Memo to Labour: the City isn’t that important to UK’s health


3:11 pm - May 10th 2012

by Left Outside    


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Finance and Professional services are not synonymous with The City, something Rob Marchant (via Chris Dillow) needs to grasp when discussing Hollande’s lessons for Ed Miliband.

And, regarding his policy programme, it is difficult to see Hollande being a pragmatist in government. For example, take this declaration from a January speech:

“My enemy is not another candidate, it is not a person, it has no face, it is the world of finance.”

All very well, I suppose, down with capitalism: hurrah. But, whatever additional regulation the financial sector may need, is it a good idea, on any level, to emote about it being the “enemy”? In any event, this is an approach that Miliband would be wise not to try to emulate; in a country like ours, where one-fifth of GDP derives from the City, it would have very deep implications for government credibility, for borrowing and for investment. It is easy for France to talk about a financial transaction tax when it has a tiny financial sector compared with the mighty City; everyone wants higher taxes for the other guy.


The City probably adds about 4% to UK GDP not a fifth, that number is from 2003 and The City probably added a little more than that between 2003 and 2007 and a lot less (perhaps negative?) since then.

It’s contribution to GDP is still about half that of UK manufacturing (!) and about a fifth of the total 20% added by all finance, insurance and professional services combined. Data from the ONS. This is where I presume Rob Marchant got his one fifth figure from by adding K48, K57 of page 19.4 and deriving a percentage from cell K77.

Discussion of high and low finance should be separated, something which I suppose Hollande needs to take on board as well. I should perhaps tentatively suggest three things: that most finance is dull, should be dull and most of it takes place outside The City.

It consists either of taking short term deposits and lending that money out at a rate slightly higher rates or taking payments from large numbers of people and paying a small subsection of them large sums when something bad happens.

It is very dull, very worthwhile and it adds a lot of value but it is a world apart from what occurs in The City.

And remember that many firms in The City receive a huge hidden subsidy each year too.

For UK banks, the average annual subsidy for the top five banks over these years was over £50 billion – roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $60 billion per year. These are not small sums.

Not small sums at all, and I recommend you read Haldane’s speech in full. The City’s contribution to GDP is modest, although I will at least grant that its contribution to exports is larger.

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About the author
Left Outside is a regular contributor to LC. He blogs here and tweets here. From October 2010 to September 2012 he is reading for an MSc in Global History at the London School of Economics and will be one of those metropolitan elite you read so much about.
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Reader comments


1. margin4error

As others have started to point out – one doesn’t have to be a friend to the city and to bosses, to be a friend to business. The tories have demonstrated this by being a friend to the first two while doing a quite a lot that many normal business people consider outrageously bad practice.

Rapid changes in regulations, tarrifs and investment programmes have led companies to bankrupcty and triggered major uncertainty – added to by the complete halt on a range of reforms that have left companies unable to plan for the future while they wait for the conditions they will be working in to be announced.

Labour has a chance to position itself as a friend to business – and thus to jobs – quite seperately to opposing the outrageous unacountability of the people at the top or the recklessness of the city.

New Labourites are Thatcherite Tories and shouldn’t be in our party. In what way can they be said to share any of our beliefs?

As an observable fact, some affluent economies are able to thrive without the extent of Britain’s dependence on banking and financial services. It’s just that, for whatever reasons, Britain happens to be unusually competitive by international standards at providing financial services to a global market. This is but one example:

“The worldwide volume of foreign exchange trading is enormous, and it has ballooned in recent years. In April 1989 the average total value of foreign exchange trading was close to $600 billion per day, of which $184 billion were traded in London, $115 billion in New York, and $111 billion in Tokyo. Twenty-one years later, in April 2010, the daily global value of foreign exchange trading had jumped to around $4.0 trillion, of which $1.85 trillion was traded daily in London, $904 billion in New York, and $312 billion in Tokyo.”
Krugman and Obstfeld: International Economics (Financial Times 9th ed.) p.355

I don’t believe that there is much controversy, politically partisan or otherwise, over the objective of diversifying Britain’s economy. The crucial and challenging questions are about how to accomplish the transition. Having followed news reports about this, I have to say that we seem to be a long way short of any practical policy options. With recurring evidence of shortages of industrial and technological skills, especially computer skills, I doubt that there are quick fixes.

Germany is good at making machine tools; Britain is good at financial services. Both industries can be vulnerable (German GDP fell by more than UK GDP at the worst part of the financial crisis, as manufacturers worldwide slashed investment), but as Bob says, both are where the countries’ comparative advantage lies.

Improved regulation is a great idea, not assuming bubble-driven booms will last forever is an even better idea (and class warfare run under the pretence of austerity is a terrible, evil idea that has stuff-all to do with the interests of the financial services industry) – but deliberately seeking to do less of the thing we’re best at and more od the things we’re worse at because DERP doesn’t follow from either of those.

Not sure the OP linking to a 4 year old article, written a few days before the Lehmans crisis kicked off, arguing for the UK to join the Euro is a particularly good or reliable source.

As the article itself says though, Financial services account for 9% of UK GDP (the OP uses the smaller City of London number alone) and that in itself doesn’t account for the GDP tied to finance in terms of support industries and other services and spending.

By all means argue for diversification of UK industry, but don’t for a second be foolish enough to suggest Financial services aren’t incredibly important for the UK.

6. Margin4error

Bob

Time zone, stability of legislation and low taxes make us competitive for things like market trading. In effect the UK has utterly terrible infrastructure (28th in the world according to WEF) so we can’t be competitive at most things. Fortunately services like currency trading often don’t need much infrastructure. While a car manufacturer requires good road, rail and port access for its goods and for its supply chain – a currency trader just needs an office with internet connections.

To create greater diversity in our economy we’d need a government willing to invest heavilly in infrastructure (and in skills) which we’ve just not had since the 60s. So we’ll keep staying afloat by cutting taxes and regulations to attract service sector companies to the UK. And that will continue to leave our economy overly dependent on relatively few sectors.

“Not sure the OP linking to a 4 year old article, written a few days before the Lehmans crisis kicked off, arguing for the UK to join the Euro is a particularly good or reliable source. ”

Sorry, true, I could have spent longer looking for a breakdown of the City’s contribution to GDP in the national accounts, but I couldn’t be bothered. Its smaller than finance and much smaller than the 20% figure bandied about by Rob Marchant.

You say this….”By all means argue for diversification of UK industry, but don’t for a second be foolish enough to suggest Financial services aren’t incredibly important for the UK.” Under an article where I say of most finance… “It is very dull, very worthwhile and it adds a lot of value but it is a world apart from what occurs in The City.”

Hmm…

@ 7 Left Outside

“Finance” includes most of what you would probably call casino banking. Hedge funds, pension funds, insurance etc are all tied to each other, given they need banks to access the market for most products. Even the “dull, worthwhile” stuff requires access to markets. How do you think it operates? Money markets and fixed income markets are an integral part of even the most basic banking and lending operations.

So trying to divorce a certain part of”the finance industry from the best of it is firstly a twisting of the real issue, and secondly, as I say, foolish.

http://fullfact.org/factchecks/does_banking_dominate_the_uk_economy-1512

Even if you jsut use the 8-9% figure for finance, it is near impossible to divorce it from all the service industries surrounding it in related fields, before you even consider the associated but non-related industry which supports it. Wipe out finance, and you dón’t only damage the 4% you are talking about, but all the IT and legal contractors, as well as the shops and services catering for more basic human and business needs. As the link I provide above shows, you are talking more like 32% of GDP when all things are considered.

You have also completely ignored that finance and it’s employees pay more tax in proportional terms than other industries, compared to their share of GDP.

So as I say, by all means act to grow other industries to rebalance the economy, but trying to shut doown finance without anything to replace is incredibly foolish – and it seems to stem from what is little more than an ideological position you hold.

Relevant info:

This book is anything but dull: Robert Shiller (Yale): Finance and the Good Society (Princeton UP 2011). It is evidently intended for a relatively wide but educated readership. It is a book where a reader can dip into any chapter and still learn something fresh – in short, an excellent book to pass the time as a passenger on a long journey. The range of scholarship, extending even to various moral philosophers, is astonishing but then an excursion into political economy is really the book’s theme. The bibliography includes online addresses to some of his relating lectures.
http://www4.gsb.columbia.edu/null/download?&exclusive=filemgr.download&file_id=7219336

Shiller is a highly respected and effective destructive critic of the received orthodoxy about financial markets – the “efficient market hypothesis” – but this book argues that with reform “financial capitalism” is nevertheless the best available system going for allocating resources and for promoting innovation. Among his credits, he forecast the busting of the dot.com boom c. 2000 (Irrational Exuberance) and of the property price bubble c. 2008. One of his past seminal papers shows that stock market prices are far too volatile to reflect changes in market fundamentals.

You might also want to check your figures on manufacturing as well….it’s about 11% of GDP.

Manufacturing as a % of GDP also fell by 11% under the last Labour govt, whilst it only fell about 3.5% under the 79-97 Tory govt. Which rather puts paid to thee idea the Thatcher destroyed UK manufacturing – if anything it was Blair and Brown.

@ Bob B

I do wish sometimes some left wing commentators (notably RIchard Murphy) were better educated – enough to understand the scientific difference between a hypothesis and a law.

Efficient markets is the former….which means it’s reliability is not proven, but it is a useful but imperfect simplification fo rmany situations.

Rather than continue with the political blame game, it would be more productive IMO to address the challenging fundamental issue of how to go about rebalancing Britain’s economy to reduce reliance on banking and financial services.

Just for starters, it would be helpful to have a methodology or route map for selecting sectors to focus attention on. Looking at the data for product or sectoral trade balances is one approach for identifying product or service lines where Britain has a competitive advantage in international markets, for example. And we really do need to look at the continuing problem of skill shortages before committing public resources to a sector where persisting skill shortages are likely to be an inhibiting factor.

Saying that what we want is more “manufacturing” really isn’t helpful because that is too broad – whoever goes into a sales office and asks to buy 35 kgs of manufactures?

Eeven after the banking collapse, we are still afraid of these clowns in the city. When will we start to police, control and enforce strict rules?

rentergirl: “When will we start to police, control and enforce strict rules?”

That’s a good question.

In the Queen’s speech, HM said that “measures will be brought forward to further strengthen regulation of the financial services sector and implement the recommendations of the independent commission on banking”.
http://www.guardian.co.uk/business/2012/may/09/queens-speech-george-osborne-banking-reform

Fair enough but we are still lacking the all important detail and the rumours about it being years before anything effective happens are not reassuring. The trouble is that SMEs need more supporting bank loans to boost business investment but the banks are saying they can’t be doing that and meet the new, higher minimum capital requirements as safeguards against the possibility of future bank failures. How about cutting bankers’ bonuses to contribute towards the higher capital requirements? Can’t do that, say the bankers, ’cause the banks would lose talented bankers to overseas jobs. And so it goes on.

But facing up to the bankers’ blackmail isn’t going to rebalance Britain’s economy. We are still short of policy options to accomplish rebalancing.

@ 14 Bob B

It’s not even that simple. Corporates are sitting on huge cash piles and aren’t investing because they are worried about the global economy, especially Europe.

Banks aren’t hugely willing to lend to SME’s because the failure rate is going to be very high thanks to the same global/European economic woes.

Bankers bonuses are really only a tiny issue, especially given that they are already heavily down and most of that money either goes straight to the taxman or back into the economy as spending….

What really needs to happen is the cost of business and investment is heavily reduced. Red tape and legislation have a large part in this, as well as funding. The other thing that really needs to happen is for the Euro crisis to be speedily and finally resolved – until then business and consumer confidence will remain low. Comparing Europe to the US, which itself still has problems, the banking and mortgage/housing issues in the US have largely been resovled, and the US economy is growing and UMich consumer confidence is now at post Lehman highs.

As much as it seems like a copout to blame the UKs slow growth on Europé’s troubles, there is a real and strong argument for it given how much trouble Europe is in (Greece and Spain especially) and given how Europe is the UKs largest trading partner.

Tyler

But none of that relates to how Britain’s economy is to be rebalanced to reduce the percentage contribution of the banks and financial services to the economy – which is what we relly need to focus on.

That said, we are still short on the detail of how and when the government proposes to strengthen the regulation of financial services and to implement the recommendations of the independent commission on banking.

With the Eurozone economy in the state it is, Britain’s heavily indebted consumers and the reluctance of businesses to invest (for whatever reason), just what is going to make up for that gap in aggregate demand as the government cuts back public spending?

In the news:

Shares in JPMorgan Chase have dived 9% after the biggest US bank, revealed a trading loss of at least $2bn (£1.2bn). Chief executive Jamie Dimon blamed “errors, sloppiness and bad judgement” for the losses and warned “it could get worse”. The risky hedging strategy could cost the bank an additional $1bn, he added.
http://www.bbc.co.uk/news/business-18039744

Wonderful stuff banking. I wonder what will happen to the bonuses paid out in JP Morgan – which btw was one of the initial creators of the notorious CDOs according to some accounts of what happened.

The Queen’s speech made mention of new laws against drug-driving – which are to be welcomed – but nothing to deal with banking while under the influence.

“You might also want to check your figures on manufacturing as well….it’s about 11% of GDP.”

Yeah and the city is around 4%, and ONS pointed to manufacturing adding 10% in total in 2010 (a bad year to pick for both now I think about it) about double the size. No?

And what are the policy options for diversifying Britain’s economy to reduce dependence on banking and financial services?

What does the government need to do? Every one is evading the crucial issue.

And what are the policy options for diversifying Britain’s economy to reduce dependence on banking and financial services?

What does the government need to do? Everyone is evading the crucial issue.

@ 18 Left Outside

You are using a very narrow definition of finance. The City of London is 4%, and manufacturing would indeed be roughly double that.

Add in ALL financial services and the number is 9%. Take financial services and all it’s support industry and you are looking at something like 30%.

You can’t make your argument right by trying to effect a basic fiddle of the situation. You’d have been far better off going down Bob B’s line and asking what can we do to enhance and build other industry, but instead you have just gone in for a little banker bashing – more than a little mypoic considering how reliant UK finances and your beloved welfare state are on finance.

@ Bob B

You are correct in asking what can be done to diversify industry, by growing other parts of the UKs industrial base. Without wanting to go into what could be a huge piece, I would argue that the government is limited to a great extent on what it can achieve directly. Far better to create the situation for private industry to feel comfortable and confident that their investments are worthwhile – and legislation (or removal of) and low taxation do have important parts to play. Longer term, education also has an important role, where the government can more directly affect outcomes, and as we have seen educational attainment and skills have fallen over to the point where employers are concerned with the education of school and Uni leavers, especially compared to international peers.

Ultimately though, there is no magic button the government can push to make industry and growth better, and to claim otherwise is pure nonsense.

“You are using a very narrow definition of finance. The City of London is 4%, and manufacturing would indeed be roughly double that.”

No, I’m using a very narrow definition of “The City”, using it to refer to “The City”. Yes finance is bigger, I made that explicitly clear in the post. THIS IS NOT A POST CRITICISING FINANCE IT IS CRITICISING PUBLIC PERCEPTIONS OF THE CITY’S IMPORTANCE.

You made me use shouty capitals because this is the second or third time you have failed to read the argument above. Go to the top of the page and reread the post.

“You can’t make your argument right by trying to effect a basic fiddle of the situation. You’d have been far better off going down Bob B’s line and asking what can we do to enhance and build other industry, but instead you have just gone in for a little banker bashing – more than a little mypoic considering how reliant UK finances and your beloved welfare state are on finance.”

But I wasn’t bashing finance and services! That was the whole point of the post which has flown over your head.

Finance and Services are good worthwhile things! I say that above, at length.

What I am arguing is that the City alone doesn’t add vastly to British GDP, we’d miss it, but not as much as many people think, and that large firms in the City receive an absolutely huge amount of money in the form of a not so implicit guarantee.

Also, economic growth, particularly productivity is more or less random, so there is very little we can do to encourage certain industries because knowing which industry to encourage is more or less unknowable.

“more than a little mypoic considering how reliant UK finances and your beloved welfare state are on finance”

Ahem..from above…

“For UK banks, the average annual subsidy for the top five banks over these years was over £50 billion – roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $60 billion per year. These are not small sums.”


Reactions: Twitter, blogs
  1. Bleam

    Memo to Labour: the City isn't that important to UK's health http://t.co/TYyBOkIm

  2. Phil Jones

    Memo to Labour: the City isn't that important to UK's health http://t.co/TYyBOkIm

  3. Oxford Kevin

    Memo to Labour: the City isn't that important to UK's health http://t.co/TYyBOkIm

  4. BevR

    Memo to Labour: the City isn't that important to UK's health http://t.co/TYyBOkIm

  5. leftlinks

    Liberal Conspiracy – Memo to Labour: the City isn’t that important to UK’s health http://t.co/INeuvoHJ

  6. christine clifford

    Liberal Conspiracy – Memo to Labour: the City isn’t that important to UK’s health http://t.co/INeuvoHJ

  7. Martin McGrath

    The City's real contribution to the UK economy is? http://t.co/rdggjD5L @libcon

  8. BevR

    Memo to Labour: the City isn’t that important to UK’s health | Liberal Conspiracy http://t.co/IIG2Ez11 via @libcon

  9. Foxy52

    Memo to Labour: the City isn’t that important to UK’s health | Liberal Conspiracy http://t.co/IIG2Ez11 via @libcon

  10. Clive Burgess

    Memo to Labour: the City isn't that important to UK's health http://t.co/TYyBOkIm

  11. BevR

    Memo to Labour: the City isn’t that important to UK’s health | Liberal Conspiracy http://t.co/IIG2Ez11 via @libcon





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