A couple of quotes on bankers...

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First from Eamonn Butler at the ASI:

Let us not forget that after New York, London is the world's leading services centre. The sector brings in about £60bn in tax every year, more than 10% of the government's entire budget. We need it to succeed, and retain talent – which means paying them world market rates. That's what we do with footballers – John Terry is paid £6.7m a year, Wayne Rooney is on £15.1m and Steven Gerrard picks up £7.2m and got an MBE too. But football clubs are very small businesses compared to banks. Though a world footballing brand, Manchester United's capitalization is just £2.47bn; the market capitalization of RBS is seventeen times bigger, at £41.8bn. Should we be surprised if star performers in RBS are paid seventeen times what Rooney earns? But in fact we baulk when they are paid fifteen times less.

Absolutely. And let's not talk about how much income assorted ever-so-witty TV panellists get paid for their snide remarks and jokes that were funny the first time but, after several hundred slight variations, have descended into utter boredom. When regular panellists get £30,000 or more per show on the BBC there really is no room at all for them to criticise how much bankers get paid.

Second from Ogden Nash (as I like a little balance). From a poem entitled "Bankers are just like anybody else, except richer."

Most bankers dwell in marble halls,
Which they get to dwell in because they encourage deposits
and discourage withdrawals,
And particularly because they all observe one rule which woe
betides the banker who fails to heed it,
Which is you must never lend any money to anybody unless
they don't need it.

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In which an ex-central banker inadvertently explains what's wrong...

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John Gieve, opining in the Financial Times, manages to capture what's wrong in his headline:

Who is in charge of the British economy?

This is a revealing question since it assumes that Mr Gieve and his ilk were - indeed are - somehow "in charge" of the economy. Think for a second what we mean by "the economy" and the sheer hubris of this man's belief becomes apparent. The British economy consists of the choices made by nearly seventy million people and millions of business. It's the sales made by the corner shop, the decision we make about this year's holidays or whether to go to B&Q or IKEA.

Yet this ex-central banker, undaunted by the scorching of his feathers as he flies ever closer to the sun, says stuff like this:
 

...the UK is now pursuing three macroeconomic objectives – steady growth, low inflation, and a stable supply of credit – with three sets of policy instruments. In the long term, the goals are compatible. But in the medium term there may be trade-offs. A new framework should explain how and by whom those trade-offs will be made and how the three sets of policy tools will be combined to best effect.

Impressive stuff I'm sure you'll agree. But it's wrong and not just because it's barely comprehensible. It's wrong because only a deranged idiot would think he (or a claque of him and his pals) can run the economy. It is this outlook that is causing all the damage - this stupid belief that there are a set of levers in the Bank of England that if pulled in the correct order will usher in an era of growth, prosperity and prizes for all.

All the rest of us going about our lives buying, selling, sleeping, eating and dreaming, we didn't cause the problem. It was caused by people like John Gieve who, despite all the evidence, still believe they know better. They don't know better and no one is in charge of the economy (unless you're in North Korea).

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Jeremiah and the Cuts...

One of the reasons we're likely to be giving Ireland a big bung in the near future is that our banks own about £100bn of that lovely Irish debt. And most of that lending was by those banks now under state control. It's just another example of how the smoke and mirrors of finance confuses us - which suits the bankers and their political clients (or vice versa - it's hard to see whether bankers or the public sector benefits most from this arrangement).

What worries me is that the approach we're taking - mostly pretending that by some mystic process we can go on affording to cough up a minimum of £70bn each year paying the interest on public debts while maintaining 5 million folk on welfare (and at the same time importing large numbers of cheaper, harder working people from elsewhere in the world to do the jobs that some of those 5 million could be doing).

My generation have, without doubt, been the greediest generation ever. Not just the bankers or other fat cats - all of us. We've gone on year after year voting ourselves ever more generous benefits, we've piled borrowed money into our pleasures not thinking of the consequences and we've created a world where every entitlement under the sun must come to us. And we vote accordingly to pile up those debts - to load a huge burden onto tomorrows taxpayer while making sure our position is protected.

And when some Jeremiah points out that we're headed for disaster they are rounded on. Condemned as uncaring, laughed at, dismissed. Yet those Jeremiahs are right. We cannot continue like this. We cannot continue pretending that all the arts funding, the subsidised higher education, the overmanned public sector and the extravagant welfare system is sustainable.

We may want all those things. We probably consider them good. But, at some point, we need to cut our cloth to fit the cash we've available. And that means getting rid of a lot we take for granted now.

...or maybe we'll go on taxing too much, borrowing too much and ignoring the facts. Until it really is too late. And then we'll be really sorry we didn't do it now.

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Sorry but cleaners are not more valuable than bankers or ad men - however much you may wish this to be

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“Cleaners more valuable than bankers” screams the headline – written to get the most attention the Unison press release celebrates the publication of a report from the New Economics Foundation (NEF) dubbed “A Bit rich”. A boy is it a bit rich – and for that matter a lot ignorant and very worrying.

I could go on for a long while taking apart the economic illiteracy of the NEF report – it purports to show that cleaners, child care workers and recycling employees contribute more value than do bankers, advertising executives and tax accountants. And it does so by applying something the authors call the “Social Return on Investment” – precise figures for the value added by the carefully selected professions are presented that show just how evil bankers, ad men and accountants are and how we really should be paying cleaners and child minders more money than these spawn of Beelzebub.

However, I have trawled through the full report and there is no model, no econometrically valid methodology – just some adding and subtracting based on sweeping assumptions about the chosen jobs:

“We attributed the entire measurable loss to the UK’s economy and public finances to an elite few thousand very highly paid financiers – those earning over £1 million in bonuses.”

Big assumption that one! Those 1000 bankers are really bad boys! Clearly this is a ridiculous assumption with no theoretical foundation and certainly no validation.

“The calculation for the advertising executive centred on the notion of overconsumption – that we consume more than we need and that this has damaged environmental and social impacts.”

This is based on something invented by the Joseph Rowntree Foundation as a means of assessing what the lowest reasonable income should be – the Minimum Income Standard. Most of the consumption above this level is, according to NEF, down to wicked advertising folk making us buy stuff we don’t want.

For the tax accountants “…there is clearly an opportunity cost in terms of foregone public service value that could accrue to society from having this revenue available.”

Obviously tax accountants are bad because they help their “wealthy clients” avoid tax. This is also known as paying the right amount and is no different from making sure that the folk on benefits get their entitlement surely?

This is not economics – there is no replicable model that I can test on say “Equal Opportunities Officers” or “Five-a-day Co-ordinators” to find out what they contribute. Moreover the argument builds on:

1. The lump of labour fallacy. The “iron law of wages” (that they always trend to a minimum) is so comprehensively false it’s hard to countenance the arguments made just on this basis. Empirical observation tells us that Ricardo was right (as he was on trade) innovation will always raise wages above subsistence.

2. The determination of utility by money. My jaw dropped reading the statement that “…orthodox economic thinking tells us that our utility is derived from money.” Again this is a comprehensive misrepresentation – the only way to measure economic value is money but the utility of something isn’t derived from money. Utility (probably the first thing you learn on an economics course) is determined by how much it is of use to the consumer.

3. The confusion of earnings with spending. The work of public sector workers – however we value it and deem it important – is consumption. What bankers, ad men and accountants do is earn – without that earning we cannot have the spending. Simple really – the private sector earns and we spend it (sometimes through the mediation of taxes)

4. Ignoring consumption. It’s not at all clear whether the authors recognise that it’s consumption that matters rather than production? The banker, the ad man and the accountant either spend or save their ill-gotten gains (and roughly half of that spending will be taxes) – that spending employs shop workers, plumbers, holiday company executives, car salesmen and adult entertainment providers. The model does not recognise how valuable all that spending is to our economy.

5. And the saving supports investment. All those savings – the deferred spending – go to invest in industry, commerce and (too much these days) providing borrowing for governments. It isn’t wasted.

There is within the NEF report a great deal of information, much referencing but no evidence of research. Was I assessing its academic value I would suggest that the whole idea is to substantiate an initial (and economically illiterate) ideological position rather than to extend the body of knowledge. It is a triumph of selective desk research over a genuine understanding of economics as a science and does cleaners, bin men and child minders no favours. I'll believe when some models are constructed, data is collected, assumptions are challenged and this shows the headline is right - theory says it's wrong and the market says it's wrong. 'Nuff said.

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