by Bob Hancké, Political Economist at the London School of Economics and Political Science

Now that the crisis has jumped from finance to industry, most governments in the West are facing a problem. How do you handle the more or less legitimate claims by workers in manufacturing industries that are particularly hard hit by the current crisis, such as the automobile industry, against the background of multi-billion (possibly trillion) dollar bail-outs for the rather more undeserving banks, who then spend it all on bonuses for their – let’ s use a nice euphemism here – underperforming staff (and I don’t mean the secretarial staff)? The easy answer is to subsidize the car industry alongside the banks: it’s a big industry that can pull many others up as well, so the overall effect is likely to be important for the economy as a whole. France is doing it, the US is doing it, and Germany’s doing it – so it ought to be right – right?

One way to think about this question is to emphasize that the financial sector is, in George Orwell’s words, ‘more equal than the others’. It has what is called a systemically important role in capitalist economies, since it makes sure that investment takes place. Problems in that sector therefore need a fast response by government, before they destroy the economy as a whole. True enough, but as my friend and colleague Willem Buiter (http://blogs.ft.com/maverecon/) pointed out several months ago, if it is that important and if it is going to cost you a trillion dollars to clean up the mess when it goes wrong, why not cut out the middle man and nationalize the banks in the first place?

Another way to think about this is that targeted aid to industries does not have a good record in declining sectors. If aid to industry has some positive effect, it is in research and development, export subsidies, or other means that support growing but not declining industries. For many years, Europe subsidized its old steel industry until it was blue in the face, without improving all that much on performance. The low end of the car industry, where the problems are most serious, both in Europe and the US, seem next in line: rich countries can, in today’s global economy, not make cheap cars profitably. The choices are up (more expensive, better cars), or out (to low-wage countries).

This helps explain why governments are, with varying degrees of consistency, tough on their industries in trouble; only six months ago, it would have been rather remarkable to see a US president fire the CEO of one car company, and force another into a merger with a European rival (or go bust). It also helps explain why all governments are limiting their interventions in the economy to measures at the level of the economy of a whole: provide cheap money, and let consumers decide what to buy with it. It helps make sense of why they provide aid directly to workers in the car industry, either as generous unemployment, early retirement, or retraining packages; after all, there’s not much that the workers in the industry can be blamed for if their bosses run the company into the ground.

But that leaves us with one big problem: why and how did the bankers get away with subsidies for themselves? Possibly the most remarkable piece of information on the banking industry over the last few months – and that’s saying something – was that bankers had ‘guaranteed bonuses’. Now, for the rest of us, that is a contradiction in terms: a bonus is a discretionary payment, usually reflecting performance. But in the banking industry it seems to be a euphemism for padding the wallet. It’s bad enough that it’s with taxpayers money (remember how we bailed out many banks, and as a result, the industry as a whole?; just ask yourself what one bank would do if it was the last one standing), but that is not all. The real scandal lies elsewhere: what is going on in those banks goes to the heart of a properly organized capitalist economy; it seems to suggest that capitalism is merely a convenient foil for the bankers. I think it was Martin Wolf of the Financial times who lamented a world in which capitalism existed for the workers and socialism for the bankers…

You could, of course, get angry because you don’t like large Wall Street salaries, or just don’t like Wall Street. Fine – it’s a free country, and I also happen to think that less inequality would be a good thing for many rich (or better: currently seriously indebted) economies. But there’s a more intelligent way to get upset over this. Bankers usually not only perform the function of providing capital to the rest of the economy. They also monitor the performance of the companies they invest in: if a company underperforms, shareholders (investment banks) sell shares, and management gets punished, usually by being booted out.

Now, those principles of monitoring, and of linking pay to performance seems to have been forgotten when it was supposed to be applied to bankers. That’s what guaranteed bonuses and similar things are really about: they are means to circumvent standard accountability mechanisms in a market economy. That is the real scandal of the bonuses: they were paid to people who have certifiably underperformed. And that’s why governments everywhere are right in forcing banks and bankers to stop such practices: it is not blind class hate, not even the standard duty that government has to make sure tax money is used properly. It is the survival of civilized capitalism itself that’s at stake.