As City profits soar, the low-skilled, service areas of the economy continue to suffer a fall in income. Radical action might avoid a social catastrophe
When Sir Mervyn King, Governor of the Bank of England, this week criticised Goldman Sachs (NYSE: GS-PB - news) for delaying bonus payments so as to take advantage of April’s reduction in the top rate of tax, it had the sort of impact of which he could usually only dream. Would that the Bank of England was so effective when it comes to the economy. Within hours, Goldman had run up the white flag.
That Goldman, supposedly home to some of the cleverest brains on the planet, could have allowed itself to become embroiled in such a public relations disaster is perhaps the most surprising thing about the episode. Sometimes it seems that bankers must actively be seeking ways of ensuring that they stay public enemy number one.
Notwithstanding the governor’s strictures, investment bankers are very much back in the game. Both Goldman Sachs and JP Morgan (Other OTC: JPAAZ - news) this week announced profits that smashed all expectations, and for some this is going to be a record bonus season.
It is small wonder that Sir Mervyn should side so strongly with popular opinion. Much of the rest of society is still suffering badly from the financial crisis. For many bankers, it seems as if nothing really happened. It’s back to business as usual.
Yet there is something of a paradox here. One of the reasons Goldman’s profits are soaring is that it has put the brakes on remuneration, which fell to “just” 21 per cent of revenues in the final quarter, one of the lowest ratios ever for the Wall Street stalwart. Much of this fall was achieved through headcount reduction, with many of those that are left being paid even more a kind of survivor-takes-all syndrome. Even so, the renewed surge in banking profits is as good an indicator as any of a fast-recovering financial system, and on a number of levels is precisely what public policy in advanced economies is trying to achieve: allowing capital to be rebuilt and credit expansion to resume.
Some of the wider, macroeconomic benefits of this are already apparent in the US, where the debilitating process of post-crisis private-sector “deleveraging” seems to be essentially over. Bad debts have been largely cleared and, goaded into action by very low interest rates, investors are recovering their appetite for risk. It’s too early to be certain, but advanced economies may at last be spluttering back to life.
As for delaying City bonus payments until the tax rate is cut, the fault, it might reasonably be argued, lies not with Goldman Sachs but with George Osborne, the Chancellor. If you believe in the merits of low taxes as an important driver of wealth creation, and ultimately of government revenues, then you can hardly complain when companies and individuals take advantage of them. So as ever, the big picture is more nuanced and complicated than the populist soundbites suggest.
Where Goldman went wrong was in its failure to keep up with public opinion. Ten years ago, virtually every bank and company in the land would have come up with a similar wheeze (and it’s a fair bet that many we don’t yet know about are still planning to). Yet most publicly accountable companies are avoiding this kind of thing, if only because they recognise the risk to their reputation of being found out. Some banks and businesses are simply failing to move with the times. And they wonder why there is such an extreme regulatory and political backlash.
One of the most startling facts about the Great Recession is that although it has profoundly hit the living standards of millions of people, after-tax corporate profits have continued to surge save for a brief plunge in the midst of the crisis and in the US are now at their highest in history as a share of GDP.
Good news, you might think, if only the blighters would invest and spend their gains. Unfortunately, wages have failed to experience the same bounce-back, and are now at their lowest ever share of US GDP. The read-across to Britain and Europe is not precise, but the trend is much the same. This has to be as much a matter of concern to the Right as it is to the Left, for we know from experience that when capital takes too much, it’s riding for a fall. Eventually, society will find ways of hemming it in, with potentially catastrophic consequences for everyone.
Which is why I have become persuaded of the case for a “living wage”, or at least a much higher minimum wage. The potential negatives from such a policy are almost too numerous to list surging inflation, higher immigration, rising unemployment, a growing black economy, and so on. These alone might appear to kill the idea stone dead. Yet all these adverse consequences could quite easily be countered, and it is a fact that the great bulk of internationally competitive business in Britain already pays living wages. It is in the low-skilled, service areas of the economy that the problem largely lies.
Set (KOSDAQ: 027040.KQ - news) high enough, a living wage would obviate the need for in-work benefits one of the biggest areas of growth in welfare spending; it would significantly add to demand in the economy; and it would substantially boost tax receipts, enabling the Government partially to compensate business for the extra costs through reductions in payroll taxes and/or corporation tax.
For the moment, the concept is too “out there” to be taken seriously on anything more than a voluntary basis. Yet the banking crisis has turned much conventional thinking on its head. This may be an idea whose time will yet come.