Further to my blog yesterday on whether London subsidises Scotland or, as I think likely, the flow is actually in the other direction, my University of Sheffield colleague Adam Leaver drew my attention to a blog post he wrote in 2013 which I read at the time but had, I admit, since forgotten. This was written for the Tax Justice Network's Tax Justice Focus but was republished on Open Democracy. Adam's theme was similar to my own, and had the title:
The metropolitanisation of gains, the nationalisation of losses
The summary was:
The prosperous South East can no longer afford to subsidise the rest of the United Kingdom. Or so runs the conventional wisdom. The facts, on the other hand, are rushing headlong in the opposite direction.
A recent 800-page report highlighted just how unequal the UK regional economic landscape has become [1]. In ratio terms, the UK's largest 2nd tier city generates around 10% of the output of London — the second highest capital to 2nd tier city output inequality within the EU. In terms of the regional concentration of GDP creation, we have more in common with a Hungary, Bulgaria, Romania or Greece than a Germany, Netherlands or Sweden. And while there is evidence to show that the UK's 2nd tier cities were growing faster than the capital pre-crisis (from a lower base), that trend is now being undone as austerity cuts bite into the non-metropolitan North and West.
At one level it is no surprise that the UK coalition government's immediate post-election rhetoric about rebalancing has been abandoned, to be replaced by a new, morally-laden discourse about the unfair subsidies received by the regions and the rights of Londoners to keep more of ‘their' income [2]. UK recessions encourage internecine squabbles over resources and London's position as both political and economic centre mean there was only ever likely to be one clear winner. But as Londoners and their informal representatives look on jealously as the bank notes seem to disappear to the non-metropolitan North and West, it is perhaps worth revisiting how we got here. This is a complex issue that requires balance and open-mindedness if we are to understand the diversity of flows in a national economy.
In terms of the UK national growth model, two processes have cemented London's dominance within the economy. First we now rely less on the manufacture of things and more on the manufacture of credit. We have bought into a growth model that depends on the ability of our banks to lend against assets, and for households (and businesses) to convert the capital gains from those rising asset prices into expenditure. It is a startling fact that the real value of housing equity withdrawal under Thatcher and Blair was marginally higher than the real value of GDP growth [3]. This national model significantly empowers London's form of ‘gentlemanly capitalism': the historically entrenched culture and interests of land and finance within the UK which prioritise the making of money from money over the making of money from industrial enterprise. The political and economic spheres mutually reinforce each other: finance has access to the charmed circle of policy formation because of the great wealth and prestige bestowed upon them by a credit-fuelled, asset based growth regime.
Second, the broader process of privatisation and the extension of public-private partnerships disproportionately benefit a global city like London. London does attract capital, but it does so because it is a kind of conversion machine, taking national and international assets, converting them into revenue streams from which well-placed individuals skim high pay. In other words: London attracts capital because it is also extractive. Let's take the UK's Private Finance Initiative (PFI) [4] as an example. The PFI is a form of Public Private Partnership (PPP) where public infrastructure projects are funded, built and managed by the private sector to a public specification. Generally PFI contracts last a minimum of 25 years, during which the private sector receive payments in exchange for bearing the project risk. Notionally private sector participants are paid only if services are delivered according to the negotiated concession agreement. The decomposition of activities around a contracted-out infrastructure project leads to a fragmentation of corporations around specialised functions, so that one company may provide the finance, another may build the school or hospital, another may manage the services. In theory some of these functions need not be located on the site of the project. And certainly the revenue streams do not all circulate regionally: the finance company probably has its operating office in London, as might the service management office. Even the building firm might be co-ordinated from London using local contractors on site. Overseas companies that invest in infrastructure funds are also likely to have an office in London, and those senior workers are likely to be extremely well paid.
Fragmentation has led to a concentration of certain functions like financing and asset management in London. This has diminished capacity in the regions through the withering of broad competences, the destruction of joined up supply chains, and skills drift as talent is forced to relocate down South to find a job. State-sponsored investment projects across the country have benefited private sector growth in London and the South. The obvious counterfactual — a publicly funded and organised infrastructure development programme — would result in a greater proportion of project revenue streams accruing to the region around the development site, kicking in multipliers that would further benefit the local economy.
These two developments tell us something about modern day capitalism in the UK. Contrary to the fantasies of free-market proponents, the success of London has much to do with an active UK state and its willingness to take on or underwrite private sector liabilities. The banking sector, for example, is a net recipient of state funds which the whole country must pay for, even though the private gains are largely realised in London. By our calculations, the Treasury received taxes of £203 billion over five years up to 2006/7; substantially less than the cost of the UK bank bailouts, estimated at between £289 billion to £1,183 billion by the IMF [5]. If we factor in the impact of government bailout guarantees on bank borrowing rates, then the longer term subsidies are even higher [6]. And all this is before we consider the costs of mis-selling and other predatory habits
Liabilities are also underwritten at public expense in the case of PFIs. Typically PFI consortia leave the maximum contractual risk with the local state or cost at a premium any risks that cannot be offloaded. So the flipside to the revenue streams clipped by metropolitan elites is a series of costs and liabilities passed on to non-metropolitan areas. There are also many hidden, contingent liabilities — as when NHS Trusts cannot repay their PFI loans, or unwieldy contracts produce inefficiencies and exorbitant penalty clauses which are costly to renegotiate. And this is before we discuss the many contracts that overshoot their original estimates.
All of these interventions should be thought of as State subsidies; received mainly by private subsidiaries operating in the capital, and paid for by taxpayers the length and breadth of the country. This quiet cross-subsidy from North and West to South East has been running un-noticed for a long period of time. Its unanticipated result is a kind of regional moral hazard: the metropolitanisation of gains, and the nationalisation of losses.
But we have arguably reached the limits of that model. Despite the current political spin that a three per cent rise in house prices (driven mainly by an eight per cent rise in the capital) marks the end of our problems, there is a limit to how far asset prices can rise when wages and growth are stagnant. We just aren't growing fast enough to take on the liabilities to fuel the asset price rises, and we aren't paying people enough to allow them to take on larger interest repayments. If debt is a claim on our future growth, there comes a tipping point where the scale of debt repayments acts as a drag on growth, crowding out investment and consumption.
From this perspective, a genuine rebalancing of the economy to a more sustainable model will involve a lot more than devolution. It will involve a lot more than encouraging private sector growth in the regions. It will require a fundamental rethink of the corporate welfare apparatus that has so benefitted the London area in recent years.
This article was written for Tax Justice Focus, the newsletter of the Tax Justice Network. To read the Finance Curse e-book, or to subscribe to Tax Justice Focus,click here.
End Notes
[1] Parkinson, M., Meegan, R.,Karecha, J., Evans, R., Jones, G., Sotarauta, M., Ruokolainen, O., Tosics, I., Gertheis, A., TönkÅ‘, A., Hegedüs, J., Illés, I., Lefèvre, C., Hall, P. (2012) ‘Second Tier Cities and Territorial Development in Europe: Performance, Policies and Prospects'; Scientific Report | Version 30/06/2012 for the European Observation Network on Territorial Development and Cohesion (ESPON), p.27. [online] http://www.ljmu.ac.uk/EIUA/EIUA_Docs/SGPTD_Scientific_Report_-_Final_Version_03.10.12.pdf
[2] See for example Nick Clegg: Regions ‘can rely on City no more' http://www.channel4.com/news/clegg-regions-can-rely-on-city-no-more
[3] Froud, J., Johal, S., Law, J., Leaver, A., Williams, K. (2011) Rebalancing the Economy (Or Buyer's Remorse), Centre for Research on Socio-Cultural Change (CRESC) working paper 87, p.22 [online] http://www.cresc.ac.uk/sites/default/files/Rebalancing%20the%20Economy%20CRESC%20WP87.pdf
[4] The PFI is a form of Public Private Partnership (PPP) where public infrastructure projects are funded, built and managed by the private sector to a public specification. Generally PFI contracts last a minimum of 25 years, during which the private sector receive payments in exchange for bearing the project risk. Notionally private sector participants are paid only if services are delivered according to the negotiated concession agreement.
[5] CRESC (2009) ‘An Alternative Report on UK Banking Reform', [online] http://www.cresc.ac.uk/sites/default/files/Alternative%20report%20on%20banking%20V2.pdf
[6] For more detail on this, see Haldane, A. (2010) ‘The $100 Billion Question', comments given at the Institute of Regulation & Risk, Hong Kong, 30 March 2010 [online] http://www.bankofengland.co.uk/publications/Documents/speeches/2010/speech433.pdf
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Very interesting indeed and thank you for resurrecting.
One of things I have noticed over recent years in my area of the East Midlands is the increasing appearance of Londoners and those from the South -East.
They’ve either moved up here to escape the ‘rat-race’ or wages in sectors of the economy have declined so badly that they cannot afford to live down there anymore. So they cash in their property ‘chips’ and use the funds to move. The result is an increase in house prices that could be attributed to this migration – they are literally importing inflated property prices into an area where prices were stagnant for some time. We are also seeing an upsurge in housebuilding here too and an emphasis on ‘executive’ style homes.
On the wider issue of national accounting, you have ably demonstrated that no one is able to present an honest and consistent account of Government and national flows of income and expenditure.
I see London and the SE as just heavily indebted regions myself – every one is in the process of acquiring assets although the culture is that when even doing this, you are a ‘home owner’ – even if you are still paying off say the mortgage. London and the SE is all about paying off debt in my view. The only really rich people in London are the bankers and the land owners and those who have finished paying their mortgages.
If affluence is based on debt, is it really affluence? Well, others may be fooled, but not me.
Me neither
Sorry – but following on for my earlier post………….
Over the years I have noticed many many public buildings up and down our country (schools, park etc.,) missing their metal railings. My father told me that a lot of this happened during the war when they were cut down to make munitions.
What has puzzled me over the years is that, if we supposedly won those wars, why were we not able to replace these and make them good as new? I mean that’s what victors do isn’t it? Preserve what they had?
I think that the fact that these railings were never restored in many cases offer us little clues as to the true nature of war (it’s expensive to be on the winning side) and the rather haphazard and laissez-faire way in which we are Governed as well as who in society really reaps the rewards of such violence and death.
I’m afraid I can’t give you a link to anywhere, but I recall reading some time ago that the metal from the metal railings, and most of the metal collected “to make planes and guns” ended up being just thrown away. I can’t vouch for the truth of this obviously. I wish I could recall where I read that. If that truly is the case, I feel so sad for all of those people who gave up their metal.
Our first house, in Liverpool, a terraced house, had the nubs of metal that the railing would have been attached to still sticking out of the sandstone topping stones to the bricks of our front wall. To be honest it always seemed odd that anyone would have a metal railing in front there, as it was guarding a “garden” only about 1 foot deep!
And off topic – I’m remembering the episode of “Foyle’s War” where local kids were going round collecting metal and newspapers and were instrumental in bringing down a gang of spies!
The railings were cast iron and they simply could not be melted down for anything very useful because steel was what was not needed and I seem to remember that was chemically a transition that was hard to do then. I have no idea now.
The cast iron collected was dumped in the Thames estuary. The existing steel mills were built to turn iron ore to cast iron but this was kept hot to be immediately transformed in to steel. I believe that new infrastructure would have to be built to melt the cast iron and transform it into steel and there was not enough to be economic to build this new infrastructure.
I knew it was something like that
Cast iron is a very odd material
Brilliant, and difficult
I suppose my point was why leave our common areas etc., so disfigured? There’s work to be done It’s as though we’ve never stopped paying for victory – real or imagined.
its also arguable that we won the war. We were on the winning side, for sure. We borrowed heavily from the Americans, who came to our rescue/support. And of course the Russians probably did all the hard work.
Thanks for this; a good isummary of how rentier faux-capitalism works for London, and rips-off everywhere else. The stand-out points seemed to me:
1) It is in London that the, “political and economic spheres mutually reinforce each other: finance has access to the charmed circle of policy formation because of the great wealth and prestige bestowed upon them by a credit-fuelled, asset based growth regime.”
I would add that the banks prefer to lend against assets that are protected from the effects of market forces through supply invariability; banks prefer to lend against their gold standard invariable asset: land. They will even destroy the whole financial system pursuing it. The banks do not like business and industry – it is all difficult and complicated, full of risky markets. That isn’t what neoliberalism expects, unless of course you are a monopolist. Neoliberalism is political economy in its purest form; it is not really interested in market economics (something of a politcally motivated smoke-screen I suspect); neoliberalism is just rentier politics masquerading as economics.
2) “London does attract capital, but it does so because it is a kind of conversion machine, taking national and international assets, converting them into revenue streams from which well-placed individuals skim high pay. In other words: London attracts capital because it is also extractive.”
Actually London is more like a medieval guild, providing an official stamp of authenticity on an international flow of money it does not own but processes within a global system of financial transfers. Large fees are skimmed off for this over-promoted postal service (allegedly special because it fits neatly on the clock between Shanghai and New York stock markets), but actually because London works very hard to look very responsible on the surface, but it is actually so open, wild-west and unregulated that it is the beloved international centre of preference for Russian oligarchs and similar to live, work and protect their money. That really ought to make everyone think; but this is London. It doesn’t count.
3) “These two developments tell us something about modern day capitalism in the UK. Contrary to the fantasies of free-market proponents, the success of London has much to do with an active UK state and its willingness to take on or underwrite private sector liabilities. The banking sector, for example, is a net recipient of state funds which the whole country must pay for, even though the private gains are largely realised in London.”
Privatisation does not mean the privatisation of state assets. I suspect all we have left unprivatised is the prisons. The NHS hangs by a thread. Privatisation is a system developed by neoliberalism to ensure the big financial institutions, and London are served first; all the profits in the UK are sucked into London (save for our huge estate of tax havens). London’s role is to privatise the profits for big players, and nationalise all the losses, especially whenever there is any problem. ‘Too big to fail’ is not really about the banks, it is about the preservation of London’s power to extract all the value and life out of the rest of Britain and serve the rentier life of London.
Agreed
And remember the tax havens were given life the creation of offshore in London in the late 1950s.
The physical locations are but branch offices of London in reality
‘London is more like a medieval guild’. Indeed. The City’s ‘liberties’ were enshrined in Magna Carta and have remained on the statute books ever since (one of only three such clauses still remaining in law). As such its ‘wild-west’ nature is an integral, and indeed foundational, aspect of the British constitution. To the extent that it is a conversion machine it reproduces privilege (a medieval term, as I’m sure you know), through tight control of these freedoms and of the knowledge required to exercise them. The same model underpins our ancient universities, our oldest public schools, and a variety of what could generously be termed ‘civic’ groups which sit alongside local government in many of our cities. A good example of the latter might be the Merchant Venturers in Bristol who, by all accounts, spent several years refusing to countenance any modification of Colston’s statue before it was toppled so gloriously this year. If the Conservatives can still be said to be conserving anything it is these power structures, which by their nature grant freedoms and privileges to a very small group of people at the expense of everyone else.
There is a deep conceptual issue here concerning the origin of “the market”. The political philosophy of Liberalism was and is a massive effort to pretend the state had no role in bringing “the market” into existence and that in fact the state acts as a hindrance. In fact as David Graeber argues on pages 49 and 50, Chapter Three Primordial Debts, in his book “Debt: The First 5,000 Years” (2014 Paperback Edition) as societies grew there was a need to raise standing armies, even navies, to protect and grow those societies. The cost of maintaining these standing forces was immense and using the power of taxation forced into existence an efficient means of doing this “the market.” To obtain the money necessary to pay the taxes triggered a great deal of economic activity to supply the state’s standing forces, this activity became “the market.”
“…one need only take a glance at Kautilya’s Arthasasatra, the Sassanian ‘circle of sovereignty,’ or the Chinese ‘Discourses on Salt and Iron’ to discover that most ancient rulers spent a great deal of their time thinking about the relation between mines, soldiers, taxes, and food. Most concluded that the creation of markets of this sort was not just convenient for feeding soldiers, but useful in all sorts of ways, since it meant officials no longer had to requisition everything they needed directly from the populace or figure out a way to produce it on royal estates or royal workshops. In other words, despite the dogged liberal assumption – again, coming from Smith’s legacy – that the existence of states and markets are somehow opposed, the historical record implies that exactly the opposite is the case. Stateless societies tend also to be without markets.”
If you understand this origin of “the market” and you understand the MMT or Chartalist argument that money is not a commodity or a thing (as Adam Smith confusingly argued following Locke) but an accounting phenomenon then you understand that today the state not only has a right to “interfere” in “the market” but a vital necessity to do so. We can see this most clearly in the issues swirling round Brexit whereby the EU is concerned its “market” should not be undermined by the UK “market” being directly subsidised by the state. To this end the EU is working with other countries to reestablish the adjudication function of the WTO neutered by Trump. The EU’s purpose in this is so that it can justify raising tariffs (which are a form of taxes) against countries like the EU who try to take unfair advantage in “the market.”
All of this goes back to the necessity of the British choosing their politicians wisely. I see no evidence, for example, that the party which is meant to be the one for “social justice,” the Labour Party, understands the state origin of “the market” not merely for military purposes but in modern times equitable distribution of resources. Instead it kow-tows to the Liberal misperception of what “the market” is and how it should function.
I will be addressing Labour Party issues tomorrow
Correction. Should read “countries who try or might try like the UK to take unfair advantage”
Also from the Tax Justice Network was an article in 2018 referring to a study published by the University of Sheffield on the Finance Curse arguing that the City of London has, by their calculations, imposed a cost on the UK economy of around £4.5 Trillion, or greater, and rising, thanks to the financial crash and to the way the City has extracted wealth from the economy. The TJN add in a further £700bn of what they call “excess rent” or in laypersons’ terms, greedy fat cats grabbing as much as they can.
I always thought this research never got the coverage it deserved.
It didn’t, but I am biased: it’s main author was my regular co-author of late, Andrew Baker