Picking losers

So we are to have a new industrial policy, this one courtesy of the coalition government and, more specifically, George Osborne and Philip Hammond, the Chancellor of the Exchequer and the Transport Secretary. Both are economically literate, professing faith in markets as allocators of resources; but they have found the lure of shaping the economy in their image irresistible.

The goals of the new industrial policy are two: to reduce the relative importance of financial services, and to disperse economic activity more widely throughout the nation. In pursuit of the first we have bank-bashing that will discourage the growth of financial institutions, limits on bonuses, an increase in the marginal tax rate to an effective 52 per cent, and acceptance of four new Europe-wide regulators just when our own regulators are least able to stave off expansionist Eurocrats.

No one can quarrel with the political wisdom of all this. Bankers are on everyone’s hate list, their industry did after all have to be bailed out, and it is a brave politician who might mention that, properly regulated, they are important contributors to economic growth as employers and exporters.

Nor should anyone deny that there are good economic reasons for some reforms. It is important to align bankers’ compensation schemes with the national interest in avoiding another financial meltdown. Short-term greed can be transformed into acceptable long-term profit by forcing something of a wait on high earners before they cash in on their performance; bonuses can be clawed back if they prove to have been ‘earned’ by creating profits that evaporate upon examination; payment in shares rather than cash might focus the mind on enterprise survival. And rating agencies can be forced to find some way to make a living besides fees from the issuers of the securities they rate.