City excess and youth unemployment – the twin results of free global capitalism on speed

The Labour movement column

By Anthony Painter / @anthonypainter

The Krug is flowing once more. Lehman Brothers are dust but that’s just left juicier morsels for the remainder. Credit crunch? So 2007 darling – drop a text to your banker mates, they’ll be the life and soul once again. Bonuses are back, baby – BAB! Let the good times roll.

And, guess what? Something else is back too: youth unemployment. How 1980s retro. 835,000 18-24 year-olds are out of work which is a socially destructive rate of 17.6%. That’s what happens when you get a deep recession. Remind me, what caused the recession? Oh yes, the excessive risk-taking of corrosively blasé global finance. Yep, those guys and gals who are picking up their bonus packages once more.

City excess and youth unemployment are the twin consequences of the era of free global financial capitalism on speed. Its imbalances and excesses were left unchecked and now the return to business as usual seems distastefully quick.

In social terms, youth unemployment for any period of time will be calamitous: personal desolation, lost assets and skills, communities and families blighted.

This time there is a Labour government in charge so it won’t be as bad as last time. All 16 and 17 year olds will have guaranteed training and education from September. Anyone who has been out of work for more than a year will have an offer of a job, training or further education. These policies will mitigate the consequences but, alas, will not eradicate them altogether.

Of course, the quickest way to limit and reverse the growth of unemployment is to get the economy growing once again. The financial recovery package, fiscal and monetary stimulus, and nationalisation of failed banking institutions were critical. Given a fair wind and averting any more shocks, growth should be restored by the end of the year.

Nonetheless, the juxtaposition of City largesse with the precarious economic existence of those without market power could not be starker. It is of little surprise that all three parties have begun yelping about City bonuses. Equally, the pressure group, Compass is right to seize the moment in continuing to raise concerns about inequality.

What should we make of this stark economic inequality brought home so vividly in the last few days? It’s actually quite simple. Some have the power to turn risk and reward in their favour, others are not in control in the same way. It’s not just about income inequality, which is an outcome; it’s about unequal assets – financial, social, and educational. It is about what Amartya Sen calls, in the current vogue, capability.

One person’s capabilities and limitations can’t generally be redistributed to another. However, the means to acquire those capabilities can be. The tricky question is how to do so in a politically, economically and socially viable way?

Compass’ approach this through their proposal for a High Pay Commission. There is definitely more scope for transparency on top pay. That in itself could strengthen the hands of shareholders and promote public scrutiny and debate on fairness and that is a good thing.

Realistically, any maximum ratio or maximum pay proposal would be very problematic, however. Will Hutton argues that action has to be taken against those who receive excessive pay on the grounds that they are able to abuse their market position to rig the rules of the game in their favour. Morally and theoretically it’s a powerful argument.

But how do you decide who has benefited ‘unfairly’? Has Bill Gates? Vince Cable doesn’t think so and nor do I as it happens but that’s just my opinion. And why would you cap pay as opposed to taxing it? You create economic costs and few benefits with a wage cap other than you improve your gini coefficient.

The argument about bankers’ remuneration is a separate issue that has become entangled in the whole debate. Yes, there are very many highly paid people in the City. Of even greater concern is the systemic risk that the mode of remuneration poses. That is an issue for HM Treasury, the Bank of England, and, primarily, for the FSA.

But there is a bigger underlying issue to all of this. How do you really shift power to those who have little? A higher level of top rate tax seems like an insufficient solution. You don’t have to be a disciple of Laffer to worry that this will raise only relatively small amounts of revenue. There are better ways of proceeding.

Wealth is concentrated in the hands of the few, as detailed in a recent Demos pamphlet. 3 per cent of the population hold one sixth of the total asset wealth. Between 1976 and 2003 the least well off half went from owning 12 per cent to just 1 per cent of the wealth. The asset poor have become poorer.

In addition to clamping down on tax avoidance and evasion, the idea of some sort of wealth tax needs to be considered seriously. The easiest and most obvious way is to start to tax higher value houses more. Capital gains could be applied to the top bracket of first residence housing – in excess of £750,000 say and local taxes on the same properties could also be increased. There are other assets that could be targeted. Politically, there would be difficulty so the purposes would need to be explained very clearly.

Perhaps fighting unemployment could become the justification for wealth taxation? Proceeds could be invested in building up the asset base of the least well off – housing, education, savings, pensions and so on. In these tough economic times, we could use the revenues to create employment. Why not create jobs and skills refitting public buildings so that they are more environmentally efficient? The arguments will have to be clear and open.

This credit crunch offered a chance to re-think the way we do things fundamentally. Our destinies are entwined. A society where a few enjoy unlimited gain while many struggle on, toiling under the burdens of risk over which they have little control, should be left in the last era. We’re in this together. A better, more harmonious, more creative society awaits if we can build the assets and capabilities of each. We just need the political courage to get there.