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Is London really cursed by having lots of rich people?

Reuters carries this rather biased piece (well, at least the headline gives the game away) about London and the “rise of the plutocrats”:

“London’s population of millionaires has boomed in the last decade, both because of the lucrative jobs on offer in the finance industry and the arrival of thousands of foreign super rich, for whom it has become a favoured playground. The process has turned central London into a boom town, increasingly decoupled from the wider British economy. Land values and other economic variables bear little relation to national trends. But while it is a rare bright spot in a sluggish British economy, economists are starting to warn of the dangers of displacing the middle classes and exaggerating a broader trend of rising inequality by importing more plutocrats.”

The article goes on to quote those leftists at The Tax Justice Network:

John Christensen, an economist who runs Tax Justice Network, which campaigns against tax havens, equates the dominance of finance in the UK economy to the “resource curse” that exacerbates inequality in the developing world. Finance in the UK, like oil and gas or mining in the developing world, has crowded out other sectors and therefore narrowed opportunity for the working age population. “The Finance Curse is every bit as corrupting as the Resource Curse which hits mineral rich countries,” he says.

(Update: Tim Worstall fisks this piece of nonsense).

This seems to be wrong on a number of levels, while superficially plausible. First, unlike oil or gas, Londoners did not benefit from some discovery by others, as is the case when Western firms developed the oil reserves in the North Sea, the Middle East or wherever. Instead, London has seen the benefits of a number of largely Man-made factors, such as the rule of law; stable property rights; a cluster of legal, accounting, banking, insurance and other industries; a relatively benign tax and regulatory environment (at least until recently), a measure of peace; the English language as the language of global business; the timezone in how it intersects Europe, North America and Asia, and finally, its proximity to Europe and its attractions. Transport, despite all the moaning and groaning of we townies, is still broadly effective, although things might deteriorate if we don’t improve air and rail links. But in general, this “curse” – if it is a curse – of having lots of money in London is something that cannot be likened to the oil or energy industries of say, Russia.

The problem with the whole thrust of this approach – as perhaps is hinted at if you read the entire Reuters piece, is the zero-sum mentality. I don’t become poorer because a rich guy moves in next door. Yes, if I am not yet a homeowner, then the presence of more rich people will make housing more costly if – and this is the crucial bit – there are planning restrictions on new housing, or if it is very difficult for me to easily commute in from a cheaper part of town. In fact, if house prices rise due an influx of say, wealthy foreign investors from Asia, then that is the sign of prices doing their job in communicating the shift the relative supply and demand for X, and if a market is working with some measure of efficiency, it will generate a response, such as people selling up and moving to cheaper places to capture a benefit, or more high-rise developments, or more development of brown-field and green-field sites, or more remote working from low-cost areas, etc. In fact, if the “curse” of London being an incredibly expensive place remains, then expect other towns and cities outside London to start taking a bigger share of business from the aspirational middle class that no longer wants to live in London.

We might start to see more stories of whole businesses moving up to the Midlands, East Anglia, west country, etc, as a result of this “curse”. If transport networks are up to the job, I see no reason not to regard this as wholly favourable.

Some other thoughts occur to me. For one, it is sometimes said, even by people who like to think of themselves as pro-market, that London’s financial services industry is “too large” compared with the rest of the economy and it is “distorting” the economy. That rather begs the question of how anyone can imagine a counterfactual reality in which we would know how large London’s financial industry would be if other things had been different. Also, I dislike the implicit notion that there is some “right” or “wrong” size for any economic segment. At the present time, it would be nuts to say that the energy sector is “too large” in Russia; if the division of labour and the relative cost/benefits are such that energy is the big industry in Russia, how is this an issue?

And talk of division of labour leads me to this point. London now benefits from the global division of labour. London is not just the banking, insurance and legal hub for the rest of the UK (apart from Scotland, maybe), it is, increasingly, providing such a hub for much of the planet. So it makes perfect sense for London to have the pull and economic clout that it does.

There are no doubt the effects of a period of very low interest rates to consider. The current phase of Quantitative Easing is surely bound to underpin a part of this prime central London property boom, and bear in mind that the asset bubble was in part caused by such derangement of the monetary order in the first place. Debt has tended to be more favourably treated in tax terms than equity – it would be better for the balance of the economy if that were not so.

Another point which I have challenged before is the idea that this situation would be less severe if we had a land value tax. Although not directly comparable, jurisdictions such as Hong Kong have taxes similar to an LVT in some respects. But property markets in places such as Hong Kong are highly volatile, so maybe property taxes are not effective in making things more stable. Another bad feature of LVT in this context is that people in central London who are not that well off but who have seen their property values skyrocket would have to sell up to one of those “plutocrats” – hardly quite what those socialists at the Tax Justice Network would intend.

In fact, an LVT is a plutocrat’s dream. Another tax suggestion is some sort of punitive tax on homes worth more than a certain amount, but I read that such a tax is not as simple to enforce as some think, and also that driving the wealthy from the UK is bad policy (as well as being objectionable generally). Also, remember that whenever one of these evil “plutocrats” buys a house in Kensington or Hampstead, they already pay a shedload in stamp duty – a transaction tax – which, ideally, could be used to finance cuts in income taxes on the rest of us, possibly. (That would be a good idea and of course, general taxes should be cut anyway, for all sorts of reasons).

And a final point, as mentioned by the Reuters piece. Yes, it may be the case that an influx of rich folk is not always going to benefit those who are temporarily priced out of the housing market, but then again, such rich immigrants are also going to spend a lot of money here, or they should be encouraged to do so, and that surely will translate into good things for those able to capture that spending and investment. If we really do believe in the mutual benefits of voluntary exchange, then complaints about “plutocrats” and foreign investors should be seen as a rather dodgy hybrid of nationalistic dislike of foreigners and socialistic misunderstanding of capitalism.

Those who seem to want to drive wealthy foreign investors from the UK should beware the old saying: Be careful what you wish for. It might come true.

23 comments to Is London really cursed by having lots of rich people?

  • Yes, well, he has discovered that there are people that he considers philistines who live in nicer houses than he does. Horror. Gasp. Shock.

  • Another point which I have challenged before is the idea that this situation would be less severe if we had a land value tax.

    Mark Wadsworth may beg to differ on that, Johnathan.

  • Johnathan Pearce

    James, no doubt Mark would make that point. But as he would probably concede, it all rather depends on how severe the LVT is in terms of the rate. If it is a high one, then announcing such a tax would have a chilling – but possibly temporary – effect on prices. But in the medium term, if all these “plutocrats” insist on parking their money in the UK residential property market for their various reasons, then the chief losers from LVT will be those existing property owners who see their tax bills soar, forcing them to sell. (Like, say, an elderly couple who bought a small flat in Earl’s Court in the 70s).

    If we have to tax property at all, I’d rather we tax the transactions, or turnover, rather than some share of the rise in the value of “unimproved” land since, pace Mr Wadsworth and his allies, I don’t see a clear way to distinguish between the value of a property that comes from its location and from the physical stuff itself. (Despite his claims to the contrary, LVT is not as simple as it appears). As a least-worst option, I’d rather tax the transactions. This is a choice of evils, by the way, not the achievement of some sort of utopia.

    In case anyone rags me for raising this issue, I should add that I haven’t referred to LVT for many months, but given the topic, it would be remiss not to do so.

  • Another reason London serves well as a business and financial centre is because of the integrity of its arbitration courts relative to what’s on offer elsewhere in the world. A lot of oil industry contracts I have dealt with in Russia and Nigeria state London as being the preferred place of arbitration – for all parties!

  • If I was one of the mega-rich, I’d be selling up and moving in the not too distant future rather than endure the politics of envy by these scum.

  • Paul Marks

    Was in the middle of a long reply – somehow it vanished.

    Cut to chase….

    R. should close – as should rest of msm. In the end everything that is not explicitly dedicated to reducing the size and scope of government (to private PROPERTY rights) inevitably comes under leftist control – even if dressed up in “free market” language.

    For example, in this week’s edition of “Newsweek” Bushbaby David F. gives the examples of tens of millions of people getting “free” food financed by the government, and people getting their rent paid by the government (thus causing chaos in the property market — inflating general rents) as examples of the “free market” (and if anyone says that the Economist magazine is fundementally better than Newsweek you are kidding yourselves).

    Having rich people living in a country is not a “curse”.

    There are no “tax havens” as places like the Channel Islands actually charge far HIGHER taxes than they used to (as recently as before World War II) – it is just that taxes have not gone up so much as they have in demented countries like Britain.

    People (even if not rich) should get out of Britain if they can.

    Especially if the budget turns out as expected.

    If the cut in the top rate of income tax is delayed till next year it will not happen at all – as political conditions will hardly be less difficult next year than they are now.

    Yet any rise in property tax will happen. (By the way I see no point is extending the property tax to “unused” land – that would just destroy farmers, which is why “the rates” were taken off farm land in the first place, back in 1929).

    And any crackdown on “avoidence” (now to be treated as if it was evasion) will happen.

  • RRS

    Looking at the scrivenings that generated the reactions:

    Poverty is not caused.

    Poverty is.

    Betterment and ultimately wealth is caused.

    As a student of taxation:

    Land Value Taxation, seems very similar to the “assessed value” principle used in the U S. It is not based on “intrinsic” value, but on prices deemed to represent value (i.e.,Fair Market Value). That is sometimes replaced with with what has been called “Best Use Value” (if the property were used for something else it could produce more economic [and now “social”] benefits).

    The fundamental “purpose” of taxation is to provide for the functions of government. That is not to say it is hewed to. In fact these urgings are aimed at other engineering of the uses of a particular resource, simple, if not pure.

    Taxation, the major coercive force in non-totalitarian governments, becomes a totalitarian force when it is applied for social engineering rather than the functions of government. Extending the “functions” of government for social engineering results in coercive taxation.

    More soon.

  • Alisa

    People (even if not rich) should get out of Britain if they can.

    Where to, Paul?

  • Mendicant

    If transport networks are up to the job, I see no reason not to regard this as wholly favourable.

    Transport outside London up to the job, that’s a great joke, made me laugh out loud.

  • Alisa

    So, Mendicant, instead of fixing the transport system, you’d rather ban rich foreigners from settling in London?

    It’s funny, BTW, how the Left are against rich white immigration, and the “Right” are against poor brown immigration – they do have something in common, don’t they.

  • Paul Marks

    Alisa.

    For English speakers – Australia and New Zealand might be the least bad places.

    Although I have a childish bias towards New Zealand because of all the fantasy stuff that is made there.

    Not just “The Lord the Rings” films – but a lot of other stuff to (going back to “Xena” and a lot of other nice sillyness).

    Volcanos, earthquakes, terrible waves from the great Pacific, weather fronts from Antartica…….

    Yes – but they produce nice television shows and films.

    Besides – Australia is hot. Still being MadMax…..

    RRS – quite correct.

    Poverty (indeed starvation) are the natural default state.

    People who talk of “rights” to material goods and services are, at best, fools.

    By the way – the budget turned out as predicted.

    Big tax increases on the wealthy now – in return for PROMISES of tax reductions in the future.

    And even if the promises are kept (and if you believe that….) the tax increases on the wealthy are five times the size of the cuts (or rather the cuts that are promised for April 2013).

    But there is small (but welcome) reduction in company taxation.

    And a tax allowance for computer games and animation.

    To achieve the Chanceller’s “aim to keep Wallace and Gromit in the U.K.”.

    I think that refers to a show about an animated man and cat – a show that the Chancellor is particularly fond of.

  • Alisa

    LOL, Paul.

  • RRS

    Wallace and Gromit will stay in the U K, because that’s where they get their “background” music. Listen?

  • RAB

    Gromit is a dog actually Paul, but I’m never sure when your dry humour is kicking in ;-)

    I’ll just repeat what I said over on Counting Cats…

    Doesn’t “keeping Wallace and Gromit where they are” refer to iDave and the boy Clegg, rather than the fine Bristol based animation team?

  • David Gillies

    It’s a relatively safe bet that anything produced by the Tax Justice Network will be immemorially cretinous. Most of their output falls into the category that Wolfgang Pauli called ganz falsch, usually translated as being so ludicrous as to be “not even wrong”.

  • Mendicant

    Alisa, you missed my point. Transport outside London is a cretinous, indefensible shambles which would embarrass a third-world country.

    It is quite ironic that the German government can’t run a UK bus service properly, and it is even more ironic that Britons are paying taxes (and that’s what they are given the German state runs them) to the German government for the use of buses.

    Even Giger and Dali could not have devised something as freakish, perverted, and absurd as German state run UK bus and rail.

  • john malpas

    The servants of the rich were once quite numerous and had to be housed and fed. Has this ceased to be the case?

  • 'Nuke' Gray

    I am curious- does London still house tax exiles from France, like Laetitia Casta, who was used to model for that French symbol, the Maid of Orleans?

  • Hmm

    It would be nice if governments had (instead of stealing wealth from ordinary people to give to cronies) actually worked to make it possible for everyone to become richer. That would be the sort of curse I could live with.

  • Paul Marks

    RAB – so Gromit is a cartoon dog, not a cartoon cat?

    Now I understand.

    Now everthing Mr Osbourne and Mr Cameron have done makes sense.

  • Roue le Jour

    Paul, I suspect you are being willfully obtuse. Gromit is a Plasticine dog.

  • 'Nuke' Gray

    I get it- gromit and Wallace are throwbacks- from the Plasticine Age! Life was more fun then, wasn’t it?

  • Paul Marks

    A plasticine dog?

    Now all is clear to me.

    Not only does the budget make sense – it is actually a work of genius!

    In this state of mind I should be employed by the Economist magazine – to write their leading articles.

    See the front cover of this week’s Economist magazine.

    Or, if you value your sanity, do not go look at the front cover of this week’s Economist magazing.