has to be contained.

Banks need to be contained and constrained everywhere and the only way to do it is to break them down to manageable entities and enforceable regulation with addendum as the loopholes arise.

Dejavu:

“Stock dealings which had made bankers rich and respected
in the era of affluence now glared as scarlet sins in the age of depression. Disillusionment with speculators and securities merchants carried over from investment bankers to commercial bankers; the two were often the same, and an embittered public did not care to make fine distinctions”. Glass and Steagall made just such a distinction. They underpinned it with legislation, signed by President Roosevelt in June 1933.

Posted by hsvkitty | Report as abusive

“The problem here is that so long as the City remains dominant in the UK economy, other sectors of the economy and regions of the country will never be able to attract the smart labor it desperately needs.”

Exactly.

And more, you get a finance-equivalent of Dutch disease. In the Netherlands from the 1960s onward, booming oil and natural gas made the currency abnormally strong and made manufacturing uneconomical. All the rest of the economy directs its attention to serving the needs of the booming sector. Similarly, much of the economy of the UK bends toward the service of the City.

Posted by DanHess | Report as abusive

Once confidence has eroded far enough, anything is possible! It’s the 12th hour folks, cut spending and begin to balance your budgets-you’re flirting with dynamite!

Posted by DrJJJJ | Report as abusive

ok

Posted by write_thesis | Report as abusive

The Coalition has little incentive to cap bonuses as half of it comes back in taxes. Their only concern is that the issue has become a political stick with which Labour can beat them. Labour could evolve an alternative approach now, if they could see beyond the immediate benefits of beating up the Coalition using bonuses as the media-wielding stick. A State Savings Bank (RBS or perhaps Lloyds TSB with its branches and without a significant trading division?) would guarantee depositors and not indulge in hedge fund and derivatives trading. It could genuinely invest in UK-based small business and support first-time buyers! Depositors in all other banks would be told that there would never be any government guarantee of their deposits (no more bail-outs). Other banks could then do what they wanted (no more vain attempts to restrict their operations as all State prohibition policies are always doomed to fail) … but all the risk would be theirs not the taxpayers.

Posted by F1ddler | Report as abusive
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