The biter bit

In this week's MoneyWeek (best economic journal out there at the moment), an article by Simon Wilson on the risk of a "City exodus", prompted by Darling's special bankers' bonus levy, included the following sentence:

"The confusion over whether certain businesses will end up paying this tax is symptomatic of the wider problem faced by the City of London - increased uncertainty and political risk."

Good! It's called "sovereign risk", and I hope they choke on it. The rest of us have been swimming in it for years, thanks to the micro-managing, targeted mechanisms that successive governments have deployed and repeatedly modified, in order to encourage preferred technologies and outcomes (i.e. "pick winners"). And which group of organisations were most instrumental in advising the government about which winners to pick and how to incentivise them? That's right: their corporate pals, and in particular the financiers and consultants in the City. The banding of the RO, and the EU-ETS farrago are classic examples, but there are many others in the energy sector alone.

It's tempting to hope that this might be a salutary lesson that teaches them to oppose targeted intervention, but there's as much chance of corporates, consultants and pin-stripes renouncing rent-seeking and admitting the limits to their knowledge and intelligence, as there is of Gordon Brown admitting he screwed up.

The article also repeats am inversion of logic that is becoming so common it is in danger of becoming received wisdom. People criticised the bonus levy because it was unlikely to raise much tax-revenue, and are now starting to mute that criticism as it looks like bankers may still take big bonuses and the tax revenue will therefore be higher than expected. In my opinion, kicking a banker (and worse) is justified in its own right, as some minor redress of the moral hazard created by insulating them from the consequences of their irresponsibility. But the more powerful argument in favour of the bonus levy was precisely that it would act as a disincentive to the payment of massive bonuses at a time when they are supposed to be rebuilding their balance sheets.

It is a sign of success, not failure, if the bonus levy raises little tax revenue. Conversely, it is a sign of failure, not success, if it looks like the levy has failed to deter them from paying big bonuses. The worst thing that the bonus levy can do is fail to deter bonuses while insulating the Government from the reality of its fiscal position. If the choice of where these billions should go is between (a) divided between bankers and the Treasury, or (b) onto banks' balance sheets and reducing the cost of borrowing, it's not a difficult decision for me. Nor for bankers, of course, but sadly (though predictably) with a different conclusion.

When will people understand the symbiotic relationship between the big financial institutions and big government? Too many people think that bankers are just a special kind of businessman, and blame business and capitalism generally for the appalling irresponsibility and greed of our financial services "industry". They see the world as divided into people and government (as protector of the people) on one side, and business on the other. In reality, it's government and its corporate leaches on one side, and people and businesses on the other. Whether you are an individual or a business, and whether you are paying taxes, bank-charges or energy bills, you are being screwed the same way by the clique with its claws on the privileges of power.