London fact of the day

London is the richest city in Europe.  Real output per person is central London is nearly four times the average in the European Union, and nearly twice that Europe’s other large, rich metropolitan areas, such as Amsterdam and Paris.  Strikingly, London is more than twice as rich as the next richest region within Britain.  However one slices it, the city is an extraordinary economic outlier.

That is from the forthcoming Work, Power and Status in the Twenty-First Century, by the always worth reading Ryan Avent.

Comments

I suspect Brexit was as much a vote against London as it was a vote against Brussels for many people.

+1 - London is going down. The UK self-nuked their crown jewel out of envy. Like the Monty Python skit, "What has Rome [London] ever done for us?"

Well, it is decreasingly the crown jewel of the actual British.

@M - I take it you voted Leave? Anyway, it makes no difference to me, as I'm not a UK citizen. Time will tell how this plays out, but I'm calling an end to UK dominance. In time, they (and France) should be kicked out of the UN Security Council as irrelevant.

Actually, it is an end to Brussels dominance.

The best argument for Brexit I have heard goes like this:

1) London loses its financial capital status
2) London real estate becomes less attractive for foreign billionaires
3) London real estate becomes more affordable to ordinary people, even those who are suffering from the economic effects of Brexit

I'd take a moderate US recession if it meant I could afford to live in a decent apartment where I grew up in New York.

Sorry, we've already had a pretty deep recession and prices did not become affordable.

because in times of uncertainty, restricted assets like London and New York real estate become *more* attractive. It's heads I win, tails you lose.

I doubt the price of an average apartment in London is much driven by foreign billionaires.

By his mistresses and hanger-oners and his personal chefs.

No, but if 85% of Wall Street decamped for Quebec City, I bet Manhattan apartment prices would go right down.

Essentially, for some people the potential loss of the City's financial center status is a feature, not a bug, of Brexit, despite its effects on the British economy.

Have you folks considered the possibility that it just isn't true? Maybe London isn't the richest city in Europe. The trivial way to look at this is per-capita output. However, the correct measure is PPP-adjusted per-capita output. London is fantastically expensive. Adjusted for the local cost of living, is London really that rich? Perhaps not.

Let me use two analogies. On a simple per-capita GDP basis, Sweden is richer than the USA (has higher income per-capita). However, adjusted for the local cost of living, the reverse is true. A better example, might be New York City. On a per-capita GDP basis, NYC looks rather rich. However, once you factor in the local cost of living, NYC is quite poor.

This fits reality better than the per-capita GDP numbers. NYC has a very low quality housing stock, poor schools, extreme congestion, and very high prices. Except for Wall Street, incomes are unexceptional. Basically, NYC is a poor city (in a poor state) with a smattering of (very) rich people.

Could London be the same?

Many people who work in New York or London do not live in the city. They contribute greatly to the level of economic activity of the city but do not have to bear the costs of living in the city limits. If what we are interested in is the value of goods and services produced by factors of production in the city, it doesn't make sense to deflate that value by the cost of rent.

Ricardo,

From "The Reality of New York City Commutes" (http://www.citylab.com/commute/2016/04/why-new-york-city-commutes-are-long/476475/)

"Although the majority of jobs in New York (79 percent) are filled by city residents, many workers still commute from outside the city. For all that’s been made of more affluent, educated workers moving back to the city to enjoy shorter commutes, the report finds that many workers in higher-paying industries and jobs live outside the city. For example, 38 percent of finance workers live outside city, as do 40 percent of utility workers and 30 percent of government workers. By contrast, workers in lower-paying service jobs are more likely to live in the city: 85 percent of retail and healthcare workers and 90 percent of food service workers live in the city.

Finance workers also have the longest commutes: an average of 51 minutes. The industry with the second-highest commute is construction (50 minutes), followed by public administration and manufacturing—each with 48-minute commutes.

Even workers with shorter commutes have to travel a while to get to their jobs. Workers in educational services may have the shortest commutes, but they are still left traveling for 40 minutes. Close behind are workers in real estate, as well as arts and entertainment, who travel for 41 minutes, and workers in retail, who travel for 42 minutes on average."

As you can see, for ordinary folks NYC combines relatively low incomes with very high prices and strikingly low quality housing (and schools). Some upper income folks get NYC incomes and (somewhat) cheaper non-city housing. They pay the commuter tax (in time). Whether commuters contribute to NYC's GDP depends on how you measure GDP. If you use place of residence, they don't. If you use place of employment, they do.

IRC London probably doesn't have poor schools - there's a "London Effect" in education that's quite marked. Contributes to greater outcomes for migrant children (IRC 1st, 2nd and 3rd Gen) at GCSE level, disproportionately in London, despite generally somewhat lower rated Cognitive Ability Tests (not as much as for equivalent ethnic origin groups in the US for some reason) and also second language disadvantages. Education seems more effective in London relative to pupil quality.

For housing, quality relative to cost of housing is probably as you say (The Rent Is Too Damn High Party argument). Otherwise, anecdotally - food, transport, clothing, energy costs are either lower or not higher in London, compared to salary, compared to low density parts of the country (the big chains where people source food and clothes from essentially cost the same everywhere, same for energy and public transport is cheaper), and choice is quite a bit larger.

TC,

Could Brexit be a vote against London? Sure it could. London has both advocated and profited from cosmopolitan globalization. The rest of the UK has suffered from the same. Given that London hasn't shown much interest in "sharing", why shouldn't the rest of the UK vote against London?

The positive model of this is that London has (hypothetically) gained $2 for every dollar lost by the rest of the UK. That would make a Coasian bargain at least possible. However, everyone agrees that no such bargain has ever happened or is likely to happen.

If the only impact of cosmopolitan globalization is poverty, voting against it is highly rational.

Lets connect the dots. UK has productivity gap (http://marginalrevolution.com/marginalrevolution/2016/07/the-british-productivity-gap.html) + London is richest city in Europe + London is financial "services" hub = London wealth is derived from transaction costs? http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1976.tb01882.x/full London more like bandits preying on passing merchants than wealth generator.

""""like bandits preying on passing merchants"""

London also services the worlds bandits, the Oligarchs, the Dictators, Embezzlers , etc

It's worked for Switzerland.

One can argue that Switzerland originally profited by reducing transactions costs bus has had to adapt to external generation of transaction costs rather than play Baptists and Bootloogers with internal regulation. https://www2.unine.ch/files/.../WP_8_2014_Salomon.pdf

Also New York.

""""Real output per person is central London is nearly four times the average in the European Union"""

By "Central London" I assume they are talking about the "City of London", not the curry shops of Brick Lane?

Well, I like those. And it's better than living in Perfidious Albion.

You are referring to currywurst a specifically German snack.

"Those Germans have a word for everything", don't they?
https://www.youtube.com/watch?v=O74hxLjy1L8

Currywurst is actually an excellent example of how German cookery uses subtle flavors and frugal ingredients to create very appealing dishes. Some people like to bad mouth
German cuisine but currywurst is very popular. German food doesn't need to rely on heavy spicing to produce flavor - another example of German efficiency and practicality in application. I can't find the link right now but there's been substantial archaeological and historical evidence that the curry sauces originated in Brandenburg which is the region around Berlin and the techniques traveled to India, not the other way around as is commonly held.

I don't know about that. German cooking just seems to oversalt everything in lieu of having different flavors, subtle or otherwise. The main flavor in German cuisine seems to be "salty", and it's far from subtle.

The bread is good though.

Jetzt bin ich beeindruckt - 2 comments which are passable parodies.

Such amusing effort on the part of some unknown commentor.

The commodore would undoubtedly express his admiration for such a fine effort in the ever shifting tides of this comment section.

"If you don't like German food, you are wrong!"

--p_a

Currwurst is not curry. It's wurst.

Of course, measuring output in the financial sector is difficult at best. The difficulty can be best understood conceptually by considering Willie Sutton's answer when asked why he robbed banks: "Because that's where the money is". For an academic analysis (of London's financial sector output not of Sutton's Law), here's one study from 2011: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb110304.pdf

Per-capita output on the Enron trading floor was extremely high... Until it wasn't...

AIG did a lot of trading in London up to 2008, then the US taxpayer had to bail out their loses. They probably still are trading, after all when declared too big to fail by the US government why not gamble.

London's been a finance hub for oh about one thousand years so if it is a ponzi scheme it's a pretty long last lasting one.

And what's with all the hate on the finance industry? Has MR been infected by a bunch of teenage communists? I remember reading debates from the 1930's about the wastefulness of capitalism due to spending on advertising and finance and how communism would be so much more efficient because it would do away with these parasites. That didn't work out so well now did it? I'd trade a bit of "transaction costs" against Stalinism anyday. Capitalism, (democracy), is the worst economic (political) system apart from all the rest.

"Has MR been infected by a bunch of teenage communists?"

You must be new here.

"...infected by a bunch of teenage communists?"

They're not teenagers.

I thought about making that point. They seem to cover the age spectrum.

I have no idea why we get such low quality liberals here. I don't think the liberal pro-government argument is nearly as bad as you'd think based on the comments on MR.

" I don’t think the liberal pro-government argument is nearly as bad as you’d think based on the comments on MR."

Yes, I think you are correct on both of those points.

most of us teenage communists here are fine with the free market, provided that there is some real degree of transparency and accountability. the altogether too-cozy relationship between finance and government makes that kind of transparency impossible to achieve, and instead makes finance a tool to enrich the few at the expense of the many.

+1

This is a very reasonable comment. If only it were representative of most comments on this site.

Finance is necessary but has become bloated.

Thanks for setting up the straw man. I can burn him for heat when winter comes.

Considering that the financial system is essentially nationalized without direct management, I consider myself anti-communist.

If you were polite you would be thanking us that you have a job at all.

You think Quants didn't study differential equations?

What's the matter with Indiana?

Average pay in Kokomo is quite good and cost of living is low.

It does take quite a lot of "gumption" to nuzzle up the backsides of potential clients all day long.

Savage

Sounds like you got a problem with quality control managers in Kokomo

"And what’s with all the hate on the finance industry?" *

Can you count?

http://blogs.wsj.com/economics/2012/10/01/total-global-losses-from-financial-crisis-15-trillion/

* ask TC

$15 trillion sounds impressive, but how much were the gains before 2007 and how much were the gains since 2009?

What's your point?

+1

Yes, London is the richest city in Europe, because it is the chief LOOTER due to its soon-to-be-past status as Europe's financial capital. For similar reasons, Washington DC Metro is one of the richest cities in the US--also from LOOTING, but of the "federal government variety" rather than the Wall Street/Financialization type.

It's a fair point. London is a bit like NYC and Washington rolled into one. Washington has some extremely wealthy zip codes and the vagaries of the federal procurement process are not unrelated to this fact.

" a bit like NYC and Washington rolled into one": and LA too. Unlike LA, London has an unpleasantly humid microclimate: so back we go to NYC and DC.

What is LA looting, and from whom?

"Real output". Use of this phrase is indicative of how much economists and the cronies in government don't get it.

Rent seeking has been elevated to highest status industry.

Clearly Keynes has been wiped from economics.

"I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution."

And thus we have so many people trying to revolutionize multiple nation states by any means possible.

Real per capita income in D.C. is higher than any state and is about 166% of the national average.

"Output". Please define. You are unlikely to hear the financial services industry criticized here as it butters much of the bread of those helming the vessel.

Econsists have been brainwashed since the 60s when an efficient economy had zero profits and very low rents, rents sufficient to pay labor costs for bookkeepers.

Since, labor costs are something to be eliminated because only a population of wealthy consumers can produce an efficient economy, one with 100% profits.

It must be nice to have a random word generator; I should get one.

"Real output per person is central London is nearly four times the average in the European Union, and nearly twice that Europe’s other large, rich metropolitan areas, such as Amsterdam and Paris."

If that is true, it must all be going to the billionaires. Reality check: go to the beach resorts of Portugal in August. Are the young lads from London on stag weekends staying in rooms twice as expensive as their counterparts from Amsterdam? Or go to Tuscany. Do doctors from London seem to be able to afford holiday villas twice as expensive as doctors from Munich, or vintages twice as expensive in the trattorias? Outside of Belgravia and Knightsbridge, is the average car on the streets of London twice as nice as in Vienna? Where's the money going?

The output doesn't necessarily accrue to the workers. In London a large share of output goes to landowners (rent); the public transport workers also take a larger slice than in other comparable cities.

As for your observations on whether British or Dutch young men occupy the more expensive hotels, bear in mind that young Britons graduate from university with significant debt, unlike the Dutch.

Also you can't know (without asking them) whether they are from London or from elsewhere in the UK. Given that London generates a disproportionate share of the UK's national income, we can infer that the rest of the country is quite a bit poorer than most of the Netherlands.

Bottom line: if you're skilled enough to get a job that affords you a comfortable life in London, then go for it. But if not, you'll enjoy a better quality of life in the Netherlands or Germany. In practice that's what we see: the only Dutch who come to the UK are those in highly-skilled sectors. Language barriers mean that relatively few less-skilled Britons move the the Netherlands, but that's their loss.

I don't know that few Britons, young and low skilled, moving to the Netherlands and the like is explained by language barriers. There's probably enough exposure to foreign travel (by stag parties if nothing else) that, if there was an important and perceived lifestyle differential, they'd make that choice. Doesn't really happen, so much (probably more move to Spain and France).

If you think "real output" is something that can be compared across territories, you probably don't understand what "real" means as a statistical term. Perhaps you have in mind PPP?

But the general gist seems about right.

Aylok:
I live a bit outside of Belgravia (Earls Court - 3 Tube stops from Harrods) but still central - and the cars here on the streets are still REALLY nice - the share of BMWs, Aston Martins, Mercedes, Bentleys, Porsches, even a few Ferraris, big SUVs and so on is indeed significantly higher than in Munich (where I lived before) and which is the richest town in Germany.
Which is really no surprise to me because if you can afford a flat for 20-30k rent per year then a few k for a nice car is not a big difference anymore...
Even if I go further outside I am surprised by high share of good cars, just saw in a much poorer and run down neighbourhood a brand new BMW M4 where I really was surprised about its presence in from of a pretty run-down house.
I guess it's also about lower car prices in UK and British attitude to leasing and consumerism (vs Germans less leasing and more likely to only buy a car for which they already saved the full purchase price)

It's so cool you got an advanced copy!

PPP adjusted Inner London's (an NUTS -2 level area) per capita GDP is 3.25x that of the EU-27.
http://ec.europa.eu/eurostat/statistics-explained/index.php/GDP_at_regional_level

Inner London is (roughly) about 300 sqkm in area with ~3 mn people - Zone 1 and 2 as Londoners would usually describe it. Somewhere between Manhattan and the whole of NYC is size/scope. Central London (the Manhattan equivalent) is likely even richer. This does include the curry houses of Brick Lane. They are super-productive, fwiw.

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