Saturday, 2 March 2013

Is Boris right to oppose an EU cap on bank bonuses?

My usual liberal instincts tell me that governments have no place in micro-managing markets: that what companies choose to pay their staff is no business of either politicians or bureaucrats in a democratic society. Such interference is the hallmark of tyrannies and, practically, has been shown not to work very well in the log run, leading to a misallocation of resources and economic activity. Even more to the point, in a world where the residence of individuals and companies can be changed virtually at the flick of a switch, it is a quixotic gesture. Either the individuals the regulations are aimed at will suddenly be employed offshore, or corporate structures will be devised that enable them to stay in situ but to be paid offshore, or the jobs will move to other people in other jurisdictions where the dirigistes hold no sway. As Boris Johnson has identified, the effect on the individuals' earnings is likely to be small but the damage to the business of the City of London, and to the EU economy, may be large.

On the other can see their point...the interferers, the micromanagers, the bureaucrats the very indirectly elected politicians. They say that such large bonuses encourage individuals to take huge risks with other people's money. When the individuals who may receive the bonuses work for very large banks then the 'other people's money' is the public purse because a big risk that goes wrong must be covered by government intervention to prevent the collapse of the banking system. So the risk takers may not even be risking their jobs. When these risks are so large as to threaten the economic system then, the dirigistes argue, government must act to contain these risks. One way of doing so is to limit the incentives to take risk. Further, they may argue, the normal mechanisms of shareholder oversight of these financial institutions has failed. It has done so for two reasons; either shareholdings are so thinly spread that none has the power to influence or the institutional shareholders themselves employ large bonus schemes and are therefore part of the problem.

But then...oh how I wish for a third hand...voluntary codes of conduct have been put in place in the City of London that restrict the way bonuses are paid, spreading them over several years to try to limit the incentive to boost short-term profits at the cost of taking big long-term risks. Why can't such methods be extended to more individuals and permanent working parties be established, on a voluntary basis, to find ways to limit incentives that encourage bad behaviours? Are we sure that such voluntary mechanisms don't work?

I think, on balance, we the public need more information before we could possibly make an informed decision. And that is a big issue with these and other EU proposals: the democratic deficit of EU institutions. These matters are not debated and publicised in the public domain. Regulation within the EU is something that is done to us rather than something we can feel we participate in. That is why, in the end, the liberal in me revolts at EU regulation and supports Boris's protest