Wednesday, November 28, 2007

Why does banking pay so well?

Superb article from Martin Wolf in the FT:

He starts with the question: "Why does banking generate such turmoil, with the crisis over securitised lending the latest example? Why is the industry so profitable? Why are the people it employs so well paid?" and goes on to suggest the answer is "banking takes high risks. But the public sector subsidises this risk-taking. It does so because banks provide a utility. What the banks give in return, however, is gung-ho speculation.".

The key point is that (Wolf again; I can't put it any better): "banks benefit from sundry explicit and implicit guarantees: lender-of-last-resort facilities from central banks; formal deposit insurance; informal deposit insurance (of the kind just extracted from the UK Treasury by the crisis at Northern Rock); and, frequently, informal insurance of all debt liabilities and even of shareholders’ funds in institutions deemed too big or too politically sensitive to fail... if things go well, shareholders earn exceptional returns. If they go badly, the downside cannot exceed their equity. Beyond that point, creditors and government share the losses."

This goes a long way towards explaining why bankers are paid so well: during times of profit, banks can pay out crazy wages and bonuses. However, the government guarantees Wolf alludes to above in effect put a lower bound of zero on remuneration: bankers don't ever have to pay back earnings (i.e. receive negative wages), no matter how thinly capitalized their industry or how bad their decisions turn out be. Wolf again: "...a run of profitable years in which shareholders receive high returns and employees are handsomely rewarded. Then comes the year of the locusts ...since they do not receive negative pay, they are able to keep their earlier gains."

Monday, November 19, 2007

An unexpected ally...

It seems as though Bill Gates' dad - of all people! - is on my side about inheritance tax:

Apparently Gates senior's view is:

"...individual wealth is a product not only of hard work and smart choices but of the society that provides the fertile soil for success. They don't subscribe to the "Great Man" theory of wealth creation but contend that society's investments, such as economic development, education, health care, and property rights protection, all contribute to any individual's good fortune..."


Tuesday, November 06, 2007

Where are the doctors?

Here's a curious fact. The UK and US are both countries where doctors get paid very well: UK is (anecdotally) #1 in Europe on this count (or close), and US doctors are certainly far better paid than their European counterparts. Yet the UK and US - and here's curious bit - are not the countries with the most doctors per capita. Germany - to take one example, there are others - has more docs than either the UK or US. The difference is actually quite striking: Germany has 3.4 practicing doctors/1000 people, the UK and US each have 2.4 (numbers from OECD). This is a huge difference of 42%. Absent any fundamental scarcity, a high wage for a given profession should increase the supply of labour and thereby reduce wages. If this is what's happened in Germany, why doesn't it happen in the UK and US? Given the rewards on offer, why don't more people become doctors in these countries?