While I have been away there has been some discussion on instituting a high pay commission.
Some people on the left have backed this, like Sunny from LibCon. Citing a New Yorker article Sunny argues that “you can blame [this recession] on the sub…

Try to remember who actually generates wealth for this country. Nobody disputes the huge value to wider society provided by nurses, doctors, teachers or even social workers – but – dont forget that they (and also most private sector workers) dont generate any net income for this country whatsoever. And though that might sound a bit mercenary, as said above, without that income into the UK you simply wont be able to pay for the welfare state, nhs, public sector etc. City bankers might be obnoxious nasty tw@ts, but they are among the few that do bring serious money into this country. Sad but a reality of life that britain has to face up to.

“You’re actually arguing banks should pursue high-risk short term strategies rather than organic growth?” Try as I might, I cannot fathom how you could have interpreted what I wrote like that. (by the way “organic” growth means “not by acquiring other banks”, it doesn’t mean “low risk”). That passage you quote from me was intended to explain how thinking of “risky” behaviour in banking as if it was like betting on long-odds outsiders at the races is a mistake – you talk about “high-risk short term betting”, I do not know what you mean by that and I’m not confident that you do.

Meanwhile, there is still no sign whatsoever that you have grasped what I have been saying all along, about how you may suceed in changing the incentives faced by bankers by somehow cutting bonuses, but if that only serves to increase the profits to shareholders (as it would if bonuses were simply lowered) then you will not have removed the peverse incentives from the system in the way that you hope to (not to mention that it’s rather odd for left-wingers to be campaigning for higher profits). Hence why it’s necessary to think about how banks generate revenues, not just about how those revenues are split beteween bonuses and profits.

As for what you write about the limited capacity of regulators, well I quite agree that we cannot expect too much – but if you are saying that the capacity to identify the build up of systematic risk in the system is beyond regulators, well we really are in a fix. Reassuringly, smarter people than me think otherwise. Like Roubini and the Obama administration.

Haven’t I been reading about the crisis? Yes I have! Here are some three of the best papers on the subject (all intended for a non-technical reader – I highly recommend them) are: here (pdf), here (pdf) and here. This would be a good place to explore too.

Err, no. Details, as always, are important. The House passed such a law. The Obama Administration said:
http://www.foxnews.com/politics/first100days/2009/03/22/administration-changes-needed-percent-tax-aig-bonuses/

“White House economic advisers said Sunday that President Obama won’t “govern out of anger” despite calls for the heads of AIG executives who received bonuses, and acknowledged that using tax law to get back $165 million in government-funded bonuses may be “a dangerous way to go.” ”

The issue died in the Senate. It ain’t law.

Obama’s actual proposals were more along the lines that cash bonuses should be limited to $500,000 or less. Anything over that sum should be paid in restricted stock (ie, stock that couldn’t be sold for a few years) so as to create incentives for long term performace, not just short.

Which is in fact pretty much the way Bob Diamond of Barclays Capital is paid. Huge chunks of Barclays shares. So much so that he lost £20 million or so on his holdings last year.

“How many of those people eloped to other countries?”

So, despite the fact that the tax didn’t go through, there’s another point to be made about why the American experience would be different from our own.

If you are a USian, you pay US taxes whereever in the world you live. If you are in a lower rate tax regime then you owe the extra to Uncle Sam each year. Thus fleeing the jurisdiction doesn’t make all that much difference (there are some allowances but at the top end it makes very little difference). You have to give up your citizenship and that is a very complex and very expensive process indeed.

Our tax system is based upon residence. You can bugger off and from 5 th April that yearthat’s it, no more UK tax to pay. Further, under EU law it would be illegal for us to try to move to the US system (although Richard Murphy still advocates such a move).

So what the Americans do in the face of high tax rates (that didn’t get imposed) won’t tell us much about what would happen here.

If you want to see what would happen with very high tax rates just look back at UK history. 60s and 70s….so many people buggered off that we called it “the brain drain”.

On further point of interest. There have been two great bursts of globalisation, two great shifts to the international division of labour and its specialisation. 1880s-1914, 1980 ish to now. Both times London specialised in finance, Germany in manufacturing. If it had happened one way once, the other the other, then we might think that policy had something to do with it. That it happened the same way both ties doesn’t mean that policy didn’t have anything to do with it, of course, but it does at least begin to point at the idea that there might be some comparative advantage at play.

Some “natural” reason why global finance moves to London if it is able to. Me, I think it’s the legal system but that’s me punting, not a fact.

So why haven’t they already left?

Andy – a few things. That argument is always trotted out and yet I’m yet to see any evidence this is taking place. The Obama administration recently put a 90% tax on bonuses of companies that were bailed out by the administration. That essentially encompassed a huge swathe of the US finance industry. How many of those people eloped to other countries? Perhaps you can offer us some stats?

This argument that because of a globalised world we shouldn’t enforce any standards is getting rather tired. Hey, we may as well buy clothes from people using slave labour because otherwise those factories will move somewhere else using the same practices right?

Our aim should be to ensure the banking sector – which is essentially underwritten by the taxpayer – is not beset by continual instability because of the way risks are rewarded. We need better regulation and we need to ensure that next timesome financial company goes bust – it isn’t in danger of talking down half the sector with it.

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Luis Enrique
The problems come if bankers are paid so extravagantly and they able to cash in their chips too soon that once they’ve had few good years they don’t really care about the long-run.

That is EXACTLY what is happening now. Have you not been reading the articles unpicking the financial crisis?

Now this almost makes it sound as if banking was betting on horses, and that bonuses give incentives to bet on the long-shots, rather than the favorites – taking on more risk and gambling “wildly” – but of course that doesn’t work, if you start betting on long-shots you win less often, your revenues are lower, and banks pay their bankers out of revenues.

What? You’re actually arguing banks should pursue high-risk short term strategies rather than organic growth? The only reason they can do this is because they know they’re backed by the tax-payer. Otherwise banks would be more careful about high-rish short term betting. I’m not necessarily talking about only betting long-term, I’m talking about taking on less risk that puts the entire bank at risk, and pricing risk better. And more transparency.

A better solution might be for regulators to notice that the bank has done a damn fool thing like bet the house on mortgage back securities, make them pay some sort of insurance fee

You’re asking under-resourced regulators to monitor all the securities banks are buying and trying to determine whether those risks are adequately priced. That’s an even more unworkable solution than a high pay cap. And it’s too much regulation. Much better to ask why banks are mis-pricing high risk derivates in the first place, no?

End up making money for the government.

I am a banker and if there is a limit on what I am paid I will just bugger off to Singapore, Dubai or Hong Kong

Mind the door on your way out. It’ll be tough, but I’m sure we’ll find some way to cope without your doubtless immeasurable talents. Do enjoy your time living in a real authoritarian society. Just don’t come back crying to us if it doesn’t work out for you.

Please do

I think I’ll be safe on welfare, I think your banking ideals are not safe at all, because one more blip and Banks will be brought under real control of the state.

The money used to pay staff clearly should not have been counted as profit, it should have been used to offset risk. The bank gave incentives to their staff to expand their lending (building up risk), they also underestimated the level of risk they were building up and turned thir industry into a gigantic gravy train for their staff.

Had pay (in some way) been limited, we would have had less incentive to expand and build up that risk and a greater cushion to protect against risk. It was hardly the only factor at play, but from where I sit it looks like banking pay incentivised the kind of behavior that got us into this mess.

Umm, maybe by not spending tax money on some of the things that tax money is currently spent upon? We can all make up our own little list of waste: ID cards, Trident to some, the EU, perhaps diversity outreach advisors, to others. But I doubt very much at all that there’s anyone out there who thinks we cannot slice 30 billion off a £660 billion budget. Thirty large being the amount needed to raise the personal allowance up to the minimum wage level (rough calculation, 30 million taxpayers, 5k increase in allowance, we’d be losing tax at 20% on that sum).

“How else would a government fund better education?”

You’re assuming that better education requires more funding. When there are other countries that have better education systems than we do on the same (and sometimes less) money than we spend then perhaps it’s the way we spend money rather than the amount that needs to be changed?

A lot of Tom Harris’ objection was based on the idea that this must lead to a maximum wage, or pay ceilings. He would be right to object to that, though I take the Compass call for this to be considered to be somewhat rhetorical, and clearly many of those backing their campaign for the principle of more scrutiny of pay are not in favour of that, including St Vince.

David Coats offers some sensible comments, recognising the validity of scrutiny of top pay and broader inequalities, and the issues which should be addressed, suggesting that polarising the debate could leave it stuck. There is a trade-off there – it is necessary to mount the public argument, which has been missing, but the question is how to do so in a way designed to win it and open up the political and public space. The high pay argument as a whole does open up space; I suspect putting a maximum wage prominently in a campaign has the opposite effect, potentially narrowing support and giving opponents an easy target rather than their having to defend current arrangements (which is rather more difficult for them)
http://www.nextleft.org/2009/08/how-to-win-argument-for-fair-rewards.html

Tom H also forgets New Labour’s own campaigning against rewards for failure before and after 1997, which gave us the windfall tax as well as the minimum wage, and its policy agenda has always sought to mitigate and hold back inequality, (in terms of the overall distributional consequences of every budget – even including the infamous 10p own goal one, as Tom Clark noted the other day, being a Guardian columnist who knows his way around the institute of fiscal studies http://www.guardian.co.uk/commentisfree/2009/aug/18/gordon-brown-philosophy-vision), while being insufficiently bold in practice to meet the ambition of reversing it, as I acknolwedge and indeed have been arguing

So Harris falls into the politically debilitating trap of offering us a mythologised version of new labour (always and only defined against the left) which is much narrower than the broad coalition of support which new labour had in 97, and so which never acknowledges that it would need a broad coalition again to recover. Indeed, Roger Liddle made a good argument for a top pay commission as a New Labour argument back in 2008, as I wrote here
http://www.labourlist.org/impeccably_new_labour_case_scrutiny_top_pay_sunder_katwala,2009-08-18

Of course, those who say New Labour was very and too wary of this territory are right. One can certainly support the principle of scrutinising top pay without being New Labour(!); my point is simply that the government and ‘New Labour’ need not respond with existential dread to the idea of scrutiny of inequality including at the top, and they will in fact be outflanked even by not very-post-Thatcherite Tories like Osborne were they to retreat entirely from the discussion.

Even if you had a cap at remuneration within the financial sector or more broadly (say at $1 million a year) – you’re looking at less than 1% of the population, if less. Many of them would not only be non-domiciles but won’t be voting for your party anyway.

They’re not a lot of votes, but they have a lot of money. Money buys votes. Plus, the Labour Party are pretty deep in the hole, aren’t they?