Get a grip

In recent days I have come across a couple of insightful articles which expose the lack of new thinking at the heart of the Conservative Party which goes a long way towards explaining why the Brexit vote happened and why the negotiations are not going as hoped. In an article at the weekend, Will Hutton argued very forcibly that the party’s inability to consign the Thatcher years to history is preventing it from moving forward (here). We have to allow for the fact that Hutton has a particular political bent, with his Wikipedia page describing him as being “widely known for his advocacy of centre-left policies.” That said, his article did hit many issues on the nail.

Hutton was particularly critical of former chancellor Nigel Lawson who “in any league table of national figures who have been consistently wrong on almost every major judgment … must rank close to number one … Yet, extraordinarily, he is the ringleader of a group of Thatcherite ultras who now crowd on to our airwaves, exploiting the mythology of Thatcherite greatness to insist Britain must make a complete break with the EU.” In 2016, Lawson wrote an article for the FT in which he claimed “Brexit gives us a chance to finish the Thatcher revolution.” But Hutton points out that many of the supply-side reforms of which Lawson is so proud are now beginning to unravel. The tide of opinion has turned against privatisation as society increasingly questions who has reaped the benefits. The financial deregulation over which Lawson presided was one of the contributory factors to the UK banking collapse in 2008, and also helped to widen regional imbalances as London benefited whilst other parts of the country lagged behind. Finally, the labour market reforms of the 1980s, which emasculated the trade unions, are increasingly being seen as one of the reasons why workers are being squeezed despite unemployment at 40-year lows.

It also raises a question of why a politician who left front-line politics almost 30 years ago should still be invited to opine on economic matters. Is the party really so devoid of new thinking? Indeed, I still find it odd that a man who was aged 84 at the time of the EU referendum should have had such a prominent role in the Leave campaign, when he is unlikely to be around to see the long-term effects. Moreover, I do not recall that in the 1980s any of Nigel Lawson’s predecessors from 30 years previously enjoyed such a prominent media profile as he does today (still less calling for the sacking of the incumbent, as Lawson recently demanded of Philip Hammond). Lawson was a bold, self-confident reformer in his day but his time has passed. Unfortunately, many members of his party appear not to have realised that time has moved on and that the solutions of the 1980s may not be appropriate today.

This is indeed a point I have made on this blog in recent months (here, for example). But the blogger Pete North offered an impassioned critique of the problems facing the Conservatives (here – it’s a fine post which deserves a read). More to the point, it explains very eloquently how the current iteration of Conservative economic policy differs from what went before, and gets to the heart of an issue that I have spent much time trying to explain to foreign friends and family. North notes that whilst aspiration was at the centre of Conservative policy during the Thatcher era “there was also something about Mrs Thatcher's values that made her version of conservatism the definitive one. There was something more than just the slash and burn free market instinct. There was still an underlying obligation to observe that, as citizens, we are custodians of a particularly British order where enterprise sits comfortably alongside the institutions of state.” He goes on to state (admittedly in a less than temperate fashion) that “I don't see that in the modern Conservative Party. For the most part I see the dregs of Thatcherism and the second generation Toryboys wedded to extreme free market dogma - which is no respecter of anything … It is this corrosive trend that is ultimately shredding the social contract.”

You can argue about the nature of the language he uses, but his point about the shredding of the social contract is a valid one. The recent experience of having to wait almost four weeks for an appointment with my local GP is an indication that there is something badly wrong with local health provision. Indeed, North argues, as I have done, that if this were consistent with the operation of a free market policy “we should at least be seeing some sort of corresponding tax cuts” as compensation for the reduction in service.

But the wider point is this: A large swathe of the Conservative party has been captured by the ultras who see Brexit as an end in itself. This in turn has divided the party which is scared that the diametrically opposing economic solutions offered by the Labour Party are increasingly finding electoral favour. As a result, the whole government appears to have turned in on itself in a bout of vicious in-fighting and has less time (or perhaps just the stomach) to tackle the mounting economic problems caused by failed welfare reforms such as the botched rollout of Universal Credit (here and here).

We may not yet be quite at the McCarthyism stage here in the UK but as Robert Peston tweeted today, the current state of public discourse “is redolent of a country suffering a Brexit-induced nervous breakdown.” Given the magnitude of the economic challenges ahead (Brexit, flatlining productivity, overly-indebted households, the lack of adequate pension savings for many people), the UK really needs a government that can get a grip – and fast.

They still don't get it

It has been pretty evident to anyone with even a passing interest in the subject that the Brexit negotiations are not going as planned. The closeness of the referendum result in June 2016 reflected a country that was split down the middle on the issue of EU membership, and in the subsequent 16 months the Conservative Party has all but torn itself apart. Theresa May’s attempts to placate the hard Brexit faction within her own party has resulted in a series of clumsy soundbites (“Brexit means Brexit” and “no deal is better than a bad deal”) which fail to cover up the fact that the government does not have a plan – or at least not one that is acceptable to the EU27 and the two factions within the Conservative Party.

This has been compounded by an election which robbed the PM of whatever authority she had, and as a result the EU27 is loath to accommodate any demands the UK might make for fear that she will not be able to deliver at home. With more than a quarter of the negotiation period mandated under the Article 50 process having ebbed away, the UK is no further forward than in March. If a scriptwriter had come up a parody of all that is wrong with modern politics, they would have struggled to come up with a story as bizarre as the one which is unfolding before us.

There are those who continue to believe that the EU needs the UK more than vice versa. Indeed, a group of Brexit supporters has written an open letter to Theresa May demanding that she commit the UK to trading under WTO rules in the event that no deal with the EU27 is forthcoming because “no deal on trade is better than a deal which locks the UK into the European regulatory system and takes opportunities off the table.” Moreover, “it has become increasingly clear that the European Commission is deliberately deferring discussions on the UK’s future trading relationship with the EU27 post-Brexit. The EU is taking this approach because they do not believe that the UK would be prepared to go to WTO rules for our trading relationship with them.”

Owen Paterson MP argued in a radio interview this morning (here starting at 1:09:10) that the EU27 has “simply not taken up [Theresa May’s] generosity to discuss a future trading relationship” following her Florence speech and it is time to take an alternative approach. In Paterson’s view, this would give business “certainty” as to the post-Article 50 trading arrangements. He also repeated the canard that it is “massively” in the EU27 interests to do a deal on trade because “they run a huge surplus” with the UK. Paterson argued that a fallback to WTO rules would allow the UK (and I emphasise that I am quoting verbatim from the interview) to “immediately be able to grab the advantages of leaving the single market, leaving the customs union and doing trade deals around the world [and] sorting out our own regulation.” Yes, you did read correctly that leaving the single market is somehow an advantage.

I am not sure which alternative reality Paterson (and other signatories to the letter, including former Chancellor Nigel Lawson) are inhabiting but it is not one that most economists recognise. When 47% of UK exports go to the EU whilst 16% of EU27 exports go to the UK, it should be pretty obvious where the balance of power lies – and the EU27 knows it. As for giving clarity about future trading relationships by committing to WTO rules, it would effectively give business the green light to think about alternatives to investing in the UK. Moreover, on the assumption that the UK imposes most-favoured-nation tariffs on imports from the EU, the Resolution Foundation reckons that the basket of goods which makes up 40% of consumption would rise in price by 2.7% which will hit the poorest households most hard. And of course the WTO approach has little to say about how to deal with services where non-tariff barriers are more important. Such an approach would clearly signal to banks that the government is not serious about trying to arrange a transition deal, which would hasten efforts to move business to other parts of the EU – a process which is already underway.

Of course, none of this is new. These arguments were made in the run-up to the referendum by Brexiteers who believe in the primacy of free trade without acknowledging that the EU has other objectives and no incentive to play ball. It is a sad indictment of the whole debate that the Leavers continue to make the same hollow arguments. However, the evidence is mounting that there is an economic cost. Why, for example, don’t our incomes stretch as far as they once did? It’s mainly because the currency markets have taken a negative view of the UK’s post-Brexit economic prospects and have forced down the value of the pound, resulting in higher inflation and a real income squeeze. It may not have been the economic disaster that was feared in summer 2016, but whilst we may not have dropped the frog in a pan of boiling water it is in the pot and the heat is being turned up.

Those people who want Brexit at any price are blind to the consequences of their actions. But equally, they fear that the UK will not leave the EU as planned because they underestimated the complexities of doing so and will be trapped in the exit lounge for longer than they desire. But even if a transitional period is eventually granted which will give the UK an extra two years to finalise a deal, it will not be long enough. As Joachim Lang, managing director of the BDI, Germany’s chief business group told the FT, “it’s unrealistic to expect that we could renegotiate rules within two years that evolved over the 40 years of Britain’s EU membership.”

Theresa May will be told at today’s summit in Brussels that “insufficient progress” has been made during the first phase of Brexit negotiations and that the UK will not be rewarded with the start of any discussions on trade. Brexit supporters are fearful because if no such deal is forthcoming, their lies during the campaign will be found out. Many of us would be only too happy to see them drive off the much-feared cliff edge – we just don’t want to go down with them.

The day after

A day after the EU referendum and I am still struggling to take it in. It is one of the most shattering political and professional experiences I have ever experienced. As an economist, I have made the economic case for EU membership hundreds of times over recent years, but the electorate was clearly indifferent to these benefits. It is, as Boris Johnson said, a vote for independence. But from what? The notion that Brussels dominates our lives is a pure fabrication. It sets standards to which all members must adhere, and there may indeed be some gold plating, but the basic rules are the same for everyone. It is not a massive conspiracy to defraud the British. According to the OECD, the UK already has the second lowest degree of product market regulation across the EU (after the Netherlands) and the lowest level of labour market regulation. Many of our economic problems are home made. 

Indeed, as TUC General Secretary Frances O’Grady pointed out in the final Brexit debate on Tuesday, these problems are the result of deliberate government policy. Austerity was not imposed by Brussels. Our libraries and community centres are not being closed by EU mandate. Our student fees are not shooting through the roof thanks to some shady deals done in Strasbourg. This policy of austerity emanated from Downing Street, and it is therefore hardly a surprise that David Cameron and George Osborne barely showed their face during the latter stages of the campaign because they had become electoral liabilities. Cameron at least has done the decent thing and resigned. Shame he did not do so before promising the referendum! Cameron has shamelessly played domestic politics with the national interest, and lost. The EU has many faults and who knows, it may indeed shake itself apart. But far better not to be the first to leave. In game theoretic terms, this is a game where there is no first mover advantage since we will bear all the costs for an uncertain reward. 

I won’t even bother to discuss the shortcomings of the Labour Party’s pathetic efforts. Suffice to say that Jeremy Corbyn has let down all those who have put efforts into building better relationships with the EU. He is a relic of 1970s Labour thinking, whose ideas are 40 years out of date (they were wrongheaded then as well) and who actually campaigned against EEC membership back in 1975.

But I will reserve special ire for the likes of Nigel Lawson, who talks like a backbench 1990s Tory on Europe. Lawson is never encumbered by the knowledge he might be wrong. The man is so self-absorbed that the irony of the fact he lives in France never once troubled him. But to hear an 84 year-old man tell us about the future we can enjoy outside of Europe makes me downright angry. He won’t be around to see the consequences of his actions and clearly the generation of 18-24 year olds, 75% of whom voted for Remain, don’t buy his view either. 

In many ways, the Brexit vote is the last revenge of the baby boomers. They enjoyed free love in the 1960s which ended with the AIDS scares of the 1980s; they consumed like no generation before and left us with global warming; they secured their pensions and free education and left their kids to pick up the tab. And now they want to take us out of the largest, most prosperous economic block in the world and it is their children who will have to figure out how to make it work. Generational politics may well become the biggest single issue of the next decade – and no wonder.

If all this sounds like a metropolitan view, then I make no apologies. I have spent most of my working life in an international environment, working with and getting to know foreigners and how they think. And I know that many of them share the same frustrations as the British. There are many things wrong with the EU and the single currency is an economic disaster which has done more to damage the prosperity of its members than they care to admit. 

But the UK had a sweet deal. Not in the single currency nor party to the Schengen Agreement, it broadly worked for us. And whilst some crazy numbers were bandied about, the IFS reckons that in 2014 the UK made a net contribution of £5.7bn, which sounds like a lot but it is in fact around £88 per person per year, or £124 per voter. Even if we take this upper figure, it is less than £2.50 per week. No-one thought to mention that in the debates. Instead, the Remainers argued about the lies being spun by the Leavers about what the true figure was. They should have said instead, “yes it costs, but it is less than the price of a pint per week and in return we get all the network benefits of membership.” And if anyone asks what a network effect is, tell them to imagine the invention of the smart phone. Just an overpriced piece of kit until someone works out how to put games and other useful apps on it. Then tell them to imagine how they will manage to use these apps if someone takes their phone away. 

But they didn’t do that. So what we have now is a dissatisfied half of the electorate which wanted to stay, and the other half not really sure what they have won. Meanwhile the Scots are thinking about how to maintain their ties with the EU. But according to one of my Scottish colleagues, they won’t push for a referendum because it’s not in their interest. There again, the same guy told me in 2014 that no-one was talking about independence north of the border. Go figure! Now the rest of the EU is making noises about how they want the corpse of our membership out of Brussels before it starts to stink the place out. And should anyone be surprised? 

As an exercise in healing divisions, the referendum has achieved pretty much the opposite on all counts. Way to go, Dave. Oh, but you are, aren’t you?