Showing posts with label London. Show all posts
Showing posts with label London. Show all posts
Saturday, 20 January 2024
Friday, 22 December 2023
Queen Mary University, London and its Christmas Scrooge tale
Even Scrooge would marvel at Queen Mary’s pay-docking over a marking boycott. No wonder higher education is in turmoil writes Aditya Chakrabortty in The Guardian
In this season of quizzing, here’s a real head-scratcher. Can you name the big British employer that punished staff for boycotting a small fraction of their work by taking all of their pay for each day of their boycott? So that even while employees did their other tasks, putting in weeks of work, their pay packets were pilfered, month after month, from high summer until almost the start of advent. Some had to take extra jobs, others drew on hardship funds or stuck essential bills on credit cards. Amid a cost of living crisis and with Christmas looming, the Great Wage Robbery carried on. But who was responsible?
Perhaps your imagination has entered some grim distribution hangar, or is hovering above a building site. Or maybe you’re thinking of a care home bullying its migrant workers who are fuzzy on their rights and scared of speaking up. You’re seeing ruthless, rapacious big-C Capital opening its giant, bloody maw wide to chew on some low-paid and underqualified labour. Right?
Wrong. Try a charity. To be precise, that branch of charitable enterprise we call a Russell Group university. This is the story of Queen Mary University of London, whose boss, Colin Bailey, is on a package worth £359,000 a year (plus free housing in inner London) , but which bilks its own academics as brazenly as Scrooge did his clerks. If you want a closeup of the turmoil engulfing higher education, or to see how some of our most prestigious white-collar jobs have been so vastly degraded, this is a story for you. Because even Ebenezer would have marvelled at the goings-on at Queen Mary.
This spring, its academics joined a national union boycott of marking exams to protest against the low pay awards that have seen university lecturers’ salaries fall 25% behind inflation since the banking crash, and their deteriorating working conditions. By downing their red pens, tutors were hitting universities where it hurt most – since they rely on student fees. But they kept up the other parts of the academic job: guiding students, doing research and writing papers. That did not pacify the bosses, who decreed that those withholding their marks would lose up to 113 days of pay – one for each day of their boycott.
A similar standoff took place last year, when staff received payslips with a net payment of £0.00. So as not to repeat that furore, the university instead deducted about 21 days from each month’s paycheck. In July, it confiscated almost £176,000 from 82 staff – on average more than £2,000 each.
Even after the University and College Union (UCU) called off the boycott in September and the academics scrambled to give students their marks, their pay kept on getting docked for days they had boycotted. For some, December is their first month on full pay since the start of summer.
What’s it like to open your payslip and find two-thirds of it has disappeared? Even as staff told me, many worried about reprisals from managers. So here is an anonymised sample of their stories:
A woman whose manager knew she was three months pregnant was told at the end of June that her very next paycheck would be docked. The pregnancy was already judged high risk, and she had to support her 4-year-old child and husband. In July, she duly lost £2,147.
A man had to take a second job to ensure he could pay his mortgage and his child’s nursery at Queen Mary. He paid his own employer nursery fees, despite it withholding pay for him.
To look after his sick mum and elderly dad, another man worked a second job.
A woman relied on her friends letting her stay with them for months. If she had had to pay rent on her reduced salary, she said, “I simply could not have managed.”
These are senior lecturers, responsible for teaching the next generation of teachers, lawyers and doctors while doing research that will help all of us. And they have been treated like dirt.
Listening to all this, I kept hearing another voice – the clipped, precise tones of BBC Radio 4’s Justin Webb. As he and his fellow Today presenters have had to interview medics, barristers and professors about exactly why they’re on a chilly picket line, there is a distinct puzzlement audible in their questions. Disgruntled factory workers they can understand, but aren’t these meant to be the good jobs?
That’s what those academics also believed, once. Two of the stories you’ve just read came from people who were the first in their family to go to university. They studied hard and overworked, and they lived out the Blairite boast that “we’re all middle class now” – only to find that middle-class jobs are not what they were. They have become more routine, more spied upon (Queen Mary managers encouraged students to submit reports, inevitably nicknamed “snitch forms” , on their own teachers) and relatively worse paid. Yet the facade of tweedy collegiality never drops. As staff log in to the university that took their pay, they are reminded that Queen Mary is “committed to improving social justice”.
Other universities deducted pay for marking boycotts. At Aberdeen, the principal said he wanted to inflict “pain” on dissenting lecturers. But few administrations have been as punitive as Queen Mary’s. Other universities may claim to be in budgetary crisis, from Oxford Brookes to Sheffield Hallam. Not Queen Mary, which is sitting on an annual surplus of £92m. Even so, its boss still threatened a degree programmewith closure after its staff stuck up for their rights. No wonder last year it was crowned “worst university employer in the UK”. In surveys, academics frequently pick out their own bosses as the worst aspect of the entire college. “Senior management does not listen to staff and does not even attempt to show that it is doing so,” is one typical example.
I put these allegations in detail to Queen Mary’s principal and to members of its governing council, along with other questions to get their perspective. Rather than answer directly, the press office issued a short statement that read in part: “We do not withhold pay from staff so long as they deliver all their educational activities. Teaching and assessment are priority contractual activities for university staff, and we withhold pay for staff who do not carry out these core activities due to industrial action.”
You help to pay for this regime. Because charities are meant to serve a benefit to the public and work to higher ends, they are not liable for the same taxes as other businesses. Universities are not overseen by the Charity Commission but by the Office for Students, which has no expertise in charitable regulation. If they did, harder questions might be asked about what is happening inside today’s degree factories.
In the meantime, Queen Mary’s status as a charity means it charges no VAT on its fees or halls of residence and pays no corporation tax on its surplus. A conservative estimate from the local University and College Union puts this public subsidy as worth more than £100m a year.
“Out upon merry Christmas!” grumps Scrooge. “If I could work my will every idiot who goes about with ‘Merry Christmas’ on his lips, should be boiled with his own pudding, and buried with a stake of holly through his heart. He should!” Someone should nominate Ebenezer to run a British university.
Monday, 2 December 2019
Wednesday, 9 January 2019
Brexit proved our economy is broken, but our leaders still have no clue how to fix it
Politicians obsess over GDP growth yet its benefits are unequally shared. And Labour leave areas suffer most writes Aditya Chakrabortty in The Guardian
From David Cameron down, leading remainers considered the economy their trump card. In the biggest single choice Britain had had to make for four decades, they were sure economics would be the deciding factor. But with less than a month to go before the vote, seasoned operative Coetzee could see the strategy was failing. Why, just a few days earlier, George Osborne had produced Treasury analysis that Brexit would send house prices plunging by as much as 18% – and BBC journalists reported being deluged with calls from would-be buyers asking where they could sign up.
As remain started losing its central argument so, internal polling analysis showed, it began trailing leave. Hence the panic in that late-night memo, quoted by Tim Shipman in his history of the referendum, All Out War. One of Shipman’s Labour sources in the campaign cut close to the bone: “When we started just saying, ‘the economy will be fucked’, it showed what a profound misunderstanding they had of Labour motives. Across the north-east and the north-west people already felt like the economy was fucked and not working for them.”
Bingo. Project Fear stuck as a catchphrase precisely because Osborne’s rhapsodies over the health of the economy sounded to so many like Project Fantasy.
Osborne banged on about Britain’s miracle recovery even while pay remained below pre-crash levels. His replacement at No 11, Philip Hammond, made a big flourish in his last budget of doling out “little extras” to schools where teachers now face huge funding shortfalls. Over the past few years Westminster has embarked on a march of the makers that looked more like a punch-drunk stagger, erected a northern powerhouse almost invisible to the naked eye, and declared a war on skivers and freeloaders – led by Iain Duncan Smith, the cabinet minister who claimed £39 in expenses for one solitary breakfast.
But this economic chasm runs deeper and longer than just the past decade. Around the same time that Coetzee was raising the alarm in Westminster, I was reporting in Pontypool, south Wales. It was market day, and locals reminisced about old times, when the town centre would be “rammed”. In that day’s drizzle it was half-deserted. In the 80s and 90s, voters in south Wales were assured that vibrant new industries would replace the coalmines and steelworks that had shut down. What actually filled the void was public spending, and casual work and self-employment that barely paid its way.
“It’s dead now, because they took what they wanted,” Neil told me, his glasses specked with paint from his day job as a decorator. “They” meant Westminster, London, the rich. “Thatcher smashed the unions. Boosh! We’re out of here. Boosh! They’ve moved on.” Raised in a Labour family in a blood-red part of the country that had been deceived by the political classes for so long, he now considered all politicians “liars”. And in the EU referendum, he intended to let them know.
In the crudest of ways, Neil and others got some of what they wanted. Since the summer of 2016, politicians and pundits will freely declare that something in British politics and economics is broken. The trouble is, the governing classes are no closer to knowing what exactly is bust, let alone how to fix it.
It ultimately comes down to this: decades of privatisation, hammering unions and chucking billions at the housing market while stripping the welfare state has effectively ended any semblance of a national, redistributive economy in which a child born in Sunderland can expect to have similar life chances to one born in Surrey. Yet politicians remain fixated on mechanisms that no longer work adequately for those who actually depend on the economy. They obsess over GDP growth when the benefits of that are unequally shared between classes and regions. They boast about job creation when wages are still on the floor.
Most of all, they brag about London, the one undoubted gleaming success of the British economic model. “A pound spent in Croydon is of far more value to the country than a pound spent in Strathclyde,” to quote Boris Johnson, the Conservative party’s last surviving greyback. But that is to ignore how London itself is rapidly becoming unlivable for many Londoners. New research by academics the Foundational Economy Collective shows that Londoners are the least likely in the country to have a mortgage and the most likely to swim in the shark-infested waters of the private rental sector. This is great for landlords and for employers, who enjoy a conveyor belt of ready-made renters and workers supplied to them from the rest of Britain and Europe. It is not such a great bargain for the rest of us. The high income generated by London is matched by the massive income inequality suffered by Londoners.
The irony is that Neil and other Labour leave voters have handed the keys to the very people least interested in reversing any of this. The top economic brains among the Brexiteers, miserable throwbacks such as Patrick Minford and John Redwood, believe the problem with Thatcher’s revolution is that it didn’t go far enough.
We rarely ask people what they want from the economy; if we did it more often, the answers might surprise us. The free-marketeers at the Legatum Institute did pose the question in a survey conducted in 2017. Top priorities for respondents were: food and water; emergency services; universal healthcare; a good house; a decent well-paying job; and compulsory and free education. At the bottom were owning a car and cheap air travel. HS2, a new runway at Heathrow or a garden bridge on the Thames didn’t even rank.
After reporting the survey, the Legatum Institute concluded: “Significant portions of the country … are vehemently anti-capitalist.” The report was co-authored by Matthew Elliott, former head of the Vote Leave campaign. Which just about sums up the Brexiteers’ politics: savvy enough to listen to what people want, cynical enough never to enact it.
Illustration: Sébastien Thibault
Just after midnight on 25 May 2016, a senior staffer in the remain campaign sent colleagues an urgent message. “Voters are very sceptical about our warnings on the economy,” began his email. “They don’t trust the numbers. They don’t trust the Treasury.” As head of strategy for Britain Stronger in Europe, Ryan Coetzee had bombarded Britons with evidence of the economic damage they would do to themselves if they didn’t stay in the EU. He and his team enlisted the Bank of England, the IMF, the OECD and pretty much every acronym that mattered. They’d wagged fingers, flung numbers around and pointed out the danger signs.
Just after midnight on 25 May 2016, a senior staffer in the remain campaign sent colleagues an urgent message. “Voters are very sceptical about our warnings on the economy,” began his email. “They don’t trust the numbers. They don’t trust the Treasury.” As head of strategy for Britain Stronger in Europe, Ryan Coetzee had bombarded Britons with evidence of the economic damage they would do to themselves if they didn’t stay in the EU. He and his team enlisted the Bank of England, the IMF, the OECD and pretty much every acronym that mattered. They’d wagged fingers, flung numbers around and pointed out the danger signs.
From David Cameron down, leading remainers considered the economy their trump card. In the biggest single choice Britain had had to make for four decades, they were sure economics would be the deciding factor. But with less than a month to go before the vote, seasoned operative Coetzee could see the strategy was failing. Why, just a few days earlier, George Osborne had produced Treasury analysis that Brexit would send house prices plunging by as much as 18% – and BBC journalists reported being deluged with calls from would-be buyers asking where they could sign up.
As remain started losing its central argument so, internal polling analysis showed, it began trailing leave. Hence the panic in that late-night memo, quoted by Tim Shipman in his history of the referendum, All Out War. One of Shipman’s Labour sources in the campaign cut close to the bone: “When we started just saying, ‘the economy will be fucked’, it showed what a profound misunderstanding they had of Labour motives. Across the north-east and the north-west people already felt like the economy was fucked and not working for them.”
Bingo. Project Fear stuck as a catchphrase precisely because Osborne’s rhapsodies over the health of the economy sounded to so many like Project Fantasy.
Osborne banged on about Britain’s miracle recovery even while pay remained below pre-crash levels. His replacement at No 11, Philip Hammond, made a big flourish in his last budget of doling out “little extras” to schools where teachers now face huge funding shortfalls. Over the past few years Westminster has embarked on a march of the makers that looked more like a punch-drunk stagger, erected a northern powerhouse almost invisible to the naked eye, and declared a war on skivers and freeloaders – led by Iain Duncan Smith, the cabinet minister who claimed £39 in expenses for one solitary breakfast.
But this economic chasm runs deeper and longer than just the past decade. Around the same time that Coetzee was raising the alarm in Westminster, I was reporting in Pontypool, south Wales. It was market day, and locals reminisced about old times, when the town centre would be “rammed”. In that day’s drizzle it was half-deserted. In the 80s and 90s, voters in south Wales were assured that vibrant new industries would replace the coalmines and steelworks that had shut down. What actually filled the void was public spending, and casual work and self-employment that barely paid its way.
“It’s dead now, because they took what they wanted,” Neil told me, his glasses specked with paint from his day job as a decorator. “They” meant Westminster, London, the rich. “Thatcher smashed the unions. Boosh! We’re out of here. Boosh! They’ve moved on.” Raised in a Labour family in a blood-red part of the country that had been deceived by the political classes for so long, he now considered all politicians “liars”. And in the EU referendum, he intended to let them know.
In the crudest of ways, Neil and others got some of what they wanted. Since the summer of 2016, politicians and pundits will freely declare that something in British politics and economics is broken. The trouble is, the governing classes are no closer to knowing what exactly is bust, let alone how to fix it.
It ultimately comes down to this: decades of privatisation, hammering unions and chucking billions at the housing market while stripping the welfare state has effectively ended any semblance of a national, redistributive economy in which a child born in Sunderland can expect to have similar life chances to one born in Surrey. Yet politicians remain fixated on mechanisms that no longer work adequately for those who actually depend on the economy. They obsess over GDP growth when the benefits of that are unequally shared between classes and regions. They boast about job creation when wages are still on the floor.
Most of all, they brag about London, the one undoubted gleaming success of the British economic model. “A pound spent in Croydon is of far more value to the country than a pound spent in Strathclyde,” to quote Boris Johnson, the Conservative party’s last surviving greyback. But that is to ignore how London itself is rapidly becoming unlivable for many Londoners. New research by academics the Foundational Economy Collective shows that Londoners are the least likely in the country to have a mortgage and the most likely to swim in the shark-infested waters of the private rental sector. This is great for landlords and for employers, who enjoy a conveyor belt of ready-made renters and workers supplied to them from the rest of Britain and Europe. It is not such a great bargain for the rest of us. The high income generated by London is matched by the massive income inequality suffered by Londoners.
The irony is that Neil and other Labour leave voters have handed the keys to the very people least interested in reversing any of this. The top economic brains among the Brexiteers, miserable throwbacks such as Patrick Minford and John Redwood, believe the problem with Thatcher’s revolution is that it didn’t go far enough.
We rarely ask people what they want from the economy; if we did it more often, the answers might surprise us. The free-marketeers at the Legatum Institute did pose the question in a survey conducted in 2017. Top priorities for respondents were: food and water; emergency services; universal healthcare; a good house; a decent well-paying job; and compulsory and free education. At the bottom were owning a car and cheap air travel. HS2, a new runway at Heathrow or a garden bridge on the Thames didn’t even rank.
After reporting the survey, the Legatum Institute concluded: “Significant portions of the country … are vehemently anti-capitalist.” The report was co-authored by Matthew Elliott, former head of the Vote Leave campaign. Which just about sums up the Brexiteers’ politics: savvy enough to listen to what people want, cynical enough never to enact it.
Friday, 5 October 2018
The finance curse: how the outsized power of the City of London makes Britain poorer
Nicholas Shaxson in The Guardian
In the 1990s, I was a correspondent for Reuters and the Financial Times in Angola, a country rich with oil and diamonds that was being torn apart by a murderous civil war. Every western visitor asked me a version of the same question: how could the citizens of a country with vast mineral wealth be so shockingly destitute?
One answer was corruption: a lobster-eating, champagne-drinking elite was getting very rich in the capital while their impoverished compatriots slaughtered each other out in the dusty provinces. Another answer was that the oil and diamond industries were financing the war. But neither of these facts told the whole story.
There was something else going on. Around this same time, economists were beginning to put together a new theory about what was troubling countries like Angola. They called it the resource curse.
Academics had worked out that many countries with abundant natural resources seemed to suffer from slower economic growth, more corruption, more conflict, more authoritarian politics and more poverty than their peers with fewer resources. (Some mineral-rich countries, including Norway, admittedly seem to have escaped the curse.) Crucially, this poor performance wasn’t only because powerful crooks stole the money and stashed it offshore, though that was also true. The startling idea was that all this money flowing from natural resources could make their people even worse off than if the riches had never been discovered. More money can make you poorer: that is why the resource curse is also sometimes known as the Paradox of Poverty from Plenty.
Back in the 1990s, John Christensen was the official economic adviser to the British tax haven of Jersey. While I was writing about the resource curse in Angola, he was reading about it, and noticing more and more parallels with what he was seeing in Jersey. A massive financial sector on the tiny island was making a visible minority filthy rich, while many Jerseyfolk were suffering extreme hardship. But he could see an even more powerful parallel: the same thing was happening in Britain. Christensen left Jersey and helped set up the Tax Justice Network, an organisation that fights against tax havens. In 2007, he contacted me, and we began to study what we called the finance curse.
It may seem bizarre to compare wartorn Angola with contemporary Britain, but it turned out that the finance curse had more parallels with the resource curse than we had first imagined. For one thing, in both cases the dominant sector sucks the best-educated people out of other economic sectors, government, civil society and the media, and into high-salaried oil or finance jobs. “Finance literally bids rocket scientists away from the satellite industry,” in the words of a landmark academic study of how finance can damage growth. “People who might have become scientists, who in another age dreamt of curing cancer or flying people to Mars, today dream of becoming hedge-fund managers.”
In Angola, the cascading inflows of oil wealth raised the local price levels of goods and services, from housing to haircuts. This high-price environment caused another wave of destruction to local industry and agriculture, which found it ever harder to compete with imported goods. Likewise, inflows of money into the City of London (and money created in the City of London) have had a similar effect on house prices and on local price levels, making it harder for British exporters to compete with foreign competitors.
Oil booms and busts also had a disastrous effect in Angola. Cranes would festoon the Luanda skyline in good times, then would leave a residue of half-finished concrete hulks when the bust came. Massive borrowing in the good times and a buildup of debt arrears in the bad times magnified the problem. In Britain’s case, the booms and busts of finance are differently timed and mostly caused by different things. But just as with oil booms, in good times the dominant sector damages alternative economic sectors, but when the bust comes, the destroyed sectors are not easily rebuilt.
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. As Britain’s economy has steadily become re-engineered towards serving finance, other parts of the economy have struggled to survive in its shadow, like seedlings starved of light and water under the canopy of a giant, deep-rooted and invasive tree. Generations of leaders from Margaret Thatcher to Tony Blair to Theresa May have believed that the City is the goose that lays Britain’s golden eggs, to be prioritised, pampered and protected. But the finance curse analysis shows an oversized City to be a different bird: a cuckoo in the nest, crowding out other sectors.
We all need finance. We need it to pay our bills, to help us save for retirement, to redirect our savings to businesses so they can invest, to insure us against unforeseen calamities, and also sometimes for speculators to sniff out new investment opportunities in our economy. We need finance – but this tells us nothing about how big our financial centre should be or what roles it should serve.
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.
‘The competitiveness agenda is an intellectual house of cards, ready to fall.’ Illustration: Katie Edwards
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.)
But what exactly are these “misallocation costs?” There are many. For instance, you might expect the growth in our giant financial sector to provide a fountain of investment for other sectors in our economy, but the exact opposite has happened. A century or more ago, 80% of bank lending went to businesses for genuine investment. Now, less than 4% of financial institutions’ business lending goes to manufacturing – instead, financial institutions are lending mostly to each other, and into housing and commercial real estate.
Investment rates in the UK’s non-financial economy since 1997 have been the lowest in the OECD, a club that includes Mexico, Chile and Turkey. And in Britain’s supposedly “competitive” low-tax, high-finance economy, labour productivity is 20-25% lower than that of higher-tax Germany or France. Resources are being misallocated as finance has become an end in itself: unmoored, disconnected from the real economy and from the people and real businesses it ought to serve. Imagine if telephone companies suddenly became insanely profitable, and telephony grew to dwarf every other economic sector – but our phone calls were still crackly, expensive and unreliable. We would soon see that our oversized telephone sector was a burden, not a benefit to the economy, and that all those phone billionaires reflected economic sickness, not dynamism. But with everyone dazzled by our high-society, world-conquering financial centre, this glaring problem with the City seems to have been overlooked.
Half a century ago, corporations were not only supposed to make profits, but also to serve employees, communities and society. Overall taxes were high (top income tax rates were more than 90% for many years during and after the second world war) and financial flows across borders were tightly constrained, under the understanding that while trade was generally a good thing, speculative cross-border finance was dangerous. The economist John Maynard Keynes, who helped construct the global financial system known as Bretton Woods, which kept cross-border finance tightly constrained, knew this was necessary if governments were to act in their citizens’ interest. “Let goods be homespun whenever it is reasonably and conveniently possible,” he famously said. “Above all, let finance be primarily national.” The fastest economic growth in world history came in the roughly quarter of a century after the Second World War, when finance was savagely suppressed.
From the 1970s onwards, finance broke decisively free of these controls, taxes were slashed and swathes of our economies were privatised. And our businesses began to undergo a dramatic transformation: their core purposes were whittled down, through ideological shifts and changes in laws and rules, to little more than a single-minded focus on maximising the wealth of shareholders, the owners of those companies. Managers often found that the best way to maximise the owners’ wealth was not to make better widgets and sprockets or to find new cures for malaria, but to indulge in the sugar rush of financial engineering, to tease out more profits from businesses that are already doing well. Social purpose be damned. As all this happened, inequality rose, financial crises became more common and economic growth fell, as managers started focusing their attentions in all the wrong places. This was misallocation, again, but the more precise term for this transformation of business and the rise of finance is “financialisation”.
The best-known definition of the term comes from the American economist Gerald Epstein, a co-author of the new study cited above: financialisation is “the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies”. In other words, it is not just that financial institutions and credit have puffed up spectacularly in size since the 1970s, but also that more normal companies such as beermakers, media groups or online rail ticket services, are being “financialised”, to extract maximum wealth for their owners.
Take private equity firms, for instance. They typically buy up a solid company then financially engineer that company to squeeze all its different stakeholders, one by one. They run the company’s financial operations through tax havens, fleecing taxpayers. They may squeeze workers’ pay and pensions pots, or delay paying suppliers. They might buy up several companies to dominate a market niche, then milk customers for monopoly profits. They chisel the pension funds that invest alongside them, with hidden fees. And so on.
Then, armed with the juiced-up cashflows from these tactics, they borrow more against that company and pay themselves huge “special dividends” from the proceeds. If the company, newly indebted, now goes bust, the magic of “limited liability” means the private equity titans are only liable for the sliver of equity they invested in the first place – typically just 2% of the value of the company they have bought up. Private equity investors sometimes do make the companies they buy more efficient, creating wealth, but that is a minority sport compared to the financialised wealth extraction.
Or, consider the financial structure of Trainline, the online rail ticket seller. When you buy a ticket, you may pay a small booking fee, perhaps 75p. After leaving your bank account, that 75p takes an extraordinary financial journey. It starts with London-based Trainline.com Limited, then flows up to another company that owns the first, called Trainline Holdings Limited. That company is owned by another, which is owned by another and so on.
Five companies up and your brave little 75p skips off to the tax haven of Jersey, then back again to London, where it passes through five more companies, then back to Jersey, then over to Luxembourg, another tax haven. Higher up still, it passes through three or more impenetrable companies in the Cayman Islands, then joins a multitude of other rivulets and streams entering the US, where, 20 or so companies after starting, it flows to KKR, a giant US investment firm.
It flows onwards, to KKR’s shareholders, including banks, investment funds and billionaires. KKR owns or part-owns more than 180 real, solid companies including the car-sharing firm Lyft, Sonos audio systems and Trainline. But on top of those 180 real firms, KKR has at least 4,000 corporate entities, including more than 800 in the Cayman Islands, links in snaking chains of entities with peculiar names drawn from finance’s arcane lingo, like (in Trainline’s case) Trainline Junior Mezz Limited or Victoria Investments Intermediate Holdco Limited.
This is an invisible financial superstructure, siphoning wealth from Trainline’s genuinely useful and profitable services, upwards, away and offshore. None of this is remotely illegal. In our age of financialisation, this is increasingly how business is done.
In 2012, Boris Johnson, then the mayor of London, stood under an umbrella by a busy road, his blond hair whiffling in the wind. “A pound spent in Croydon is far more of value to the country from a strict utilitarian calculus than a pound spent in Strathclyde,” he gushed. “Indeed you will generate jobs and growth in Strathclyde far more effectively if you invest in Hackney or Croydon or in other parts of London.”
We are back to the idea of London as the engine of the economy. Is he right? Will pampering Croydon, London and south-east England generate wealth that can then be spread out to “Strathclyde”, Scotland and the regions? Or is London the centre of a financialising machine that sucks power and money away from the peripheries? Can an oversized City of London and the rest of Britain prosper alongside each other? Or, for the regions to prosper, must the City of London be humbled? This is perhaps the defining economic question of our times. It is a question ultimately bigger than Brexit.
The newly published research provides part of the answer; it suggests that the power of London finance is hurting Britain, to the tune of £4.5tn.
‘Private equity firms typically buy up a solid company then financially engineer that company to squeeze all its different stakeholders.’ Illustration: Katie Edwards
But let’s take a more fine-grained look. If Johnson thinks money flows from Croydon to “Strathclyde” (a Scottish administrative region, now abolished) he may wish to ponder the Strathclyde Police Training and Recruitment Centre, built by the construction firm Balfour Beatty and opened in 2002 under the now-notorious private finance initiative. Under PFI, instead of the government building and paying for projects such as schools or hospitals directly, they get private firms to borrow the money in the City to finance their construction, under a deal that the government will pay them back over, say, 25 years, with interest and extra goodies. (Cynics see PFI as an expensive way for successive governments to hide their borrowing and spending, by outsourcing it all to the private sector.)
The training centre (now called simply the Police Scotland Training Centre) sits underneath a corporate latticework nearly as complex as Trainline’s. PFI payments flow from the government to a private special purpose vehicle (SPV) called Strathclyde Limited Partnership then flow upwards from it through 10 or so companies or partnerships, to a £2bn Guernsey-based firm called International Public Partnerships Limited (INPP), then onwards via tangled shareholdings, partnerships, banking and lending arrangements, and lawyers and accountants clipping fees along the way, to other people and firms in London, South Africa, New York, Texas, Jersey, Munich, Ontario and more. The pipework is complex but the overall pattern is clear. Money flows from police budgets in Scotland, up through these financialised pipelines and into the City, posh parts of London and the south-east and offshore. Along the way, profits are being made and distributed and tax is avoided.
But there is a bigger issue than tax here. Treasury data shows that while the police training centre cost £17-18m to build, the flow of payments to the PFI consortium will add up to £112m from 2001 to 2026, well over six times as much, and vastly more than what the government would have spent if it had simply borrowed that much itself and paid Balfour Beatty directly to build it. This fits a wider pattern. The 700-odd PFI schemes in Britain had an estimated capital value of less than £59.1bn in 2017, yet taxpayers will end up paying out more than £308bn for them, well over five times that sum. PFI is a gift to the City which has resulted in, as the PFI expert Allyson Pollock acidly put it, “one hospital for the price of two”.
I have looked at several PFI corporate structures: each has a similarly convoluted financial architecture, and each involves a rain of payments from British regions (including poorer parts of London) into this central-London-focused financial nexus, overseas and offshore. And PFI is just one component of a larger picture. About £240bn, a third of the UK government’s annual budget, now goes on privately run but taxpayer-funded public services, most of it run through similarly financialised, London-focused pipelines.
On this evidence, Johnson’s picture of money flowing from Croydon to Strathclyde has it exactly back to front. These are examples of what the late geographer Doreen Massey called the “colonial relationship” between parts of London and the rest of the country. To visualise what is going on, I like to imagine old white men in top hats manipulating a Heath-Robinson-like contraption of spindly pipework perched on top of the economy, vacuuming up coins and notes and IOUs from the pockets of those underneath: the workers and users of private care homes, sexual abuse referral centres, schools, hospitals, prisons – and, of course, those of us paying mortgages on expensive homes. All are unconsciously paying tribute into this great invisible extractive machinery.
It is true, of course, that a chunk of the City’s money comes from overseas, so is not extracted from Britain. That at least must be a net benefit, surely? Not so. The core value of finance to our economy comes not from the jobs and billionaires it creates, but from the services it provides. Bringing in enormous quantities of overseas wealth doesn’t provide useful services for the British economy – but it does increase the power and wealth of the finance sector, contributing to the brain drain, the economic crises, the crashing productivity, the predatory attitudes, the misdirected lending and the subsequent inequality. Our open arms to the world’s dirty money is corrupting our politics, and it is puffing up our housing markets, penalising the young, the poor and the weak. It is all deepening the finance curse.
Finance is a great geographical sorting machine, dividing us into offshore winners and onshore losers. But it is also a sorting machine for race, gender, disability and vulnerability – taking value from those suffering reduced public services or wage cuts, and from groups made up disproportionately of women, non-white people, the elderly and the vulnerable – and delivering it to the City. It is a generational sorting machine too, as PFI, risky shadow banking profits and financialised games help the winners to jam today, with the bills sent to our kids.
This hidden tide of money flows constantly from the tired, the weak, the vulnerable huddled masses across Britain, up through these invisible filigree pipelines to a relatively small number of white European or North American men in Mayfair, Chelsea, Jersey, Geneva, the Caymans or New York. This is the finance curse in action. And it’s nice work if you can get it.
Why can’t we do something about the overwhelming power of finance? Why are the protests so muted? Why can’t we tax, regulate or police City institutions properly?
We can’t, and we don’t, not just because the City’s money talks so loudly, but also because of an ideology that has bamboozled us into thinking that we must be “competitive”. The City is going head to head with other financial centres around the world, they cry, and if we are to stay ahead in this race, we cannot hold it back with tough regulations, clod-hopping police snooping around, or “uncompetitive” tax rates. Otherwise, all that money will whoosh off to Geneva or Hong Kong. After Brexit, it will be even more urgent to stay competitive.
“We must be competitive” – it sounds great, right? Tony Blair embraced this concept, even before he slammed the Financial Services Authority in 2005, saying it was seen as “hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone”. David Cameron bowed down to this competitiveness agenda when he declared that “We are in a global race today... Sink or swim. Do or decline.” Theresa May reiterated the idea last month when she declared that Britain would be “unequivocally pro-business” with the lowest corporate tax rate among G20 countries.
Many people in Britain, it is true, are ambivalent about all this. They rightly fret that the City is a global money-laundering paradise, harming other nations, but (whisper it quietly) they like the hot money and oligarchs it attracts to our shores. There is a trade-off, they think, between doing the right thing and preserving our prosperity. Some do understand that if other countries follow suit with this competitiveness agenda, a race to the bottom ensues, leading to ever-lower corporate taxes, laxer financial regulation, greater secrecy, looser controls on financial crime and so on. The only answer to a race to the bottom, they gloomily conclude, is to agree some sort of multilateral armistice to get countries to co-operate and collaborate in not doing this stuff. But that is like herding squirrels on a trampoline: each country wants to out-compete the others, so there will be cheating on any deal. And it is hard to mobilise voters on this complex, distant global stuff. So, they sigh, we are stuck in this ugly race to the bottom.
But there is some tremendous good news here: these people are all flat wrong. The competitiveness agenda, driving us into this race, is intellectual nonsense resting on elementary fallacies, lazy assumptions and confusions. And this is for a few simple reasons. For one thing, economies, tax systems and cities are nothing like companies, and don’t compete like we might think. To get a taste of this, ponder the difference between a failed company, such as Carillion, and a failed state, such as Syria. Even more to the point, the finance curse shows us that if too much finance harms your economy, then pursuing more finance through the competitiveness agenda will make things worse.
In the last eight years, Britain has slashed its main corporation tax rate from 28% to 20%, cutting revenues by £16bn
Underpinning all this is the fallacy of composition, whereby the fortunes of our big businesses and big banks are conflated with the fortunes of our whole economy. Making HSBC or RBS more globally competitive, the thinking goes, will make Britain more competitive. But to the extent that their profits are extracted from other parts of the British economy, their success hurts Britain more than it helps.
To see this more clearly, consider corporate tax cuts, for instance. In the last eight years, Britain has slashed its main corporate tax rate from 28% to 20%, cutting tax revenues by more than £16bn. Theresa May now wants to go further, as a magic open-for-business elixir to address the Brexit mayhem.
What could Britain do with that £16bn? We could simultaneously run nine Oxford Universities, double the resources of Britain’s Financial Conduct Authority, treble government cybersecurity resources, and double staff numbers at HMRC, the tax authorities. Or we could send nearly half a million kids to Eton each year, if you could fit them all in. Does this trade-off somehow make Britain’s tax system, or Britain itself, more competitive? Of course not.
Corporate tax cuts are in fact just one of many varieties of goodies that we shower on the mobile financiers and multinationals. The same basic arguments hold in other areas, too. Better financial regulation brings benefits, while also scaring away the wealth-extracting predators. It is a win-win. There is no trade-off.
Words such as competitiveness and related terms (such as the even more fatuous UK Plc) are wielded to trick millions of taxpayers into thinking that it is in their own self-interest to hand over goodies – tax cuts, financial deregulation, tolerance for monopolies, turning a blind eye to crime and more – to large multinationals and financial institutions. We are permanently at a tipping point, we are told: all that investment is about to disappear down a gurgling global plughole unless we cut taxes and deregulate, NOW, I tell you.
But this is not how investment works. Big banks and financialised multinationals say they need corporate tax cuts: of course they do, just as my children say they need ice-cream. But in survey after survey, business officials say that when they are deciding where to invest, they want the rule of law, a healthy and educated workforce, good infrastructure, access to prosperous, thirsty markets, good inputs and supply chains and economic stability. All these require tax revenues. Low taxes usually come a distant fifth, sixth or seventh in their wish-lists. As the US investor Warren Buffett put it: “I have worked with investors for 60 years and I have yet to see anyone [...] shy away from a sensible investment because of the tax rate on the potential gain.”
We need investment that is embedded in the local economy, bringing jobs, skills and long-term engagement, where managers send their kids to local schools and the business supports an ecosystem of local supply chains. This is the golden stuff, and if an investment is nicely embedded, a whiff of tax won’t scare it away (even if Brexit might). Any investor who is more sensitive to tax has, almost by definition, shallower roots. So taxes will tend to discourage the flightier, more predatory, more financialised investors, who bring fewer jobs and local linkages, and higher corporate tax revenues pay for ingredients that attract investors: roads, police forces, courts, and the educated and healthy workers. To prosper, Britain should increase its effective corporate tax rates, at least for financiers and large multinationals.
Of course, you could also argue that the best way to become more competitive would be for a country to invest in and upgrade education or infrastructure, control dangerous capital flows across borders, manage the exchange rate, or carefully target industrial policies to nurture productive domestic economic ecosystems. You could insist that something called “national competitiveness” must meet the test of productivity, good jobs and a broad-based rise in living standards. There are respectable arguments along all these lines.
But these are not the visions that Blair, Cameron, May, Trump and other finance-captured leaders have been pushing. Their competitiveness agenda is about pursuing rootless global capital in a dog-eat-dog world. Give big banks and multinationals the goodies, and look the other way when they behave badly, in the craven and pathetic hope that they won’t run away.
Any country engaging in a race to the bottom on this stuff also needs to understand that the race does not stop when tax rates reach zero. There is literally no limit to the extent to which corporate players and the wealthy wish to free-ride off the taxes paid by the rest of us. Eliminate their taxes, appease them, and they will demand other subsidies, like the playground bully. Why wouldn’t they?
And yet your local car wash, your barber, or your last surviving neighbourhood fruit-and-veg merchant can’t credibly threaten to jump to Monaco if they don’t like their tax rates or fruit hygiene regulations. The agenda favours the mobile big players with handouts, leaving the domestic small fry to pay the full price of civilisation – plus a surcharge to cover the roaming members of the billionaire classes who won’t. The agenda systematically shifts wealth upwards from poor to rich, distorting our economies, reducing growth and undermining our democracies. It is always harmful.
The competitiveness agenda is a billionaire-friendly hoax. Most competent economists know this already. “If we can teach undergraduates to wince when they hear someone talk about competitiveness, we will have done our nation a great service,” the US economist Paul Krugman explained in a 1993 paper. “A government wedded to the ideology of competitiveness,” he later added, “is as unlikely to make good economic policy as a government committed to creationism is to make good science policy.”
So the competitiveness agenda is an intellectual house of cards, ready to fall. If we can topple it, we can tackle the finance curse. It is pretty straightforward, in fact. In the 1983 movie War Games, a computer geek hacks into the US Department of Defense’s supercomputer and gets dragged into a game of strategy called Global Thermonuclear War. As the game merges with reality, the machine races through thousands of scenarios before concluding: “A strange game. The only winning move is not to play.” Britain is in the same position. By joining this “competitive” global race we have not only been beggaring others – we have been beggaring ourselves, too. We can, and we must, simply step out of the race, unilaterally. That last word, unilaterally, is key. We can just stop it. This is a race for losers.
We need not bow down to the demands of monopolists, foreign oligarchs, tax-haven operators, wealth-extracting private equity moguls, too-big-to-jail banks, or PFI milkers. We can tax, regulate and police our financial sector as we ought to. Global coordination and cooperation are worth doing where possible, but we need not wait for it. And by appealing to national self-interest, we can mobilise the biggest constituency of all, and put finance back in its rightful place: serving Britain’s people, not served by them.
In the 1990s, I was a correspondent for Reuters and the Financial Times in Angola, a country rich with oil and diamonds that was being torn apart by a murderous civil war. Every western visitor asked me a version of the same question: how could the citizens of a country with vast mineral wealth be so shockingly destitute?
One answer was corruption: a lobster-eating, champagne-drinking elite was getting very rich in the capital while their impoverished compatriots slaughtered each other out in the dusty provinces. Another answer was that the oil and diamond industries were financing the war. But neither of these facts told the whole story.
There was something else going on. Around this same time, economists were beginning to put together a new theory about what was troubling countries like Angola. They called it the resource curse.
Academics had worked out that many countries with abundant natural resources seemed to suffer from slower economic growth, more corruption, more conflict, more authoritarian politics and more poverty than their peers with fewer resources. (Some mineral-rich countries, including Norway, admittedly seem to have escaped the curse.) Crucially, this poor performance wasn’t only because powerful crooks stole the money and stashed it offshore, though that was also true. The startling idea was that all this money flowing from natural resources could make their people even worse off than if the riches had never been discovered. More money can make you poorer: that is why the resource curse is also sometimes known as the Paradox of Poverty from Plenty.
Back in the 1990s, John Christensen was the official economic adviser to the British tax haven of Jersey. While I was writing about the resource curse in Angola, he was reading about it, and noticing more and more parallels with what he was seeing in Jersey. A massive financial sector on the tiny island was making a visible minority filthy rich, while many Jerseyfolk were suffering extreme hardship. But he could see an even more powerful parallel: the same thing was happening in Britain. Christensen left Jersey and helped set up the Tax Justice Network, an organisation that fights against tax havens. In 2007, he contacted me, and we began to study what we called the finance curse.
It may seem bizarre to compare wartorn Angola with contemporary Britain, but it turned out that the finance curse had more parallels with the resource curse than we had first imagined. For one thing, in both cases the dominant sector sucks the best-educated people out of other economic sectors, government, civil society and the media, and into high-salaried oil or finance jobs. “Finance literally bids rocket scientists away from the satellite industry,” in the words of a landmark academic study of how finance can damage growth. “People who might have become scientists, who in another age dreamt of curing cancer or flying people to Mars, today dream of becoming hedge-fund managers.”
In Angola, the cascading inflows of oil wealth raised the local price levels of goods and services, from housing to haircuts. This high-price environment caused another wave of destruction to local industry and agriculture, which found it ever harder to compete with imported goods. Likewise, inflows of money into the City of London (and money created in the City of London) have had a similar effect on house prices and on local price levels, making it harder for British exporters to compete with foreign competitors.
Oil booms and busts also had a disastrous effect in Angola. Cranes would festoon the Luanda skyline in good times, then would leave a residue of half-finished concrete hulks when the bust came. Massive borrowing in the good times and a buildup of debt arrears in the bad times magnified the problem. In Britain’s case, the booms and busts of finance are differently timed and mostly caused by different things. But just as with oil booms, in good times the dominant sector damages alternative economic sectors, but when the bust comes, the destroyed sectors are not easily rebuilt.
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. As Britain’s economy has steadily become re-engineered towards serving finance, other parts of the economy have struggled to survive in its shadow, like seedlings starved of light and water under the canopy of a giant, deep-rooted and invasive tree. Generations of leaders from Margaret Thatcher to Tony Blair to Theresa May have believed that the City is the goose that lays Britain’s golden eggs, to be prioritised, pampered and protected. But the finance curse analysis shows an oversized City to be a different bird: a cuckoo in the nest, crowding out other sectors.
We all need finance. We need it to pay our bills, to help us save for retirement, to redirect our savings to businesses so they can invest, to insure us against unforeseen calamities, and also sometimes for speculators to sniff out new investment opportunities in our economy. We need finance – but this tells us nothing about how big our financial centre should be or what roles it should serve.
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.
‘The competitiveness agenda is an intellectual house of cards, ready to fall.’ Illustration: Katie Edwards
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.)
But what exactly are these “misallocation costs?” There are many. For instance, you might expect the growth in our giant financial sector to provide a fountain of investment for other sectors in our economy, but the exact opposite has happened. A century or more ago, 80% of bank lending went to businesses for genuine investment. Now, less than 4% of financial institutions’ business lending goes to manufacturing – instead, financial institutions are lending mostly to each other, and into housing and commercial real estate.
Investment rates in the UK’s non-financial economy since 1997 have been the lowest in the OECD, a club that includes Mexico, Chile and Turkey. And in Britain’s supposedly “competitive” low-tax, high-finance economy, labour productivity is 20-25% lower than that of higher-tax Germany or France. Resources are being misallocated as finance has become an end in itself: unmoored, disconnected from the real economy and from the people and real businesses it ought to serve. Imagine if telephone companies suddenly became insanely profitable, and telephony grew to dwarf every other economic sector – but our phone calls were still crackly, expensive and unreliable. We would soon see that our oversized telephone sector was a burden, not a benefit to the economy, and that all those phone billionaires reflected economic sickness, not dynamism. But with everyone dazzled by our high-society, world-conquering financial centre, this glaring problem with the City seems to have been overlooked.
Half a century ago, corporations were not only supposed to make profits, but also to serve employees, communities and society. Overall taxes were high (top income tax rates were more than 90% for many years during and after the second world war) and financial flows across borders were tightly constrained, under the understanding that while trade was generally a good thing, speculative cross-border finance was dangerous. The economist John Maynard Keynes, who helped construct the global financial system known as Bretton Woods, which kept cross-border finance tightly constrained, knew this was necessary if governments were to act in their citizens’ interest. “Let goods be homespun whenever it is reasonably and conveniently possible,” he famously said. “Above all, let finance be primarily national.” The fastest economic growth in world history came in the roughly quarter of a century after the Second World War, when finance was savagely suppressed.
From the 1970s onwards, finance broke decisively free of these controls, taxes were slashed and swathes of our economies were privatised. And our businesses began to undergo a dramatic transformation: their core purposes were whittled down, through ideological shifts and changes in laws and rules, to little more than a single-minded focus on maximising the wealth of shareholders, the owners of those companies. Managers often found that the best way to maximise the owners’ wealth was not to make better widgets and sprockets or to find new cures for malaria, but to indulge in the sugar rush of financial engineering, to tease out more profits from businesses that are already doing well. Social purpose be damned. As all this happened, inequality rose, financial crises became more common and economic growth fell, as managers started focusing their attentions in all the wrong places. This was misallocation, again, but the more precise term for this transformation of business and the rise of finance is “financialisation”.
The best-known definition of the term comes from the American economist Gerald Epstein, a co-author of the new study cited above: financialisation is “the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies”. In other words, it is not just that financial institutions and credit have puffed up spectacularly in size since the 1970s, but also that more normal companies such as beermakers, media groups or online rail ticket services, are being “financialised”, to extract maximum wealth for their owners.
Take private equity firms, for instance. They typically buy up a solid company then financially engineer that company to squeeze all its different stakeholders, one by one. They run the company’s financial operations through tax havens, fleecing taxpayers. They may squeeze workers’ pay and pensions pots, or delay paying suppliers. They might buy up several companies to dominate a market niche, then milk customers for monopoly profits. They chisel the pension funds that invest alongside them, with hidden fees. And so on.
Then, armed with the juiced-up cashflows from these tactics, they borrow more against that company and pay themselves huge “special dividends” from the proceeds. If the company, newly indebted, now goes bust, the magic of “limited liability” means the private equity titans are only liable for the sliver of equity they invested in the first place – typically just 2% of the value of the company they have bought up. Private equity investors sometimes do make the companies they buy more efficient, creating wealth, but that is a minority sport compared to the financialised wealth extraction.
Or, consider the financial structure of Trainline, the online rail ticket seller. When you buy a ticket, you may pay a small booking fee, perhaps 75p. After leaving your bank account, that 75p takes an extraordinary financial journey. It starts with London-based Trainline.com Limited, then flows up to another company that owns the first, called Trainline Holdings Limited. That company is owned by another, which is owned by another and so on.
Five companies up and your brave little 75p skips off to the tax haven of Jersey, then back again to London, where it passes through five more companies, then back to Jersey, then over to Luxembourg, another tax haven. Higher up still, it passes through three or more impenetrable companies in the Cayman Islands, then joins a multitude of other rivulets and streams entering the US, where, 20 or so companies after starting, it flows to KKR, a giant US investment firm.
It flows onwards, to KKR’s shareholders, including banks, investment funds and billionaires. KKR owns or part-owns more than 180 real, solid companies including the car-sharing firm Lyft, Sonos audio systems and Trainline. But on top of those 180 real firms, KKR has at least 4,000 corporate entities, including more than 800 in the Cayman Islands, links in snaking chains of entities with peculiar names drawn from finance’s arcane lingo, like (in Trainline’s case) Trainline Junior Mezz Limited or Victoria Investments Intermediate Holdco Limited.
This is an invisible financial superstructure, siphoning wealth from Trainline’s genuinely useful and profitable services, upwards, away and offshore. None of this is remotely illegal. In our age of financialisation, this is increasingly how business is done.
In 2012, Boris Johnson, then the mayor of London, stood under an umbrella by a busy road, his blond hair whiffling in the wind. “A pound spent in Croydon is far more of value to the country from a strict utilitarian calculus than a pound spent in Strathclyde,” he gushed. “Indeed you will generate jobs and growth in Strathclyde far more effectively if you invest in Hackney or Croydon or in other parts of London.”
We are back to the idea of London as the engine of the economy. Is he right? Will pampering Croydon, London and south-east England generate wealth that can then be spread out to “Strathclyde”, Scotland and the regions? Or is London the centre of a financialising machine that sucks power and money away from the peripheries? Can an oversized City of London and the rest of Britain prosper alongside each other? Or, for the regions to prosper, must the City of London be humbled? This is perhaps the defining economic question of our times. It is a question ultimately bigger than Brexit.
The newly published research provides part of the answer; it suggests that the power of London finance is hurting Britain, to the tune of £4.5tn.
‘Private equity firms typically buy up a solid company then financially engineer that company to squeeze all its different stakeholders.’ Illustration: Katie Edwards
But let’s take a more fine-grained look. If Johnson thinks money flows from Croydon to “Strathclyde” (a Scottish administrative region, now abolished) he may wish to ponder the Strathclyde Police Training and Recruitment Centre, built by the construction firm Balfour Beatty and opened in 2002 under the now-notorious private finance initiative. Under PFI, instead of the government building and paying for projects such as schools or hospitals directly, they get private firms to borrow the money in the City to finance their construction, under a deal that the government will pay them back over, say, 25 years, with interest and extra goodies. (Cynics see PFI as an expensive way for successive governments to hide their borrowing and spending, by outsourcing it all to the private sector.)
The training centre (now called simply the Police Scotland Training Centre) sits underneath a corporate latticework nearly as complex as Trainline’s. PFI payments flow from the government to a private special purpose vehicle (SPV) called Strathclyde Limited Partnership then flow upwards from it through 10 or so companies or partnerships, to a £2bn Guernsey-based firm called International Public Partnerships Limited (INPP), then onwards via tangled shareholdings, partnerships, banking and lending arrangements, and lawyers and accountants clipping fees along the way, to other people and firms in London, South Africa, New York, Texas, Jersey, Munich, Ontario and more. The pipework is complex but the overall pattern is clear. Money flows from police budgets in Scotland, up through these financialised pipelines and into the City, posh parts of London and the south-east and offshore. Along the way, profits are being made and distributed and tax is avoided.
But there is a bigger issue than tax here. Treasury data shows that while the police training centre cost £17-18m to build, the flow of payments to the PFI consortium will add up to £112m from 2001 to 2026, well over six times as much, and vastly more than what the government would have spent if it had simply borrowed that much itself and paid Balfour Beatty directly to build it. This fits a wider pattern. The 700-odd PFI schemes in Britain had an estimated capital value of less than £59.1bn in 2017, yet taxpayers will end up paying out more than £308bn for them, well over five times that sum. PFI is a gift to the City which has resulted in, as the PFI expert Allyson Pollock acidly put it, “one hospital for the price of two”.
I have looked at several PFI corporate structures: each has a similarly convoluted financial architecture, and each involves a rain of payments from British regions (including poorer parts of London) into this central-London-focused financial nexus, overseas and offshore. And PFI is just one component of a larger picture. About £240bn, a third of the UK government’s annual budget, now goes on privately run but taxpayer-funded public services, most of it run through similarly financialised, London-focused pipelines.
On this evidence, Johnson’s picture of money flowing from Croydon to Strathclyde has it exactly back to front. These are examples of what the late geographer Doreen Massey called the “colonial relationship” between parts of London and the rest of the country. To visualise what is going on, I like to imagine old white men in top hats manipulating a Heath-Robinson-like contraption of spindly pipework perched on top of the economy, vacuuming up coins and notes and IOUs from the pockets of those underneath: the workers and users of private care homes, sexual abuse referral centres, schools, hospitals, prisons – and, of course, those of us paying mortgages on expensive homes. All are unconsciously paying tribute into this great invisible extractive machinery.
It is true, of course, that a chunk of the City’s money comes from overseas, so is not extracted from Britain. That at least must be a net benefit, surely? Not so. The core value of finance to our economy comes not from the jobs and billionaires it creates, but from the services it provides. Bringing in enormous quantities of overseas wealth doesn’t provide useful services for the British economy – but it does increase the power and wealth of the finance sector, contributing to the brain drain, the economic crises, the crashing productivity, the predatory attitudes, the misdirected lending and the subsequent inequality. Our open arms to the world’s dirty money is corrupting our politics, and it is puffing up our housing markets, penalising the young, the poor and the weak. It is all deepening the finance curse.
Finance is a great geographical sorting machine, dividing us into offshore winners and onshore losers. But it is also a sorting machine for race, gender, disability and vulnerability – taking value from those suffering reduced public services or wage cuts, and from groups made up disproportionately of women, non-white people, the elderly and the vulnerable – and delivering it to the City. It is a generational sorting machine too, as PFI, risky shadow banking profits and financialised games help the winners to jam today, with the bills sent to our kids.
This hidden tide of money flows constantly from the tired, the weak, the vulnerable huddled masses across Britain, up through these invisible filigree pipelines to a relatively small number of white European or North American men in Mayfair, Chelsea, Jersey, Geneva, the Caymans or New York. This is the finance curse in action. And it’s nice work if you can get it.
Why can’t we do something about the overwhelming power of finance? Why are the protests so muted? Why can’t we tax, regulate or police City institutions properly?
We can’t, and we don’t, not just because the City’s money talks so loudly, but also because of an ideology that has bamboozled us into thinking that we must be “competitive”. The City is going head to head with other financial centres around the world, they cry, and if we are to stay ahead in this race, we cannot hold it back with tough regulations, clod-hopping police snooping around, or “uncompetitive” tax rates. Otherwise, all that money will whoosh off to Geneva or Hong Kong. After Brexit, it will be even more urgent to stay competitive.
“We must be competitive” – it sounds great, right? Tony Blair embraced this concept, even before he slammed the Financial Services Authority in 2005, saying it was seen as “hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone”. David Cameron bowed down to this competitiveness agenda when he declared that “We are in a global race today... Sink or swim. Do or decline.” Theresa May reiterated the idea last month when she declared that Britain would be “unequivocally pro-business” with the lowest corporate tax rate among G20 countries.
Many people in Britain, it is true, are ambivalent about all this. They rightly fret that the City is a global money-laundering paradise, harming other nations, but (whisper it quietly) they like the hot money and oligarchs it attracts to our shores. There is a trade-off, they think, between doing the right thing and preserving our prosperity. Some do understand that if other countries follow suit with this competitiveness agenda, a race to the bottom ensues, leading to ever-lower corporate taxes, laxer financial regulation, greater secrecy, looser controls on financial crime and so on. The only answer to a race to the bottom, they gloomily conclude, is to agree some sort of multilateral armistice to get countries to co-operate and collaborate in not doing this stuff. But that is like herding squirrels on a trampoline: each country wants to out-compete the others, so there will be cheating on any deal. And it is hard to mobilise voters on this complex, distant global stuff. So, they sigh, we are stuck in this ugly race to the bottom.
But there is some tremendous good news here: these people are all flat wrong. The competitiveness agenda, driving us into this race, is intellectual nonsense resting on elementary fallacies, lazy assumptions and confusions. And this is for a few simple reasons. For one thing, economies, tax systems and cities are nothing like companies, and don’t compete like we might think. To get a taste of this, ponder the difference between a failed company, such as Carillion, and a failed state, such as Syria. Even more to the point, the finance curse shows us that if too much finance harms your economy, then pursuing more finance through the competitiveness agenda will make things worse.
In the last eight years, Britain has slashed its main corporation tax rate from 28% to 20%, cutting revenues by £16bn
Underpinning all this is the fallacy of composition, whereby the fortunes of our big businesses and big banks are conflated with the fortunes of our whole economy. Making HSBC or RBS more globally competitive, the thinking goes, will make Britain more competitive. But to the extent that their profits are extracted from other parts of the British economy, their success hurts Britain more than it helps.
To see this more clearly, consider corporate tax cuts, for instance. In the last eight years, Britain has slashed its main corporate tax rate from 28% to 20%, cutting tax revenues by more than £16bn. Theresa May now wants to go further, as a magic open-for-business elixir to address the Brexit mayhem.
What could Britain do with that £16bn? We could simultaneously run nine Oxford Universities, double the resources of Britain’s Financial Conduct Authority, treble government cybersecurity resources, and double staff numbers at HMRC, the tax authorities. Or we could send nearly half a million kids to Eton each year, if you could fit them all in. Does this trade-off somehow make Britain’s tax system, or Britain itself, more competitive? Of course not.
Corporate tax cuts are in fact just one of many varieties of goodies that we shower on the mobile financiers and multinationals. The same basic arguments hold in other areas, too. Better financial regulation brings benefits, while also scaring away the wealth-extracting predators. It is a win-win. There is no trade-off.
Words such as competitiveness and related terms (such as the even more fatuous UK Plc) are wielded to trick millions of taxpayers into thinking that it is in their own self-interest to hand over goodies – tax cuts, financial deregulation, tolerance for monopolies, turning a blind eye to crime and more – to large multinationals and financial institutions. We are permanently at a tipping point, we are told: all that investment is about to disappear down a gurgling global plughole unless we cut taxes and deregulate, NOW, I tell you.
But this is not how investment works. Big banks and financialised multinationals say they need corporate tax cuts: of course they do, just as my children say they need ice-cream. But in survey after survey, business officials say that when they are deciding where to invest, they want the rule of law, a healthy and educated workforce, good infrastructure, access to prosperous, thirsty markets, good inputs and supply chains and economic stability. All these require tax revenues. Low taxes usually come a distant fifth, sixth or seventh in their wish-lists. As the US investor Warren Buffett put it: “I have worked with investors for 60 years and I have yet to see anyone [...] shy away from a sensible investment because of the tax rate on the potential gain.”
We need investment that is embedded in the local economy, bringing jobs, skills and long-term engagement, where managers send their kids to local schools and the business supports an ecosystem of local supply chains. This is the golden stuff, and if an investment is nicely embedded, a whiff of tax won’t scare it away (even if Brexit might). Any investor who is more sensitive to tax has, almost by definition, shallower roots. So taxes will tend to discourage the flightier, more predatory, more financialised investors, who bring fewer jobs and local linkages, and higher corporate tax revenues pay for ingredients that attract investors: roads, police forces, courts, and the educated and healthy workers. To prosper, Britain should increase its effective corporate tax rates, at least for financiers and large multinationals.
Of course, you could also argue that the best way to become more competitive would be for a country to invest in and upgrade education or infrastructure, control dangerous capital flows across borders, manage the exchange rate, or carefully target industrial policies to nurture productive domestic economic ecosystems. You could insist that something called “national competitiveness” must meet the test of productivity, good jobs and a broad-based rise in living standards. There are respectable arguments along all these lines.
But these are not the visions that Blair, Cameron, May, Trump and other finance-captured leaders have been pushing. Their competitiveness agenda is about pursuing rootless global capital in a dog-eat-dog world. Give big banks and multinationals the goodies, and look the other way when they behave badly, in the craven and pathetic hope that they won’t run away.
Any country engaging in a race to the bottom on this stuff also needs to understand that the race does not stop when tax rates reach zero. There is literally no limit to the extent to which corporate players and the wealthy wish to free-ride off the taxes paid by the rest of us. Eliminate their taxes, appease them, and they will demand other subsidies, like the playground bully. Why wouldn’t they?
And yet your local car wash, your barber, or your last surviving neighbourhood fruit-and-veg merchant can’t credibly threaten to jump to Monaco if they don’t like their tax rates or fruit hygiene regulations. The agenda favours the mobile big players with handouts, leaving the domestic small fry to pay the full price of civilisation – plus a surcharge to cover the roaming members of the billionaire classes who won’t. The agenda systematically shifts wealth upwards from poor to rich, distorting our economies, reducing growth and undermining our democracies. It is always harmful.
The competitiveness agenda is a billionaire-friendly hoax. Most competent economists know this already. “If we can teach undergraduates to wince when they hear someone talk about competitiveness, we will have done our nation a great service,” the US economist Paul Krugman explained in a 1993 paper. “A government wedded to the ideology of competitiveness,” he later added, “is as unlikely to make good economic policy as a government committed to creationism is to make good science policy.”
So the competitiveness agenda is an intellectual house of cards, ready to fall. If we can topple it, we can tackle the finance curse. It is pretty straightforward, in fact. In the 1983 movie War Games, a computer geek hacks into the US Department of Defense’s supercomputer and gets dragged into a game of strategy called Global Thermonuclear War. As the game merges with reality, the machine races through thousands of scenarios before concluding: “A strange game. The only winning move is not to play.” Britain is in the same position. By joining this “competitive” global race we have not only been beggaring others – we have been beggaring ourselves, too. We can, and we must, simply step out of the race, unilaterally. That last word, unilaterally, is key. We can just stop it. This is a race for losers.
We need not bow down to the demands of monopolists, foreign oligarchs, tax-haven operators, wealth-extracting private equity moguls, too-big-to-jail banks, or PFI milkers. We can tax, regulate and police our financial sector as we ought to. Global coordination and cooperation are worth doing where possible, but we need not wait for it. And by appealing to national self-interest, we can mobilise the biggest constituency of all, and put finance back in its rightful place: serving Britain’s people, not served by them.
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