The wrong type of growth

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Yesterday, the government floated the idea that the EU-imposed cap on bankers’ bonuses might be lifted. It was well-timed; with most of the Labour Party observing an entirely unnecessary self-imposed ordinance not to indulge in politics, and most of the media dedicated to broadcasting live images, almost 24/7, of a crowd which is barely moving filing past a coffin which is not moving at all, it’s a good time for the government to carry on as normal, just with less criticism. They haven’t managed to avoid the criticism altogether, but they’ve had a lot less than the proposal deserves.

Much of the criticism which has been voiced has concentrated on the apparent injustice of allowing huge increases in the remuneration of bankers whilst everyone else’s pay is held down because of fears of inflation. It’s fair criticism, and it’s true that allowing the fattest cats to get fatter will look like appalling politics to many. It misses the point, though. There are two far bigger concerns than how much bankers get paid.

The first of those is about what they do to earn those bonuses. The reason for imposing the cap in the first place was because large bonuses were incentivising reckless and short term patterns of behaviour, which ultimately caused a major meltdown of the banking sector. I see no indications from a government that also wants to reduce regulatory control over banks that the implicit dangers of that have been understood. Hatred of EU rules and a desire to steal business and jobs which might otherwise be located in the EU seem to have trumped caution.

But the even bigger problem is the notion that they’ve got into their heads that this is somehow going to address the problem of the UK’s low economic growth. There’s no doubt that, as a result of the way GDP is calculated, an increase in banking activity in the City of London will lead to an increase in GDP, and the statistics will mechanistically report that as economic growth. The problem with headline figures for growth is that the detail is ignored; but in this case, that detail matters. Only a tiny minority in a very small corner of the UK will benefit from any growth which follows from uncapped bankers’ bonuses, and it won’t feel much like economic growth in the left-behind areas, such as Wales. What the UK needs is the sort of economic growth which spreads prosperity rather than concentrating it – we could give it a fancy name, such as, I don’t know, how about something like “levelling up”?

The ideology driving the current government claims that higher wages and lower taxes for the already well-off benefit the entire populace rather than only those whose pockets are directly filled. There is, however, absolutely no empirical evidence to justify such an assertion; such studies as have been performed all tell us that the result of putting more money in the hands of those who already have most simply leads to the rich getting richer and inequality increasing. It turns out that simple common sense predicts the outcome of giving more money to the richest better than any ideologically-driven economic theory. Who’d have thought it?