Politicians Love Price Controls

European politicians especially love them.

Unfortunately, they destroy economies and encourage crony capitalism.

The Bloomberg article below recounts how the European Union is about to cap bankers’s bonuses at one times salary or up to twice salary with shareholder consent. This is supposed to prevent bankers from taking excessive risk that can lead to bail outs.

So what will happen? This measure will reduce the supply of good bankers in Europe but not the demand for them. What then? First, salaries will rise because the bonus is capped in terms of salary. Benefits will also rise and look for the bank buying the banker anything from cars to homes. This happened in earlier days when salaries were taxed at over 90% and it will come back. But even those measures will not be enough and the banks will see that they have to spend more money influencing the political process to get the rules eased. So, there will be even more crony capitalism. Meanwhile, capital decisions in Europe will be made by more junior or less skilled bankers which may mean more poor or risky decisions, not fewer.

Price controls do not work. The French of all people should know this since price controls on bread led directly to the French Revolution and then, after being reapplied with even more severity, to the era of Terror.

In this case, there is not even a case for controls. All the Europeans need do is stop bailing out the banks and then let the banks make their own decisions.

Click here for the article.