Self-inflicted wounds

It has become clear over the last twelve months how woefully unprepared the British government is to negotiate an exit from the EU. As the play in the theatre of the absurd continues to unfold, we are faced with the prospect of the British government having to take steps to secure food supplies in the event of a no-deal Brexit, which has lit up social media sites with posts displaying a mix of trepidation and withering scorn. As more than one person has commented, we appear to have gone from “Vote Brexit to save £350 million a week” to “Vote Brexit and we will ensure that the food doesn’t run out.”

Against this backdrop the latest missive from the brains behind the drive to sign new trade deals – none other than trade secretary Liam Fox – arguing that ‘No deal’ is preferable to delaying the Brexit process is beyond stupidity. You may recall a year ago, Fox claimed in a radio interview that “the free trade agreement that we will have to do with the European Union should be one of the easiest in human history.” This is the same Liam Fox who said two years ago that “we're going to replicate the 40 EU free trade agreements that exist before we leave the European Union so we've got no disruption of trade.” With seven months before the UK leaves the EU, let us consider how many of those trade deals Fox has actually signed (clue: It’s an integer less than one). So you will forgive me for not taking Fox’s latest assertion at face value that “extending Article 50 is the definition of failure for the government.”

Fox went on to say that “The public have told us, it wasn’t a consultation, to leave the European Union, and the public already wonders why it’s going to take more than four years after the referendum for us to fully remove ourselves from the EU. To attempt to extend our membership even longer, many voters would regard as a complete betrayal by the political class.” So where to start with this one? How about the fact that the referendum was in effect a consultation – it certainly was not legally binding. And why is it taking four years? Because it is a difficult process and one which if rushed will lead to far worse outcomes than are necessary. The biggest betrayal of all would be to sell out the public in order to deliver a Brexit which leaves people worse off. And if he thinks people are angry with the way politicians have handled Brexit so far, wait until it is bungled.

Another of the Brexit-at-any-price brigade, Daniel Hannan, yesterday told readers of the Daily Telegraph “Let’s call the EU’s bluff and prepare for a no-deal.” Hannan’s argument relies on the old nonsense that “they need us more than we need them.” This is simply wrong. Around 47% of UK exports are destined for the EU27 with only 16% of EU exports headed to the UK, and the Telegraph is guilty of peddling fake news by suggesting otherwise. You can argue, as Hannan does, that the EU is being unreasonable in its approach, and we can look at that another day. But all sane commentators knew that the EU held the whip hand in negotiations and expecting it to act in any other way than to look after its members interests denotes irresponsible levels of naivety.

There is nothing new in any of this, of course. I think the Brexit ultras are wrong and they believe me to be a Remoaner, afraid of looking to new horizons. So let’s have a look at some evidence. Over recent months I have been looking at gravity trade models of the UK to assess the impact of a hard Brexit (the final results are likely to be published in a few weeks’ time). On my estimates, a no-deal Brexit will cost around 8% of UK export volumes and impose a hit of 3% on imports. With exports falling more than imports, this implies a one-off reduction of 1.5% in GDP. That may not sound like a lot but if we impose these results on a structural model and run them over a 15 year horizon, we end up reducing real GDP by 4% relative to baseline and real incomes by 3%. As a result unemployment rises and public finances turn out significantly worse than they would otherwise be. I can’t find the Brexit dividend to fund higher NHS spending (neither can the OBR). 

With support for a second referendum apparently mounting, the whole Brexit debate is reaching a tipping point. I have to stress that I am no great fan of this idea although I don’t buy the will of the people nonsense (remember, only 37% of eligible voters opted for Leave). But the decision to leave the Single Market and Customs Union is economically crazy and was certainly not on the ballot paper. However, if Theresa May continues to believe that this is what people voted for, then a second referendum may indeed be required to check whether it really is “the will of the people.”

I do wish there were more important things to write about but Brexit appears to have become an all-consuming part of this blog. However, it is THE economic question of my lifetime – and it is being driven by ideological politics. But as the journalist James O’Brien put it, “The one thing I still can’t quite get my head round: It’s optional. It’s a choice. It’s voluntary.”

Still talking at cross-purposes

Twelve months ago, in the immediate wake of the EU referendum, those of us who continued to point out that the UK had made a major policy mistake were derided as “Remoaners” bent on subverting “the will of the people” and that we should all pull together to make the best Brexit possible. I make no apologies for opposing Brexit and disagreeing with its proponents. The known economic costs are too high relative to the unknown economic benefits (if any) whilst the UK’s negotiating position is hopelessly naïve. But as I have pointed out in the past couple of weeks, there are increasing signs that people are beginning to realise the magnitude of the task involved and the voices arguing for a change of tactics are getting louder.

One of the more thoughtful interventions was from former PM Tony Blair (here) who went so far as to suggest that “European leaders, certainly from my discussions, are willing to consider changes to accommodate Britain, including around freedom of movement.” Blair also pointed out that because the opposition Labour Party’s position on leaving the single market is similar to that of the government’s, those wishing for a Labour government to change the terms of the Brexit debate may be disappointed. Indeed, he argued that the combination of the economic policy programme advocated by Labour, coupled with the fallout from Brexit, would be a disastrous combination leaving Britain “flat on our back and … out for a long count.” The problem is that whilst Blair is perhaps the most successful UK retail politician of the last two decades, his legacy has been tarnished by his association with the Iraq War to the point that people within his own party no longer listen to him.

Blair is not alone in his position. An op-ed piece in The Times on Friday by Philip Collins pointed out that “we can’t leave Brexit to the Tory wreckers” (here if you can get past the paywall). He makes the point that whilst it is tempting to ask those who got us into this mess to get us out, “they don’t know what they are doing. Their view of the EU is too ideologically narrow.” That latter point hits the nail on the head. It harks back to my point on homophilous sorting, in which like-minded people talk only to each other without hearing the arguments of the other side.

During the course of the referendum campaign, the simple message peddled by the Leavers resonated with an electorate which wanted to believe that leaving the EU was easy. As Tim Harford notes in his latest piece “last year’s Brexit campaign was based on a simple piece of wishful thinking: Boris Johnson’s idea that the UK could have its cake and eat it. How, exactly, was never quite clear, but desirability bias gave a foolish idea more credibility than it deserved. Voters hoped that Mr Johnson was right, and so they began to believe him: it is so much easier to believe what we already wish is true.”

But for all the evident difficulties in negotiating Brexit and the fact that the collapse in sterling is already making people poorer, there is not a lot of evidence to suggest that many people who voted for Brexit are ready to change their view. A radio phone-in discussion (here), in which a journalist skewered all of the arguments put forward by a Leave supporter who refused to change his view in spite of all of the evidence, is a classic example of all that was – and is – wrong with the debate. I must confess that I was not sure whether to laugh or cry having heard it.

More sober proponents of Brexit, such as Daniel Hannan, remain as resolute as ever. The fact that Hannan is one of the more rational proponents of Brexit should be taken with a pinch of salt:  He was once described by a cabinet minister as an “arsonist.” In an article published in the Telegraph, Hannan calls Remainers “childish” and argues that “there is no prospect of Article 50 being reversed.” This is where I have difficulties with the likes of Hannan: saying something which is unproven as if it were a fact. Lawyers disagree on whether the government can rescind the Article 50 notice, but I am sure the EU27 would be delighted were it to happen (although it is unlikely). Where Hannan is right is that “staying in the customs union would be the worst of all worlds: it would mean that Brussels continued to dictate our trade policy without our having any input into that policy.” Indeed, I made this point a year ago – but what he fails to point out is that leaving is even more damaging. Hannan further stretches the boundary between fact and fiction by arguing that “the majority of the 48 per cent [of remainers] … now want Brexit to succeed. Publicly undermining our negotiators can have only one effect, namely to encourage Brussels to offer harsher terms.” 

One of the real difficulties in the Brexit process is that two sides in the domestic debate cannot agree on how to proceed. We are thus wasting far too much time debating the issue at home when what is required is the presentation of a coherent set of arguments in Brussels. Unfortunately, what we have been presented with over the past year is neither realistic nor sensible, and many people who voted Remain cannot buy into these plans because they represent ideas which are clearly not in the national economic interest. Brexiteers do not seem to understand the damage which a hard Brexit will cause to the UK economy. What is worse, they do not seem to care.

In their book Democracy for Realists, Christopher Achen and Larry Bartels describe a new phenomenon in US politics whereby voters imagine that one party holds a position which fits their view of the world when it clearly does not. This helps explain why those voting for Brexit listen only to the anti-EU part of the Brexit message without hearing the discussion about costs. It may also explain why people voted for Jeremy Corbyn’s Labour Party, as a protest against the hard Brexit Conservatives but without hearing the anti-EU part of Labour's policy.  If this hypothesis is true – and I suspect it is – we have moved beyond rational debate and into the world of dog-whistle politics (though I guess that is not really news). However, it does not mean we should stop making a rational case as to why Brexit is an act of economic self-harm. One day, someone might just listen.

Danger man Dan Hannan

More than three months since the EU vote and we are still waiting – either for the sky to fall in or for the new economic nirvana to unfold before us. But a day of reckoning is a-coming as the noises out of government suggest that a hard Brexit is the most favoured scenario for many in Westminster. This is a dangerous possibility and increasingly my concern is that those who lied their way to referendum victory will never fully be held to account.

My anger was stirred (again) after reading this profile of Daniel Hannan MEP, who is portrayed as the mastermind behind the Leave campaign. I have made the point before that Hannan's vision of a post-EU Britain is not one which the majority of Leavers voted for. Those on the front line of the campaign consistently reported that immigration was the issue which aroused most fury, but the pro-free market Hannan was motivated by the desire for a more dynamic Britain unencumbered by the constraints of an EU superstate (this clip from the BBC's flagship current affairs programme, Newsnight, on the day after the vote highlighted the difference between what Hannan thinks the electorate voted for and what the rest of us think it voted for).

I cannot help thinking that his notion is (to be charitable) a romantic ideal of what Britain once was – a dynamic economic superpower. The prosaic economist in me thinks his ideas are ludicrously naive and I would barely trust him to run a bath, let alone any form of national policy. Let us also not forget that he has worked for the European Parliament since 1999.  The hyperbolic chutzpah of someone who can accept EU taxpayers money to cover his salary whilst failing to act in the interests of the institution which he represents beggars belief (the same applies to Nigel Farage). It would be no less than justice were he to be sued by EU taxpayers for a return of his salary over the past 17 years (and will he forgo his pension?) Moreover, it is claimed in the article that he plans to leave politics in 2019 when his term in Brussels ends. That being the case, he will be another of the Brexiteers who cut and run just as the battle to determine Britain's political and economic future begins.

Hannan has been likened to the militants who infiltrated the Labour Party in the 1970s and condemned it to the political wilderness. One minister described him and his ilk as not "builders. They are destroyers." Another MP called them "grammar school imperialists", who "a hundred years ago ... would have been able to vent their rather bizarre beliefs bullying people in a nether-province of India." The respected Conservative commentator Matthew Parris noted "I don’t think he sees himself in politics to give effect to what the public thinks, but to what the public ought to think, which is quite different.”

Parris went on to argue that Hannan exploited for his own ends the xenophobic tendencies in large swathes of the electorate. Indeed, I have made this point myself (here) arguing that Hannan was careful to distance himself from any charge of xenophobia or racism. Ironically, Hannan and Farage fell out over different aspects of the Brexit debate, with Farage (a man for whose views I have no time) suggesting that Hannan's vision of a free market Britain is not one that he heard on the doorsteps during the campaign.

The extreme free market policies espoused by Hannan (who like another right wing Brexit supporter, Allister Heath, did not spend his early years in the country they want to make great again) are misguided. The logical conclusion of the policies being espoused imply a UK which will have to scrap many of the laws and social protections which have made life relatively tolerable for most. If you think George Osborne's fiscal policy was regressive, wait until you see what Hannan-style economic liberalism requires.

Politicians will be forced to adopt a position between the Scylla of minimising economic pain by allowing some form of immigration (which is Hannan's preferred position), and the Charybdis of putting up the barriers and taking the risk of a big hit as economic relationships with the EU change irrevocably. As a very interesting blog post in The Spectator pointed out, Brexit could well result in the rise of the politics of resentment. If we are no longer able to blame the EU for our ills, "there is no other ‘other’ for the populist right to turn on except immigrants. They will be blamed if Brexit brings job losses and falls in living standards."

This may be alarmist but it's plausible. And it reminds me of the words of Pastor Martin Niemöller who could have been describing the position of many Brexit voters: 

“First they came for the EU supporters, and I did not speak out -
Because I was not an EU supporter.
Then they came for the immigrants, and I did not speak out -
Because I was not an immigrant.
Then they came for me - and there was no one left to speak for me.”

Malcolm Tucker had it right

The actions of politicians over the course of the past week or so have provided an ample source of ammunition to those who complain that politicians cannot be trusted. The Brexit campaign itself was an object lesson in treachery. This was followed up by the ridiculous spectacle of Jeremy Corbyn refusing to resign as leader of the Labour party despite the fact that most of his shadow cabinet withdrew their support for him. Then, to cap it all off, Boris Johnson opted out of the race for leadership of the Conservative party, whilst Michael Gove, his fellow Brexit campaigner – who had previously denied any interest in the top job – threw his hat into the ring.

Many of these politicians give the impression that they are playing a game, often with their interests in mind, whilst ignoring the fact that their primary duty is to the national interest. In a representative democracy, the key word is representative. Politicians are elected to parliament by the people and are of the people: Their duty is to the electorate. No more, no less! Nobody is saying the  job is easy: As I commented in the wake of Jo Cox’s murder, many politicians are “simply community representatives doing a job on our behalf.” But that clearly does not include Boris Johnson. He is, or at least was, the best retail politician in the UK but having effectively been the mouthpiece for the Brexit campaign, he shied away from many of the issues raised on the campaign trail in his Telegraph article last week and compounded his duplicity by shirking his duty to take on the leadership challenge because he suspected he would not win. Surely it would have been incumbent upon him to at least try to fix some of the mess he helped create.

Back in 1983, the Labour party’s election manifesto was described as “the longest suicide note in history”. Much the same could be said of the economic nonsense spouted by the Leave campaign during the last four months. The difference is that the Labour party was heavily defeated in the 1983 election and its policy was never put to the test. This cannot be said of the Leave campaign, which must now show that its inchoate nonsense can be realised. What is worse is that different strands of the Leave campaign were seeking different things from the referendum. The Farage wing were looking to control immigration. Another faction, best represented by Daniel Hannan MEP, were more relaxed about immigration and sought to regain UK sovereignty over its laws with a view to strengthening ties with more rapidly growing parts of the world. When challenged, Hannan will always deny that immigration was ever part of his platform. But it is disingenuous in the extreme to be associated with a Leave campaign in which immigration was the focal point, and then to claim afterwards “nothing to do with me, guv.”

Nothing that has occurred over the past 10 days has done anything to convince the public that politicians have any idea what they are doing. But then perhaps the electorate should hold a mirror to itself and ask what it wants rather than allowing manipulative politicians to put words into their mouths. That may be too much to hope for – it has been a feature of democratic systems since ancient times: Not for nothing did the phrase “bread and circuses” originate in Ancient Rome.

Many people are angry with the status quo, and with good reason. Politicians have repeatedly let down those parts of the electorate which needed the most help. The Brexit vote was a cry of rage against a political system that has failed to meet the aspirations of large chunks of the British electorate. Large swathes of Britain’s former industrial heartland have been stripped away by the forces of globalisation. Over the last 30 years, successive governments have told their electorate that a policy of market-oriented economics will lead to a wider range of choice, which would leave everyone better off. Well, it hasn’t. And now the people have made their choice.

As Malcolm Tucker, the spin doctor in the BBC’s superb political satire The Thick of It put it, when appearing before a parliamentary committee accused of leaking sensitive material, “How dare you come and lay this at my door! How dare you blame me for this! Which is the result of a political class, which has given up on morality and simply pursues popularity at all costs.” Amen!