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20 April 2022. Finance | Animals
How big finance takes a cut from society. // The sentience of animals arrives in UK law
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1: How big finance takes a cut from society
In yesterday’s Just Two Things, I discussed the “finance curse”—and Nicholas Shaxson’s book of the same title. The core idea: when a financial sector becomes too large for the economy it serves, it becomes extractive, with a whole range of adverse effects.
One of the strong claims in the book is that the usual rhetoric about the City of London (noisily promoted by the City) is that it subsidises the rest of the UK. Shaxson suggests that this isn’t the case: that much of this apparent wealth is merely extracted from the rest of the UK and packaged up as profits.
(The City of London, sticking it to the rest of us. Photo by kloniwotski/flickr, CC BY-SA 2.0)
Shaxson starts his explanation of how this process works in practice with an example from the Private Finance Initiative, an invention of John Major’s 1990s government that was hugely expanded by New Labour in the early 2000s. PFI was designed to invest in (much-needed) public infrastructure while keeping the costs off the public sector balance sheet.
(Why it was necessary to do this has never been clear to me: governments don’t get punished by the markets for capital investment, they get punished when current expenditure outruns revenues. But one of the features of a dominant idea about political economy is that it presents itself as both necessary and as common sense, even when it isn’t).
Shaxson has found a striking example of PFI: the Strathclyde Police Training and Recruitment Centre, in East Kilbride. It cost £17 million to build, and the PFI consortium that built it will be paid £112 million for this between 2001 and 2026. The consortium itself is structured in a labyrinthine way—it’s Special Purpose Vehicles, etc etc, all the way down—to minimise tax exposure.
If the government had issued a 25-year bond to pay for this at (a generous) 5% per year, it would have cost £37 million. Not all of the £75 million difference is free money, but most of it is. Allyson Pollock, who has researched PFI in the health sector, decribes it as “a way of getting one hospital for the price of two” (p 223).
This isn’t a special case. The best estimate of the asset value of buildings constructed in the UK through PFI is £59 billion. The cost of financing them? £306 billion. It’s not surprising that the UK has have a decaying public infrastructure, in comparison to, say, north European neighbours.
One of the results of all of this is that money that should have come from our taxes to pay for better services and so on is being channelled to the kinds of people who have investments (so more affluent than average1), who are more likely to live in the south of England, if they live in the UK at all, and some of it will end up offshore.
It’s not just about PFI, of course. When a private equity operator takes over a business, loads it with debt to pay for the transaction, and then slashes costs to pay itself the interest payments on the debt, pretty much exactly the same thing happens: productive businesses that are viable become machines for feeding the financial sector. Huge chunks of the British retail sector are run like this now, much of the elder care sector, even Manchester Utd.
The same thing also happens when public services are outsourced to the private sector.
Outsourcing was supposed to drive down costs by introducing competition into areas dominated by a stodgy state. But the result has been to create a few large monopolistic providers like Serco, Atos, Capita, and the now-collapsed Carillion, which specialise not in providing the most competitive services but in winning government contracts and maximising their own revenues (p 232).
Large monopolies—especially ones driven by financial ratios—accelerate all of the processes here. Stock buybacks—which have accelerated in recent years—are another form of financialisation that extracts money from businesses and channels it into the financial sector.
Shaxson and a research colleague, John Christensen, asked the American academics Gerald Epstein and Juan Montecino to replicate for the UK some analysis they had done on the US on the net costs of high finance on the British economy. Their conclusion: conservatively, the cost of the damage done to the UK by an outsized finance sector over the period 1995-2015 is around £4.5 trillion—which represents two and a half years of British economic output, or around £8,000 per household per year.
Sitting right there might be an explanation of the UK’s productivity ‘crisis’, which sees UK productivity sit 15-25% below the rest of northern Europe. It’s worth noting that research and development and forms of retained knowledge are often sheared off in these financialised models.
So there are some pretty obvious policy points here.
The most obvious one is that the so-called ‘Preston model’ makes complete sense as a way of not having local resources and value chains sucked away to the City. It focuses on “community wealth building’, investment in productive economic activity, and re-invests locally the benefits of local economic growth.
The second is that regional authorities and devolved nations should do some of their own local calculations about their share of the £4.5 trillion—because there is political value in over-turning the notion of the benficent City bailing out the needy regions. We need new stories here. If I were the Scottish government, I might also re-run some of those calculations about a post-independence Scottish economy.
The third is that we should be creating a vision of what Britain might look like without this vast weight of money leaching, or leeching, out to the finance sector. If nothing else, think what all of those physicists and engineers might be doing—on climate change, say—if they weren’t employed inventing ever more complex financial extraction schemes.
Shaxson has some thoughts of his own. These include: doubling down on the battle against tax havens; ensuring transparency of property assets; ‘smart capital controls’, to discourage the wrong kind of finance coming into the UK; and some serious anti-monopoly policy.
Even just naming the process, and the price that we all pay for it, might start to make a difference.
2: The sentience of animals arrives in British law
The new British law on animal welfare—about to be given Royal Assent—defines certain animals as ‘sentient beings’ in law for the first time. The reason for the law is to fill a gap left when the UK left the EU. (There was a previous requirement “to pay full regard to the welfare requirements” of animals as “sentient beings” when implementing EU policies.)
But there are still some interesting features of the Animal Welfare (Sentience) Bill. The most striking one is that it includes some invertebrates for the first time:
In addition to all vertebrate animals (animals with backbones such as mammals, birds and fish), the legislation includes certain invertebrates, including lobsters, crabs and octopuses. This is progress compared with the Animal Welfare Act 2006 of England and Wales, which – along with its Scottish and Northern Irish equivalents – only applies to vertebrates.
It also creates an Animal Sentience Committee, which is charged with
report on how government policies affect animal welfare, and can recommend further changes in how those policies are formed and implemented.
How big a deal this is probably depends on whether you see law-making as having an administrative function or a symbolic one. Certainly, animal welfare organisations are fairly excited.
At the same time, Joe Wills, the Lancaster University law lecturer who wrote the Conversation article, notes that we don’t know how much of this will work.
For example the Committee has powers to look at the impact of all areas of government policy, from international trade deals to new infrastructure projects. It can issue reports and the Secretary of State has to respond to them—so it creates some scrutiny and a bit of a paper trail.
But will the act stop restaurants boiling lobsters alive? That’s actually covered (and banned) by existing legislation, which is largely ignored by restaurateurs. So it’s possible that the new Act will create more of a spotlight on such illegal practices.
The bill does not legally oblige the government to consider animals in the policies it makes, let alone demonstrate improvements for their welfare. The government is only obliged to respond to the reports of the Animal Sentience Committee, and has no responsibility to implement any of its recommendations.
And, with the British government’s hatred of legal or other scrutiny, the bill has been designed to minimise the possibility of judicial review, and fails to define the powers of the Committee.
All the same, this seems like a step forwards. As Graham Molitor observes in his article on S-curves in policy making, by the time an issue gets encoded in law, it has passed through the ‘Framing’ and ‘Advancing’ stages, and has reached the ‘Resolving’ stage. By this time it has become part of the mainstream discourse. This is definitely of a piece with the other steps being taken to acknowledge the rights of other species because of their inherent qualities, rather than because of human concern or compassion. And it’s definitely good news for octopi, who are smart creatures and deserve our protection and respect.
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The same is true of pension investments, by the way. These aren’t as much of a leveller as defenders of finance capital seem to think they are.