The Guardian features Nick Shaxson's new book The Finance Curse as its Long Read this morning. In that article new research, including by my co-author Prof Andrew Baker of Sheffield Political Economy Research Institute, is featured. This suggests that the City of London has imposed an enormous financial cost on the UK over the last twenty years. As Nick says:
Of course, the City proudly trumpets its contribution to Britain's economy: 360,000 banking jobs, £31bn in direct tax revenues last year and a £60bn financial services trade surplus to boot. Official data in 2017 showed that the average Londoner paid £3,070 more in tax than they received in public spending, while in the country's poorer hinterlands, it was the other way around. In fact, if London was a nation state, explained Chris Giles in the Financial Times, it would have a budget surplus of 7% of gross domestic product, better than Norway. “London is the UK's cash cow,” he said. “Endanger its economy and it damages UK public finances.”
To argue that the City hurts Britain's economy might seem crazy. But research increasingly shows that all the money swirling around our oversized financial sector may actually be making us collectively poorer.
A growing body of economic research confirms that once a financial sector grows above an optimal size and beyond its useful roles, it begins to harm the country that hosts it. The most obvious source of damage comes in the form of financial crises — including the one we are still recovering from a decade after the fact. But the problem is in fact older, and bigger. Long ago, our oversized financial sector began turning away from supporting the creation of wealth, and towards extracting it from other parts of the economy. To achieve this, it shapes laws, rules, thinktanks and even our culture so that they support it. The outcomes include lower economic growth, steeper inequality, distorted markets, spreading crime, deeper corruption, the hollowing-out of alternative economic sectors and more.
Newly published research makes a first attempt to assess the scale of the damage to Britain. According to a new paper by Andrew Baker of the University of Sheffield, Gerald Epstein of the University of Massachusetts Amherst and Juan Montecino of Columbia University, an oversized City of London has inflicted a cumulative £4.5tn hit on the British economy from 1995-2015. That is worth around two-and-a-half years' economic output, or £170,000 per British household. The City's claims of jobs and tax benefits are washed away by much, much bigger harms.
This estimate is the sum of two figures. First, £1.8tn in lost economic output caused by the global financial crisis since 2007 (a figure quite compatible with a range suggested by the Bank of England's Andrew Haldane a few years ago). And second, £2.7tn in “misallocation costs” — what happens when a powerful finance sector is diverted away from useful roles (such as converting our savings into business investment) toward activities that distort the rest of the economy and siphon wealth from it. The calculation of these costs is based on established international research showing that a typical finance sector tends to reach its optimal size when credit to the private sector is equivalent to 90-100% of gross domestic product, then starts to curb growth as finance grows. Britain passed its optimal point long ago, averaging around 160% on the relevant measure of credit to GDP from 1995-2016.
This £2.7tn is added to the £1.8tn, checking carefully for overlap or double-counting, to make £4.5tn. This is a first rough approximation for how much additional GDP Britons might have enjoyed if the City had been smaller, and serving its traditional useful roles. (A third, £700bn category of “excess profits” and “excess remuneration” accruing to financial players has been excluded, to be conservative.)
Let's put that in context: that's 2.5 years of GDP at current prices. It's over £3,000 per head per annum. But even ignoring the cost of the Global Financial Crisis, it's £4,500 a household a year at current prices. And that's because we let finance get out of hand, sucking the lifeblood out of everything else that we do.
The question to ask is obvious. Can we really afford to let this carry on?
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And second, £2.7tn in “misallocation costs” — what happens when a powerful finance sector is diverted away from useful roles (such as converting our savings into business investment)..i don’t understand this. I presume you mean every £1 of saving should finance a new start up business and not invest into a mature business like Unilever??
The suggestion is that it could be better used to enhance well being rather than inflate asset prices
That’s a crude summary, but in essence is the argument
There’s now a link in the article to the research, which answers this question. Or you can see an explainer, here.
https://financecurse.net/research/the-finance-curse-has-taken-4-5-trillion-out-of-the-uk-economy-over-20-years/
Thanks Nick
Good luck with the book
Back in the 1770’s, even before my time, Arnold Nesbitt along with the Colebrooke’s and sundry friends crashed the City of London because of their speculative activities in East India stock and we lost the American Colonies. I wonder how much that has cost us?
I absolutely loved this long , very digestible, read. It pulls together all those disparate strings of financial/business issues we read over the longer term in the news: PFI and the usurous payback; Private equity loading previously profitable enterprises with insurmountable debt and laughing all the way to the bank as the business fails (the list is too long); the GFC ensuring the ‘little people’ got their money siphoned off to ensure that no bankers had to put their hands in their own pockets. It is corruption on an industrial scale.
No wonder every commercial/financial agreement used in the sell off of the public commons is badged ‘commercial, confidential’. These rentiers, parasites and their political apparachniks absolutely do not want us to look too closely.
With brexit looming and the only guarantee being that our govt will screw it and us right royally – the great thing about Shaxon’s piece is the timing and that it is broadcast-able to those who, like myself, often feel intimidated by economic writings.
I am going to send it to my MP Adam Afriye and the MP of the adjoining constituency – Teresa somebody – and demand they, as my public servants, act in the public interest.
https://publications.parliament.uk/pa/cm201012/cmcode/1885/188502.htm
The Code of Conduct for Members of Parliament :
” 6. Members have a general duty to act in the interests of the nation as a whole; and a special duty to their constituents”.
“Selflessness: Holders of public office should take decisions solely in terms of the public interest. They should not do so in order to gain financial or other material benefits for themselves, their family, or their friends.”
“Integrity: Holders of public office should not place themselves under any financial or other obligation to outside individuals or organisations that might influence them in the performance of their official duties. “
Windsorlass says:
https://publications.parliament.uk/pa/cm201012/cmcode/1885/188502.htm
The Code of Conduct for Members of Parliament :
Well said, Your Majesty. It’s high time you brought your ministers into line and reminded them of their duties to your subjects.
BarryLane says:
“And second, £2.7tn in “misallocation costs” — what happens when a powerful finance sector is diverted away from useful roles (such as converting our savings into business investment)…..”
You really think that’s what the City of London is about ? It’s what it’s supposed to do, but it’s not what it is doing. If it was we’d have some green shoots of recovery from the 2008 debacle. There was no shortage of money made available to play with….and that’s what has happened; it’s been played with.
“..i don’t understand this. ”
Apparently not.
Incalculable (or at least very, very difficult to assess) is the lost resource of highly ‘educated’ graduates wasting their time in the international money market casino, instead of doing some thing useful to further the quality of life of everybody..including themselves.
The finance sector PRODUCES NOTHING. It handles other people’s money with sticky fingers. It’s an entirely Zero Sum Game.
How hard is that to understand ?
The capitalist model which served well in the past (despite its imperfections) is now no longer doing as its core activity what it is good at; making the economy work. Making money work … putting financial resources where they are needed. There’s no shortage of money…it’s just in the wrong places and doing the wrong things.
The national deficit we are supposed to worry about tells you precisely how much money is in the wrong places. Much of it now off-shored. It’s dead money.
Well put, Andy.
Err.. the quote was from RM article, not me..
I asked “I presume you mean every £1 of saving should finance a new start up business and not invest into a mature business like Unilever”??
RM – Reply was money i.e peoples savings “should enhance well being”..
Your reply – The finance sector PRODUCES NOTHING. It handles other people’s money with sticky fingers. It’s an entirely Zero Sum Game.
Theses answers say nothing. Savers want a return, often with an ethical mandate. They deposit with banks and invest in corporate bonds, government bonds, listed equities and private equity either direct or via funds. This is what happens when people save via ISAs & Pensions. If you or RM have better ideas for peoples savings then you have to work a lot harder to get your message across than just giving lazy rhetoric.
Let’s be clear, people do not necessarily want a return
Most want a safe place to save. The vast majority have given up dreaming of real returns
And those who think equities ave provided it are going to be might tearful soon
Saving is not a function of interest rates. It is about the desire of peolle to consume at different times from when they earn with a high chance that they will be able to do so. A return has always been a bonus.
Shall we get real here?
The best description I ever heard about the Financial sector was that all it does is move money around – it does not actually make any.
And as we have come to know, they are very good at moving it from the many to the few.
It’s an excellent piece and well worth taking the time to read.
No political party or politician has yet shown that they have truly understood the problem and have both the ideas and courage to tackle it.
We need a banking and finance sector but not the one we have.
@Richard “You will notice Nick does not agree with you, at all.”
I did notice that – and knew that he and the TJN were for Remain – as far as I can remember it was due to an assumption that the UK would necessarily immediately embark on a race-to-the-bottom.
First I’m not sure whether we’d notice that anyway – there’s more than enough scope for fraud within the City and elsewhere in the EU at the moment (see Estonia for a recent case in point).
Second, as I said in my first comment – we were voting to remain in an EU wiht MORE City opt-outs (and at the same time would be voting WITH a Chancellor promising more cuts in Corporation Tax too). So we’d be accelerating bottomwards anyway.
Third – and most importantly – I just don’t see that people of the UK have an appetite to go in that direction – and outside the EU they might, by electing just one progressive government, be able to do something about it and do the whole world a favour. The electorate of the UK is uniquely placed to do something really significant with respect to global capital as we can effectively muzzle one of its most corrupt centres – that’s just too big an opportunity to pass up. Especially when the counter argument currently relies so heavily on the dubious/completely-fanciful electoral appeal
of the likes of Rees-Mogg.
“…. most importantly — I just don’t see that people of the UK have an appetite to go in that direction [accelerating bottomwards] — and outside the EU they might, by electing just one progressive government, be able to do something about it and do the whole world a favour.”
This is your prescription? And your evidence for this popular wisdom? This is some solution; an invitation to stay in both the frying pan and the fire – now that is novel.
Need I rehearse the real nature of the Brexit referendum, or the systematic inability of the Government, over two years, actually to provide any coherent, viable ‘plan’ to the EU whatsoever; that even this Brexit Government is prepared wholeheartedly, and beyond retraction, put its name to (that would never do): because the Government is too terrified of the electoral consequences of admitting, planning or doing anything – save blaming the EU, the only safe “Plan” they possess. All the Conservatives want now is a scapegoat. Somehow the Conservative Party has to leave the Brexit car crash with Theresa May alone; to take the blame, like David Cameron, and carry on as if nothing has happened. Leaving the Conservative Party, all shiny, fresh, new and eh, different – the dynamic answer to the British people who have been left in the lurch, but not by the Conservatives: to come to the country’s rescue and save us all from disaster; all to be achieved, perhaps even without resort to a General Election.
Endless Conservative Party Government without end is the dream prospect, a phoenix rsing from a Whitehall farce (joyously they can always put the shiny, recycled Henry VIII powers to good use if things become bumpy); and all because?
This is Britain. Nothing has changed.
Brexit and Citexit looks like a winning double act to me. A green left wing one too!
@Phil Espin: I am very much of that opinion and have commented as much here. The opportunity
to isolate, minimise and neutralise the pernicious effects of the City of London was one of the prime reasons why I voted Leave (and would do so again tomorrow) – a decision that had been informed by following Nick’s work for a while.
Inside the EU the City will always have the protection of the FoM of Capital and would drag any progressive government off to the ECJ faster that you can say ‘liquidity’ as soon as any serious steps were proposed. Also don’t forget that the EU that was on offer in 2016 was one with even weaker control over the City thanks to Cameron’s extra ‘concessions’ (just imagine if Remain had won – we’d now almost certainly be living with Prime Minister Osbourne and who knows what the City would be getting up to by now).
At the same time Brexit will give the EU the opportunity to protect themselves from it with whatever taxes and barriers they so chose. Seems like a win-win to me.
You will notice Nick does not agree with you, at all
Meanwhile, in Malta: ““The European Commission is expected to issue a stern warning to the Maltese Financial Intelligence Analysis Unit on what must be done to tighten up its money laundering monitoring, saying that concerns raised by the EU’s banking authority had been ignored. The EU’s justice commissioner, Vera Jourova, told the Financial Times that a “formal opinion” would list the actions that the FIAU must take, which had first been raised by the European Banking Authority in July. The commission’s opinion will be formally binding on the FIAU.”” https://www.timesofmalta.com/articles/view/20181003/local/brussels-to-issue-unprecedented-warning-to-maltas-fiau-financial-times.690630
Staying in the EU would inevitably lead to something similar happening here, no? How popular is that going to be in the City, properly enforced regulation against money laundering? Don’t suppose they’ll be getting the bunting out… no, I’d imagine the City really want out of Europe at any price, particularly since it won’t be them who have to pay it.
So in order “to isolate, minimise and neutralise the pernicious effects of the City of London”, your solution is Brexit?
Meanwhile, in the same country (more or less, I often wonder) as the City, people will pay for this with loss of jobs, income, FoM, prospects for their children, care for the elderly and disabled, for how many decades?
Do you really think those people will claim victory because the City will be punished for its fraudulent excesses?
The City will not be corrected just by Brexit and its ‘ take back control’ gimmick. (I supposed you’ve seen “The Spider’s Web”?)
Do you really think a Brexit Labour government will take notice of people in Merthyr, Blaenau, Newcastle or Stoke-on-Trent and the ‘back of beyond’ and make up for their hardships?
Even the Green New Deal, with all its great merits, will take a long time to have an effect; training people, since we won’t recruit easily with loss of FoM, will take a few years.
I’ve seen what EU funding has done to local communities, to real people’s everyday life.
I live near a Local General Hospital which is facing recruiting crisis as EU staff are packing up.
I’m now seeing all we’ll have to do without within a few months.
I do not believe Westminster will bother to make up for all we’re losing when the RDF and other EU funding disappear.
I do not believe a reorganised and cleaner City will make a blind bit of difference to what’s happening outside the South East.
I do believe, however, that greater local government with strict transparency rules, democratic accountability, greater involvement of people, i.e proximity, all set up within a reformed EU, can make a difference to regional economic and social well-being, and in turn this would benefit the whole country.
If not, the break up of the UK might be on the cards. And seriously, why not.
Indeed, why not?
Marie; “I’ve seen what EU funding has done to local communities, to real people’s everyday life.” We don’t need EU funding. We have our own central bank. Where money’s concerned, we can happily create as much as is needed for productive endeavours. We might argue a little about which those might be, but that’s an argument we should be having, not indulging in the usual misdirection about how to afford anything.
Marie Thomas says:
“…….If not, the break up of the UK might be on the cards. And seriously, why not……”
Despite her public protestations to the contrary, what Theresa May (and her team of imbeciles) is doing is making the break-up of the UK almost inevitable.
I don’t see how the Union can survive this. And I’ll not be sorry to see it go.
Are your 3000 and 4500 figures in the penultimate paragraph the wrong way around?
This sort of research is very interesting.
If so I have not time to check….
And to help to fertilise the mix with more manure we get this:
https://www.theguardian.com/commentisfree/2018/oct/05/ex-tory-minister-labour-grasps-britain-desire-change-corbyn-mcdonnell
which could be a job application to a prospective Labour government from Lord Jim formerly of the Vampire Squid.
But the Labour high command’s desire for “socialism in one country” is as futile as the Tory government thinking it can sway voters by declaring the end of the austerity and seeking to bribe them. Ironically though, and in a strangely Machiavellian manner, the Tories’ intestinal-clenching fear of a Corbyn-McDonnell government may encourage them to start shackling this second era robber baron capitalism so as to generate a greater and more equitable volume of economic and socially useful outcomes.
He has clearly not changed his spots
A hideous economic prospect that he outlines
Read the article in the Guardian this morning. Also read Treasure Islands when it was published. Will certainly buy this book when it’s published. Currently reading Oliver Bullough’s book and am delighted that the fight back has started.
What I like about concept of Shaxson’s book is that for goodness knows how long we have been told that unions, pensions, environmental requirements, fair pay for all (including gender) , tea breaks, holidays, health costs etc., have all imposed costs on consumers and society.
Now we get something like this that firmly places extra costs at the feet of the very ‘industry’ that has used these lies to leverage in their malign influence.
I like it. I like it a lot.
The reference to “official figures” for 2017 at least implies that government spending in London is lower than the rest of the UK, point thaty does not appear to be separately discussed in your blog. The “official figures” cannot apply to infrastructure spend, which is a key driver of economic growth. Just for example, Crossrail 1 & 2 cost in London is around £47Bn alone. We already know that 84% of public expenditure on infrastructure in England in the recent past has been spent in London; the rest of England receives just 16%: you do the per capita maths.
Over 50% of total HS2 cost estimates (for the whole UK project) are just to exit the line (underground) from London, and turn Birmingham into a London suburb. If HS2 missed London altogether (serving London from a link with the exirting Channel Tunnel line tp London) and linked our major UK cities (Glasgow, Edinburgh, Manchester, Leeds, Birmingham) direct to Paris and the Continent, we could do much more for European trade for the rest of the UK outside London – and for everyone, probably far cheaper than the current HS2 project. In the real world, I doubt HS2 beyond Birmingham will ever materialise; another ploy to redirect resources to London will be found and justified on a risible ‘cost-benefit’ analysis.
The use of “official figures”, or the figures themselves therefore seems deeply unsatisfactory; it reminds me of GERS.
We recently had a Health & Safety course at work and the tutor had been involved in HS2.
He said that the amount of road building to cross the new line is nearly as long as the route itself if not slightly longer because it crosses the path of so many established roads.
What price progress eh?
Sounds like a question to pose to. Tim Harford. BBC R4 more or less program 🙂
Remember that all good public investment feeds directly into local land values. Jubilee Line Extension: cost £3.5bn, increase in local land values within 2 years (research by Savills, paid for by TfL, thanks to Vice Chair Dave Wetzel at the time) £15bn.
On land values and Crossrail: public investment, private returns.
Financial crash: public rescuers, private rescued; consequence – public debt, private assets.
Why wouldn’t the Conservatives do this? Endlessly. People actually vote for this – and vote for Brexit. When somebody figures out why the public vote for such things (a form of obsessive-reflex self-harm), please take a moment to explain it all to me. I am the one lying in the darkened room.
The official average figures for London suffer from the Bill Gates problem – you know, he walks into a bar of 50 people and suddenly everyone’s a billionaire, on average. As Danny Dorling shows in his recent book, along with some clever mapping, London is a city of extremes. There are some obscenely wealthy people and some very poor people, which is another kind of obscenity in a rich country. And as John S Warren argues “official” figures are massaged.
Steadily the evidence is mounting – unfortunately the politicians don’t care, don’t read it and if it doesn’t suit their political dogma they dismiss and denigrate it. Time for the euthanasia of the political class – otherwise we will continue just as we are.
There must be something in the air.
Today my public sector company received a link to British based EU procurement platform from HMG that replaces our access to the proper EU platform in case of a hard BREXIT.
Our head of procurement – a no bullshit Yorkshireman who is known to be a Tory sympathiser went off on one in our car park about how he’d had enough of BREXIT, austerity and the Tories (although he is sick to death of the political class in this country – all of them no less).
We than had a contract meeting with our local valuation surveyors whose worries about BREXIT concerned a possible drop in property values as a result of a no deal. Basically they did not know what was going to happen but feared the worst – especially for those with loans secured against their property at current high values.
I’ll say it again – the people of this country did not vote to make some Faustian pact with the Tories to make their lives shittier. Yes – there was a winning vote for BREXIT. But there has to be a deal.
There has to be.
No deal = No BREXIT. That should be the red line of any sensible person in my view.
Pilgrim Slight Return says:
“No deal = No BREXIT. That should be the red line of any sensible person in my view. ”
Agreed, Pilgrim.
Quite apart from the practical impossibility of there being ‘No Deal’, because relations have to continue in some shape or form….the failure to agree mutually acceptable terms for departure should leave us in the default position of status quo ante until we can agree some better prospect.
Team May has backed us into a corner. Egged-on by the ERG headbangers.
ERG is a misnomer by the way. It actually means:
European
Rejection
Group
To those thinking of Lexit, 2 good articles in the New Statesman from Paul Mason writing about the recent film on the Anders Breivik massacre in Norway, and David Winner writing about the role of the left in the rise of the Nazis in Germany. Both are making the point that fighting the far right is far more important than fighting perceived enemies on the progressive centre and left.
https://www.newstatesman.com/2018/10/22-july-Anders-Breivik-norway-netflix-review
https://www.newstatesman.com/world/europe/2018/10/how-left-enabled-fascism
So true….
Time more on the left got it
Bill says:
“Where money’s concerned, we can happily create as much as is needed for productive endeavours”.
I agree we can, but the trouble is we haven’t, and regions outside the South East are done trusting the Central Bank funding anything that doesn’t benefit London’s tentacular reaches.
Carol Wilcox says:
“…….Remember that all good public investment feeds directly into local land values….”
Benefit street for the already wealthy and well to do. Great isn’t it 🙁
Of course The City is a parasitic force – they don’t produce anything! They just clip the tickets of those who do.
So any relative expansion, or greater relative profitability, of the financial sector comes at the expense of the real economy. What’s more that financial sector and those asset markets aren’t merely comprised of banksters in London. They also include the nationwide army of mostly older, well-to-do serial landlords and property speculators that make windfall gains at the expense of younger generations. Then there’s the extensive heirarchy in between those two layers. ‘The City’ isn’t specifically located, its ubiquitous.
Remember that there are basically two ways to make money: wealth creation (the competitive production of new goods and services) and rent-seeking (the capture of existing wealth). The City falls almost exclusively into the rent-seeking category
The almost unique thing with The City is the idea that it attracts foreign capital, employs British people (and pays taxes to the UK?) from the banking and trading business that it does with foreign money. This idea would hold us to the perception that it is some sort of imperialist asset to the nation.
That idea, however true or false, needs to balanced against the extent to which it is a conduit that effectively redirects foreign and UK money into avoidance schemes, tax havens and laundering activities: as such, a liability to the nation that funnels more out than it brings in? Either way, indications would suggest that the busier it is the more it increases the relative fortunes of the asset-rich and the 1%.
Having said all that I must confess to having merely glanced at Nick’s article. I now look forward to reading it thoroughly.
Read the SPERI report too
They have excluded some of the rent extraction form the estimates to be cautious – but think they are real
Hi Richard,
Sorry to be dropping in out of the blue after so long and then going off-topic a little but I thought that you might be interested in this Deutsche Welle interview with “German” Christian Democrat MEP, David McAllister. Doesn’t sound interesting, does it?
Surprisingly however, it is. Its tense, combatitive and covers quite a lot including Immigration crises, humanitarian issues, neo-fascist populism, a suggested “Marshall Plan for Africa” banking corruption and money laundering in the EU plus more. Its 26 minutes long so if you don’t have time for that I would suggest dropping in at around 11 min. 40 sec.
Cheers.
Oops, forgot the link:
https://www.dw.com/en/conflict-zone-guest-david-mcallister/av-45742803
Thank you for sharing this article on how much does the London city cost the UK . This is very informative . Keep posting.