The Red Herring of Interesting Times

These interesting times might take our eyes off the things that really matter. During a recent late night discussion on the BBC among the financial cognoscenti, one of the participants warned against getting drawn back into ‘the red herring of banker’s bonuses’. The real issues were the British government and police being in the pockets of the Murdochs, media plurality, the debt crises in Greece, Italy, Ireland, Portugal, etc etc and the future of the Euro, not to mention the changing world roles of the US and China as well as the developing famine in East Africa. Bankers’ bonuses were surely small beer against such giant issues.

Keynes argued that reducing taxes on the poor enabled them to immediately increase their spending which would stimulate growth in the real economy, thus reducing debt and creating jobs. Reducing taxes on the rich did not have that immediate effect, but, the argument ran in Keynes’ day, it enabled them to increase investment in the real economy thus having a long term positive impact on growth. That was then.

It remains true that the poor will immediately spend any reduced taxes – they are not in a position to do other. But reducing taxes on today’s rich merely increases the pot of speculative funding rather than investment in the real economy (see Pity the Poor Banker! posted here 6.2.11). Not only does that not have any positive impact on the real economy, but it also inevitably brings forward the next big bust with dire consequences for all (see The Big One is Coming posted 16.5.11).

The obvious answer is to increase taxes on the rich and reduce them on the poor. But that is against the current orthodoxy, the Washington consensus, or whatever you like to call it. Taxation is bad, progressive taxation is the worst kind. Today, any proposal to increase taxes on the rich is regarded as so outrageous it can hardly be voiced. And if it is given consideration it is on such a limited and timid basis that its effect would be negligible. Bankers’ bonuses have therefore to be ignored as a ‘red herring’.

However, they are a symbol of what is clearly wrong. Four fifths of the UK government’s cabinet are millionaires. The government might claim ‘we are all in this together’, but it is obviously untrue. The rich are not ‘in it’ with the rest. And they won’t be in it, till the Washington consensus has been replaced with a more effective truth, that recognises the importance of the real economy over financial speculation, and fairness over minimised taxes for the rich and austerity for the rest.

Taxation which makes speculation less profitable and reduces the size of the financial sector would inhibit the development of the bursting bubbles which cause so much havoc. Taxation which contributes some redistribution from Bob Diamond and colleagues might help develop a culture of fairness rather than greed. In the global context this could be made to relieve some of the austerity being meted out in Europe as well as the famine in East Africa. The generosity of ordinary people clearly demonstrates their desire for such outcomes. It would be good if change were achieved before anxiety becomes anger and aggression.

Even in these interesting times, bankers’ bonuses are not a red herring. They symbolise an important part of what is wrong.

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