Americans were only mildly troubled when our textile industry moved to Asia. After all, if cheap Asian workers want to stock Wal-Mart with low-priced T-shirts and other apparel, why should most of us complain?
When foreign manufacturers grabbed a large share of our auto market, there was rumbling, but the sounds of pain from GM and Ford workers were drowned out by the satisfaction of consumers with better-performing Japanese and German cars, and the cries of joy from workers who found jobs at the U.S. plants of Toyota, BMW, Mercedes and other “foreign” auto-makers.
After all, we would move on to higher-value products of the sort that generate high-paying jobs and rely on the incomparable entrepreneurship and 24/7 work ethic of Americans. But a funny thing happened on the way to that future — other countries began to challenge American leadership in the financial services industry.
Quite suddenly, London and other financial centers began to take on Wall Street (and the parts of midtown Manhattan, Baltimore and other places in which financial service firms are located), and with considerable success.
Panic ensued as the number of initial public offerings in London overtook the number in New York, and as key executives relocated to Britain. Sen. Charles Schumer, D-N.Y., New York Mayor Mike Bloomberg and Treasury Secretary Hank Paulson called for studies of the causes of the declining competitive position of America’s financial services industry.
Spokesmen for the financial services sector and other industries didn’t need any studies: Sarbanes-Oxley and the regulatory burdens it imposes on businesses is their chosen villain. It was to avoid those burdens that companies were fleeing the New York Stock Exchange and other U.S. markets for the more relaxed and sensible London markets.
Besides, London is a great place for an investment banker to live. The streets are safe, the tax and regulatory regimes are benign, and the people speak English. American investment bankers spent considerable energy trying to get transferred from the crime-ridden streets of New York to London.
That was then, and this is now. Rudy Giuliani turned New York into one of the world’s safest cities, while London has become one of the world’s most dangerous, with violent street crime on the rise.
And last week British Prime Minister Gordon Brown and his new Chancellor of the Exchequer, Alistair Darling, decided that in order to fund the latest expansion of the British welfare state, they would put the tax-squeeze on the financial sector.
Capital gains tax on fledgling entrepreneurs and hedge fund operators was raised from 10% to 18%, and foreigners working in Britain but intending one day to return home will have to pay a $60,000 per-year fee for the privilege, in addition to taxes on any income they earn in Britain. And when they spend that money, they are in for two shocks — a 17.5% sales tax (known as the Value-Added Tax) and eye-watering prices.
Any of you who have been to Britain lately know that it takes $2 to buy £1. That wouldn’t be so bad if goods were cheaper in Britain than in America, but they aren’t. In fact, everything in London, from a pair of jeans to a car, costs about twice as much as in the U.S.
And business and residential rents are even higher. One hedge fund just rented thousands of feet in posh Mayfair for around $300 per square foot, more than five times the highest rent I am aware of on K Street. And houses, either to buy or rent, are so expensive that the best sections of Washington are low-rent districts by comparison.
There’s worse, from London’s point of view: The regulatory system that financial firms found so attractive is more than a little flawed. There has been a run on a major bank, with depositors queuing in an effort to get their money back, and the government finally having to guarantee deposits and consider a deposit-insurance scheme just like that in, you guessed it, the U.S. It seems that banking regulation is the responsibility of three separate agencies, which means that finger-pointing replaces remedial action in a crisis.
None of this means that London is due to collapse. Its museums rank with those in Washington and New York, and its music venues and art galleries certainly top those here in Washington. But Americans need no longer fear that its high-profit, job-creating financial services sector will go the way of its apparel and other low-value-added industries. That’s one area where we can meet and beat foreign competition.
Examiner columnist Irwin Stelzer is a senior fellow at the Hudson Institute and director of its Center for Economic Policy.
