Bank bailouts: Why the US made a profit and the UK won’t

At the end of last year the US government announced that it had made a profit from its bank bailouts. The UK, on the other hand, probably won’t. So what did the Americans do right and we do wrong?

As Leonid Bershidsky explained in Bloomberg earlier this month, conventional wisdom in 2008 was that the UK government was being tougher on the banks.

At the time, Britain’s toughness on rogue bankers was praised and the leniency of the U.S. — which didn’t fully nationalize any big banks — was condemned.

But that’s not how things worked out.

It is at this point unlikely that all of the government’s initial cash outlay of $190 billion at today’s exchange rate will be recovered.

The U.S. government, by contrast, actually made a small profit.

The reason for this has much to do with the relative size of the banks and the country’s economy. The US has some big banks but also a very big economy on which its banks are dependent. The UK has some big banks but it is a much smaller economy and its banks are international.

Bershidsky refers to this fascinating paper by Pepper Culpepper of the European University Institute and Raphael Reinke of the University of Zurich, Structural Power and Bank Bailouts in the United Kingdom and the United StatesIt’s worth reading the whole thing but here are some choice cuts.

Large banks in the United States could not defy regulators, because their future income depended on the US market. In Britain, by contrast, one bank succeeded in scuttling the preferred governmental solution of an industry-wide recapitalization, because most of its revenue came from outside the United Kingdom.

Financially strapped banks could not challenge the government in either country. They had to accept whatever policy the government offered, because only with government aid could they have survived. But healthy banks were not dependent on state aid. Healthy banks in Britain were in a better position to resist the state, and they drove a better deal for themselves than did US banks. As a result, the British government absorbed more risk than the U.S. government and lost its taxpayer more money. In effect, the U.K. provided a costless subsidy to its healthy banks, which benefited from the stabilization provided by the bailouts without having to contribute to their cost. In contrast, the U.S. profited from its bank bailout, because it was able to bully healthy large banks such as JP Morgan and Wells Fargo into a collective recapitalization plan.

Both governments, effectively, insured their banks against losses, providing debt guarantees and capital injections while charging a fee. Insurance is a profitable business if nothing goes wrong. That’s why insurers try to cherry-pick the best clients and discourage the riskier ones. The US government forced all its banks to participate in the bailout, even those banks that were not in trouble. This was, after all, about restoring confidence in the banking sector as a whole. Therefore, so the argument went, even the healthy banks would benefit so they too should pay.

The British government wanted to do something similar but HSBC refused to participate:

The UK government wanted to include HSBC in the recapitalization plan, but HSBC refused. Multiple figures associ- ated with the bailout repeated in interviews with us that the UK government had no tools to force HSBC to take state capital, even though it was the government’s first preference.

So did Barclays:

Barclays never wanted state capital, but when the government negotiated the plan, it was unsure whether it could raise capital privately. Once HSBC quickly announced it would not take state capital,47 Barclays made clear it would go to extraordinary lengths to refinance itself through its share- holders rather than taking state money.48 Barclays kept the option of state capital open until, a few days later, it succeeded in raising the required capital. By then, the govern- ment had announced its debt guarantee programs, which eased funding for Barclays and helped the bank to convince investors to provide capital.

This quote from former Deputy Governor of the Bank of England John Gieve is priceless:

[Barclays] played us very cleverly, in that they managed to negotiate a sum of capital, which they had to raise and that they could raise—from their friends in Singapore and the Middle East and so on. And thereby pass our test, while still getting the benefit of the overall government guarantee.

In other words, they benefitted from the improved confidence in the banking sector that came from the government’s bailout without actually having to pay into it.

To stretch my insurance company analogy, rather than cherry picking the good clients, the British Government was left with the basket cases. The US government, by contrast, was able to charge all its banks fat fees for insuring them and sell off its shares at a profit once the sector recovered. It incurred some losses from the bailout but it more than covered them with its gains, like any good insurer would.

With its payment structure—capital injections and warrants— the US government could recoup its money. It allowed the government to internalize some of the positive external effect of its rescue program. Getting the warrants in the nine major banks generated over $4 billion, and $3 billion of that sum was paid by banks that did not need capital injections: Wells Fargo, JP Morgan, and Goldman Sachs.

How did the US government get its banks to play ball? It bullied them.

US regulators could make Wells Fargo and JP Morgan an offer they could not refuse. In the decisive meeting between the CEOs of the nine major banks and senior US government officials—Paulson, Bernanke, Tim Geithner of the New York Fed, Sheila Bair of the FDIC, and Comptroller of the Currency John Dugan—this regulatory threat was explicit, and it was repeated. In the talking points prepared for the meeting on October 13, 2008, recalcitrant banks got this message: “If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.”43 After Paulson’s presentation of the plan, which reiterated the unpleasant consequences of not accepting the aid, the CEO of Wells Fargo complained to the other CEOs “Why am I in this room, talking about bailing you out?” Paulson’s response was a threat of regulatory consequences: “Your regulator is sitting right there [pointing to the head of the FDIC and the comptroller of the currency]. And you’re going to get a call tomorrow telling you you’re undercapitalized and that you won’t be able to raise money in the private markets.”44 This is an explicit threat from a regulator against a financially healthy bank. The regulator could make trouble for the bank in unsettled markets—the regulator knew it, and the bank’s CEO knew it.

The US regulators are not people you want to mess with.

None of this was because Hank Paulson was a hard bastard and Alistair Darling wasn’t. It was simply a reflection of the relative power of the banks and their governments, as Pepper Culpepper explained in this LSE article:

This different policy was not a matter of different governmental preferences in the two countries. The British government also recognised the virtues of a collective plan that would have forced all large banks to take government money. Yet the British government faced a powerful opponent, over which it held limited leverage: HSBC, a large player in the British market, but a bank based in Asia, which does just twenty per cent of its business in the United Kingdom. HSBC was able to reject the proposal of the Labour government that it take public money, because it was in a position in which UK regulators could do only limited damage to its future prospects. This contrasted with the case of the healthy American banks: JP Morgan earned more than 70 per cent of its revenue in the US, and Wells Fargo 100 per cent. Banks so heavily dependent on the US market were unable to defy the threats of American regulators, given the costs those regulators could impose on them in the future.

The story of these bailouts is indeed one of the power of banks. Yet the power that matters is a function of the economic footprint of banks, not their lobbying strength. The different fate of the two bailouts should lead scholars and policymakers to pay increased attention in the future not merely to the lobbying muscle of banks – what political scientists call their “instrumental power” – but equally to the way in which their role in national economies gives them “structural power” in dealings with government.

In 2008, Barclays, HSBC and RBS were three of the biggest banks in the world. Based on assets, RBS was the biggest, on capital it was HSBC. The US banks were up there too but, relative to the size of their country’s economy, they didn’t loom anywhere near as large, as this chart from Zero Hedge showed.

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A big country can bully big banks. A small one can only bully them when they are weak.

Why did the US make a profit on its bailouts and the UK (and most other countries) probably won’t? In the end, it all comes down to one word. Power.


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British beer – better than it has ever been

London is recovering from a week of beer festivals. The long-standing Great British Beer Festival has been joined in recent years by the Craft Beer Festival and London Beer City, a programme of mini-festivals taking place in pubs across the city. Having them all at the same time doesn’t seem to have created competition between the festivals though. If anything, interest in one seems to fuel interest in all the others – a vast week-long celebration of ale.

Earlier this week, the Telegraph reported that the number of breweries in Britain has tripled over the last fifteen years, reflecting the demand for beer produced by small breweries.

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In the 1970s, there were only four pubs in Britain that brewed their own beer. Received wisdom said that they were anachronistic and would soon go the way of all the others. Beer would be mass-produced by a few big breweries, just like most other consumer products. But the revival of interest in cask beer and the formation of the Campaign for Real Ale in the 1970s started a microbrewery revolution. Shortly afterwards, in 1979, Jimmy Carter deregulated the US brewing industry and American craft brewing took off.


Real ale and craft beer have become divisive terms for some people. There is an element of generational tribalism about all this. In the 1970s, beardy hippies drank real ale. In the 2010s, beardy hipsters drink craft beer. I, from the beardless generation in the middle, enjoy both.

The two terms are not mutually exclusive. Real ale refers to the way a beer is kept and served. It has to be allowed to continue fermenting in the cask or bottle and be served without artificial pressure. Craft beer is a more nebulous term meaning beer brewed by small independent breweries. Because the term originated in the US and American brewers tend to serve their beers under CO2 pressure, a lot of people think craft beer = keg beer. The comments from beer festival drinkers in this Guardian piece are typical.

In fact, a lot of craft beer in Britain is also real ale. I spent a pleasant evening on Thursday working my way through Thornbridge’s range served from casks at Clerkenwell’s Craft Beer Co which, incidentally, always has over a dozen craft cask ales on the go.


Most of the breweries in the UK that describe themselves as producers of craft beer serve at least some of their range as real ale. To blur the line that bit more, some of Britain’s long-established independent breweries are now adopting the term craft beer on the quite reasonable grounds that they have been brewing beer as a craft for years.

Some people complain that the influence of US craft brewers has made us all start drinking very hoppy astringently bitter beers. That may be so but even here there is now a reaction going on. Some craft brewers are now brewing darker and maltier beers. American brewers are even starting to brew milds. The traffic in beer influences is two-way.

One of the first things I noticed about the American brewers, when I first visited craft beer bars there in the 1990s, was their irreverence. Because their brewing tradition had been extinguished by prohibition they had no pre-conceived ideas. They were doing mad things like making English pale ales flavoured with strawberries, porters with coffee and wheat beers with grapefruit. It is the US brewers who must take most of the credit for reviving the India Pale Ale in its original strong and bitter form, as opposed to the blander version we had been left with after the beer weakening during the First World War. Like Halloween, the Americans took an old British tradition and sold it back to us. They then went on to develop the Black IPA which is, of course, a contradiction in terms. Brewing an IPA with dark malts is a ridiculous idea but one that has created a fantastic new beer style. We have the Americans to thank for pushing the boundaries of brewing and encouraging brewers everywhere to create some truly original beers.

The result of all this is that beer in the UK is probably better than it has ever been, in terms of quality, choice and availability. Real ale and craft beer are still seen by some as retro movements, harking back to some idealised form of beer from the past but, if ever this were true, it certainly isn’t now. The newer brewers, especially, are moving away from giving their beers oldie worldie names and logos. These are 21st century products with 21st century branding. British brewing is a modern industry taking beer off in all sorts of exciting new directions. Some people will still whinge about craft beer but you won’t hear me complaining. These days, there is a mind-boggling array of great brews to choose from. Beer has never been so good.

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Another tsar we don’t need

The government has appointed Michelle Mone as its start-up tsar. Presumably that’s different from a self-employment tsar because we’ve already got one of those. The government thinks we need more startups and it has asked Ms Mone to help and encourage more people to start businesses, especially in economically deprived areas.

The trouble is, persuading people to start new businesses might not do much to revitalise depressed areas. A 2008 study by Pamela Mueller, André van Stel and David J. Storey found that new firms created jobs but only in the areas which were already prosperous.

Our first finding is that in some locations increases in new firm formation do indeed lead subsequently to new employment, but in other cases they do not. Our second result is that the impact on employment is greatest in the prosperous areas and least in the least prosperous areas.

study by David Storey earlier this year found something similar. New firms thrive in high wage areas and they fail in low wage ones. In poorer areas, there just isn’t the money to enable businesses to grow. As fast as new businesses create employment for their owners, they destroy it by taking business from others.

As Paul Nightingale and Alex Coad say, the typical British startup is a shop or takeaway that, if it survives, just puts another one out of business. 

The typical entrepreneur is more like someone who starts from an underprivileged position (people with good jobs are less likely to start firms), uses his/her savings to start a low-productivity firm (e.g., a fish-and-chip shop), in an established highly competitive market (e.g., a town with two fish-and-chip shops, but a market that can only support one). As a result, if they are still around in 2 years, which is unlikely, it is only because they have displaced a similar marginal firm.

And their impact on the local economy?

It certainly is the case that a small number of start-ups has a positive impact on the economy, but most of the time, for most of the firms, and for most of the performance metrics, the economic impact of entrepreneurial firms is poor.

A recent report by the Joseph Rowntree Foundation and the Social Market Foundation found that self-employment is no easy route out of poverty:

[T]here is little guarantee that promoting more self-employment will act as a panacea for poor access to work. Much self-employment is low paid. And often, particularly where the underlying factors contributing to poor work opportunities are low skill levels or poor local economic conditions, promoting self-employment does not tend to work as a way of creating jobs. These same factors – low skill levels and poor local economic conditions – also reduce the likelihood of success in self-employment.

If the area where you live is poor, there won’t be many people with the money to buy what you have to sell. If there are no companies taking on people with your skills, there won’t be many willing to hire you as a freelancer. If the local economy is depressed, lots of people setting up shops won’t make it any less so.

For most people, the financial rewards from self-employment are low. Earlier this year, Michael O’Connor, using a FOI request to HMRC, showed just how low.

These charts show the numbers and average earnings for those self-employed people earning below £100,000, grouped by their different circumstances.



About half the self-employed have income from other sources but for those who have no other income, their average earnings are extremely low. It’s not surprising, then, that the self-employed are more likely to be claiming tax credits than those in employment.

Screen Shot 2015-08-13 at 16.18.33Chart via RSA

Encouraging people in poor areas to set up new businesses will simply shift them from one form of poverty to another and may well shunt some of their neighbours who are currently running businesses back into unemployment. There will be the occasional success story which the government will use to show the scheme’s success but the overall impact on jobs and the local economy is likely to be slight. Businesses thrive where there are people with money to spend. Small businesses are most likely to succeed where there are big businesses buying their products or paying their customers’ wages.

Some people have suggested that Michelle Mone lacks the credentials to be the startup tsar. I don’t know enough about her to comment but the choice of tsar is not the problem here. Poor areas don’t have the resources to support new startups. The best business brain in the world isn’t going to change that.

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The fattening of the rush hour

Five years ago I asked whether people were starting work earlier. Based on my own observations and anecdotes from others, it seemed to me that roads and railways were packed with commuters at times of the morning when they used to be almost deserted.

Thanks to an article in the Economist, retweeted in the context of yesterday’s Tube strike, I now have some data to back up my hunch. Since 2001, the number of people using the Underground has increased and so has the length of the rush hour. It’s more like a rush three hours now. As passenger numbers have increased at peak times, the number of  people leaving early or delaying their journeys has also risen. In just over ten years, the volumes have shifted at each end by about half to three-quarters of an hour, so 6.15am now looks like 6.45am used to.


This example from the article reflects many people’s experience:

When Catherine Mulligan, a part-time economist at a non-profit group, commutes from her home in south-west London to her office in Clerkenwell, in the centre, she chooses her departure time carefully. Either she gets on the London Underground early, at around five o’clock in the morning, or she works at home and travels in when the rush hour is over. Such early and late starts may seem an annoyance, but neither is as bad as the alternative. “I avoid the peak hour because it’s hell,” she says.

The worse the Tube gets at peak times, the more people travel earlier or later so the rush hour gets wider. I suspect the data would look very similar on overground trains and buses and that something similar is happening in other major cities. TUC research last year showed that, since 2008, commuting times had increased almost everywhere.

It wasn’t supposed to be like this. Technology, we were told, would turn us all into e-commuters, working from home and connecting by video links. Few people would trudge into work every day. The term e-commuter sounds vaguely old-fashioned now and there is certainly not much evidence of people abandoning the traditional office. The home-working revolution, which caused a flurry of excitement a while back, turned out to be just another aspect of the rise in self-employment. Among employees, the percentage working from home has risen only slightly over the last fifteen years.

Home working 2014

Source: ONS

Transport for London (TFL) is planning for a 30 percent increase in population but a 60 percent increase in Tube travel by 2050, which suggests that they are not anticipating the death of commuting during the next three decades.

It’s expensive and time-consuming to travel into city centre workplaces but still we do it. It’s not just because employers don’t trust people to work from home. Most of us still like to go into a workplace at least for part of the week. There is something about working with people face-to-face that can’t be replicated by technology.

I keep hearing that work is a thing you do, not a place you go but most people in Britain will be heading off to work by train, bus or car today. This will probably be so for years to come. Decades from now, a lot of people will still be going to work. And people will still be getting up at 5am to beat the rush hour.

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Why a richer Africa means more migrants

Britain’s Home Secretary Theresa May and France’s Minister of the Interior Bernard Cazeneuve say that the only long-term solution to Europe’s migration problem is to stop so many Africans wanting to come here in the first place:

Ultimately, the long-term answer to this problem lies in reducing the number of migrants who are crossing into Europe from Africa. Many see Europe, and particularly Britain, as somewhere that offers the prospect of financial gain. This is not the case – our streets are not paved with gold.

We must help African countries to develop economic and social opportunities so that people want to stay. We must work with those countries to fight illegal migration and allow people to be returned to their home countries more easily. This means a better targeting of development aid and increased investment.

All good intentions, of course, but the trouble is, ‘paved with gold’, at least in this sense, is a relative term. The gap between income levels in Africa and Europe is massive and is likely to be so for some time. And here’s the rub; as Africans get that bit richer, more of them are likely to try their luck.

That might sound counterintuitive but it makes sense when you think about it. The increase in per capita incomes in African countries, while not doing much much to close the gap with Europe, give people the extra resources they need to emigrate. As Paul Collier said, the relationship between income and propensity to migrate is like an inverted U. The poorest would like to migrate but can’t afford it, the richest can afford it but wouldn’t gain much. It is those in the middle that have both the incentive and the means.

A fascinating report from Senegal in the Wall Street Journal found that the country’s increasing prosperity is not encouraging people to stay at home, it is enabling more of them leave.

Senegal is a stable West African democracy, and Kothiary has profited from the currents of globalization transforming rural Africa’s more prosperous areas. Flat screen TVs and, increasingly, cars—mostly purchased with money wired home by villagers working in Europe—have reshaped what was once a settlement of mud huts. The wealth has plugged this isolated landscape of peanut farms and baobab trees into the global economy and won respect for the men who sent it.

But it has also put European living standards on real-time display, and handed young farm hands the cash to buy a ticket out.

They leave behind a proud democracy whose steady economic growth has brought American-style fast food chains, cineplexes and shopping malls to this nation of 15 million, but hasn’t kept pace with the skyrocketing aspirations of the youthful population.

The flat-screen TVs raise expectations and the computers and mobile phones give access to information about how to get to Europe.

West Africa houses several of the world’s faster-growing economies but is also sending some of the most migrants out.

Deaths along the route are also high. And yet aspiring Senegal migrants are undeterred. In Facebook chats, college students swap tips on how to avoid or appease police and bandits: “Just be polite,” was the advice a friend typed to Ibrahima Sidibé, a 28-year-old at the country’s top Cheikh Anta Diop University.

Students there, Mr. Sidibé included, have cashed out their scholarships to pay traffickers for a ride to Tripoli. Even their professors have traded in paychecks to journey north, joining policemen, civil servants and teachers, said Souleymane Jules Diop, the country’s minister for emigrants.

“People don’t go because they have nothing, they go because they want better and more,” said Mr. Diop. “It’s aspiration.”

As Christine Mungai, for South Africa’s Mail & Guardian notes:

One of the more intriguing nuggets about the Africa emigration story is that far from fleeing poverty, migrants out of the continent are likely to be relatively well off, and are rarely from the most destitute families.

Data from the UN’s World Migration Report shows that African emigration rates to the OECD countries are strongly related to GDP per capita, and to household wealth, as these migrants are more likely to have the resources to pay for transport to and resettlement expenses in the OECD countries, and are more likely to have the education and other skills required to find jobs there.

The journey across the Sahara desert and over the perilous Mediterranean costs anything between $1,000 and $3,000, and often, payment is strictly in advance.

Research suggests that most people want to emigrate not because they are poor, but because their reality does not match up with their aspirations and what they expect to get out of life – it’s a relative, rather than absolute, dissatisfaction.

Research by UCL’s Centre for Research and Analysis of Migration found that the probability of migration increases in line with household wealth in Asia and Sub-Saharan Africa but decreases in Latin America, reflecting that region’s greater per capita incomes.

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For most of the world, the richer people are, the less likely they are to migrate. In Africa and Asia, though, a certain level of wealth makes people more likely to migrate because they have the means and access to information.

The UCL study comments:

Our findings conform remarkably to the predictions of our simple model: whereas migration probabilities decrease in Latin America (the richest region), they increase with the individual wealth index in Africa and Asia. The association between migration intentions and various dimensions of local amenities (e.g., contentment with public services, security), however, is negative for all regions.

That last point is important. Security and good government makes people less likely to migrate and the lack of it makes them more likely to do so. But cheaper travel and instantly available information about the world outside means that people are able to flee oppressive regimes in greater numbers.

In Syria and Iraq, for example, outbreaks of violence against Christian minorities are nothing new. Despite their troubles, the Christian populations hung on. They had nowhere else to go and few had the means to escape. In contrast, the sectarian violence of the last decade or so is likely to spell the end of Middle-Eastern Christianity. Where once people might have stayed and fought back, or died trying, they now emigrate. Communities that have existed for two thousand years look set to disappear within decades. Last year, Syria accounted for the most migrants attempting to cross the Mediterranean.

So far this year, according to the Economist, most Mediterranean migrants have come from Gambia, Senegal and Somalia, which illustrates the multi-faceted nature of the migration. Some of it is political, some of it is economic but all helped along by cheaper travel and more widely available technology.

Writing in IRIN last month, Christopher Horwood, of Kenya’s Regional Mixed Migration Secretariat, commented

Modern mobility is also empowered and inspired by unprecedented levels of connectivity – particularly through email and social media – and the virtual proximity of a seemingly obtainable better life. Immeasurable though it may be, we cannot underestimate the force of aspirations, dreams and adventurism of many young people stuck in what they regard as politically restrictive, socioeconomic backwaters.

There is evidence suggesting that migration actually increases as countries become more prosperous and educated. As the lions of the African economy flourish in what is dubbed by some as the African Renaissance, expect more migration not less, as increasing numbers of people have the resources to migrate.

Eventually, there may come a time when the wealth gap between Europe and Africa is reduced to the point where people no longer feel the need to migrate. That is unlikely to happen for many years though. In the meantime, as Africa gets richer, more people will have the knowledge and the means to migrate. The streets of Europe will still be paved with gold and more people will have the wherewithal to go looking for it. As Christine Mungai said, expect more overcrowded boats.

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Will employers’ gender pay gap figures tell us anything new?

The government is consulting on the detail of its proposal to force companies with over 250 employees to publish their gender pay gaps. We don’t yet know what information employers will have to give. Whatever happens, it will probably yield some interesting data  for wonks to pore over. Apart from that, though, I’m not sure it will tell us anything we don’t already know.

The last five years have seen a gradual fall in the full-time gender pay gap but the overall figure disguises significant differences. For women in their twenties, the gender pay gap had disappeared by the late 2000s. If anything, median pay for women has been slightly higher than that for men of a similar age for the last half decade. Over the same time period, the full-time pay gap for women in their thirties fell until it, too, disappeared. For those in their forties and fifties, though, there is still a big gap between the pay of men and women.

Gender Pay Chart 2014

Source: ONS ASHE

That’s not the whole story though. The age related pay gap gets more severe the further up the pay scale you go. Again, there is not much of a gap for women in their twenties. It’s during their thirties when men’s pay starts to pull ahead in the more highly paid occupations. In the upper income deciles, the thirty-something pay gap shoots up. Women at the 90th percentile earn 16 percent less than their male counterparts.


Source: David Richter, using ONS data.

It’s not difficult to see what’s going on here. The pay gap increases with age and seniority which, given the relationship between the two is perhaps not surprising. This is, by and large, the result of people having families and the decisions they take about who looks after the children.

Debra Leaker’s study for the ONS found that the gender pay gap increased with the number of children people had. More children made little difference to men’s earnings but had a big impact on the pay of women. She also found that there was no gender pay gap for single women.

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Women take the greater share of responsibility for child-care after leaving the workforce to have children and they often don’t return to the jobs they had before. Because they need to be near to their children’s schools, they are more likely to take jobs nearer home. As the Women & Work Commission noted:

Women, particularly women with children, tend to have shorter commuting times than men which limits the range of jobs available to them. This potentially leads to the crowding of women into those jobs available locally, and in either case, depresses wages.

On average, women who have children have a quicker journey to work than women without children. The travel-to-work time of women with more than two children is half that of their male counterparts.

Women often want shorter commuting times than men if they have children to drop off and pick up. Also, for women working part time, it does not make financial sense to commute long distances.

The report also found that the difference between commuting times was greatest in London. Longer commutes mean higher pay, especially in London.

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It’s therefore not surprising that, while the gender pay gap at the median has fallen during the past two decades, it has proved stubbornly persistent at the higher end of the salary distribution. The gap between male and female pay at the 90th percentile has hardly moved in the last 20 years.

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Source: House of Commons Library

Let’s take a hypothetical story of two accountants, Harry and Hermione. They both get good degrees from good universities and join the same City firm. Both start work in London on corporate and international assignments and both earn more or less the same. For a while, in her late twenties, Hermione earns more than Harry.

At around 30, Harry and Hermione get married. At 34, Hermione has her first child and has another a couple of years later. She tries to stick with her job in London but, in the end, the stress is too much and she and Harry realise that one of them will need to work closer to home. It never even occurs to Harry to volunteer so Hermione gets a transfer to the regional office near to their house, working in one of the firm’s back office functions.

Once the children are at school, Hermione returns to fee earning work but still in the local office. Here she works for local SMEs while Harry continues to work in London on the big corporate accounts with the bigger revenues and bigger rewards.

By the time the children are old enough to look after themselves, the world of corporate accounting has moved on and Hermione no longer has what the firm considers to be the right skills and depth of experience for the top-level assignments. The impressive network of contacts she had in her twenties has long since dissipated so her ability to generate new business is nowhere near what it was. She returns to work in the London office but never makes it to the senior ranks and never again matches Harry’s earnings.

Before anyone cries foul, I’m not singling out accountancy firms here. There are similar stories in any number of firms and occupations. This doesn’t just happen in London either. the scenario is played out in all our major cities. In whatever line of work, staying close to home limits career options and, in the majority of cases, it’s the women that do it.

PriceWaterhouseCoopers is one of a few employers to voluntarily publish its gender pay gap. It was 15.1 percent in 2015 compared to a national figure of 19.1 percent. Presumably this is an overall figure including part-time roles, as that’s what they have compared it against. Compared across grades, says PwC, its gender pay gap falls to 2.5 percent:

[W]e adjust this figure for the different gender demographic across the grades, as we have more men than women at our most senior grades, and the adjusted pay gap figure is 2.5%.

Most of the pay gap is accounted for by the different gender balance in senior and junior grades, which the firm also publishes.

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As you might expect, the further up the hierarchy you go, the greater the proportion of men. PwC’s gender and grade profile is probably not much different from that of any other professional services firm.

Whenever the gender pay gap is in the news there is usually talk of the need for more flexible working and family friendly policies. There are sound reasons for all these suggestions and there is no doubt that they have helped a lot more women to stay in the workforce. At the same time, though, they are reinforcing the gender pay gap at the senior levels. A lot of employers have put a lot of effort into helping women to downshift their careers when they have children. But the trade-off for flexibility is lower pay. The highly remunerated jobs are still done in the big glass towers in the city centre and they require your presence early in the morning and late at night.

Helping women to carry on working after having children also helps them to earn less. That’s why Scandinavian countries, which have done more than most to eliminate gender inequality, still have pay gaps only a few percentage points below ours. Good social democrats they might be but Scandinavian dads still leave their wives to do most of the childcare. Compare this with Italy which has almost no full-time gender pay gap because many of its women simply leave the labour force altogether when they have children. That’s the trouble with statistics. You need to get behind them to find out what is really going on

When details of employers’ gender pay gaps are published, they will show that almost every company pays men more than it pays women. Some firms will look better than the national average, others will look worse but most probably won’t be that far either side. It will be worse in some industries than others. The financial services firms will almost certainly be the worst of the lot but will probably not be that much different from each other. Unless more detailed figures are published, comparing the pay of people in specific jobs, it will be impossible to say whether a gender pay gap is due to something the employer is doing wrong or simply because that’s the way things are in that industry.

As Darren Newman said, the purpose of equal pay legislation was to stop specific forms of discrimination. It was never designed to address the underlying structural issues that lead to women earning less than men. Or, as low pay commissioner Neil Carberry put it earlier this week:

Publishing employers’ gender pay gaps won’t tell us much that we hadn’t already worked out. The PwC figures, for example, are interesting but not surprising. We will find out that men dominate the upper reaches of management and that pay gets more unequal with age. It will be worse in some industries than others but probably not that much different between employers in the same industry.

What we do with that information is anybody’s guess.


Someone just sent me this chart from Pew Research on the relationship between the full-time gender pay gap and the amount of parental leave countries give. Fascinating!

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The financialisation of slavery

Starting on Wednesday this week, the BBC is running a series Britain’s Forgotten Slave Owners. It is based on research by University College London which found that Britain had 46,000 slave owners in 1833, the year slavery was abolished in the British Empire. All are clearly identified in the records of the compensation claims. If you want to see whether any of your ancestors were involved, the database is here.

What has shocked many people is the sheer scale of slave ownership revealed by this research. It wasn’t just a few rich plantation owners. The wealthier middle-classes were in on it too. In those days, a lot of central London was still residential and the addresses of the slave owners are marked on these maps produced by UCL. In the well-to-do areas of Fitzrovia and Marylebone, slave ownership was widespread.

Recipients of slave-compensation who lived in the Fitzrovia area of London

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Recipients of slave-compensation who lived in the Marylebone area of London

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Should we be surprised by this? Given the number of British possessions in the Caribbean, their role in colonial trade and the importance of slavery to their economies, it would be astonishing if those who had money to invest didn’t put at least some of it into enterprises built on slavery. That people in Britain are shocked by this is because British slavery is something we don’t really talk about. We prefer to think of it as something that happened over there.

When he was elected president, Abraham Lincoln’s initial aim was to confine slavery to the Southern States. Events overtook him but, after abolition, the American entertainment industry succeeded in confining the blame for slavery to the Southern States. Thanks, largely, to the proliferation of American books and films on the subject, people tend to have a stylised view of transatlantic slavery. The two enduring images are the slave ships and the cotton plantations of the American Deep South.

But this is like reading the first and last chapters of a book. The shipping of Africans to the Americas, initially by the Portuguese, is the start of the story. The great plantations of Alabama and Mississippi were its final phase. By the time the cotton economy boomed, the transatlantic trade was over. In between, there were 300 years when most slaves were put to work growing rice, tobacco, coffee and, of course, sugar. Many of those slaves were in what became the northern states of the USA and in British possessions in the Caribbean.

Even when we discuss Britain’s involvement in slavery, we like to put a geographical boundary around it. Just as Americans like to see it as a Southern thing, we point to the grand buildings of Bristol, Liverpool and Glasgow as legacies of the slave trade. The UK release of 12 Years a Slave in 2014 kicked off a new round of breast-beating as our west-facing ports were reminded of their shameful past.

Now, though, thanks to the UCL research, we know that people all over the country profited from the slave trade. Many of them did not own land. Their slaves were managed by someone else and hired out to the plantations. The financialisation of the slave trade is a subject that has received very little attention but it enabled thousands of people who would never visit a plantation, let alone wield a whip or give an order, to invest in and profit from slavery. Small investors in the UK provided the expansion capital for the slave-owners and received handsome profits in return.

The financialisation of slavery reached its peak in the early 19th century. It enabled the rapid development of the Deep South’s cotton economy. The demand for cotton was increasing but the planters needed investment to get them going. In a detail that perhaps a lot of people missed, the plantation owners in 12 Years a Slave refer to mortgages on their slaves. They borrowed money, using their slaves as collateral, to finance their expansion.

Edward E. Baptist of Cornell University, author of The Half Has Never Been Told (HT Sunny Singh) explains how this finance was raised:

The cotton and slave trades were the biggest businesses in antebellum America, and then as now, American finance developed its most innovative products to finance the biggest businesses.

In the 1830s, powerful Southern slaveowners wanted to import capital into their states so they could buy more slaves. They came up with a new, two-part idea: mortgaging slaves; and then turning the mortgages into bonds that could be marketed all over the world.

Does something about that sound familiar? It should do.

The financial product that such banks as Baring Brothers were selling to investors in London, Hamburg, Amsterdam, Paris, Philadelphia, Boston, and New York was remarkably similar to the securitized bonds, backed by mortgages on US homes, that attracted investors from around the globe to US financial markets from the 1980s until the economic collapse of 2008.

[M]ortgage-backed securities shifted risk away from the immediate originators of loans onto financial markets while promising to spread out and thus minimize the consequences of individual debtors’ failures. Investors who purchased latter-day mortgage-backed securities planned to share in streams of income generated by homebuyers’ mortgage payments.

Likewise, the faith bonds of the 1830s generated revenue for investors from enslavers’ repayments of mortgages on enslaved people. This meant that investors around the world would share in revenues made by hands in the field. Thus, in effect, even as Britain was liberating the slaves of its empire, a British bank could now sell an investor a completely commodified slave: not a particular individual who could die or run away, but a bond that was the right to a one-slave-sized slice of a pie made from the income of thousands of slaves.

The slave-backed securities of the early 19th century worked in the same way as the mortgage-backed securities of the early 21st. They spread the risks and provided a means by which capital from all over the world could be channelled into the Deep South. This also meant that, even after abolition, British investors could still profit from the slave trade. They no longer owned slaves. Instead, they owned slave-based derivatives; financial instruments made up of mortgages on enslaved people.

I couldn’t find any information on the extent of British investment in slave-backed securities but the involvement of Baring Brothers in the design and marketing of these products suggests that there must have been considerable demand in Britain. (This was also, incidentally, the trade that took Lehman Brothers from Alabama cotton broker to Wall Street finance house, giving the bank’s history a fascinating symmetry.)  Even after emancipation, then, British investors were still profiting from the slave trade. As, too, were investors in other parts of Europe. Even countries like Germany, which had little direct involvement in slavery, provided finance through these bonds.

The financialisation of slavery led to its industrialisation. The cotton plantations were much bigger than those of the old Upper South. From 1831 to 1837 cotton production almost doubled. The demand for labour drove a massive transfer of slaves from the North and Upper South to the Deep South. Some historians calculate that twice as many people were sold south as were shipped to North America in the transatlantic trade. (For more on this see previous post.) Even after abolition, through their slavery bonds, 19th century British investors financed as much misery as their ancestors did.

This was no cover up though. None of the information has been kept secret. Because of the financialisation of slavery, there are detailed records available on production, management and ownership. The UCL team and Edward Baptiste simply went looking where no-one else had. It is convenient to put a geographic boundary around slavery and restrict it to the masters and overseers in the the Deep South and the Caribbean, or the captains of slave ships from Bristol and Liverpool. But it could not have happened on the scale it did without investment from the northern US states and Europe. Evidence of this widespread involvement in the slave trade was there all along. We just chose not to look for it.

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