20 February 2018

Finance is for the many, not the few


At a time when no politician will publicly stand up as a friend of the banks, the leader of the Labour Party is the industry’s most virulent foe. Long gone are the days when Peter Mandelson could cavalierly declare that Labour was “intensely relaxed about people getting filthy rich”. Jeremy Corbyn may decry austerity Britain, but he is adamant that City fatcats and the multinational firms they serve shall face a long and grim winter when his party comes to form a government.

One might expect a rather less adversarial tone. The financial services sector, after all, accounts for 8 per cent of gross value added in the UK economy. Financial firms, and those directly servicing them, employ two million people. The sector was at the forefront of British productivity growth until the 2008 crash, and it remains one of the UK’s comparative advantages.

Financial services exports pay for our imports of foreign-made goods and services. Financial services workers are richly rewarded and onerously taxed, which helps the rest of us since the top 1.3 per cent of earners (those making over £150,000 per year) pay 30.4 per cent of all income tax.

But the Left’s utilitarianism towards finance – “we’ll leave you be so long as you pay up” – died with New Labour. As Corbyn’s speech to the EEF, a manufacturing industry body, shows, his objection to the industry is first and foremost one of morality and principle. As such, it reeks of the ancient prejudices against money men. Like the sceptics of old, Corbyn suspects the financial sector of an ambition to control industry and politics.

The financial crisis did not change Jezza’s views of finance. He was a radical socialist when slightly-less-radical socialism was British government policy, and he remained one even as the country changed course. But lately he has succeeded at galvanising swathes of the UK population in support of an idea that has destroyed economies wherever it has been tried. Corbyn’s opponents must not only point out the impracticality of his proposals, but show that the dystopian world of poverty, inequality and free-wheeling speculation he describes lives only in his imagination.

Corbyn’s speech to the EEF suggested that UK manufacturing is in decline. This was bad news, he said, because manufacturing workers are comparably productive and commensurately remunerated. In fact, British manufacturing output is close to all-time highs, about 20 per cent higher than in the 1970s.

Manufacturing employment has, on the other hand, declined as a share of all employment, from 26.1 per cent in 1973 to 9.5 per cent today. But that is the source of manufacturing workers’ high productivity, which Corbyn is so proud of. UK manufacturers are comparably efficient because they make a lot with relatively few people and are thereby able to pay each of them more. Directing more people into manufacturing industries, as the Labour leader aspires to do, would surely drive down the sector’s productivity and average wages.

What we need is for other parts of the UK economy to follow in the footsteps of manufacturing: mechanise, automate, outsource so that British workers can focus on the high-value (high-pay) things, which also tend to be less dangerous and boring than low-value work. Automation and the reorientation of output towards services help to explain the more than doubling of per capita incomes since Corbyn’s precursor Tony Benn was Secretary of State for Industry.

What about finance? The Labour leader paints an picture of self-serving speculation and greed, asset-stripping and hostile takeovers. In fact, the sort of sales and trading business that critics dislike comprises at most 15 per cent of all UK financial sector revenues. The bulk of activity is, unsurprisingly, represented by retail and business banking, asset management (including pensions) and insurance. British finance fundamentally serves the many, not the few. Furthermore, the reach of financial services is expanding, as more people are able to save for the future using cheaper and higher-yielding products than the old-fashioned savings account.

Contrary to Corbyn’s preconceptions, there is no difference between the financial economy and the real economy. Finance emerged and has developed to enable the sort of planning and investment that only prosperous societies can contemplate. Setting up a business, saving for retirement, and insuring against ill health and natural catastrophes were of little concern to the primitive societies where life expectancy was thirty, famine a routine occurrence and subsistence a matter of daily struggle. But, thanks to free and open markets, we have moved far away from that world.

Earlier today, Corbyn proclaimed that “banks should be helping the real economy not suffocating it”. When Labour comes to power, I fear that somebody else will do the suffocating for them.

Diego Zuluaga is Head of Financial Services and Tech Policy at the Institute of Economic Affairs.