Dawning realisation

The third round of Brexit negotiations, which started this week, has not gone well. Michel Barnier has called on the UK to start "negotiating seriously” as the mood across the continent hardens against the British government's policy of constructive ambiguity. There are, of course, two sides to this story. One is the domestic shenanigans which increasingly dominate the UK debate as the government slowly gets to grips with the enormity of the task at hand (shamefully slowly, many would say). The view from continental Europe is far less strident, almost bordering on indifference. Brexit is seen as a problem for Britain to sort out and come to terms with.

The domestic narrative is viewed from two sides. The Remainers have little confidence in politicians to deliver a deal, with chief negotiator David Davis known for his breezy confidence rather than his ability to knuckle down and deliver. Meanwhile, Leavers such as international trade secretary, Liam Fox, have hit back by suggesting that the EU’s position on the exit bill amounts to blackmail. Whilst I share the Remainers’ lack of confidence in the UK government’s position, the EU's approach should not be accepted uncritically as the application of fair-minded logic.

When Barnier talks about serious negotiations he really means the UK should fall into line with the EU's payment demands and only then might it be willing to talk about a trade deal. In doing so, the EU is behaving in the time-honoured fashion of a big economic block using its position to try and intimidate a smaller one, as the Greek government found to its cost, and as the UK will discover further when (or if) Fox is allowed to complete the many trade deals he claims are possible. But as I have noted before, the UK cannot realistically commit to paying a sum, the magnitude of which will likely only be revealed in 2018, without getting something concrete in return. None of this should come as a surprise, of course: We all knew that the EU would play hardball and that the UK is negotiating from a position of weakness.

There are ways out of this impasse. One possible solution floated earlier this week was that the UK pays a sum of around €10bn per year into the EU budget for the next three years in return for a transitional arrangement. This effectively means continuing to accept EU laws (freedom of movement and ECJ oversight) in return for single market access whilst losing voting rights. Indeed this is similar to the idea I floated in March except for the fact that the annual cost is too high, as it is broadly what the UK pays now in net terms. The government would have to be desperate to maintain the status quo without any voting rights. Yet according to today's Sunday Times, “Theresa May is set to approve a politically explosive Brexit bill of up to £50bn after the Conservative Party conference in October in an effort to kickstart trade talks with the European Union. Under plans being drawn up in Whitehall, Britain would pay between £7bn and £17bn a year to Brussels for three years after Brexit before ending sizeable direct payments into EU coffers in time for the 2022 general election.” So much for saving £350m per week (£18.2bn per year) to spend on the NHS.

Meanwhile, the public appear to be getting a little restless. There is concern that negotiations are not proceeding as rapidly as anticipated and that the UK will be forced to accept a deal on terms which they were promised would not happen. Indeed, the DailyTelegraph recently carried an article by the European Parliament's chief Brexit negotiator, Guy Verhofstadt, who responded to claims that the EU was being inflexible in its negotiating tactics by pointing out that the EU had actually been very flexible in offering membership on terms which suited Britain. "An opt-out from the euro, but banker to the Eurozone. An opt-out from Schengen, but access to the security databases linked to it. A blanket opt-out from Justice and Home Affairs, with the possibility to opt back into the most effective crime-fighting measures. The list goes on." All true, of course, and exactly what I pointed out in the wake of the referendum. What was notable was that the Telegraph offered Verhofstadt such a platform in the first place. This was after all the newspaper which in August 2016 blamed the economic problems facing the UK on "the pessimism of the previous government, the Labour Party, Barack Obama, global institutions, sections of the media and, of course, the Bank [of England]". The gung-ho confidence of the Brexiteers which characterised parts of the media a year ago has dissipated.

For that, much of the blame should be directed at those prominent campaigners who argued that the EU would be begging to do a deal and "they need us more than we need them". Moreover, those naive campaigners who suggested that "absolutely nobody is talking about threatening our place in the single market" clearly miscalculated the EU's position. Unfortunately, this problem has been exacerbated by the UK government's own decision to leave the single market and customs union (even if the letter to Donald Tusk triggering Article 50 did not explicitly suggest the latter).

In a way, this goes to the heart of the domestic Brexit contradiction. The electorate apparently voted to regain sovereignty, which for many meant controlling borders (i.e. immigration). But many of the leading campaigners are free marketeers who simply want to trade more freely. The fact that they are fantasists with an old-fashioned liberal view of the world (some call themselves Whigs) is where the trouble starts. They have the influence and political clout but no practical idea of how to achieve what they want. More importantly they have totally failed to understand the EU and what it stands for. For many Brits EU membership is a transactional arrangement, but for the original six members there is a much deeper political commitment. The hero of many free-traders is Adam Smith, who pointed out the benefits of comparative advantage – specialising in what you are good at. But that only works if the trading arrangements under which we operate allow everyone to benefit. The ideological thrust at the heart of the free-traders’ campaign is not consistent with the realities of modern day trading arrangements in which the UK is not a major exporter of goods and relies heavily on a services industry which sells to the rest of the EU. Faced with the evidence, maybe even a rationalist like Smith would be forced to agree that the free-trade case for Brexit is weak.

As a final thought, it is worth pointing out that Brexit is not the issue in other EU countries that it is in Britain. The EU has moved on, with France dealing with its own issues and Germany preparing for an election. Ultimately, Brexit boils down to a domestic debate about what role Britain wants to play on the world stage. It can either choose to be outward looking and deal with rising economic powers as an equal, or it can leave the EU and suffer the increasing economic irrelevance that goes with it. Boris Johnson is about to be proved wrong: you can't have your cake and eat it.

How to spot a fake

They say that if you can fake sincerity you've got it made. These days it's fake news we worry about. But it is rare that anyone goes to such great lengths to highlight it as this fascinating Twitter thread I found the other day (also picked up by The Times). A data scientist with the Twitter handle Conspirador Norteño (CN) observed that bot and troll accounts on Twitter often have names that end with 8 random digits. He then took the time to trawl through a series of Twitter accounts, searching for those that referenced #unitetheright and #firemcmaster, both of which are trends followed by those on the Alt-right end of the political spectrum, and found 824 accounts with an 8 digit handle at the end of their user name. Searching their followers for similarly named accounts, and subsequently their followers' followers yielded 63099 accounts. It was (for CN) a simple task to trawl through the followers of these accounts in order to plot the node network. This research yielded the nugget that the largest node in the network belongs to a David Jones based in Southampton.

It then starts to get a little murky thereafter. CN observed that said account posted only between 8am to 8pm Moscow time "almost like it's his job or something". Breaking down the subject matter of the account reveals that this account posted a lot about Ukraine in 2014, then in 2016 moved on to the issues of Brexit and Trump (see chart). Some of the material on the Brexit topic was very inflammatory, particularly with regard to immigration. When it came to the US election, CN pointed out that the language was very similar to that used by adherents of the Alt-right, despite the fact the poster was supposed to be British. CN concludes that this account was "one of the more interesting troll accounts I've seen (and almost certainly human operated and not a bot)". Furthermore, the variety of topics was "aligned with the interests of the Kremlin at the time."

Now we may be maligning David Jones of Southampton unfairly and perhaps he really feels very strongly about the issues at stake. But as one commentator pointed out, if it were a UK based Tweeter their times would vary with the switch to daylight saving in the UK, which would change the time vis-a-vis Russia which has no DST. But they do not, hence accentuating CN's suspicions. This clearly highlights the ease with which it is possible to influence issues of the day by disseminating a particular view and creating a fake network of followers to provide "likes" and recommendations.

This is not to say that the likes of Russia are unduly influencing the democratic process in western economies – at least no more so than usual. Foreign powers have always used propaganda to influence beliefs in other countries. There is evidence to suggest its use as far back as the sixth century BC and it reached new heights during the Second World War, and the Cold War that followed. Even today, the TV channel RT and the BBC World Service provide a view of the world as seen from Moscow and London respectively.  Fake news is not new either: One of the more historically notable events was the publication by the Daily Mail of the infamous Zinoviev Letter in 1924 which purported to be a directive from the head of the international Communist movement, based in Moscow, to the British Communist Party encouraging it to engage in seditious activities. What appeared to be a direct attempt to influence British domestic policy turned out to be a forgery, but it cast a shadow over the Labour Party for decades thereafter, which (unfairly) blamed its heavy election defeat on the letter.

However, the rise of social media has changed the way in which propaganda can be disseminated. For one thing, it is easy to maintain online anonymity which means we can never be 100% sure of the source of the material. Moreover, social media operates on a decentralised basis so that it is straightforward to set up a series of apparently independent channels all feeding the same message. In this way, the message can be drip-fed rather than blasted out.

The impact of fake news on voting patterns is believed to be very small. In one study (Spenkuch and Toniatti 2016[1]) the authors suggest that exposing voters to one additional television campaign ad changes vote shares by approximately 0.02 percentage points. If exposure to one TV ad is as persuasive as one fake news article, each fake tweet influences voting patterns by mere hundredths of a percent. Preaching to the converted will not win more votes, so it does not matter how many times those convinced of a particular view are exposed to fake news because they only have one vote. But the cumulative effect of many thousands of such fake messages will start to mount up if they then influence other voters who otherwise might not be susceptible to such tactics. According to one source (Gottfried and Shearer 2016[2]), 62 percent of US adults get their news from social media and 18 percent do so often, with Facebook the most popular medium. Not everyone will believe the fake news of course, but the dissemination of fake news may have more of an effect than we often credit.

This appears to be a serious problem but I will leave it for others to debate the impact on voting patterns. As an economist, my concern is how such tactics could change the way politicians react to the groundswell of apparent public opinion. If social media is abuzz with reports of how health spending, for example, is scandalously low, do governments react by changing their priorities in order to win votes at the next election? And how would they do so: Do they change their defence budget? Given the low costs associated with fake news dissemination, it is easy to understand why foreign powers with a different world view might try to influence the policies of other governments. But the same applies to domestic interest groups which want to prioritize spending on one area over another. Companies might also apply the same tactics to make the case for a change in the law. If anything this highlights the extent to which all members with a vested interest in our society have a duty to do a little bit of due diligence rather than simply accepting the newsfeeds put before us.

Otherwise, as the often prescient and always quotable HL Mencken put it, "As democracy is perfected, the office of president represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart's desire at last and the White House will be adorned by a downright moron."

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[1] Spenkuch, Jörg L., and David Toniatti. 2016 “Political Advertising and Election Outcomes.” CESifo Working Paper Series 5780 
[2] Gottfried, Jeffrey, and Elisa Shearer. 2016. “News Use across Social Media Platforms 2016.” Pew Research Center, May 26. http://www.journalism.org/2016/05/26/news-use-across-social-media-platforms-2016

Their generation

It is now 10 years since the first indications of the looming financial crisis began appearing on our radar screens and its aftermath was the main thrust of Janet Yellen’s speech at Jackson Hole last Friday. Some people saw the crisis coming, having warned about problems in the US housing market since at least 2005, but most of us did not. Looking back at some of the material I produced in summer 2007, I did point out the risks which were emerging in the financial sector, but that is all they were – factors that could potentially disrupt the outlook. They were treated as the equivalent of an event on the outer reaches of a fan chart: a theoretical possibility but one we did not set much store by. By the end of the year, I was paying far more attention, pointing out that risk assessments were too low and that investors were too optimistic about earnings prospects, with the result that I expected a sharp market correction. This did happen, but not for the reasons I anticipated.

Looking back at what I wrote in late-2007/early-2008, I had almost forgotten how concerned I was about the state of the economic and financial environment. But however concerned I might have been, I never saw the Lehman's bankruptcy coming. When the Queen asked academics at the LSE why nobody saw the financial crisis coming, their answer was they trusted that risk management tools were adequate. My response would have been that nobody expected the Fed to pull the plug on a major financial institution, having always ridden to the rescue hitherto (my assessment of the Lehman problem one week before the final collapse was not one of my better forecasts). More than any single financial event in the previous 80 years, this was the one with the most far-reaching consequences. It was a signal to the markets that financial institutions could no longer rely on central banks to bail them out and that they had better start getting their houses in order.

Fast forward to 2017, and many of the problems which emerged then continue to echo. Admittedly, banks have deleveraged and have been wrapped up in red tape to the point that they pose far less of a risk than a decade ago.  But they are less profitable and employ fewer people (no great loss there, say the general public). Not surprisingly, Yellen’s main thrust was the changed landscape in the financial world. She did touch on the question of whether the new regulatory environment has adversely affected growth and concluded that although “material adverse effects of capital regulation on broad measures of lending are not readily apparent, credit may be less available to some borrowers, especially homebuyers with less-than-perfect credit histories.” But her main conclusion was “our more resilient financial system is better prepared to absorb, rather than amplify, adverse shocks … Enhanced resilience supports the ability of banks and other financial institutions to lend, thereby supporting economic growth through good times and bad.”

But the macro environment has changed in other ways. Interest rates in Europe remain at immediate post-crisis levels, the full consequences of which we will only find out when we retire and cash in our pensions. There has also been a permanent loss of income in the sense that it remains below where it would have been had the pre-2008 trend continued i.e. we are less well off than we would otherwise have been. Unemployment in many parts of Europe is still too high and dissatisfaction with the status quo has mounted, culminating in the Brexit vote and the election of Trump. In some ways, this is an echo of the first half of the twentieth century, with electorates seeking populist solutions to complex and deep-seated economic problems. It is almost miraculous that we did not see more of this in continental Europe given the magnitude of the euro zone crisis. But the election of Emmanuel Macron as French president is a sign that European electorates have not given up on 70 years of integration and that the high water mark of populism may (I say that very cautiously) have passed.

But what have we learned? Most obviously, perhaps, self-regulation is an inadequate defence mechanism. Banks cannot be relied upon to police themselves (nor can politicians for that matter). More generally, the policy of laissez-faire which has dominated the Anglo Saxon world for the past 35 years, may have reached its limit. A policy of creating incentives to encourage people to take risk has arguably been carried too far. It surely is no coincidence that younger voters, who have been severely disadvantaged by current economic circumstances, have flocked to politicians such as Macron and Jeremy Corbyn who offer a message of hope and inclusivity.

This may be viewed by many as hopelessly naive but we should not dismiss this groundswell of support. Just as people of my generation were fed up with the limits of the post-1945 settlement, so a new generation is finding that the system of which they are now part does not necessarily work for them, and they want change. It will take time to work its way through, but we are going through a period of change every bit as radical as the early 1980s – if not more so. Ours will be a world shaped by different economic forces to those which have operated over the last three decades.

Plenty to (re)moan about

Events of recent days have confirmed what many of us thought all along: the UK government's original position on Brexit is untenable. And as we watch one red line after another being crossed, the credibility of its position is weakened further. This matters because in a negotiating environment, you only have a chance of achieving your goals if the other side believes in the strength of your position. Those of us derided as Remoaners have consistently highlighted that the idea of the UK threatening to walk away from negotiations was nonsense. The European Commission knows it too, so either we are headed for a car crash, or an exit on the EC's terms as I have long suspected. Of course, another alternative may be – and whisper it quietly – that the government realises the folly of the whole charade and is seeking to ensure that Brexit means "as little as possible, as slowly as possible" to quote Dan Roberts in The Guardian.

Where to start? I have already dealt with the Economists for Free Trade paper, which has been widely criticised for being at best a piece of wishful thinking (here). But for anyone interested in an alternative take, the view by Flipchart Rick is worth a read as he also lays into the latest piece by the Institute of Economic Affairs.

Another key event this week was the release of the government's position paper conceding that the European Court of Justice in Luxembourg could still play a key role in Britain after Brexit. This comes after Theresa May promised last year that “we are not leaving only to return to the jurisdiction of the European Court of Justice. That’s not going to happen.” But the government now recognises that some form of oversight body will be required to manage relations between the EU and UK and concedes that it will have to abide by many of the regulations passed down from the ECJ. Indeed, justice minister Dominic Raab noted that the UK would have to keep “half an eye” on ECJ rulings in future simply because it controls many of the non-tariff barriers which will be so crucial to any trade agreement between the UK and EU.

As the commentator Ian Dunt argued in a recent article, “the government's new Brexit position paper is actually pretty good” which as he acknowledges “isn't something I usually say.” He also makes the valid point that rather than criticise the government for adopting a course they have advocated all along, pro-Remain MPs should be “welcoming it and encouraging them to go further.” Indeed, as many people increasingly believe, there is an argument in favour of both sides engaging in more constructive dialogue rather than sniping at each other. I agree, but this is easier said than done given the blatant lies told by both sides during the referendum campaign, and the hardening of the rhetoric from the prime minister during last autumn’s party conference season.

Personally I have never understood the Brexiteers’ pathological hatred of the ECJ. I always thought they had bigger issues with the European Court of Human Rights, which did so much to block the extradition of convicted terrorists from the UK to the US. The ECJ has actually come down in the UK's favour in the recent past on the vexed issue of whether euro clearing could take place in London. I suspect that the two courts have simply become interlinked during the whole Brexit debate without anyone bothering to differentiate between the two.

The other issue which has enraged the Twittersphere this week is immigration. I will look more closely at the figures another time, but suffice to say that net migration to the UK was down to 246,000 in the year to March, from 327,000 12 months earlier, with most of the slowdown driven by a reduction in numbers from the EU (primarily the new accession countries). Those concerned about skill shortages in an economy running close to full employment – at least as measured by the unemployment rate – will take no comfort from that. Worse still, official figures revealed that fewer than 5,000 students a year stay on after their visa expires whereas the government repeatedly claimed the figure was around 100,000. As one wag put it on Twitter, it's a good thing we have not based a huge change in economic policy on figures which are so evidently flawed.

Just to round things off, 100 EU citizens this week received letters notifying them that “a decision has now been taken to remove you from the United Kingdom.” Clearly they were sent in error but as one of the recipients, a Finnish academic Eva Johanna Holmberg, noted "it shows the Home Office currently cannot function. It does not know how to obey the law or even its own rules. It is probably not able to deal with all the paperwork.” She added that this has made her "even less likely to trust anything Amber Rudd, Theresa May, or David Davis says to calm us EU nationals down". It certainly does nothing to promote the case of a Britain which is open to the world and in the long run could do a lot of reputational damage if these cases continue to arise.

Trust is indeed the key word here. Dysfunction seems to be endemic at the heart of government and it is hard to trust the current administration to manage Brexit properly. I have been accused of being a Remoaner but I prefer to think of myself as a realist. The complexity of Brexit was always far greater than either its proponents or the government acknowledged, and to waste part of the post Article 50 period with an unnecessary election campaign looks more ill-judged as time passes. I still find it hard to understand how the government can square the circle between what it promised and what it can deliver without doing great economic harm. The only way, surely, is to row back on some of the more unrealistic promises. That will undoubtedly enrage those elements of the Conservative Party that wish to see Brexit at any price. But it is time to make a stand based on economic rationality rather than ideology. And that is something else to which I will return in future posts.

The economic benefits of Brexit (or how to oversell your case)

Patrick Minford is a heavyweight academic economist whose work on macro modelling is first rate. He is also the front man for the group Economists for Free Trade (EfFT) which provides the intellectual ballast in favour of Brexit and which has recently published the main results of a study due for release in the autumn. Minford and his collaborators argue that “Brexit could boost the UK economy by as much as £135 billion a year” which is equivalent to 6% of annual GDP, and that “’Hard Brexit’ is good for the UK economically while ‘Soft Brexit’ leaves us as badly off as before.” Obviously, when someone as able as Minford produces detailed analysis of this sort, it deserves to be taken seriously. But the view across the economics profession is that it is – to put it politely – flawed.

One of the key premises of the paper is that unilateral abolition of all UK tariffs should be a key plank of the post-Brexit world. But most economists do not buy the analysis. For one thing, it assumes that most of the benefits to the UK are derived from the import side. In the view of EfFT, there will be an immediate increase in UK living standards as a result of the abolition of UK import tariffs. This will put competitive pressure on domestic business to improve its relative position and as a result the economy will emerge stronger in the long-term. Minford et al justify this with reference to the example of Sir Robert Peel’s abolition of the Corn Laws in 1846 which “greatly reduc[ed] the price of food and help[ed] to stimulate the industrial revolution.”

There are just a few tiny problems with this Panglossian view of the world. 

• First, it will lead to a massive initial widening of the trade deficit which will likely result in a sterling depreciation which boosts inflation and squeezes household incomes – a bit like we are seeing today.
• Second, it will wipe out large chunks of UK manufacturing industry which are unable to compete with low cost Asian producers. Even if there is a competitiveness response, it will take years to show through and we would have to balance out the short-term welfare losses against any potential long-term gains. 
• Third, Minford argues that “to offset the long run effect of losing EU protection, manufacturing productivity needs to be raised, compared with no Brexit, by only about 1% a year for a decade, which looks entirely feasible.” Given that one of the main macroeconomic problems we face today is the weakness of productivity, which has flatlined since 2008, raising productivity growth to 4% per annum, as he implies, looks entirely infeasible. 
• Fourth, the 1846 example is misguided. In a world of much more intense global competition, it is not clear that the UK could easily cope with the near-tripling of the trade deficit that occurred in 1847 and which was left permanently higher as a result.

Nor do most economists buy the view that unilateral tariff elimination is a sensible strategy. If you don’t believe in unilateral nuclear disarmament why should you believe the same principle applies to trade? You might promise to cut tariffs during trade negotiations but you certainly do not throw away one of the main bargaining chips before even entering the negotiating chamber. He may be a good macroeconomist but he’s a lousy game theorist.

Alan Winters, at the University of Sussex, has been a major critic of Minford’s analysis all along and his latest blog piece does a good job of skewering some of the assumptions. The detailed breakdown of the EfFT numbers suggests that the gains from free trade alone will amount to 4% of GDP. Winters points out “EfFT claim that current EU trade barriers are equivalent to a tax of 20% on both agriculture and manufacturing. In manufactures only about 3.5% of the extra cost is tariffs, so what is the rest? If the 20% is correct, much of the remaining 16%-17% is standards.” Applying the arithmetic, abolishing trade barriers might only be expected to produce a boost equivalent to 0.7% of GDP (4%*3.5%/20%).

Indeed, this hits upon a major problem – standards and other non-tariff barriers are much bigger obstacles to trade. One simple example is differing car pollution emission limits: Even if tariffs could be eliminated, the fact that cars are subject to different standards around the world significantly raises production costs. Indeed it was the raising of US emissions standards in the 1970s which killed off the classic Jaguar E Type. Another example is financial services, in which a passport allowing regulatory equivalence enables banks to trade their products across EU borders without let or hindrance. It may not be everyone’s idea of a great industrial role model but the UK does at least run a consistent external surplus in financial services trade.

Leaving the EU Single Market will require the UK to massively raise its foreign trade with non-EU countries to make up for the loss of tariff-free access to the EU market. Analysis by NIESR suggests that if the UK left the single market but made unilateral trade deals with major developing economies and the Anglosphere, it would only claw back about one-third of the 20-30% reduction in lost total trade resulting from leaving the EU. Moreover, deals on services trade are far less comprehensive than those for goods, and as NIESR has also indicated, it will be hard to replicate the EU deals that we have now.

Winters also points out that “EfFT believe that we can get all the benefits of the European Single Market (SM) unilaterally. That is not true. The SM boosts our exports, which confers benefits over and above those achieved by liberalising imports.” It is precisely because the UK has some say over single market regulations it can influence them to benefit certain industries, such as financial services. Small economies simply cannot decide their own trading standards in a globalised world and the UK will become a rule taker rather than a rule maker. The bottom line is that by leaving the single market, the UK will be giving up a lot of influence over its ability to set terms and conditions. Far from taking back control, we will be throwing ourselves on the mercy of the global economy.

One of the ironies associated with this analysis, which has been criticised for being given far too much prominence, is that it is the mirror image of the doom-laden scenarios produced before the referendum which were dismissed as Project Fear. So why should this be treated so reverentially by the media? After all, it was produced by the “experts” we all thought we had heard enough from.

How should we remunerate politicians?

Many of us spend a lot of time bashing politicians – sometimes fairly, sometimes not – but it cannot be denied that the job which they do in most democratic societies is a thankless one. They have to subject themselves to electoral approval every four or five years and they get a lot more brickbats than bouquets – when things go wrong, it is politicians who stand in the front line of public criticism. You have to be idealistic enough to believe you can change things; extrovert (some might say narcissistic) enough put yourself forward to the electorate on a regular basis and sufficiently thick-skinned to cope with the criticism. It puzzles me why anyone would ever want to do that – in most developed economies, at least, the rewards do not stack up to the degree of opprobrium heaped upon politicians.

Aside from the prime minister of Singapore, who earns an annual salary of USD 2.2 million, public sector chief executives are paid significantly less than chief execs in the private sector (see chart 1). There are various metrics against which we could measure a country’s performance in order to assess whether the chief executive is worth their pay. One way would simply be the size of the economy – the bigger they are, the more they can afford to pay. But that rather falls at the first hurdle given the size of the Singaporean economy. Indeed, in our sample of 60 countries, the correlation between the ranking of overall economy size (GDP) and the salary of head of government is rather low, at 0.375. Another way to think about it is that the bigger the population, the higher the salary should be given that they are responsible for many more people. But this falls pretty flat with the rankings showing zero correlation – hardly surprising given that President Xi of China earns only USD 22,000 per year and Indian Prime Minister Modi’s official salary is just USD 30,000.

We get more success, however, if we look at incomes per capita with the rankings showing a correlation of 0.55 (rising to 0.57 if we look at PPP adjusted incomes). Societies appear prepared to reward their politicians on the basis of their ability to deliver economic prosperity. Naturally, there are some outliers. The President of the Comoros earns a whopping $408,000 per year (541 times the average income) despite it being one of the poorest countries in the world. Contrast this with Uruguay where the presidential salary is only 80% of the average income. Indeed, the degree of disparity is highest in countries not known for the quality of the democratic process (chart 2). But on the whole there is a decent degree of correlation: For example, Donald Trump is paid the fifth highest salary (USD 400,000) whilst the US ranks sixth in terms of GDP per capita; Theresa May’s salary of USD 215,000 puts her 13^th on the list compared to a GDP per capita ranking of 16 whilst French prime minister Édouard Philippe’s salary of USD 200,000 is placed 16 against a GDP per capita ranking of 17. Perhaps societies are indeed prepared to reward their leaders in proportion to how well they manage the economy.

Even the position in Singapore, where the apparently outlandish salary of PM Lee Hsien Loong is off the charts on an international comparison, does correlate with the fact that standards of living are amongst the world’s highest. Singapore is also safe, clean and ranks second on both the WEF’s global index and the World Bank’s Ease of Doing Business index. At a time when the economic threat posed by China is increasing, that is no mean feat.

But compare this with corporate salaries where the median total compensation for S&P500 CEOs in 2016 was USD 11.5 million whilst the average FTSE100 CEO received remuneration of around USD 6 million. Thus, given the dissatisfaction with politicians around the world, would we improve their quality if we paid them more? The case for paying more is that we attract a higher quality of candidate. But there is also a principal-agent problem: Politicians generally set their own salaries, and aside from the odd burst of outrage, in many countries there is little to stop them from raising their own salaries in excess of inflation or indeed in excess of their deliverable outcome in a way which is detrimental to society.

The empirical evidence is mixed. A 2009 paper based on Brazilian data suggested “that higher wages increases political competition and improves the quality of legislators.” Similarly, a study based on Mexican data  indicated that the quality of civil servants also increases when higher wages are offered. Against that, a study based on the European Parliament found that a salary hike raised the proportion of politicians with lower education levels, perhaps because  it “gave lower-quality MEPs a greater incentive to get into office and, once there, to stay put.”

As Stephen J. Dubner of Freakonomics fame put it, “I am not willing to argue that paying … government officials more would necessarily improve our political system. But, just as it seems a bad idea to pay a schoolteacher less than a commensurately talented person can make in other fields, it is probably a bad idea to expect that enough good politicians and civil servants will fill those jobs even though they can make a lot more money doing something else.” There are no easy answers to the question of how to reward politicians. But we generally know a good one when we see them.

Not pleasing anyone any of the time

One of the great ironies of the modern information economy is that we have more facts at our disposal than ever before, yet we are also subject to more fake news. In this environment, proponents of Brexit are able to make the most outrageous claims and brush aside objections without any regard for the facts. This is particularly annoying in the context of the phrase “will of the people” which is used to justify going ahead with a Brexit policy very much at odds with what a large slice of the electorate voted for. More importantly, the statement is statistically incorrect.

Admittedly 51.9% of those who voted did indeed favour Brexit. But this merely represents the will of those who voted: The fact that 28% of eligible voters did not even make it to the polling booth means that, by definition, the outcome cannot represent the views of all people. This is not to deny the democratic legitimacy of the vote. After all, no UK government in modern times has ever taken more than 50% of all available votes, so the process is no more undemocratic than usual. The difference is that Brexit is an irreversible process and it was therefore incumbent on the powers-that-be to make sure that sufficient checks and balances were built in to prevent it from descending into the farce we see today. This is why the  Scottish devolution referendum held in 1979 required that a threshold of 40% of all eligible voters was necessary to validate the result. Although the pro-devolution faction secured 51.6% of the popular vote, they only obtained 32% of eligible votes due to the fact that the turnout was fairly low at 63.7%. Ironically, if the turnout had been 77.5% or higher, the same final outcome would have given them victory. In 2014 the turnout was 84.6% so had people been as motivated to vote as in 1979, Scotland would long since have achieved greater independence from the UK.

A key issue of contention over the past year is whether the narrow margin of victory in the Brexit referendum is sufficient to justify the government’s gung-ho attitude. If all those eligible to vote had done so, there would be no need to have the discussion. But on a statistical basis since more than a quarter of those eligible to do so did not cast a vote, we can think of the result as representing a sample – albeit a large one – of the whole population. And as with any sample, there is an associated error. We cannot ever know how the stay-at-homes would have voted but if they had voted 55-45 in favour of Remain, the result would have gone the other way. It is thus reasonable to look more closely at the statistical evidence. 

Classical statistics suggests that a 90% confidence interval around the Leave vote share implies that they would still have swung it. But this neat little paper entititled 'What does the data of the Brexit referendum really say?, written by a couple of statisticians, uses effect size, which is a way of quantifying the magnitude of the difference between two groups without relying on sample size as in classical statistics, and this paper measures the sizes of differences between the Leave and Remain votes. The authors conclude that “a 52%-48% split represents only a spurious difference, not sufficiently different from a 50-50 split to claim a majority for either side.” They also suggest that on the basis of a 72% turnout “a minimum split required to make those claims is 69%-31%.” 

This obviously raises the question of how we should respect the result – a question posed by Simon Wren-Lewis on his blog. SWL takes the view that the lies told by the Leavers during the referendum campaign are “enough to completely discredit the referendum as an exercise in democracy.” Although he stops short of suggesting we should ignore the result, it is quite clear that many of the things which people thought they were voting for cannot possibly be achieved. For example, UK government sources suggest that EU citizens will be free to visit the UK after Brexit without having to obtain visas. Whilst this does not mean they will have the right to remain indefinitely, it is a significant watering-down of the position which many Brexit supporters thought they were voting for.

The very fact that the referendum result was insignificantly different from a 50-50 shot suggests that nobody is going to be satisfied with whatever compromise agreement is finally achieved. The UK will clearly not be able to leave the EU on the basis which many hard Brexiteers might wish but given the government’s decision to trigger Article 50 (before it lost its parliamentary majority, lest it be forgotten) it equally cannot remain an EU member. I maintain my view that for a long time to come, various elements of UK policy will be conducted on the basis of a Schrödinger’s Cat approach: Simultaneously half-in and half-out of the EU. They say you can’t please all the people all of the time. Brexit is a case of not being able to please anybody any of the time. If the current generation of politicians had a better grasp of statistics they would have known this all along.

* 22 August 2017: I subsequently amended this piece to correct a couple of errors. Thanks to those who pointed them out