There’s been a few interesting posts recently (see bottom of post) about how one of the issues we have currently is we have companies that are considered “too big to fail”. That we have to bail out banks, because if they fail, the economy breaks down totally, and it’s not a far jump from that to rats gnawing on your cold lifeless body in the street.
I was at a Yeah Yeah Yeahs gig last week, and between the support act and my second favourite half Korean coming onto stage, the solution dawned on me, as blindingly obvious.
Every time (not this year but the last 10) a company (Oil/Banking/etc) makes ludicrous profits (Billion dollars a second yadda yadda) everyone’s up in arms, as it’s immoral and wrong and we should impose a windfall tax.
I’m against windfall taxes. They sound like a good idea, but I think they’re mostly desired out of misplaced moral outrage (under the false assumption no one should make that much money) and not any decent economic reasons. If companies are making money be being anti-competitive, then competition authorities should come down on them. If it’s just a result of running a successful business then well done to them and we should move on.
I do however have a massive issue with bailing out these companies after they spent year after year declaring ludicrous profits. Yo banks, I’m looking in your direction.
The solution of course is not a ‘windfall tax’ but a bailout tax. When companies reach a certain size such that their failure would have impacts beyond their market and into the general populace, they have a choice. They can spin off sections of themselves into independent companies and slim down such that the failure of any single part would not have severe economic consequences.
Or they have to pay a bailout tax. This tax money would go into a government reserve (some fiscally stable system) and not general taxation. And when companies fail this money is drawn on to bail them out. This saves us printing new money (cough sorry quantitative easing) or borrowing such that my friends’ children will grow up in debt having to bail the lot of us out.
Now of course if a business doesn’t fail, the money goes to bail out businesses that do. That’s how insurance companies work and well let’s be honest, we need a few more insurances. And businesses don’t have to pay the tax. They can avoid the tax, by avoiding being too big to fail; otherwise when you’re declaring £10 billion a quarter in profit, you can pay a hefty chunk of that to make sure it’s not frigging me that’s bailing you out.
I want my tax money to go to something useful. And bailouts are not useful, but needed when things have gone too far wrong. I shouldn’t be the one paying for your mistakes.
If you’re interested two good articles on why we shouldn’t allow companies to be too big to fail:
The recognition that failure happens is the other intrinsic part of a resilience approach. Mistakes, malice, pure coincidence—there’s no way to rule out all possible ways in which a given system can stumble. The goal, therefore, should be to make failures easy to spot through widespread adoption of transparency through a “given enough eyeballs, all bugs are shallow” embrace of openness, and to give the system enough redundancy and slack that it’s possible to absorb the failures that get through
What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.