Why the rise of the ultra-rich in London is bad for the rest of Britain

November 18, 2013

London: Not the best place to drive your Maserati (Neil Irwin/Washington Post)

LONDON – “How are we being outbid by college students?” my friend asked.

We were at a pub in central London. The friend was half of a professional couple in their early 30s, both of them with quite good jobs. They have been looking for a new place to live, and the places they were interested in kept being snapped up by students.

A broker explained: These aren't ordinary college kids. They are students from the United Arab Emirates or other places rich with natural-resource wealth, whose parents offer to pay a full year’s (very pricey) rent in cash, upfront.

It’s the kind of story that every Londoner seems to have these days in what increasingly feels like a gilded city, a preserve for the global super-rich.

There are the eerily silent streets of Mayfair and Belgravia, dark at night because many of the giant houses there are owned by Russian and Middle Eastern plutocrats who are rarely in town to use them. There is the indignant tabloid reporting on rich people building underground mega-mansions, and legal efforts to halt the practice.  There is the funny-looking scene of people idling in the stop-and-start traffic in Ferraris and Maseratis, the gloomy skies of London overhead; such vehicles are presumably a lot more fun on the open roads on the French Riviera.

The prosperity of London has diverged drastically from that of the rest of Britain in the last decade, in ways that contain economic lessons for the rest of the world.

The per-capita economic output of Londoners, for example, was nearly double that of the United Kingdom excluding London in 2011 (35,600 pounds versus 18,700, based on data from the Office of National Statistics that I crunched a bit).

UK-Valueaddedpercapita

London has always been richer than the rest of Britain, but since 1997 it has gone from per-capita economic output that was 70 percent higher than the rest of the nation to aper capital income that is 90 percent higher.

So does any of this matter? Growth is growth, and of course a bustling, modern financial capital will have stronger growth than the older, industrial cities of the north of England.

Well, yes. But.

The weaker economies of the rest of Britain surely benefit in some important ways from London’s prosperity—there is a lot more tax revenue to go around than there would be otherwise, for example, and there are ancillary businesses that serve the booming businesses in London (back office functions for an investment bank, for example, or a Maserati repair shop).

But in important ways, the prosperity of London actually damages the competitiveness of the rest of Britain.

It is a mild version of  a phenomenon known as “Dutch Disease,” a phenomenon in which countries with lots of natural resources see other domestic industries suffer. When money is flowing in due to oil or other natural-resource wealth, it pushes the value of the nation’s currency upward, which makes its manufacturing and other industries less competitive on the global marketplace through no fault of their own.

Britain’s Dutch Disease isn’t driven by the export of oil or natural gas, but of something more ephemeral: A safe place for the global elite to park their money. When a Russian oligarch pays $80 million for a house in Knightsbridge, or shifts a billion dollars worth of his assets into British banks, the economic effect is similar to what would happen if he were buying exported oil.

And when Mark Carney and the Bank of England Monetary Policy Committee get together each month to set interest rate policy for the UK, they see a rosier economic picture by looking at the whole of Britain than they would if London were not part of the equation.

Just last week, the bank signaled that interest rate increases may come sooner than it had thought, which pushed up the pound on global currency markets. Surely if Carney & Co. were setting monetary policy only for the UK excluding Britain, they would not be so eager to raise rates.

The result of all this is that businesses across the countryside of Britain have a more challenging competitive environment than they would otherwise, leaving them less able to compete with German or French or American competitors.

This is why the Guardian’s Larry Elliott recently called for London to be made a city-state separate from the rest of Britain (it is not entirely clear if he was being tongue-in-cheek; you know how we Americans have trouble with that wry British humor). Some other homes for the global super-elite, namely Singapore and Hong Kong, function just that way, as city-states of their own.

But in the meantime, London’s great prosperity has victims even beyond those 30-something professionals who are being outbid for apartments by college kids.

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Evan Soltas | November 18, 2013