DExEU's Midnight Runners

Today has been another one of the momentous days in British politics which appear to have become all too frequent as a result of Brexit. Yesterday’s cabinet meeting was an ominous sign that all that was not well: Whilst the Withdrawal Agreement is a large document, and was always going to take a long time to digest, it was evident that a five hour meeting hinted at major disagreements. And so it proved when Brexit Secretary Dominic Raab tendered his resignation this morning.

This comes just four months after the previous incumbent, David Davis, resigned when it became clear he could not support the Chequers Plan. To misquote Oscar Wilde, to lose one Brexit Secretary is unfortunate but to lose two is careless. To be charitable, the job of Brexit Secretary is a thankless task for a Leaver when the process is being controlled by the prime minister’s office. But it is also an indication of how difficult it is to deliver the kind of EU departure that would satisfy Brexit supporters. In addition to Raab and Davis, we should not forget that junior minister Steve Baker, another prominent Brexit supporter, also left DExEU in July to form the trio we should name DExEU’s Midnight Runners. As was the case in the wake of the referendum in summer 2016, it is another example of how Brexit supporters tend to run away from the mess they have created. And when they have been given ministerial responsibility, they have not exactly covered themselves in glory with Boris Johnson widely regarded as one of the worst Foreign Secretaries of all time.

But it is not just Brexiteers who object to the Withdrawal Agreement, as Theresa May’s session to parliament indicated this morning. Many MPs will vote against the EU agreement for a variety of reasons – perhaps because they are opposed to the terms of the deal, or simply because they oppose Brexit. Or, in the case of the opposition Labour Party, because the leadership sees this as an opportunity to force a general election. Despite the mounting opposition, Theresa May is doggedly determined to put the Withdrawal Agreement to parliament. And as I noted yesterday, it can still pass depending on the number of Conservative dissenters. But the risks are rising.

The first problem is the position of the prime minister herself. Jacob Rees-Mogg was the first MP to send a letter of no confidence in the PM to the backbench 1922 Committee and up to 12 others have confirmed they have followed suit. Recall that it will take 48 such letters to trigger a leadership contest. JRM has no chance of becoming leader himself and of the others known to have sent letters, the likes of Brexiteers Steve Baker, Nadine Dorries and Andrew Bridgen have as much chance of becoming PM as I do of winning the Nobel Prize for physics. Indeed, the latter two characters belong to the category of politician characterised by Irish journalist Fintan O’Toole as “the genuine hallmarked, unadulterated, slack-jawed, open-mouthed, village idiot variety.” As O’Toole pointed out “the Brexiteer MP Nadine Dorries admitted in effect that she didn’t know what a customs union is. Her comrade Andrew Bridgen said last month: ‘As an English person, I do have the right to go over to Ireland and I believe that I can ask for a passport. Can’t I?’” (Don’t believe it? Listen here.)

Whatever the PM’s personal position, we now have to reckon with the real possibility that the Withdrawal Agreement may not pass through parliament. What happens if it does not? The first recourse would be to go back to Brussels and secure a minor concession on the pretext of being able to put the bill before parliament for a second time. If that fails then Theresa May is in real trouble. The sensible strategy at that point would be to extend the duration of the Article 50 process, which is possible if there is unanimity on all sides. But May explicitly ruled out that option this morning (again).  So either she reneges on her commitment or is forced to resign whilst another Conservative prime minister is installed who is prepared to extend the Article 50 period. Politicians at this stage appear more likely to ask for an extension than push for a second referendum. In any case, given that time is short, it is likely that an extended Article 50 period is a prerequisite to enable a “people’s vote” because it almost certainly cannot now take place before 29 March 2019.

None of this will satisfy the “slack-jawed, open-mouthed, village idiot” brigade which believes that no deal is better than compromise. But they are losing ground in the war to deliver their form of Brexit. A poll conducted today by Sky News suggests that whilst only 14% of respondents support the prime minister’s deal, 54% would prefer no Brexit versus just 32% for a no deal outcome. We know how reliable polls can be, but this is not a one-off result. And whilst Theresa May gets a pretty low approval rating of just 31% in  terms of those most trusted to lead the country through the Brexit process, she still leads Jeremy Corbyn and is well ahead of Boris Johnson and JRM.

For politicians who set so much store by delivering the “will of the people” it seems that many of them have lost touch with it. The electorate is becoming fed up with the political posturing and any politician prepared to gamble with the country’s economic future ought to think twice, for the electorate may yet wreak its revenge.

A gambling man

Getting in on the act

The phone message had been brief and to the point. “Show up by 10 pm; bring lots of cash and your A Game. This is a card game for big boys with cojones. Minimum entry requirement £100,000. Be there or be somewhere else. And be lucky.”

I was intrigued. After all, I played a bit of poker in my youth and had kept my hand in over the years. And I wasn’t bad either: I worked on the basis that statistically a good hand always came around once in a while and the trick was not to lose too much on the bad ones. Of course, I had never played for anything like these stakes and I didn’t have £100,000 to splash around. But I knew people who knew people, and could probably get hold of the cash. I reckoned I could win enough to pay them back with a bit of interest. The thought of losing never entered my head. Probably just as well: The folks putting up the money would not hesitate to make life difficult if I didn’t pay them back.

The motley crew

So it was that I arrived at the flat in the backstreets of Westminster at 9.55 pm, carrying an anonymous looking bag containing 100 grand. After confirming my identity, I handed the money over in exchange for gambling chips and entered the room where the event was to take place. I was the last to arrive and my opponents were already seated around the table. The dealer was a Frenchman called Michel and unusually he insisted that all players identify themselves before play commenced. Immediately to the dealer’s left was Dave, a pink-cheeked well-spoken gentleman who said with typical understatement that he liked a flutter. To his left sat Bozo, a journalist who worked – in his words – “for the gutter press.” Going further round the table, DD was a hard-bitten used car salesman from the East End of London, whilst Jake was a languid city banker whose cut-glass accent made him sound like a pantomime villain. The circle was completed by Nige, a gentleman of no fixed occupation who seemed very fond of alcohol and the only woman present, Tessa, who it transpired, was a geography teacher.

Michel brought proceedings to order by announcing we were to play seven card stud: The initial hand would consist of two cards face down and one face up with a minimum bet of £100. “Good luck everyone,” he said as play commenced. As is usual in any poker game, the first few rounds consisted of checking out the strength of the opposition and assessing their tactics. After a couple of hours things were starting to take shape. Dave was an impulsive player, who took some big risks but generally was looking good and had significantly increased his pot over and above his initial stake. Bozo, Jake and DD played safe, exploiting opportunities as they opened up and making small gains as a result. Nige was pretty hopeless, having funded most of Dave’s gains, whilst Tessa clearly tended to fold under pressure by avoiding entering into a bidding war when the stakes were raised. I was breaking even and bided my time, content to see how things panned out. 

Sorting the men (and women) from the boys

Shortly before 1 am, the first significant move took place. Dave had a full hand of seven cards, with a pair of nines; a ten and a Queen face up on the table and three in his hand. He was betting heavily. Bozo’s two Queens, a Jack and a King looked strong to me and I dropped out of the betting, as everyone else did soon afterwards. But Dave kept raising the stakes until the pot stood at £75,000. Finally, Dave called Bozo’s hand: Three Queens and two Kings versus Dave’s three nines and assorted rubbish. Bozo’s three of a kind plus a pair was stronger than Dave’s three of a kind. All his gains from the night were gone and his cash reserve was below his initial stake. This need not have been a problem if he had played judiciously, but after a small loss in the next hand, Dave went for broke again and this time was wiped out by a concerted effort from Bozo, DD and Jake. “Thanks for the game chaps. No hard feelings.” said Dave as he left the room.

“Probably going back to the family estate,” grunted DD after Dave had gone. “Now we can really play.” Nige was the next to fold. He had played dreadfully all night and was clearly out of his depth. I was just about hanging on as Bozo, DD and Jake really piled on the pressure, winning hand after hand. After having initially appeared to be playing as a team, it was obvious the threesome were now competing against each other, which allowed Tessa and me to stay in the game. As the hours ticked by, it was evident that Bozo bluffed more than was good for a decent card player and we were reeling him in. Tessa’s caution was paying off and after a few more hands, Bozo was clearly losing a lot of cash. Surprisingly, it was DD who folded first. Tessa had played him well, allowing him little wins in some hands but generally taking more off him in others. He was far from bust but his pile of chips was worth far less than his initial £100k, and he had evidently decided that enough was enough. A flushed and apparently panicked Bozo dropped out soon after.

A losing streak

So it was down to Jake, Tessa and me. Jake was a good player. He took calculated risks but didn’t give much ground, and he was an excellent bluffer. But I was confident and told myself that you just have to trust the numbers: the good hand always arrives eventually. Jake also had a weakness: He occasionally – just occasionally – pursued a doomed cause, which left him vulnerable. Six hours in, and we were all feeling pretty tired. At this point, Jake’s face-up cards were showing two tens and two nines. Two pairs – a pretty strong position. Tessa had nothing on show. Nor, on the face of it, did I. Queen of spades, 10 of spades, 8 of clubs and a four of hearts. But I had three cards that Jake could not see.

I had been fairly cautious all night, so when I called Jake’s hand and raised another 100 he must have thought I was bluffing. Tessa immediately dropped out whilst Jake responded by raising the call by a further 200, which I countered by raising him another 500. In a bid to test my mettle, he raised by 1000. I appeared to hesitate to give the impression that I was reluctant to bid. In reality I was anything but, and raised the call by 5000 which Jake promptly doubled. He had a good hand, but I trusted in what I knew and doubled his call. Jake didn’t like losing, especially to an oik like me. So he promptly raised the pot by 50,000. I gasped. Surely he was not going to be that stupid. But I raised to 100,000 and awaited his response. Jake tossed five 20k chips into the pot and drawled “call.”

I turned over my three hidden cards one at a time. First the Jack of spades followed by the King of spades. Jake blanched: He knew what was coming next. And sure enough, it was the Ace of spades – the death card. I had a straight whereas the best Jake could manage was three nines and a pair of tens. He was so fixated on the strength of his own cards that he had failed to see that others might have a stronger hand, and was wiped out as a result.

At that point, Tessa remarked that she was also done for the night and although she had expended a considerable amount of her initial capital, she was smiling broadly as she departed into the darkness of a cold early morning.

“Well done, my friend” said Michel who had played an important but low-key role throughout the night. As I cashed in my chips, I turned to Michel and said “I believe this is yours,” handing him £100,000 in cash. “A great pleasure to do business with you,” he replied. “You are not merely a gambler. You calculate the odds and act accordingly and I always knew we would get our stake money back. Now if you are interested, I have some friends in Washington DC who are keen on a high stakes game in the US. Here is the number. Just ask for Don.”

Jacob's adventures in Wonderland

The Economists for Free Trade (EFT) group (formerly Economists for Brexit) today released their latest unfortunately-named  publication  “A World Trade Deal – The Complete Guide” which is not much of a guide and is in no way complete. Moreover “A World Trade Deal” is no deal – it is the default option in the event that the UK is unable to agree an arrangement with the EU. Given this starting point, expectations for the rest of the publication were pretty low and it more than lived down to them. But let’s focus on some of the details.

Trading under WTO rules implies imposing tariffs on EU trade where there are currently none. This is in no way a “deal” as EFT would have us believe: The WTO represents nothing more than a lowest common denominator set of rules to reduce trade frictions. EFT also believe that the UK can simply continue trading on the basis of these rules as soon as it exits the EU. There are one or two issues to iron out, such as agreeing on the division of quotas for goods which have already been agreed at the EU level (the US, Australia and NZ have already objected to the proposed divvying up of agricultural quotas). Incidentally, EFT believe this “should not cause great difficulties … the EU and the UK have been working harmoniously in this regard for some time” although The Guardian reported in the spring that “in recent months the united EU and UK front has splintered.”

EFT then poses the question “Does the WTO require physical customs checks, meaning lengthy delays at our ports and borders?” and in their view the answer is negative. But the delays come when other countries impose customs checks on goods entering foreign markets, and then some! According to the WTO, “high levels of bureaucracy and unnecessary costs” result from document requirements that lack transparency and involve duplication; a lack of cooperation between traders and customs agencies and lack of automatic data submission with the result that “at some border crossings, cargo can take up to 30 days to be cleared.”

Against this backdrop, EFT continue to argue that the economic gains to Brexit outweigh the costs. “Those who have modelled a Clean Brexit properly report long-term gains from free trade alone of 2%-4% of GDP.” You have to laugh at the chutzpah. Those who have modelled Brexit “properly” certainly do not include EFT. “The long-term negative outcomes claimed by the Treasury and the January Cross Departmental Brexit Analysis were produced by assuming implausibly high (and illegal) frictional UK-EU border costs.” Yet the bulk of the academic evidence finds that border costs are far higher than often supposed. It is not tariffs that are the problem; rather the costs associated with transacting across borders (legal, contract enforcement, transport and distribution expenses). Indeed, they are generally larger than the marginal costs of production[1].

Then EFT simply descend into fantasy. They reckon that in addition to the positive effects of free trade, the UK will save “approximately £12 billion a year” by cutting payments to the EU. Finally, “because we will be doing all this without the encumbrances and constraints of the Withdrawal Agreement … we can … withhold most or all of the estimated £39 billion divorce payment.” The upshot will be a “long-term gain to GDP of …  about 7% over the next decade and a half” which will “allow enhanced spending on public services and tax cuts by the early 2020s, further boosting the economy.” To sum this up, EFT reckon that a system of imposing additional tariffs on EU trade is going to somehow boost GDP and find a Brexit  dividend that the OBR says does not exist. As the kids would say, LMAO.

And we’re not done yet. EFT argue that “the economically optimal trade strategy in most circumstances for the UK would be to eliminate all tariff and non-tariff barriers unilaterally with respect to all our trading partners.” The elimination of all non-tariff barriers implies the complete deregulation of all product standards. And since non-tariff barriers exist primarily due to differing regulations between trading partners, unless we suddenly converge on a set of global standards (e.g. China and the US adopt the same standards), it will be impossible for the UK to eliminate non-tariff barriers on all imports. Moreover, there is no reason why the rest of the world should reciprocate, particularly if the UK is a relatively small export market (which it is for most countries).

There are numerous other dodgy assertions but I will reserve some final flak for the idea that losing access to the EU market will not damage the financial  services industry. Without going through it point-by-point, I would question the assertion (provided without a reference) that “only 9% of the City’s revenues are vulnerable to the loss of passporting.” More than half the revenue generated by the City is generated from the rest of the EU according to TheCityUK, and initial estimates suggest that 20% of London revenues could be at stake. Moreover, some of the solutions proposed by EFT such as “setting up small entities in the EU that trade with EU customers and those entities entering into mirror, or “back-to-back” trades with the UK parent” would run fall foul of the ECB, which has ruled out boiler plate operations. Anyone who believes that Brexit will not have adverse consequences for financial services would do themselves a favour by talking to people in the industry who are already making their post-Brexit arrangements.

Eurosceptic MPs, operating under the guise of the European Research Group, promised earlier this month to produce an alternative to the Chequers plan but backed down when it became clear that some of the proposals were of “dubious quality.”  Given that Jacob Rees-Mogg lent his support to the EFT proposals but was not prepared to back the ERG plans, you really do have to wonder how bad they were. As trade expert David Henig tweeted this afternoon, the EFT analysis “isn't in any way a serious document. Media should treat the report, and any MPs citing it approvingly, as having nothing useful to say on the subject of post-Brexit trade.” As a drowning man clutches at straws, so the Brexiteers continue to hang their hat on sub-standard analysis such as this. They’re losing the argument because they haven’t got one.

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[1] Anderson, J. E. and E. van Wincoop (2004) “Trade Costs” Journal of Economic Literature (42), pp. 691-751

Choose your enemies wisely

As the Brexit clock ticks closer to March 2019 the UK political landscape is increasingly fissiparous as Theresa May tries to appease both sides of her fractured party whilst managing to satisfy neither.  With regard to Brexit, her main tactic has been to play for time in the hope that something will turn up. But it is increasingly apparent that it has not, and will not, and May is reaching the stage where she will have to demonstrate some proper leadership in order to ensure that the UK gets the deal that it wants. As Simon Nixon pointed out in a recent Wall Street Journal article the PM has embraced a number of contradictory positions and she will have to decide which of them she is going to break. In doing so, the PM will make enemies – it is merely a question of choosing those who cause her the least harm.

Consider first the group of backbench MPs, led by Jacob Rees-Mogg, who regard themselves as keepers of the Brexit flame. JRM’s latest stunt has been to warn the prime minister that if she goes ahead with her plan to pursue a customs partnership with the EU, his 60-strong faction of MPs will withdraw their support. Rees-Mogg’s objection is that it would “leave us de facto in the customs union and the single market.” For many – including most economists – that is not such a bad idea. But it is (a) legally not true and (b) the EU27 is not very enthusiastic about a plan whereby the UK collects tariffs set by the EU customs union on goods coming into the UK on its behalf. If Rees-Mogg really wants to play a clever game, his best tactic would be to let the EU sink the plan without the need to create waves at home.

But whilst the pro-Brexit lobby is large and vocal, the Conservatives hold 317 seats in parliament. The awkward squad is outnumbered roughly 5-1 by more moderate MPs, some of whom are opposed to Brexit and others who are not willing to go to the barricades on the issue of the customs union. Admittedly, it would take only 48 Conservative MPs (15% of their parliamentary representation) to issue a motion of no-confidence in the leader, so incurring the wrath of Rees-Mogg and his chums would have consequences. But if Theresa May really wants to demonstrate some leadership, perhaps it is now time to face down those who continue to pursue a ruinous Brexit policy. She may not win a leadership contest, because she does not have the wholehearted support of the Remainers, but it seems doubtful that the Brexit ultras would win either. It is time to force the issue. As I have noted previously, Theresa May might have been the least worst option as leader in summer 2016 but it is not clear that she is the right candidate now to deliver the Brexit deal – at least, so long as she is not prepared to challenge her opponents.

That said, whilst it is easy to criticise Theresa May for her caution, we also have to be mindful of the wider backdrop against which she is operating. As the Withdrawal Bill proceeds through the House of Lords, the government has now suffered ten defeats on important legislative matters. The key vote took place on Monday, when peers voted to give parliament a decisive say on the outcome of the final Brexit negotiations rather than simply allowing the government to decide. Of course, this is not set in stone: When the bill goes back to the lower house, MPs will be able to vote on whether to overturn this amendment. However, it triggered much frothing of the mouth in the tabloid press with the Daily Mail accusing “the Remainer elite “ of “fighting a guerrilla war against Brexit using any weapon it can.”

We have come to expect such rabid commentaries from this particular organ over the last couple of years. Clearly, the headline writers do not appear to understand the UK’s constitutional setup in which the House of Lords has no power to block legislation. There again, the paper demonstrated a similar lack of constitutional understanding following the infamous “Enemies of the People” headline when the High Court ruled that parliament should  be given a vote before triggering Article 50. The political editor James Slack either did not realise that the judiciary is separate from government, or more likely, did know and planted a fake news story. This time around, the irony appears to be lost on the Mail that one of the key themes in the whole Brexit debate was about taking back control – British laws decided in the British parliament, and all that – and the House of Lords is giving parliament the opportunity to do just that.

It is precisely because of such vitriolic nonsense that the prime minister has to be very circumspect in how she deals with the Brexit debate. She is simply obeying the Machiavellian dictum to keep your friends close and your enemies closer. But to borrow the old SAS slogan, she who dares wins.

Major issues

I don’t want to keep banging on about Brexit but as the Article 50 period approaches the halfway mark, the pitch of the debate is intensifying as Remainers line up to point out the flaws in the Leavers arguments, who in turn respond by accusing Remainers of being unpatriotic. Former prime minister John Major waded into the debate yesterday by pointing out all the flaws in the Brexit argument and criticising the government for boxing itself into a corner by refusing to countenance any deviation from a policy which is likely to prove extremely costly.

It was punchy stuff but then Major has never shied away from a fight, and we should not be fooled by his calm demeanour. When it was suggested by the likes of Iain Duncan-Smith that he should hold his counsel in order to avoid undermining his successor, Major responded that he has rarely spoken out on the EU issue, unlike his own predecessor Margaret Thatcher, who in his recollection spoke out “weekly”. Indeed, Major has more cause than most to be irritated by the actions of a vocal minority of backbench MPs who spent the years 1992-97 undermining the efforts of his government.

At the time, Major was not regarded as a particularly impressive prime minister but he increasingly looks like a political giant as we deal with the pygmies attempting to implement policy today. Indeed, in June 1995 he memorably faced down his detractors by resigning as leader of the Conservative Party whilst serving as prime minister and challenged anyone to take him on. In the end, he comfortably beat off the challenge of the Eurosceptic John Redwood (who still haunts the backbenches of Westminster today). It was a very courageous move and one which Theresa May would do well to emulate, though she appears to lack the political courage (and probably the support of her party’s MPs). And lest it be forgotten, it was Major’s government that secured opt-outs from the Maastricht Treaty which kept the UK out of the European single currency. The legacy that he bequeathed to successive UK governments was thus a considerable one which his party now appears intent on squandering.

The years of Major’s premiership were not happy ones, dogged as they were by a party that was split on the issue of the EU, and as prime minister Major often seemed to be a prisoner of events. But his was a remarkable triumph over adversity, coming from a poor household and without the benefit of a university education. If anyone should be able to understand how Brexit will impact on the poorer members of society, surely it is him. And as has been pointed out many times, it is ironic that the leading lights of Brexit are well-educated, well-heeled members of the establishment such as Boris Johnson and Jacob Rees-Mogg. But as well-educated as these honourable gentlemen may be (and I use the term advisedly), they are clearly none-too-bright.

The attached pic shows a tweet from Rees-Mogg which highlights an article from The Sun newspaper outlining how much consumers would save if the UK were to leave the customs union. For example, the article notes that a pair of Nike Air Trainers, which currently cost £120, would be reduced to £99.60 if the 17% tariff on imports of such items was eliminated. Unfortunately, that is arithmetically incorrect. A £120 pair of trainers would actually cost £102.56 if the 17% tariff is abolished because the authors have wrongly calculated the new price as 120*(1-0.17) instead of the correct method of 120/1.17 – and have done so for every single item on the list. Jacob Rees-Mogg, educated at Eton College and Oxford University and who runs his own fund management firm, failed to spot the error and indeed compounded it by retweeting the original. He also accused Jeremy Corbyn of voting against the implementation of the Good Friday agreement in Northern Ireland when in fact he did no such thing.

So the next time Rees-Mogg makes claims in favour of Brexit, remember he is the guy who does not do the checking of basic details. John Major’s speech laid out the Brexit facts – and for too many Leavers the facts are an inconvenient detail which undermines their case. But they must be held to account on the facts because the Brexit vote was determined in their absence – and look where that got us.