When a financial centre grows above its optimal size and beyond its useful roles it starts to inflict all sorts of damage on the state or country that hosts it. This is the finance curse. Because it is such a complex phenomenon, accurate numerical estimates for the scale of the problem aren’t possible.
Still, a few “big numbers” have been produced, and more will follow. All the estimates below have been published alongside the proviso that, as ever, “more research is needed.”
Andrew Haldane, 2010
In 2010 the Bank of England’s Andrew Haldane sketched out some ways of thinking about how badly the global financial crisis damaged the world economy. He said that these costs went far beyond the costs of bailing out the banks, and were felt most keenly in terms of lost output:
“These losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy.”
Epstein and Montecino, 2016
In Overcharged: the High Cost of High Finance, Gerald Epstein, Professor of Economics at the University of Massachusetts, Amherst, and Juan Antonio Montecino, also at Massachusetts, Amherst, estimate the costs to the U.S. economy of the financial sector growing above its optimal size and beyond its healthy functions. They estimate
- Rents, or excess profits;
- Misallocation costs, or the price of diverting resources away from non-financial activities;
- The costs of the 2008 financial crisis.
They check for possible “double counting” between these three dimensions and conclude: “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.”
Watch Prof. Epstein discuss his research at Sheffield University in November 2017.
The UK’s Finance Curse? Costs and Processes, October 2018
Andrew Baker, Gerald Epstein and Juan Montecino, SPERI.
Building on Epstein’s and Montecino’s 2016 paper Overcharged (which estimates the damage to the US economy inflicted by an oversized financial sector,) this paper will calculate the damage inflicted on the UK, in terms of lost GDP accumulated over 1995-2015, compared to what GDP would have been had finance been its optimal size.
(This paper is flagged in the Finance Curse book (p278, footnote 12) with a slightly different title: “Baker, A., Epstein, J., Leaver, A., Montecino, J., Fields, D. and Atkinson, R., ‘The UK’s Finance Curse? Costs, Processes and Future Research Agendas’, Sheffield Political Economy Research Institute Working Paper, 2018.”)