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Adair Turner: He has argued that the UK's financial sector is "socially useless" (CBI)

Happily, the Great Recession of 2008-09 is now being discussed in the past tense. Growth of national output last year was almost 3 per cent, taking the level of output to somewhat about its previous peak in 2008. Some commentators are even projecting steady expansion of over 2 per cent a year through to the 2020s, much in line with Britain's typical record since the start of the Industrial Revolution.

But in one key respect recent performance has been much worse than the historical norm. Although national output is again reaching all-time peaks, output per head (or "productivity") is still slightly lower today than it was seven years ago. The recovery from the Great Recession has seen healthy growth in employment. The trouble is that, on average, we are producing less per person than before the crisis began. A seven-year period with no gain in productivity is unprecedented and suggests that something fundamental has gone wrong. (Elsewhere in this issue, Martin Wolf of the Financial Times describes this "stagnation of labour productivity" as such a disappointing feature of the current recovery as to be "remarkable".)

The halt to productivity growth is widely regarded as a bit of a puzzle. However, in some parts of the economy it is easy to identify the causes at work. Indeed, in one important, conspicuous and politically contentious sphere—financial services and the City of London—the check to output per head is readily explained.

In the 1960s and '70s the City of London became the premier centre for "offshore finance", financial activity in dollars that people and companies preferred to do outside the US, deals in Swiss francs that savers and investors wanted to have completed outside Switzerland, and so on. The volume of business rose rapidly, with the move to London largely motivated by attempts to avoid regulation and tax. In the 1980s and '90s the ability to conduct transactions—quickly, effectively and for a global marketplace—was facilitated by dramatic advances in telecommunications and information technology.

These developments enabled those engaged in international financial services—bankers, dealers, analysts, fund managers, underwriters and brokers—to increase turnover per head several-fold. Although margins tended to be squeezed in highly competitive markets, revenues and output per head also climbed. Whereas in the 1960s the typical City income was perhaps 25 per cent above the national average (with the banks offering "London weighting" to offset the higher cost of living), by the late 1990s it was three times the national average.

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