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.