Vince Cable’s moral compass
It is said that you can judge a person by the company they keep. In that case, Vince Cable’s halo has slipped a bit.
His decision to give his support to Compass in its campaign for a High Pay Commission to curb “excessive” pay is bad politically, economically and morally.
Compass is an avowedly socialist campaign group, the primary focus of which is the Labour Party. It is a partisan body that has for some time sought to make Labour even more interventionist, statist and illiberal. Vince Cable should not be giving it intellectual succour.
In addition, the very idea that the government should impose maximum wages upon individuals should be anathema to him both as a liberal and as an economist.
I have written an article on the Institute of Economic Affairs blog explaining some reasons why maximum wage legislation is a bad idea. On the one hand, “There is no reason, functionally or morally, why a person should not enjoy any amount of wealth”. On the other, free economies have a far better reputation for wealth creation, poverty alleviation and even wealth distribution than interventionist ones. So maximum wage legislation is unfair both on an individual and a community-wide basis.
On top of this, Vince’s reason for supporting the High Pay Commission is flawed. In his words “There is no justification for massive pay and bonus awards in financial institutions, the most important of which are guaranteed or owned or have been rescued by the tax payer. Transparency and tax are important but a High Pay Commission looking at both equity and economic aspects is a welcome suggestion too.”
Firstly, the justification for “massive pay and bonus awards in financial institutions” is the same as it always was: it is necessary to attract the best talent. That the industry spectacularly failed in 2007 does not mean that there is no need to chase talent in 2009. What was wrong with the bonus culture in 2007 (and before, and indeed since) was not the size of the bonuses but the behaviour for which they were being paid. Had Compass proposed a Short-Term Gain Bonus Commission they might be on to something, but that is not what they are proposing. In attacking the size of the bonus rather than the behaviour they are rewarding, Compass is off the mark.
It is also not true that “the most important” financial institutions “are guaranteed or owned or have been rescued by the tax payer”, unless he is referring to the Bank of England’s lender of last resort function, which is centuries old and has been exercised without the need for maximum wage legislation for all that time. Only some financial institutions are actually owned by the taxpayer; Barclays and HSBC did not require a bailout and should not be subject to interference. Indeed, Lloyds TSB would be in a far better state had the government not effectively strong-armed it into merging with the bankrupt HBOS.
Of course, the government should not have a stake in the banks. Even if a bailout was necessary it should be reversed as soon as possible. But while the government does own shares in the banks it has a duty to taxpayers to get the best return on its investment. This will require the best talent available in the industry, which means that state-owned banks will need to compete with the rest of the sector by offering pay and bonuses commensurate with market rates. In fact, one cannot escape the feeling that the idea of limiting pay in the private sector is just a means of keeping down the costs to state-owned industries; a case of government being forced to intervene further to address the consequences of its past interventions.
His final point is the one I have discussed at in my IEA blog posting. The “equity and economic aspects” of government intervention are far more harmful to the poor than are the effects of leaving people alone. Free societies are not only fairer than less free ones, with the poorest owning a larger proportion of the nation’s wealth than in more interventionist economies, but they also create more wealth, so that the poor enjoy vastly more absolute wealth in free economies than in command economies.
Maximum wage legislation is a bad idea. It is also a bad idea for the Liberal Democrat’s shadow chancellor to support the socialist wing of the Labour party.
Tags: Compass, Maximum wage, Vince Cable
