Alistair Darling has imposed a windfall tax on bankers' bonuses to howls of disapproval from the bankers affected and crocodile tears from those who have shamelessly appropriated money from the public funds that were used to rescue them. Banks took hugely dangerous risks in the good times but took out no insurance for the bad times. Then the financial tsunami hit and Joe Taxpayer had to pick up the tab.
In subsequent polls, a large majority of those questioned said they approved of the new tax. The public seems indignant that they are being conned, and who can blame them? It didn't help that the boss of Goldman Sachs, Lloyd Blankfein, invited further outrage around the world when he argued that bonuses were deserved because bankers were "doing God's work". Greed and excess rule, OK? Well . . . no.
This one-off tax does not make the UK anti-bank: far from it. Threats that bankers don't want to play the game any more and want to take their football someplace else should be met with loud cries of "Bon voyage" (see page 7). There are clearly grounds for believing that there has been inadequate regulation of banks and this is going to have to change in the future.
Andy Haldane, the Bank of England's outspoken head of financial stability, suggested that banks had become too big and was sharply critical of a culture in which bankers could take huge risks in the knowledge that the taxpayer would bail them out. "If some of that were to migrate overseas that would be unfortunate but, given the costs of carrying that financial system around, it may be a price worth paying." He is right, of course.
In an interview with the Daily Mail, the external Monetary Policy Committee member and US transplant Adam Posen argued similarly that bankers who helped cause global economic havoc should see the 50 per cent bonus levy as a "solidarity tax". If the government's crackdown leads to job losses and lower pay in the City then "so be it", Posen added, urging the UK to get over its "love affair with the City". This may be going too far, but
it is certainly time to consider carefully the appropriate size and structure for the UK's financial sector.
Pay for performance is one thing, but bonuses for lack of performance is quite another. It makes sense to tie pay directly to overall company profits rather than to that of some small sub-part of the organisation. This is very much in the spirit of Martin Weitzman's "share economy" and earlier arguments developed by the Nobel laureate James Meade, whereby incomes are exposed to a significant amount of market risk. Incomes, and hence bonuses, should rise and fall with company profitability. This is not what has happened.
Reform has to take place to ensure that the bankers share not only the profits, but also the losses. This might well involve legal changes to enhance shareholders' powers. Non-executive directors, many of whom are part-time, appear to have been asleep at the wheel leading up to the crisis, so reform of bank governance will be vital.
One of the main justifications for the windfall tax was that the money would be used to reduce youth unemployment. Young people have had the misfortune to come of age during a recession that is not their fault. There is strong evidence that unemployment while young can scar you. Even among employed people, those who graduate in bad economies may suffer from underemployment and are more likely to experience a job mismatch because they have fewer jobs to pick from.
It also turns out that those who choose to go to college or university may be hurt if they enter the labour market in a recession. Lisa B Kahn* recently found that the labour-market consequences of graduating from college in a bad economy have large, negative and persistent effects on wages. Lifetime earnings are substantially lower than they would have been if the graduate had entered the labour market in good times. Furthermore, cohorts who graduate in worse national economies tend to end up in lower-level occupations.
The young will be paying for bankers' excesses for the foreseeable future, so a hypothecated tax on banks and/or bankers to enhance young people's employability seems reasonable. Ultimately, it is the young who will be most impacted by the profligacy of bankers like Fred the Shred.
Banking is not just another industry that can be allowed to go its own sweet way, especially given the huge amounts of public money that it has received. To prevent the same mistakes happening again, more regulation will inevitably follow. It remains uncertain what form such regulation will take and whether the Financial Services Authority, the Bank of England or some other institution will be responsible for it, given the differences in views of the political parties. A one-off tax on bankers' bonuses, with its receipts targeted on the young, seems like a good idea to me. And why, sir, are you against it?
*Lisa B Kahn, "The Long-Term Labour Market Consequences of Graduating from College in a Bad Economy" (Labour Economics, forthcoming)
David Blanchflower is the Bruce V Rauner professor of economics at Dartmouth College, New Hampshire, and the University of Stirling. He writes a weekly economics column for the New Statesman
This article is taken from the New Statesman supplement Held To Account: What's next for UK Banking? sponsored by Barclays