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December 13, 2011

Comments

Paolo

Another more prosaic reason may be that bank bonuses are a strong support for ridicolous house prices in London.....

Paolo

...not to mention commercial properties providing office space to City's workers. Guess that is another gigantic bubble waiting to bust.

chris

True, Paolo - but as Willem Buiter rightly said, house prices aren't net wealth (and I guess the same's mostly true for commercial property).

Jorjun

When Labour exported IT work to Bangalore, your argument (2) was applied. But in fact, it was just bitterness & actually caused damage. For instance the City needed new IT systems to perform risk management, because humans being human - traders - their downside to losing too much money was to become unemployed, whereas on the upside they could become millionaires. Unfortunately in such a set-up, it is hard to expect people to police themselves. Looks like the City could not find enough saints to hire. What they needed was IT professionals to encode ideals into the trading systems. But hey, they had just been replaced. How very convenient for 'neo liberal' haters.

As for the miners, yes, what happened was cruel, but their industry was being supported by tax payers. There was no economic raison d'être for coal mining in Britain in the 1980s. It is not true that banking is the same. It was effectively vandalised by ideologues. It is a high value activity. If it stops then trillions of pounds go elsewhere, and so do the 0.03% commissions of the highly skilled, generally trusted traders working in London.

The City was seemed to be undermined for two reasons : 1. To provide state funding credit - the old tax and spend formula had become out-dated. 2. To 'prove' that 'neo liberalism' did not work by letting the systemic failure wreak its own demise. Then we could blame the systemic failures on 'right wing greed'.

(1) was convient to Old Father Brown's paternalistic good causes - they like to help the people that they know. Screw the people that are out of sight & therefore mind. Before you argue that this was how the miners were treated - effectively by propping up a dangerous activity that was not actually economically viable, if they did not take on the unions then they were abusing tax payers.

(2) Was also good for those ideologues who think Europe should wrest control of our mature market mechanisms (not that they dont need technical progress like everything else) so that they can help the Eurozone triumph in its preferred centralised, grand-planning climate - one of socialistic mendacity rather than cold, hard, market reality.

Ralph Musgrave

The fact that the City funds the Tory Party might have something to do with it.

Metatone

It's worth noting that while there's a widespread belief that coal-mining in the UK is not economical, the facts are not on the side of that argument even now (we have a much reduced coal industry, but we still have one).

The facts were even less on the side of Thatcher at the time of the miner's strike. (Although the dash to gas had some environmental benefits.)

1) South African coal was used to replace UK coal in power stations, but it was unethically cheap because of apartheid.

2) Britain would be much better off even now had we looked to slow down our consumption of North Sea gas and also to export more of it.

gastro george

"Britain would be much better off even now had we looked to slow down our consumption of North Sea gas and also to export more of it."

Or not blown the money on tax cuts ...

Kellie Strøm

@Jorjun

The coal industry "was being supported by tax payers," whereas the banks . .

Paolo

@chris - totally agree, my point was that the political backlash from the coalition's electorate strongholds would be unpalatable.

Infoholic UK

3. Those workers are highly skilled and could find employment elsewhere, within the same sector but outside of the EU, so the loss to the economy would be equal to their lost earnings.

LOT of work going in Singapore, Zurich, Hong Kong right now. There will be more if the EU gets its way.

Most likely 4. - a mixture of 1, 2 and 3.

Recusant

Well, Chris, maybe it is because over 50% - actually closer to 65% - of front office staff in the City are not UK nationals. They are ONLY here because of the form the City currently takes. Say bye bye to that and you say bye bye to all their 50% taxes.

aragon

http://www.guardian.co.uk/business/2011/dec/12/britain-ruled-by-banks

"According to the IMF, British taxpayers have shelled out £289bn in "direct upfront financing" to prop up the banks since 2008. Add in the various government loans and underwriting, and taxpayers are on the hook for £1.19tn"

"In other words, about two-thirds of all bank lending in 2007 went to pumping up the bubble."

The city is a huge liability, with three to four thousand on pay of £1m+ p.a.

Keith

The answer to this problem is that ex mps and Cabinet ministers should only be allowed to work down the pit. Then they would prop up the coal industry rather than the city. Coal miners would also be better paid too; so whats not to like?

More seriously it does seem that the financial crisis has revealed that the city has an implicit guarantee of state aid which other parts of the economy lack. Where is the evidence that this is a rational use of the tax power of the state? Exposing the tax payer to enormous unquantifiable loss is to turn the state into a participant in gambling on an enormous scale. Labour politicians eg darling as well as Democrats in the USA seem happy to back one sector of the economy without any rigorous arguments. It strikes me that the development economists have been pointing out for decades that it is unwise to depend too much on one economic sector and is not finance an example of that today in developed countries. Subsidies, explicit or implicit, for one sector invites over dependence and risk.

As for the "Veto" that is surely irrelevant? There is no support for European political integration in the uk as there is in most of the rest of europe. The uk is not and probably never will be "at the heart of europe". A large proportion of Labour and Liberal voters are hostile or indifferent to the EU; the elite merely try to ignore this fact. Even Blair who was pro joining the euro and had a huge majority in Parliament would not risk defeat on the issue. So backed off. If EU integration goes ahead the city will tend to lose out over time and no one can do anything about it. A fully integrated EU will favour its own banks and firms. It is a mistake to confuse influence with control. The uk will have some influence in or outside the EU project but never a veto as the other states can always by pass the uk and have more integration if they want. You can have "influence" and be over ruled: what euro sceptics really want is the power to always prevail but that is a fantasy. Say no if you like but the uk cannot dictate the ends of european politics. We are not powerful enough to do so. And european politics will always affect the uk.

PaulB

If investment banking moves out of the City, most of the high-earners will go with it. You need option (3) some other country gets the benefit.

You might be right that the high earnings come from an underpriced externality, but the risk of recession is the same whichever country banking is in, and bail-out costs are borne by the countries that own the banks, not the countries where they operate.

McGazz

"There was no economic raison d'être for coal mining in Britain in the 1980s."

When you add up the cost of all the benefits paid out to people who never worked again, plus their children, who couldn't find work and add to that the cost of dealing with the health problems, anti-social behaviour, etc, found in communities with high levels of long-term unemployment, subsidising coal mining looks like a bargain.

Sandwichman

The claim of a "lump of labour fallacy" is based on the following propositions:

1. The interests of the poor must have the highest priority (after all "What would become of the rich if there were no poor people to till their grounds, and pay their rent?"

2. There is not so great a difference in the real interests of the rich and the poor;

3. Trade is a large and difficult subject that requires deep thought, long study, extensive reading and large experience to form a true judgment;

4. Machines distinguish men in society from men in a savage state. There are many examples showing how machines benefit people;

5. All improvements at first produce some difficulty but many receive benefit while only a few suffer and hopefully not for long;

6. Trade will find its own level. Those thrown out of their old employments will find or learn new ones. Those who get a disproportionate gain will soon find many rivals and lose their temporary advantage; and

7. There is a disposition among people to be unduly alarmed by new discoveries.

8. Even if machines or globalization or financialization are evils they are necessary evils. We might as well make the best of them.

9. This would be a prosperous time for the poor, if only they weren't so inclined to carry their money to the alehouse.

10. Anyone who disagrees with the above truths is a irreligious, conscienceless scoundrel.

dcomerf

There's an political geography issue here. It may well be that letting London jobs go would have ~ zero cost overall but, under outcome (2), the other jobs that are created may be more geographically dispersed. This will benefit the rest of Britain (non tory) at the expense of the South East of England (tory).

Neil

I think Keith has already said this, but: Who'd want to spend their retirement from politics working down a mine?

dirigible

"the lump of labour fallacy"

Is there any evidence that this is in fact a fallacy?

I mean empirical evidence, not the harrumphing of columnists at automated checkouts.

Blissex

«If investment banking moves out of the City, most of the high-earners will go with it.»

And the problem with that is what? As our blogger points out what matters is the aggregate cost to GNP, and:

«This means that if the City shrinks by half - and I know of no estimate as high as this - and workers lose half their income in moving to other jobs, we‘ll lose 1% of GDP.»

Note that this is unlikely to be a permanent loss, because the "best and brightest" once redeployed to productive work should then add considerable value to tasks other than tunnelling to themselves the state-provided capital of major banks.

«It is not true that banking is the same. It was effectively vandalised by ideologues. It is a high value activity.»

It is so high value that over the cycle it has net losses that often destroy the capital base of the industry. Does not sound that its customer value it so highly if in effect it is an industry that prices their services below cost.

Blissex

«"the lump of labour fallacy"

Is there any evidence that this is in fact a fallacy?»

Well, the usual obvious bit of empirical evidence is that so far in the first-world unemployment has not been shooting up in the aggregate, even if it has shot up quite a lot in certain periods in certain industries. This seems to prove that in the aggregate there is enough demand for labour to employ everybody eventually.

But in the short term and in specific locales there is a indeed a lump of labour, as it can take many years for capital to reallocate itself around new employment patterns.

But there are lots of warnings that come with that lump of evidence, that undermines a bit the argument:

* There is certainly a lump of labour for any country given their capital and labour endowments and trade comparative advantages, at any given target level of median wage. It is generally assumed that first-world countries are not resource constrained and not trade constrained in the near future, an assumption that may start being tested.

* If there was no lump of labour then employment would not be supply constrained, the labour market would be always tight, all productivity gains would be captured by labour, and median wages would be rising all the time. The last 30 years tell a different story.

* In the first-world there has been a very large increase in non-tradable and arguably non-value adding jobs to maintain overall employment. Largely to soak up lots of new female voter labor market entrants, but also simply to keep the notional unemployment rate down. Consider the university degree bubble.

* There are countries where there is widespread underemployment and unemployment, and it persists for decades or centuries. Those countries provide a very clear indication that they have a lump of labour situation.

Overall I think that the "lump of labour" discussion is pointless. What matters is the relative market and political strengths of property owners and labour suppliers in the first instances, and the distribution of income thereof, which is arbitrary within pretty ample bounds (because markets can clear at many different points).

Neil

It's a little unfair to single out the Tories as being inconsistent here - as Labour takes the opposite position on all three sectors you mention, they are by definition exactly as inconsistent.

Mind you, it's only inconsistency if you're in the mindset of the left, where protecting *jobs* is what you're all about; to my knowledge, no Tory is standing up to say "please think of these poor bankers who will be left unemployed if we do this". What they *are* saying is: "The Financial Services Industry, unlike mining or the public sector, is a massive source of revenue for this country, and it would be stupid to throw that revenue away."

There's no inconsistency in a position that looks to protect profitable industries and destroy unprofitable ones.

Blissex

As to the economic viability of coal mining in the UK, that was not a big issue.

The big issue was that the NUM made a colossal economic and political error in trying to blackmail the rest of the country in their role of a selfish guild run by malevolent morons (and I do know that pit work was vicious and brutalizing with often fairly hideous pit bosses and owners, so I understand the temptation for miners to get revenge).

Eventually even union-member voters decided that the government rules the country and not the NUM, and provided political cover for the reduction of coal mining. Overreach is a very bad strategy (but apparently not for investment bankers), and too bad that the unionization bubble of the 60s-70s (endless corporatist strikes) resulted in their near disappearance.

As usual it is impossible to understand UK politics in the past 30 years without looking at this graph:

http://mazamascience.com/OilExport/output_en/Exports_BP_2011_oil_mtoe_GB_MZM_NONE_auto__.png

and it was pretty obvious that in 1984 Thatcher had on her desk projections that showed that coal was no longer critical to the UK economy.

One point of view is that by switching deliberately and massively from coal to oil not only the blackmail potential of coal workers was eliminated (and oil is much more of a commodity than coal is), but also it saved the country and miners themselves from a lot of health problems, as coal is quite poisonous (there is a fair bit of nasty stuff mixed in with the carbon).

Another point of view that in effect the coal mines have been mothballed, and the coal is still in the ground, and when oil ends, the UK will still have that coal, if desperate enough to pay the high human cost of mining it and the high health cost of using it.

My hope is that the political and voter classes realize that bankers are another overreaching guild trying to blackmail the country through their control of the payment system, and they will be reduced like the miners were.

Sandwichman

"Is there any evidence that this is in fact a fallacy?"

The claim is itself a fallacy (Pigou 1913, Dobb 1928). Here's how it works: the harrumphing columnist assumes a number of dubious but discretely undisclosed premises (self-adjusting economy, "best of all possible worlds", unlimited natural resource, individual choice of income and leisure) on the basis of which the opponent's argument "can only make sense" with the additional assumption that the amount of work is fixed.

Blissex

«"The Financial Services Industry, unlike mining or the public sector, is a massive source of revenue for this country, and it would be stupid to throw that revenue away."

There's no inconsistency in a position that looks to protect profitable industries and destroy unprofitable ones.»

EXACTLY! Therefore the sooner the UK loses the financial services industry the better, because over the cycle it is vastly unprofitable. Revenue is not the same as profit.

Sure the City has somewhat vast revenue (as our blogger mentions it is about 4% of GDP) directly or indirectly, but it is also rather unprofitable, just like Wall Street.

The issue then is whether the revenue is worth the pretty large subsidy that must be paid to keep the banks open mining other people's wealth, or whether as our blogger says there may be better endeavours where to deploy the UK's "best and brightest" without paying them a huge subsidy.

Perhaps if there is a defense for keeping trading pits open by shoveling periodically huge state subsidies at them it is that at least the welfare goes towards exportable services, so that in effect the UK is just underpricing financial exports to keep up house prices in central London, which may be a reasonable policy goal.

But this is the "national champion" view of UK finance, and industrial policy is supposed to be wrong :-).

Blissex

«There's no inconsistency in a position that looks to protect profitable industries and destroy unprofitable ones.»

BTW there is a great deal of hypocrisy here too: the market is supposed to do that. If the Tories had let unprofitable trading pits to their destiny during the recent recession, the market would have destroyed the unprofitable ones. Conversely there is no point in protecting profitable industries.

Otherwise the government is making losers into winners. Strangely enough :-).

Blissex

«There is no support for European political integration in the uk as there is in most of the rest of europe. The uk is not and probably never will be "at the heart of europe".»

I have a proposal to reverse all that. Based on two points:

* The English are by and large little Englanders who still haven't gotten over the loss of Empire (the Welsh, Northern Irish and Scottish seem rather more pro-European than the English).

* Many continental countries admire the UK civil service, NHS etc. (their versions are even worse).

The obvious solution is then to change the name of the EU to Empire of Greater Britain, and to let Europe be administered by the irritating but somewhat efficient mandarins of Whitehall, they have a tradition of running large scale conglomerates of very different places.

Westminster would become a bit more diverse, or it could stay as English local parliament and the Imperial Parliament remain in Strasbourg. Ideally the Royal Family would move nearer to their roots, I suggest Aachen because of the ancient historical precedent.

If I were on the continent I'd take it. Even if I were French or German. Just to get those obstructionist English tossers to shut up and put up and work hard to keep the whole mess together, while the French and German just get on with the far more important jobs of making good food and good machinery.

I'd just insist that in exchange the City be shut down and replaced with a fantasy finance themepark. Nobody would notice :-).

FlatEric

The Treasury regards the City as a 'cluster', as the UK's only cluster, in fact. This is supposed to generate externalities, from having co-located similar businesses in a single region. Germany has clusters in machine tools, this is what the UK has . The initial location of a cluster may be arbitrary, but once it's established the process is self-reinforcing.

This comes from conversations with HMT economists. It's not my area (read Tom Peters, or more generally about economic geography... Or even early Krugman for more). So I don't know if the notion of clusters is particularly helpful. But I'm pretty sure this is the academic scribbling that underlies this particular frenzy from the political madmen. Since you asked.

Blissex

«The Treasury regards the City as a 'cluster', as the UK's only cluster, in fact.»

That different from the arguments I have seen more commonly, which are that it exports a lot, and that it induces a lot of business in related sectors (e.g. law, PR, accounting).

It is not a meritless argument, but I would question the utility of a cluster that needs to be periodically recapitalized by the State because it does not earn enough to cover its costs.

Also I note the irony: the UK used to have several other clusters, which were all undermined by the government because they were all in unionized industries, and regrettably most of those unions overreached.

Keith

Blissex seems to want to restore the Holy Roman Empire. However what ever merits that may have some one called Habsburg has first claim on the restored empire! The minor royals of Saxe-Coburg could hardly expect such promotion. But england was never part of it, and they had no single currency either. Many members of the Empire wanted to leave and did so e.g. The dutch reblellion. So no solution there. But nice try.

cartoner

i could not agree more, and i think most of the people also agree with you.

fake

**EXACTLY! Therefore the sooner the UK loses the financial services industry the better, because over the cycle it is vastly unprofitable. Revenue is not the same as profit.**

What on earth, Got any facts to back this up?

**The issue then is whether the revenue is worth the pretty large subsidy that must be paid to keep the banks open mining other people's wealth**

This would be the Scottish banks, not the city banks?

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