Needless to say, high incomes in London's financial sector caused resentment in the rest of the country, but even under New Labour the City's dynamism received official blessing. Exports—exports, let it be emphasised—of financial services more than doubled as a share of national output between 1987 and 1997, and then almost doubled again in the ten years of the Blair premiership to 2007. (I have emphasised that the boom was in exports to refute a claim by Adair Turner, former chairman of the Financial Services Authority. Lord Turner has argued that the UK's large financial sector is "too large" and "socially useless" because it constitutes "distributive rent extraction" between citizens of the same nation. This is ridiculous, as it overlooks that most of the City's customers are not British.)
The boom in the output per head of those employed in the financial sector was, of course, a boom in productivity. By 2007 (when Blair resigned and the Great Financial Crisis began) the UK's exports of financial services were only 3.4 per cent of GDP, but if insurance and a range of legal and finance-related service exports were added in, and allowance were made also for UK customers of these activities, the financial services cluster accounted for about a tenth of the British economy. The growth in productivity in this cluster over the 20 years to 2007 was so strong as to make a disproportionate contribution to the growth in the productivity of the UK. The evidence was clear in, for example, the enormous bonuses of a lot of people working in the City.
But since 2008 the UK's exports of financial services have gone sideways, the UK's share of international financial service business has started to decline and the surge in financial-sector productivity has stopped. One reason has been the imposition of new controls and regulations (including direct restrictions on the size of bonuses), often at the behest of such opinion-formers as Adair Turner and Martin Wolf. They should perhaps think harder about what they wish for. Do they need to be told that, if the productivity of a tenth of the economy stagnates after a period in which it had been growing by 5 per cent a year, the annual increase in productivity at the national level is 0.5 per cent lower than before?
The boom in the output per head of those employed in the financial sector was, of course, a boom in productivity. By 2007 (when Blair resigned and the Great Financial Crisis began) the UK's exports of financial services were only 3.4 per cent of GDP, but if insurance and a range of legal and finance-related service exports were added in, and allowance were made also for UK customers of these activities, the financial services cluster accounted for about a tenth of the British economy. The growth in productivity in this cluster over the 20 years to 2007 was so strong as to make a disproportionate contribution to the growth in the productivity of the UK. The evidence was clear in, for example, the enormous bonuses of a lot of people working in the City.
But since 2008 the UK's exports of financial services have gone sideways, the UK's share of international financial service business has started to decline and the surge in financial-sector productivity has stopped. One reason has been the imposition of new controls and regulations (including direct restrictions on the size of bonuses), often at the behest of such opinion-formers as Adair Turner and Martin Wolf. They should perhaps think harder about what they wish for. Do they need to be told that, if the productivity of a tenth of the economy stagnates after a period in which it had been growing by 5 per cent a year, the annual increase in productivity at the national level is 0.5 per cent lower than before?
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