The finance curse has taken £4.5 trillion out of the UK economy over 20 years

(Please feel free to cross-post this, as long as you attribute it to here.)

Alongside the launch of The Finance Curse, and my Guardian article, there’s a new study by Andrew Baker of the University of Sheffield, Gerald Epstein of the University of Massachusetts Amherst, and Juan Montecino of Columbia University, estimating that the UK has suffered a cumulative £4.5 trillion hit to its GDP from 1995-2015, due to its financial sector being too large and having turned away from its proper traditional functions towards more harmful and predatory ones.  That is equivalent to 250 percent of GDP – or £170,000 per UK household.

That report is here (also here.)  This image shows what the report is essentially measuring:

In other words, if Britain had had an optimal, smaller financial sector focused on its traditional  beneficial roles, it would have had a higher growth trajectory represented by the line A, but in the real world it had a lower growth trajectory due to oversized finance, on line C. (The £4.5 trillion, for wonks, is the area of the graph between lines A and C.)

How do they calculate this £4.5 trillion? Well, it’s (conservatively) the sum of two components.

First is the long-running cost of the global financial crisis and its aftermath, which looks like this:

(This is a pretty standard calculation, and this £1.8 trillion is quite compatible with estimates by Andrew Haldane of the Bank of England, and others.)

Second, there’s a category called “misallocation” – which is, roughly, the £2.7 trillion damage to economic growth due to finance distorting the economy, and extracting wealth from it. That category looks like this:

In other words, economic growth has been lower, year after year, than it would have been if finance had been at its optimal size and serving its proper functions.

If you’re looking for examples of “misallocation”, look at this recent post, or my new Guardian Long reads article, or for the Full Monty, my book.

Adding these two figures – £1.8 trillion in crisis costs, and £2.7 trillion in misallocation costs, and you get £4.5 trillion (obviously taking care to avoid double counting: as the study explains, the data being used already “controls for business cycles associated with financial crises.”)

But wait!  There’s a third category, known as “excess rent,” which is, roughly, too much profit and too much remuneration flowing to finance, over and above what they should earn for providing their services. (Banking billions, billionaires and bonuses, you might call it.)

That’s a further £700 billion. The academics don’t add this to the £4.5 trillion total to get £5.2 trillion, because a good chunk of those excess rents are from overseas.  But there’s a good case to be made that plenty of it should be added. (People may try to push back against this idea, saying that excess rents are simply a transfer from one part of the economy to another. To get a sense why this isn’t so, imagine Amazon’s boss Jeff Bezos walks into a bar. Suddenly everyone in the bar is, on average, a billionaire. But to get a sense of how well they’re all really doing, you  need to remove Bezos’ billions from the calculation.)

The point is, the £4.5 trilion is a conservative total. (What is more, the damage is calculated up to 2015 – but the damage has continued to mount since then.)

What is the optimal size, and how do they calculate the damage?

There’s a whole body of academic research out there now which is known as “Too Much Finance” – all of which shows the same basic relationship. This research is summarised here.

As a financial sector in a country develops, it tends to support other parts of the economy – but only up to a point. There are several papers with graphs showing the same basic inverted u-shaped relationship – here’s one, from the IMF:

The Baker / Epstein / Montecino report uses a different, and more widely used metric, than the one in this graph, and that’s the ratio of credit to the economy, to GDP. The ‘sweet spot here’, the IMF and others have found, is when this credit, on the relevant measure, hits around 90-100 percent of GDP.  The UK passed that point long ago, and over 1995-2015 averaged around 160 percent.

Based on where the UK is on the curve, and the angle of slope at that point, you can then get a rough estimate of the annual hit to growth. Then you add it up over the years.

My own back of the envelope estimate is that a 1.2 percent annual hit to growth will get you to 250 percent of lost GDP over 20 years. (Here’s how it works: in Year 1 your GDP is 1.2 percent smaller than it should have been. In year 2, your GDP starts 1.2 percent lower, and loses another 1.2 percent, for 2.4 percent. In year 3, you’re down 3.6 percent. Pretty soon, you’re talking real money.

The UK’s Finance Curse? Costs and Processes. Take a look.

It follows an earlier study by Epstein and Montecino, looking at the growth costs to the US of oversized finance:

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.

That was the first of its kind for the US, and this is the first of its kind for the UK.

18 thoughts on “The finance curse has taken £4.5 trillion out of the UK economy over 20 years

  1. fhershberger

    Jake tapper I have 40 trillion dollars added up of your costs from my sources how will you pay for it. Ok the 32 trillion dollar item actually saves us 2 trillion dollars over what we currently pay today so u will subtract 2 trillion dollars from my 40 trillion and exnore the other 32 trillion dollars we already pay for today and make you explain how you will pay for that 32 trillion dollars we already pay for. That is counting it twice you cant do double entry in book keeping. 40 trillion 34 trillion equals 6 trillion so in the worse case all she needs to explain away of 6 trillion dollars not 38 trillion that Jake tries to put her on the hook for.

    Reply
  2. Pingback: Nick Shaxson – The Finance Curse – Brave New Europe

  3. busty girls

    I know this if off topic but I’m looking into starting my own blog and was curious what all is needed to get set up?
    I’m assuming having a blog like yours would cost a pretty penny?

    I’m not very web smart so I’m not 100% sure. Any tips or advice
    would be greatly appreciated. Many thanks

    Reply
  4. πισινεσ προκατ

    Excellent article. Keep writing such kind of information on your blog.

    Im really impressed by your site.
    Hello there, You’ve done a fantastic job. I will definitely digg it and in my opinion recommend to my
    friends. I am confident they will be benefited from this web site.

    Reply
  5. Start an Adult webcam business

    So, inside response to the question, just how do women initiate casual sex.

    Heading on college implies that not just will be the life goals of career and receiving an adult going to begin, but in addition that you are welcomed to the
    arms of sexual experiences. It’s when two different people
    have different end games, or expectations, in mind
    that things can get sticky.

    Reply
  6. california motorcycle Accident Attorney

    I have been surfing online greater than three hours these days, yet I never found any fascinating article like yours.

    It’s beautiful price sufficient for me. Personally,
    if all web owners and bloggers made good content material
    as you probably did, the net will likely be much more helpful than ever before.

    Reply
  7. http://swarife.com/fKp

    Fossil fuels like coal and oil supplied us with
    all the essential resource to create your own electricity
    with all the use of generators in power plants. As energy prices increase and many
    homeowners are more mindful of their carbon footprint,
    solar power panels have received renewed interest among consumers.
    You can find out much more about how this renewable power system works inside my url below.

    Reply
  8. http://zo.ee

    It is inevitable that couples will fight and find excessive stress
    during hardships within the little things. The first
    theory reaches time for our caveman roots along with the evolutionary causes of making love – survival from the species.
    Whichever form of dating site you are interested in, there are a few
    tips that you are able to use to obtain the most from
    adult online date sites.

    Reply
  9. Pingback: example.org.17

  10. Energy companies

    Benefits of Magnetic Power Generator

    All around the globe shortage of power is a kind of problem that is certainly why
    individuals are looking for some reliable and cheap source of
    electricity. Many folks are using magnetic generators and
    also the reason behind this is they get many advantages through them.

    This generator is very easy to install at your residence in a limited
    place without disturbing the initial settings of your house.
    All you need is a little spare space to set up this.
    This will help you to lessen your normal electricity
    bill. You can use this being an energy supplier for many from the
    times so you do not need to switch time for your old strategies to power consumption. As
    soon as you begin using this supply of energy in your own home you will
    notice a visible saving with your income.

    It doesn’t produce any harmful gases that may damage environment.

    In this generator, magnets will generate energy that’s usable in almost any condition. The cost of
    possessing power generator is not high in any way.
    It is the cheapest supply of power generation nowadays in this era of technology.

    The main thing within this generator is really a magnet which works and also a small wheel.

    As you know that it’s absolutely free and there is no
    third party involved with installing this generator, which means you won’t need any maintenance from some expert.

    You can maintain it by yourself by cleaning it at regular intervals.

    This is the most ideal thing to place at your residence being a
    source of electricity. It can support the energy sufficient
    to take care of every one of the appliances with the
    house. A family of 4 to six is extremely ideal for
    this type of energy generation device.

    No harmful rays with no complex electric motors are involved here so that you shouldn’t be worried about the protection of your family and friends.
    Unlike other free electric generation devices, it doesn’t need any solar powered energy or
    wind. It will work with its very own without the method to obtain external natural energy.
    Weather is not going to customize the performance or generation of your energy from this magnetic generator.
    As it doesn’t be determined by any external source this would be an uninterrupted supply of power generation.

    Check more info on site : http://vivads.net/guJklG

    Reply
  11. https://Www.nlrbfcu.org

    It’s a pity you don’t have a donate button! I’d most certainly donate to this superb blog!
    I suppose for now i’ll settle for bookmarking and adding your RSS feed to my Google account.

    I look forward to brand new updates and will share this website with my Facebook group.
    Talk soon!

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *