From the Roosevelt Institute in the United States, a long report that seeks to generate an overall estimate of costs to the US economy of the financial sector, over and above the benefits that the finance sector provides:
“What has the flawed financial system cost the U.S. economy? How much have American families, taxpayers, and businesses been “overcharged” as a result of these questionable financial activities?
After some detailed work, an answer is in:
“In this report, we estimate these costs by analyzing three components: (1) rents, or excess profits; (2) misallocation costs, or the price of diverting resources away from non-financial activities; and (3) crisis costs, meaning the cost of the 2008 financial crisis. Adding these together, we estimate that the financial system will impose an excess cost of as much as $22.7 trillion between 1990 and 2023, making finance in its current form a net drag on the American economy.”
There’s a long article in The Guardian from 2014 by four academics, Ewald Engelen, Sukhdev Johal, Angelo Salento and Karel Williams, entitled How to Build a Fairer City. The purpose of this blog is not so much to dissect this article in detail, but to point to it. Because it’s important for our competitiveness investigations. Its introduction is framed like this:
“The central argument is that we can move towards a fairer city by reframing our problems and rethinking our solutions in two ways:
1. Break with the dominant old problem of the competitive city, which competes economically against other cities and sponsors internal competition for limited opportunities.
2. Stop fixating on redistributive policies which will not deliver fairness, and start thinking about reorganising policies which build a grounded economy in the areas which are not exposed to competition.
The global obsession of our age is competing everywhere with everyone for everything. In the mainstream imaginary, every city has to chase competitive success in a league table where it secures prosperity by getting ahead of others.”
It has been widely suggested and supposed that the abolition of exchange controls – one of the great episodes of financial deregulation in the United Kingdom since the 1970s – was the result of lobbying by the City of London. In this post for Fools’ Gold, Jack Copley of Warwick University explores the history, and finds a rather different story, focusing particularly on the issue of ‘competitiveness’ as it applies to the exchange rate.
What role did the ‘competitiveness agenda’ play in the Thatcher government’s deregulation of finance?
The case of exchange controls
By Jack Copley, Warwick University
Fools’ Gold has continued to expose the nefarious power of the City of London in British policymaking. As the biggest sector of the British economy, it is able to exercise undue influence over the government in order to secure preferential treatment. The notion that the City must remain globally competitive, and that ordinary people should be concerned about ensuring this, is a key part of the ‘competitiveness agenda’ in the UK.
Margaret Thatcher is the British politician most commonly associated with the City. Under her administration, a number of key financial deregulations took place, including exchange control abolition (1979), the Big Bang (1986), and the Building Societies Act (1986). Experts generally points to two explanations for the Thatcher government’s deregulatory agenda: 1) the City’s lobbying power; and 2) Thatcher’s ideological desire to promote the interests of the City over those of industry. This was particularly the case with exchange control abolition, which is widely perceived to have been a case of Thatcher giving a direct subsidy to financial elites and justifying it with rhetoric about national competitiveness.
Update: also see Anti-Tax, Anti-Regulation Sirens emerge after Brexit.
We have our own particular reasons for disliking Brexit – the recent decision by the UK to leave the European Union. In a pre-Brexit analysis the Tax Justice Network quoted Adam Posen, director of the Peterson Institute for International Economics, who articulated a huge generic concern:
“If you’re anti-regulation fantasists to begin with, you start going down the path, ‘Oh we can become an even more offshore center. We can become the Cayman Islands writ large, or Panama writ large.’ And this frankly is the way I think this also spills over to the rest of the world, is that the UK decides, ‘Hey, regulatory arbitrage, letting AIG financial products run in London, actually destroyed the US financial system, but didn’t hurt us – made us a lot of money. Let us continue down this path. Let us be the ‘race to the bottom’ financial center. And I think this that’s where this going, because they’re not going to have any other option. It’s not good.”
The British-based non governmental body Actionaid has for some time been at or near the forefront of efforts to lobby for progressive reforms to the international tax system for the benefit of developing countries. This week their ‘Tax Justice Policy Adviser,’ Diarmid O’Sullivan, wrote a blog entitled The UK: always the bad guy on anti-tax haven rules? which says, in the first paragraph:
“Poorer countries badly need more tax revenues to pay for public services such as schools and hospitals, but they stand to be among the losers from the UK’s insistence on protecting its “competitive” low-tax regime for companies.”
We’re really delighted to see the c-word in quote marks: it’s an important signal that the writer has seen through the nonsense of so-called ‘competitive’ nation states.
From Citizens for Tax Justice, a blog that’s worth reproducing in full, as yet more useful ammunition to wheel out against those who keep banging on about tax cuts and so-called ‘competitiveness.’
New Research Shows Millionaires Less Mobile than the Rest of Us
A new study (PDF) released today provides the best evidence yet that progressive state income taxes are not leading to any meaningful amount of “tax flight” among top earners.
Stanford University researchers teamed with officials at the Treasury Department to examine every tax return reporting more than $1 million in earnings in at least one year between 1999 and 2011. They found that while 2.9 percent of the general population moves to a different state in a given year, just 2.4 percent of millionaires do so. Even more striking is that for the most “persistent millionaires” (those earning over $1 million in at least 8 years of the researchers’ sample), the migration rate is just 1.9 percent per year. As the researchers explain: “millionaires are not searching for economic opportunity—they have found it.”
The author of today’s FG blog has just had a piece in the Washington Post entitled Five Myths about Tax Havens in which Myth 5 goes like this:
“5. Cutting corporate taxes helps nations compete with tax havens.
Reducing corporate taxes to attract wealth back from tax havens sounds plausible — “Republicans call [tax inversions] the inevitable consequence of a flawed tax system,” Bloomberg View recently observed, “and say the only solution is a full revamp of the tax code, including lowering the corporate rate and limiting taxes on foreign profits.” But it doesn’t work that way. Tax cuts at home don’t persuade corporate bosses to ease up on tax avoidance, and there are always more lucrative shelters abroad.
The German-American economist Friedrich List never once mentioned competitiveness directly by name, but he nonetheless remains an important figure in the pre-history of the Competitiveness Agenda, a modern body of thought that, put crudely, says that countries need to shower capital on capital and the owners of capital, for fear that they’ll flee to more hospitable jurisdictions. It is, in part, a theory about how nations ‘compete.’
List is not a famous economist from history, and this blog judges him harshly. But this is not to say that he should be ignored: one cannot present a comprehensive historical account of the agenda without at least some discussion of List’s National System of Political Economy. It was he who first made the case in the 1840s for collective national sacrifice in the interests of stronger future macroeconomic performance. Choose carefully the sectors in which you might expect to prosper at other countries’ expense, he said, and then channel all available resources into those sectors. No other social objectives could be allowed to interfere with this one overriding priority, which is why List felt able to advocate the political privileging of national economic champions.
This latest post for Fools’ Gold by Matthew Watson reviews List’s arguments, but also shows why they have never been treated as good economics.
FG bloggers have been rather embroiled in the Panama Papers, fielding a blizzard of interviews and writing stuff like this. Apologies for relative lack of recent posts.
For now, please forgive our frivolity: all we have to offer at this stage is light entertainment.
FG bloggers who have confronted politicians and civil servants with our kinds of questions about the Competitiveness Agenda have so often been rebuffed with the “is your husband home?” kind of response.
Which is, of course, telling.
Martin Hellwig is the co-author (with Prof. Anat Admati) of the book Banker’s New Clothes, a book about finance that the Financial Times’ chief economics commentator Martin Wolf described as “the most important to emerge from the crisis.” Hellwig is also Executive Director of the Max Planck Institute for Research on Collective Goods and, among other things, a former head of the German Monopolkomission (Monopolies Commission).
The Monopolkomission in 2003 published a report entitled Competition Policy under Shadow of “National Champions” which is a most useful document from our perspective. It argues, as we have, that the pursuit of what we at FG call the Competitiveness Agenda tends to lead to restrictions on market competition. It also argued against creating a German “banking champion” – a position that earned it a dismissive rebuke from the government of Gerhard Schröder, which basically said all was safe and well regulated.
A couple of short excerpts from that document provide flavour and context, and the interview with Hellwig is below.