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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