{"id":36020,"date":"2017-05-16T18:27:10","date_gmt":"2017-05-16T08:27:10","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=36020"},"modified":"2017-05-16T18:27:10","modified_gmt":"2017-05-16T08:27:10","slug":"why-britain-should-not-worry-about-brexit-motivated-bank-relocations","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=36020","title":{"rendered":"Why Britain should not worry about Brexit-motivated bank relocations"},"content":{"rendered":"

\t\t\t\tOn April 26, 2017, some smarta*!se journalists wrote a Bloomberg piece – The Brexit Banker Exodus Gains Momentum<\/a> – with some not-so fancy graphics purporting to show where the “U.K. banking jobs might be headed” allegedly because Britain is to leave the European Union. On May 9, 2017, the increasingly terrible UK Guardian bought in on the frenzy with its article – City banks could move at least 9,000 jobs from UK due to Brexit <\/a>. And so it goes. Apparently, Deutsche Bank is “leading the threatened exodus”, followed by JP Morgan and Goldman Sachs. All exemplars of virtue, not! While the threat of the ‘City’ leaving London is now used to frighten British people about Brexit, the reality is, in my view, quite different. I would be celebrating the cleaning out this infestation of unproductive enterprises, which remain one of the destructive legacies of Margaret Thatcher and, later, New Labour and its so called ‘light touch regulation’.
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In Chapter 12 (Part VI) of his 1936 General Theory<\/a>, John Maynard Keynes wrote <\/p>\n

\nSpeculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism – which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.\n<\/p><\/blockquote>\n

That was in 1936. We take a long time to learn, don’t we?<\/p>\n

In 2013, Nicholas Shaxson and John Christensen and from the British Tax Justice Network, , published – The Finance Curse<\/a><\/p>\n

In 2015, they followed it up with a paper published in The British Journal of Politics and International Relations, written with Duncan Wigan an academic – The Finance Curse: Britain and the World Economy<\/a>.<\/p>\n

The Finance Curse is an interesting application of the so-called Dutch Disease<\/a>.<\/p>\n

I have written about the Dutch Disease in previous blogs (search if you are interested) in relation to the impact that our mining sector has on the prosperity of our manufacturing and agricultural sectors.<\/p>\n

The Dutch disease, which takes its name from the impact that the discovery and exploitation of North Sea oil had on Dutch agriculture, refers to the way in which exchange rate movements impact in a disparate fashion on the export side of the economy.<\/p>\n

In Australia’s case, our repeating mining booms push the Australian dollar up which undermines our export competitiveness and damages our other exporting sectors (such as manufacturing) which are not experiencing the same commensurate increase in world demand that mining enjoys at the time.<\/p>\n

The appreciating currency: (a) damages the competitiveness of ‘import-competing’ sectors (dominated by manufacturing, service and agricultural firms) because import prices fall relative to local cost levels; and (b) promotes wage pressures which further damage sectors who are not enjoying buoyant demand conditions.<\/p>\n

The ‘Dutch Disease’ or, as it is sometimes called the “Resource Curse” is typically associated with depressed rates of growth, a loss of investment in new productive capital replaced by ‘rent-seeking’ (quick profits), increasingly unbalanced economic development with rising suspectibility to crisis, rising wealth and income inequality, declining productivity, and increased poverty rates.<\/p>\n

There are exceptions to the rule (such as Norway) but they are usually because the government maintains tight regulation and has well-developed redistribution policies in place within communities that maintain solidarity and a concern for equity.<\/p>\n

Specifically, as the Tax Justice Network authors note, Norway has maintained:<\/p>\n

\n… centralised wage formation and income coordination … a ‘local content’ policy of trying to build up domestic supply chains for the oil industry … heavy investment in education, research and development … active countercyclical economic policies … other labour market policies … other industrial policies to diversify exports … expansion of the public sector to boost employment.\n<\/p><\/blockquote>\n

Without these strong government interventions, the consequences of the “Resource Curse” produce a very unattractive cocktail.<\/p>\n

This World Bank study (May 2012) – Natural Capital and the Resource Curse<\/a> – provides an interesting account of the role of government in attenuating the curse of resources.<\/p>\n

We learn that “natural resource booms become a curse” when:<\/p>\n

\nWeak governance and corresponding poor economic policies underlie the misallocation and mismanagement of resources. Resources shift out of productive activities into unproductive rent-seeking activity when, for example, patronage networks are strengthened with their appropriation of fallen-from-heaven rents. It is not by chance that resource curse cases can be primarily associated with extractive industries (oil, gas, and minerals) because these are “concentrated ‘point source’ resources that can easily become the object of rent-seeking and redistributive struggles” …\n<\/p><\/blockquote>\n

But these destructive outcomes are not confined to nations dependent on their extractive industries.<\/p>\n

The “Finance Curse” outlined by the Tax Justice Network authors is a version of this syndrome and runs counter to the usual (special pleading) that the financial sector is indispensable and its departure will cause untold damage to Britain.<\/p>\n

As the authors note, the popularised argument run by most economists is that:<\/p>\n

\nThe argument for the utility of finance is well-rehearsed. Liquid and deep financial markets reallocate capital from savers to borrowers, ensuring that funding is directed to those best able to use it … Financial systems act as efficient information processors, centralizing the dispersed knowledge of market participants to generate prices reflecting economic fundamentals. More finance completes markets ensuring an efficient competitive equilibrium … Finance cannot cause harm since market movements mirror but do not drive changes in the real economy … Speculation is ultimately stabilizing … Hosting a large financial sector represents the high road to economic success. The sector provides quality jobs and sizeable fiscal dividends to host states. Finance-dependent countries perform well in international rankings of income per capita. Given this, governments should focus on growing the financial sector.\n<\/p><\/blockquote>\n

This was the neo-liberal argument that was used by Margaret Thatcher to promote the ‘City’ in Britain as she was hacking into the more traditional working class sectors such as mining and manufacturing.<\/p>\n

Theh GFC exposed the lie. It turns out the finance sector is largely unproductive – shuffling wealth between gamblers. But it is worse than that, which is what the “Finance Curse” is about.<\/p>\n

The authors say that “evidence is accumulating that … financial sector growth failts to deliver expected benefits to a country, and can even harm it.”<\/p>\n

The Bank of International Settlements study – Why does financial sector growth crowd out real economic growth?<\/a>, for example, concluded in February 2015 that:<\/p>\n

\nFirst, the growth of a country’s financial system is a drag on productivity growth. That is, higher growth in the financial sector reduces real growth. In other words, financial booms are not, in general, growth-enhancing, likely because the financial sector competes with the rest of the economy for resources. Second, … we … find that credit booms harm what we normally think of as the engines for growth – those that are more R&D-intensive. This evidence, together with recent experience during the financial crisis, leads us to conclude that there is a pressing need to reassess the relationship of finance and real growth in modern economic systems.\n<\/p><\/blockquote>\n

And it is clear that one couldn’t hold out the BIS as an exemplar of progressive thought. So things must be bad!<\/p>\n

The thesis the Tax Justice Network authors develop is that:<\/p>\n

\nCountries overly dependent on an outsized financial sector display similar characteristics. Britain, whose financial sector is the world’s third largest, and the largest by a composite measure of size and interconnectedness, is a case in point.\n<\/p><\/blockquote>\n

This massive financial centre:<\/p>\n

1. “crowded out manufacturing and non-financial services”.<\/p>\n

2. “leeched government of skilled staff”, not to mention other sectors.<\/p>\n

3. “entrenched regional disparities”.<\/p>\n

4. “fostered large-scale financial rent-seeking”<\/p>\n

5 “heightened economic dependence”.<\/p>\n

6. “increased inequality”.<\/p>\n

7. “helped disenfranchise the majority”.<\/p>\n

8. And to top it all off “exposed the economy to violent crises.”<\/p>\n

What is the worry if they all pack up and go then!<\/p>\n

On April 28, 2017, the British Trades Union Congress released some analysis – London and the South East set to account for 40% of the economy by end of next Parliament, says TUC<\/a>.<\/p>\n

They produced these estimates based upon the official Statistical Regions in the UK. I added the Population proportions to their data to scale it a bit but there is no need for proportionality given the fact that industry composition is different and productivity rates will vary as a consequence.<\/p>\n

The regional imbalances in the UK are thus predicted to worsen over the next 5 years.<\/p>\n

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The TUC says that there is a need for more public infrastructure investment in regional areas to enhance private investment, targetted public procurement “to improve jobs and pay”, increased investment in renewable energy, increased investment in low pay sectors to increase productivity etc.<\/p>\n

The following map provides a different view of the same data.<\/p>\n

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The Tax Justice Network authors find that the growth of the “City of London from the 1970s onwards was a significant (though not the only) factor behind the dramatic decline in British manufacturing.”<\/p>\n

They cite three major reasons:<\/p>\n

\nFirst, the huge inflows of foreign capital into the City (much of it destined for mergers and acquisitions and real estate purchase rather than new investment) has served to prop up the pound Sterling, raising prices (look at UK property price inflation since the 1970s) and making it harder for other exporting sectors to compete on the global markets. This exchange rate\/inflation effect is similar to the Dutch Disease that resource-dependent countries suffer from.<\/p>\n

Second, high salaries in the financial sector have a ‘brain drain’ effect, attracting a large proportion of university graduates away from other sectors of the economy and forcing those other sectors to compete against the highly inflated remuneration packages offered by banks and law firms in London.<\/p>\n

Third, oversized financial service sectors are prone to damaging cycles of rapid growth followed by bust. According to economist Hyman Minsky, periods of apparently stable growth in asset values breed complacency among lenders and borrowers, leading to rising debt leverage followed by crash. Debt is a major contributor to this volatility, which has worsened in recent decades as a result of the trend towards lax regulation.\n<\/p><\/blockquote>\n

These negative impacts are “disguised by debt-fuelled growth in consumption”, of the type that dominated the pre-GFC cycle and which the current policy settings in the UK are biased towards.<\/p>\n

But when the “busts occur the long-term damage caused to other sectors of the economy becomes more apparent, but those sectors are hard to resuscitate, not least because of skills shortages and long-periods of under-investment”.<\/p>\n

The Tax Justice Network authors argue that the way ahead is not to invest more resources into the ‘City’, which will only “exacerbate an already unsustainable situation<\/em>.”<\/p>\n

Rather, “any development strategy that aims to rebalance the UK will need to begin with a significant downsizing of the City of London”.<\/p>\n

The following podcast from the TJN (30:16 minutes) extends the analysis to the US (particularly New York) and shows that the financial sector is “a net drag on their economy”, in the same way that the ‘City’ drags down the UK.<\/p>\n