Finance’s contribution to GDP — another sleight of hand?

Yesterday’s pub­lic­a­tion of fur­ther dis­mal GDP data for the UK is an oppor­tun­ity to recon­sider its basis as the jus­ti­fic­a­tion for many aspects of the cur­rent neo­lib­eral order. Brack­et­ing out the ques­tion of whether eco­nomic growth is a valid lode­star for any just soci­ety, there comes the old but under-​frequented ques­tion¹ about what con­sti­tutes growth and whether and in par­tic­u­lar fin­an­cial ser­vice activ­ity offers any­thing pro­duct­ive at all.

The ques­tion deserves cri­tique because every­one from the Prime Min­is­ter to the banks loses no oppor­tun­ity to ham­mer the point that fin­an­cial ser­vices provide 10% of the UK’s GDP and con­sequently the sec­tor should be protected.

The UK’s offi­cial GDP data is pre­pared by the Office for National Stat­ist­ics (“ONS”) but pre­lim­in­ary research found the data­sets insuf­fi­ciently detailed for the pur­poses of this ana­lysis. I there­fore turned to the Bank of England’s Quarterly Bul­letin (Bur­gess 2011:Q3²) and its help­fully pre­pare paper on meas­ur­ing finance’s con­tri­bu­tion to GDP. Page ref­er­ences are to this paper.

The first thing we find is that among com­par­ator states the UK is out done by Ire­land (10.5%) and Aus­tralia (11%) in terms of OECD assessed con­tri­bu­tions of fin­ance to national GDP. The UK comes in with 9.5%; the U.S. 8.2% Con­tin­ental European states offer 6% and less. Import­antly, if also obvi­ously, the UK’s 9.5% var­ied con­sid­er­ably as the sec­tor shrank dur­ing the Credit Crunch.³

Turn­ing, how­ever, to our prin­cipal interest, we will look at that 65% of fin­an­cial ser­vices activ­ity provided by banks and fin­an­cial inter­me­di­ar­ies (thus ignor­ing insurers, pen­sion funds and oth­ers). Here is the break­down of how the banks’ con­tri­bu­tion is made up⁴:

1. Fees and com­mis­sions receiv­able (30% of gross
   output).(1) This dir­ect meas­ure of out­put includes all the
   fees banks obtain from invest­ment bank­ing activ­it­ies
   (under­writ­ing, broker­age, advis­ory ser­vices), fees
   asso­ci­ated with loans and advances and cur­rent accounts
   (eg credit card, mort­gage and over­draft fees) and
   com­mis­sions asso­ci­ated with sales of insur­ance products
   by banks. To provide a volume indic­ator, these rev­enue
   data are deflated using the AWE series for the fin­an­cial
   ser­vices industry, exclud­ing bonuses and adjus­ted for
   changes in productivity.(2) This assumes that price changes
   in an industry can be prox­ied by the part of pay growth
   that is not accoun­ted for by pro­ductiv­ity improvements.
2. Net spread earn­ings (10% of gross output).(1) This is a
   meas­ure of ser­vice income provided by banks involved in
   deal­ing activ­it­ies. It cap­tures earn­ings that banks receive
   by under­tak­ing trans­ac­tions at prices above or below the
   mid-​market price; for example, the sale of for­eign cur­rency
   to a con­sumer at a favour­able rate to the bank. These
   earn­ings can be gen­er­ated on secur­it­ies and deriv­at­ives as
   well as on for­eign exchange. Net spread earn­ings are
   deflated in the same way as fees and commissions.
3. Other oper­at­ing income (20% of gross output).(1) This
   com­pon­ent includes rents received by banks and other
   mis­cel­laneous sources of income. These rev­en­ues are
   deflated in the same way as those from fees and
   commissions.
4. Fin­an­cial Inter­me­di­ation Ser­vices Indir­ectly Meas­ured
   (FISIM) (40% of gross output).(1)(3) This meas­ure uses the
   mar­gin between the interest rates offered by banks and an
   assumed ref­er­ence rate to impute a ser­vice charge for all
   the valu­able activ­it­ies of banks that can­not be meas­ured
   dir­ectly. Akri­tidis (2007) provides a com­pre­hens­ive
   account of how this has been imple­men­ted in the
   United Kingdom.

Com­ment­ing on these head­ings in turn:

1. Fees and com­mis­sions receiv­able. Those who have read my Short Legal His­tory of the Credit Crunch (see links below) will not to be sur­prised to see that 30% of the banks’ GDP con­tri­bu­tion comes from screw­ing fees out of their hap­less cli­ents. In that series I showed how the eco­nomic crash the banks caused was used as a pre­text to charge ail­ing com­pan­ies 6 – 7 fig­ure fees for restruc­tur­ing advice, facil­ity amend­ments, and agency work. At the start of the crisis Mitzuho Bank’s U.S. secur­it­ies out­fit charged a whop­ping US$10,000,000 for struc­tur­ing and man­age­ment fees on a secur­it­isa­tion packed with assets that it has simply made up out of thin air. I sig­ni­fic­ant rev­el­a­tion of the Crunch was how a fee-​based cul­ture had caused banks to act­ively ignore, if not down­right mil­it­ate against, the eco­nomic value of the invest­ments they were engaged in. To but it bluntly, 30% of the banks’ con­tri­bu­tion derives from pro­tec­tion rack­et­eer­ing, fraud, and spivvery.
2. Net spread earn­ings. As stated above this 10% comes from pro­pri­et­ary trad­ing, deriv­at­ives and sim­ilar. Thank­fully it appears (and I hope) that GDP is not based on the total notional value of these trades, which would amount to many times more than total global GDP, but on actual real­ised gains and losses. But remem­ber, this is the area Hec­tor Sants of the Fin­an­cial Ser­vices Author­ity described as “socially use­less”, and which is the locus of vari­ous instances of banks dir­ectly bet­ting against their cli­ents’ interests, in some instances hav­ing advised those cli­ents to take daft pos­i­tions. Such cli­ents are called “mup­pets” at Gold­man Sachs, we are now told. The recent scan­dal of banks selling swaps to small busi­nesses who com­pletely fail to under­stand them and have ended up out of the money no doubt also adds to this con­tri­bu­tion to national GDP. Inter­est­ing, this is the area of much trum­peted “innov­a­tion”, but it is the smal­lest chunk of “pro­duct­ive effort”.
3. Other oper­at­ing income (30%) includ­ing rents. In recent dis­cus­sions with an ex-​bank ana­lyst who has joined the ranks of Occupy, I was informed that many merged banks are now sit­ting on sig­ni­fic­ant real estate inher­ited from defunct entit­ies like HBOS and Dresdner. What the other sources of income are is unclear — pos­sibly insur­ance income, which recalls the recent pay­ment pro­tec­tion insur­ance scan­dal, and tax struc­tur­ing, which has helped US$21 tril­lion be stashed away offshore.
4. FISIM. This 40% is per­haps the most galling, for, as the BoE Paper makes clear, it is the profit each bank makes simply from oli­go­pol­ising the money mar­kets. To bor­row the Paper’s example, if the Bank of Eng­land lends to the banks at Base Rate 0.25%, the banks will lend to Joe Bloggs at 2.5%. The 2.25% dif­fer­ence is the banks’ cut for the priv­ilege of link­ing Joe Bloggs to cap­ital. It has all the char­ac­ter of a mono­pol­isa­tion of a nat­ural resource — the profit simply arises from the banks hav­ing cornered the resource to the exclu­sion of the 99%. Broadly put, 40% of the banks’ pro­duct­ive effort arises from, er, simply being banks. If Brit­ish chim­ney sweeps were sud­denly gran­ted sole access to the Lon­don money mar­kets, they would be provid­ing c.4% of UK GDP (assum­ing they would hap­pily whack a 2% cost of funds on top of base rate). But the thing is, this is not a nat­ural resource — it is the state which has ordained that money cre­ation should oper­ate in this way.

As the paper makes clear⁵, actu­ally meas­ur­ing the product under these heads is very dif­fi­cult and could vary widely from final fig­ures. Part of this must surely arise from the sheer lack of any real product in the above activ­it­ies. We have here spec­u­la­tion; non-​productive labour that is para­sitic on pro­duct­ive labour (the mup­pets) for 60% of the con­tri­bu­tion, and oli­go­pol­istic with respect to the remain­ing 40%.

Read­ers of G. Arrighi, and Robin Black­burn, will imme­di­ately under­stand why GDP has been anchored in what amounts to a sleight of hand. The col­lapse of pro­duct­ive cap­it­al­ism in the West has led to government-​promoted policies which seek to replace this short­fall with information-​based cap­it­al­ism, fun­da­ment­ally “groun­ded” on noth­ing other than belief in the value of the inform­a­tion being moved around, be it money, data, or con­sumer signs. Bankers know this: when the crunch happened they dumped all this inform­a­tion on the gull­ible and bought heav­ily in land, com­mod­it­ies, and the still con­sidered “safe-​haven” gold. This is the real sleight of hand — the “magickal” art of con­vin­cing people to swap assets of real human value for mere sym­bols and fet­ishes. This is where the cur­rent inequal­it­ies have been accelerating.

10% of GDP? Only for so long as people keep believ­ing it.

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