The economics of flight overbooking (or how to avoid a beating)

The recent news that a passenger was unceremoniously hauled off a United Airlines flight because the airline was unable to persuade enough passengers to voluntarily disembark strikes me as an extreme case of market failure. It is well known that airlines routinely overbook flights in order to maximise the chances of a full aircraft, given that a certain number of passengers will not travel for one reason or another. In the event that there are more passengers than seats, the airline must offer some form of compensation to persuade passengers to voluntarily make way. At the same time, the passenger must weigh up whether the price offered is sufficient to compensate them for the inconvenience. It is a classic bargaining situation worthy of further investigation.

Obviously, the aircraft cannot take off until all passengers are seated and it must wait at the departure gate until the supply and demand for seats is in equilibrium. The airline is charged in proportion to the time elapsed over and above the scheduled departure time. According to industry estimates (here), the cost of such delay is around £70 ($87.50) per minute. The airline will know before boarding begins that they are overbooked so it is in their interests to offer compensation before passengers take their seat, although in the recent United case the airline appears to have waited until they were on board, which is a major strategic error.

We can devise a simple model to analyse the choices facing the airline, based on some arbitrary assumptions but it makes the point. If we assume that it takes 10 minutes to remove luggage and repack the hold, then the airline has an incentive to offer compensation of less than $87.50 up to 10 minutes before the scheduled departure time. Between 9 and 10 minutes prior to departure, the strike price rises to $87.50 which is the price of saving another minute of delay. With less than 10 minutes until the scheduled departure time, and no takers for the offer of compensation, the fine will continue to rise in a linear fashion because the airline cannot unload the luggage and still make the slot. The airline will thus have to raise its offer to passengers on the basis that $87.50 has not proved sufficient incentive so far. On the assumption that one of the passengers does not suddenly “crack” during this standoff, the airline will have to engage in a price discovery process in order to tempt one of them to drop their claim for a seat because otherwise the delay will continue indefinitely.

Suppose that for every minute that elapses, the airline raises its offer by $10. Thus, with 9 minutes to go, the airline will face a fine of $87.50 and offers passengers a similar amount. With eight minutes to go, the fine rises to $175 and the passenger payout to $97.50 and so on (see chart for the representation of the cost structure in this case). The total cost to the airline is the fine levied by the airport for missing the departure slot plus the customer payout (we ignore the costs of any overnight accommodation for inconvenienced passengers). If there are still no takers at the scheduled takeoff time, the airline faces costs of $1052 (a fine of $875 and compensation of $177.50). Obviously, this process could go on for a while – in theory up the point at which it becomes cheaper to refund all passengers and cancel the flight (less the cost of unused fuel and any sundry items).

As it happens, one limit to the process is the legal maximum compensation which US airlines are required to pay ($1350). In our simple model formulation, the airline would have to wait two hours before reaching this limit but by that point the airport fines would exceed $11,000. Indeed, as the chart shows, the airline has an incentive to avoid the steeply rising departure fines. A simpler option would be for the airline to decide in advance how much to offer the passenger before it has to pay any departure fines. Thus, more than 10 minutes prior to departure the airline will not be subject to fines but knows that if it waits until the scheduled departure time before finding an agreement, it will have to pay $1052. The sensible option is thus for the airline to offer the passenger an amount up to $1052 which allows it to take off on time without incurring any departure fines; gains goodwill from the affected passenger and still pay an amount which is less than the legal maximum. Note, by the way, that European airlines are less generous. Payouts per passenger depend on the distance travelled and range from a minimum of €250 for short-haul flights to €650 for longer journeys.

The simple model suffers from a number of shortcomings, none of which change the broad picture. It does not deal with multiple equilibria (i.e. if more than one passenger were to accept the offer). A workaround to this problem is to pick a passenger at random and make the offer rather than hold an auction. More problematic would be the case where the airline needs to bump more than one passenger which changes the airline payoff because different people have different preferences, thus making it harder to find a series of market clearing prices.

This raises a question of what would tempt a passenger to accept the airline’s offer of compensation? It all depends on their time preference, or the rate at which they discount the need to be at their destination on time. This will depend on factors such as income and the value they place on their time. If you are a US worker with just two weeks holiday per year and you lose one day due to flight problems, you may set a high value on the cost of delays. If, however, you earn $50,000 per year, you can earn an extra day’s pay ($200) simply by holding out for two minutes beyond the scheduled departure time.

If the model outlined above does not provide a solution, the process can be short-circuited by the drawing of lots to choose who leaves the aircraft – as apparently United did. Unfortunately, the gentleman removed from the United flight was a doctor, who presumably applied a very high discount rate to his time, so it is hardly surprising that he was not best pleased at being asked to leave the flight – let alone the manner of his departure. There are many issues involved here, but perhaps the key takeaway is that airlines are desperate to avoid departure fines so if you have the time to negotiate, chances are you can drive a hard bargain. There again, you might just be hauled off the aircraft …

Beware the economics of populism

Venezuela is probably the worst managed economy in the world today. It has the largest oil reserves of any country, accounting for around 18% of the world total and twice as much as the whole of Europe put together, yet its citizens suffer food shortages and a lack of access to basic medicine. In short, they live in a country whose economy is – to put it bluntly – a basket case. It should not be like this. The fact that it is can be attributed entirely to a policy of economic mismanagement, driven by a government which for the last 17 years has pursued a brand of socialism known as Chavismo, named after its initiator, former president Hugo Chávez. 

When asked in a recent TV interview what Venezuela must do in order to get its economy back on track, my first answer was “get rid of the government.” Chavismo is a ruinous policy which sought to build a mass movement of popular democracy in order to establish economic independence, equitable distribution of revenues and an end to political corruption. It has failed on every count. It is not popular; has failed to break the dependency on oil and has resulted in an even less equitable distribution of incomes than when the policy started. Meanwhile, Transparency International today ranks Venezuela 166^th out of 176 countries in its Corruption Perceptions Index, compared to 71^st in 2000. In short, Venezuela is a classic example of how not to run a populist policy.

But, I hear you say, this sort of populist nonsense only happens in third world dictatorships such as Venezuela or Zimbabwe – it would never happen here. And you would probably be right. But it is interesting to note that the share of electorates voting for populist parties in the so-called developed world is at its highest since the 1930s (see chart below). The chart was taken from a recent excellent study by Bridgewater Associates which is well worth a read (here) and which takes a look at how populism emerges, how it runs its course and what are the wider implications. As the report states, “populism is a political and social phenomenon that arises from the common man being fed up with 1) wealth and opportunity gaps, 2) perceived cultural threats from those with different values in the country and from outsiders, 3) the “establishment elites” in positions of power, and 4) government not working effectively for them.”

This all sounds very familiar after the events of the last year, and although neither Brexit nor the election of Donald Trump are expected to lead to the extreme outcomes associated with past periods of populist government, they do share certain similarities. Both were motivated by a certain degree of xenophobia and both to varying degrees involve elements of anti-free trade, as well as being highly nationalist campaigns. We have also seen some elements of this in the French and Dutch election campaigns in recent weeks.

The real concern is that populist agendas tend to do more economic harm than good in the long-run. One of the unsung economic populists identified by Bridgewater is Robert Muldoon, the New Zealand prime minister from 1975 to 1984. His policies promised a continuation of New Zealand’s generous social welfare programs and protections, which resonated with elderly and rural voters, who helped bring him to power. His policies, which included setting up a pension system described as “the most generous universal pension scheme ever introduced in any country in any era,” came against a worsening domestic and global economic backdrop. The upshot was that New Zealand was subsequently forced to backtrack and introduced a major restructuring programme in the mid-1980s (the Rogernomics programme) which caused a lot of pain in order to reverse the excesses of Muldoon's policies.

Donald Trump’s threats to impose barriers to countries wishing to trade with the US threaten to do more harm than good. Brexit, if not handled correctly, will cause much greater long-term damage than many of its current proponents believe. Whilst we may not be about to go along the same path as Venezuela, the historical evidence makes it clear that politicians who make promises their economies cannot keep do us all a disservice.

Compromise on so many levels

In her January speech which set out what the UK seeks for its post-Brexit future, Theresa May stated that the UK does not seek “partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out. We do not seek to adopt a model already enjoyed by other countries. We do not seek to hold on to bits of membership as we leave.” But if politics is about anything it is the about the art of compromise, and over the past week, signs have emerged that the government is indeed prepared to “hold onto bits of membership” in order to avoid the cliff-edge that the prime minister has warned about.

The Financial Times reported in midweek that the UK may accept ”the possible extension of free movement, as the European Parliament agreed to open the way to a potential association agreement.” This sounds very much like the sort of policy guaranteed to get hard-Brexiteers foaming at the mouth but it is a rational and sensible response to something that could otherwise become a major problem. The UK is an open economy which has taken international specialisation to extremes. To simplify hugely, the UK has become a service-based economy and sources large chunks of its manufactured goods offshore. Precisely because the services sector is highly labour intensive, the UK needs to import large quantities of labour in order to meet demand. This model means that the UK is highly integrated into the global economy meaning that it makes little sense to suddenly throw up obstacles to the supply of labour which the UK needs to continue generating output.

The UK has also suggested that it may be prepared to take the rulings of the European Court of Justice into account in the interpretation of laws which derive from the EU – at least until there is time and appetite to change them. To the extent that the ECJ is a symbol to many Brexiteers of all that is wrong with the EU – overbearing, overreaching and undemocratic – this sounds like a significant concession. It is also recognition that taking back control of your own laws, after 44 years during which a large proportion have been designed with the EU in mind, is not an easy task. It is also yet another indication that the domestic civil service will be overwhelmed with the task of dealing with post-Brexit Britain and that large parts of the policy agenda will be given secondary consideration (see this article in today’s Observer).

All this suggests that there is a dawning realisation in government that the process of exiting the EU will be a lot more complex than people were led to believe twelve months ago (don’t say I didn’t warn you). It will also cause friction within the group of Leave supporters who seem to be split between the desire to “take back control” (whatever that means) and the slightly less-unhinged who (wrongly) see Brexit as an opportunity to remap Britain’s international trading relationships. Anyone advocating a clean break after two years of Article 50 negotiations is simply intent on marching the UK towards the cliff-edge that the prime minister is intent on avoiding. I am thus more optimistic after this week than I have been for a long time that if we cannot avoid Brexit, we may at least be able to secure an exit which minimises the damage.

It also raises the question of post-Brexit UK-EU relations? Extrapolating from this week’s (admittedly very small) sample of events, there is a possibility that the UK could indeed become the half-in half-out member that Theresa May appeared to rule out in January. On the one hand, this is a very bad compromise for it will not give the Leavers what they want and will fail to satisfy the Remainers who argue that we can obtain the same benefits by remaining in the EU. Yet it is the least worst outcome for a country which appears intent on leaving the EU.

But it also raises another question of what the EU wants to be in future. Twenty years ago, many economists argued that the EU was not ready to pursue a policy of full integration and that a variable speed Europe was the better option. The rationale was that since many countries were coming from different starting points, attempts to impose common standards would raise the degree of strain as they were forced to arrive at the same point at the same time. The experience of EMU, in which Italian output has not expanded since it joined the single currency, is an indication of the damage that can be caused if countries do not put in place the requisite reforms to ensure they comply with common standards (in Italy’s case, this means labour market reform). Brexit may thus be a precursor of a regime in which different countries integrate at different speeds. It may be no bad thing, and I will come back to it in a future post.

But as the British may well prove over the coming years, EU membership may not be a binary choice. After all, in this day and age, consumers are increasingly unwilling to accept take-it-or-leave-it choices. Why should the EU be any different?

Keep talking

Last week, Bank of England chief economist, Andy Haldane, gave one of his excellent speeches which on this occasion provided a tour-de-force on the topic of central bank communications (here). He pointed out that just over twenty years ago, central banks were still concerned to maintain their mystique. Indeed, I well remember from my student days that much of the contemporary economic literature was focused on the extent to which central banks could influence policy by withholding their reaction functions from public view. Today, however, central banks are much more open institutions. According to Haldane, the BoE’s communications last year amounted to 4.5 million words, which is pretty impressive even by the standards of the Twitter age.

But what is the point of all this communication? Central banks in democratic societies believe that they have a duty to get their message across to as many citizens as possible. There is a certain logic to this: After all, even though most central banks are independent – albeit to varying degrees – they still have a duty to explain their actions to the people in whose name they are acting. One of the pioneers of such communications was the Bank of Canada in the 1950s whose governor, James Coyne, viewed BoC speeches and other reports as devices to explain monetary policy to the public but also as a tool to underpin the central bank’s credibility and reputation. Karl Blessing, President of the Bundesbank from 1958 to 1969, similarly argued that: “A central bank which never fights, which at times of economic tension never raises its voice ... will be viewed with mistrust.”

Of course, much of this effort is wasted if those at whom the information is aimed do not understand the message being conveyed. The BoE is acutely aware of this problem and it was highlighted in a post by Jon Fullwood on the Bank Underground blog last October (here) which demonstrated that BoE texts generally have a Grade 14 reading level, which is equivalent to that required by a second year university student. In any case, even if the message is understood, it may not be accepted – particularly at a time when trust in institutions is low. This raises an important question of whether trust and understanding are inextricably linked. It is likely, as Haldane points out, that  “change in the nature of public language – shorter, simpler, shriller – puts an even greater premium on institutions making themselves understood … That means speaking in words and sentences that land rather than levitate with the public, that connect rather than divide public opinion, that illuminate rather than darken public debate.”

Some might say that this is akin to dumbing down the message. But there is nothing wrong with a little dumbing down if it gets the message across – after all, those with more interest in the subject matter can always engage at a higher level if they have the desire to do so. In any case, the actions of managing the economy do not have to change at all – merely the way in which they are communicated. Central bank communication can, of course, be taken to extremes as Richmond Fed President Jeff Lacker found out this week following the discovery that he had communicated sensitive market information to an analyst (prompting his immediate resignation). Sometimes the phrase “too much information” takes on a new meaning.

But despite central bank efforts to ensure that they communicate as effectively as possible, sometimes I wonder whether they overdo it. Should central banks worry overly much about whether their every last utterance is understood by the ordinary citizen? A certain degree of financial literacy amongst the general public is desirable but many citizens manage just fine without much knowledge about what central banks are up to.

As for a market perspective, it sometimes feels like Say’s Law is in operation, with supply creating its own demand. In other words, the more information central banks give out, the more markets seem to want. I would not be at all surprised if at some point in the near future there are calls for live broadcasts of central bank discussions, or at the least a live Twitter feed. That said markets are much more trusting of central banks today. Gone are the days when markets used to interpret central bank actions as being motivated by any informational advantage which they enjoyed. This is partly the result of greater central bank openness – after all, the Fed has gone out of its way to avoid a repeat of the actions which prompted the bond crash of 1994. But it is also to do with the communications revolution which means that markets and central banks operate with similar information sets.

Ironically, economists were originally employed in financial markets to interpret the actions of opaque central banks. I well remember a TV interview around 1990 in which Gavyn Davies was asked what the 1990s would hold for the City. His answer was something to the effect that he did not know but he ventured that by the end of the decade there would be fewer economists employed than there were at that time. He was wrong about that: But with central banks providing much more information and comment than they used to, it is possible that he will only be wrong about the timing.

Watching them watching us

It is always interesting to read what outsiders think of Brexit, so I recently did a quick trawl of some of the main international newspapers to get a handle on the issue. One of the best places to start is with the excellent Irish Times, largely because it is a newspaper similar in tone to its more rational English cousins, but also because Ireland is the one EU economy likely to suffer heavily in the event of a nasty turn of Brexit events. 

This piece by Chris Johns argues that the attitude of the British government is reminiscent of the Charge of the Light Brigade. In his words, “Theresa May has just ordered ‘charge’ and an incredulous Europe stands, like the Russian gunners at Balaclava, ready to shoot as soon as the British come into view. It’s as one-sided a negotiation as they come.” He also notes that “the UK is facing into the most challenging set of decisions since the second World War and is being led by May, Johnson, Davis and Fox, all of whom appear to have been completely captured by the Daily Mail … it is rare to see such a lethal combination of incompetents and ideologues. Even Margaret Thatcher had a deeply pragmatic side and was able to populate her administration with people who knew how to get things done.” Clearly, it is not just me.

The Irish Times’ Berlin correspondent Derek Scally wrote in a recent article that  “for seven decades, most Germans idealised Britain much as many Brexiteers idealise Britain’s past and its post-EU future: a thriving, open-yet-closed land of cricket, cream teas and fair play. But Brexit has toppled Britain from its lofty, post-war pedestal in Germany.” I can attest to the fact that the German view of Britain is very different to that which many Brits have of their country. The Germans have failed to understand how the UK domestic political landscape has changed and how the right-wing capture of the centre ground has made the political debate a lot harsher. Those who come to live here soon notice that beyond the flashy façade of London, the public finance squeeze makes the UK look pretty shabby in contrast to most German towns. Those who have been here for any length of time understand, just as the natives do, that there is an increased degree of mean-spiritedness about Britain which is far from the idealised version of the story books.

What about the view from Germany? The conservative Frankfurter Allgemeine Zeitung argued in an editorial last week that Germany was likely to be a big loser from Brexit since it will reduce Germany’s blocking majority against the creeping trend towards turning the EU into a transfer union. An online reader survey in the same newspaper, which polled more than 20,000 readers, showed that 64% are opposed to the idea of the UK leaving the EU, versus 30% who believe it to be a good thing with 6% undecided.

Die Welt was rather less sanguine, with one story about Theresa May carrying the headline “The Iron Lady of Little Britain.” The range of views amongst reader comments was also interesting and echoed many of the opinions one often hears outside the rabid UK tabloids. This one from Ulrich H. particularly caught my eye, “For many jobs there are no British candidates, not because they are badly paid, but because the British are too poorly trained. Note also that the UK voluntarily opened its doors to the likes of the Poles, when Germany and Austria did not do so due to transitional arrangements. The fact that the number of foreigners is now regarded as a problem and a cause for Brexit has more to do with xenophobia - which does not really fit with a country which is open to the world.”

The French newspapers, perhaps surprisingly, also took a conciliatory approach. Le Monde reported in an editorial that “Now begins the enormous task of undoing all the ties that have united Great Britain to the life of the Twenty-Seven. And the ties that bind them to the life of the British. We must forge a new relationship that minimizes the damage for both. This will be all the harder since Theresa May, the British Prime Minister, has set goals that ultimately will hurt her country's economy and, most likely, inflict collateral damage on its ex-partners.”

The article also highlighted the extent to which people have crossed borders and made their lives in other countries, Brits in the rest of the EU and continentals in the UK. It thus concluded “now that Article 50 has been activated, this issue has to be dealt with separately, not as a "parameter" in the talks, which will be tough. We suggest starting the talks on a positive gesture: let's first deal with the question of our nationals trapped by Brexit. The four European dailies signing this editorial call for an agreement between London and the 27 to guarantee the rights of these five million people.”

Whilst this trawl was, of necessity, a fairly quick exercise I believe it shows there is sufficient goodwill amongst other EU nations to ensure that a reasonable settlement can be achieved as long as both sides approach the talks in the right spirit. But perhaps what it shows most of all is that the sheer nastiness of the domestic debate, in which the press has played a key role, is in stark contrast to the more reasoned view elsewhere in Europe. The British pride themselves on their good manners. Perhaps some of our commentators and politicians should look across the channel for lessons on how to conduct themselves with dignity.

Cool it (for now)

After years of resistance, I recently signed up for Twitter. After all, if the leader of the free world uses it to conduct policy, it’s where anyone with an interest in current affairs needs to be. And what a revelation! I was previously aware of the phenomenon of homophilous sorting (the tendency of people with similar interests to group together) but it is quite incredible how Twitter enables social divisions to occur. The people I tend to follow are very much anti-Brexit and given the torrent of commentary which they tweeted and retweeted in the wake of the Article 50 letter, it is hard to see how the electorate ever voted for Brexit in the first place. But in the interests of balance, I had to check out what the other side was saying – and yes, it was as bad as I feared.

This highlights that both sides in the Brexit debate talked past each other in the run-up to the referendum and clearly are still doing so today. Theresa May’s hope that the country will emerge more united after the EU negotiations, appears forlorn. Regular readers will know that I am totally opposed to the notion of Brexit but I can see why those in favour express irritation with people who argue that “Article 50 can still be stopped” or “we need another referendum to verify the terms of the deal.” Not that I necessarily disagree with the sentiments, but this is not the right time to make such arguments because it does come across as “Bremoaning” (such an ugly word) and merely hardens the position of those who are going all out for Brexit.

Indeed, it may be time to let the EU27 take up the cudgels on behalf of the Remainers. Already, German Chancellor Angela Merkel has suggested that the issue closest to the UK’s heart – securing a trade deal with the EU – will have to wait until exit terms are agreed whereas the UK’s position is that the two should run in parallel. For all the domestic bravado since June, we have known all along that the terms of engagement would change once the Article 50 letter was delivered. The pressure is now on those who argued that Brexit would result in a bright new future, to deliver on their promises (Boris Johnson, David Davis, and Liam Fox to name but three). Now we will see what they are made of, and if they are perceived to be failing to deliver, that is the time to really turn up the pressure because that is when some of the cracks in support for Brexit may begin to show.

Whatever happens after the EU negotiations have been concluded, and whether it is a “good” deal or not, it will be mighty hard to convince me that we will be as well placed as we were in the EU. Indeed, as Simon Wren-Lewis wrote in his latest blog post, “those who voted Leave didn’t win. If they wanted immigration to quickly fall, it won’t ... If they think their wages will rise because of Brexit they will see - are seeing - the opposite. £350 million to the NHS will become £50 odd billion to the EU ... In other words the big news is that Leave voters were conned.” Unfortunately, it will take many years for the full effects of the damage to become evident. If the economy grows 0.3% per year slower than it would have done otherwise, it will take 15 years to produce a 5% reduction in relative living standards. The real tragedy, of course, is that it is the children (and more likely grandchildren) of today’s Brexit supporters who will have to live with the folly of the vote (“tell me again grandad, how did you vote in the referendum?”).

In the longer term, of course, the sun will continue to rise and the world to turn and we will all have to deal with many personal heartbreaks which put Brexit into perspective. But Brexit will change Britain – and indeed will likely change the EU, and nowhere will the loss be more keenly felt than in Ireland and Germany.

Nonetheless, I do wonder how the political map of Britain will evolve on a 5-10 year horizon. If the UK does indeed suffer economically from Brexit, the right-wing of the Conservative Party will undoubtedly blame the current leadership for failing to deliver the right deal. This will probably push the Tories further to the right which could produce one of two outcomes. Either the Conservatives maintain their dominance with a leader who is even more in thrall to the Eurosceptics than anyone we have seen so far, and condemns the Labour Party to the irrelevance which is often predicted. Or – and history suggests this is more likely – the pendulum will swing, leaving space for the Labour Party to move towards the centre ground and capture the popular vote. However, they won’t do this as long as Jeremy Corbyn remains leader and it relies on regaining some ground in Scotland (I assume that Scotland will not be independent within five years though further ahead, I wouldn’t like to guess). An alternative prospect is that an element of the Conservative Party splits off to form a new political group, just as the Labour Party split in 1981 with key figures going off to form the centrist Social Democratic Party.

Whilst all this is necessarily speculative, it is a recognition that something is going to have to give in the political landscape. Too many people have too much political capital invested in Brexit (either for or against), for events not to go their way. And then there is the electorate in whose name all these shenanigans have taken place. My guess is voters care less about ideology than income and if Brexit fails to deliver the goods, it will not be the “experts” who have to answer questions – it will be the politicians.

Now what?

Today’s delivery of the letter triggering Article 50 has set the UK on a road to a far less certain future. I have been through the economic arguments countless times as to why Brexit is a thoroughly bad idea – indeed I have been making them since January 2013 – but that is an argument which has been lost and there is no point in raking over old coals. Theresa May’s speech to parliament tried to sound convincing but I suspect it fell flat on the near half of voters who do not share this government’s vision.

All the challenges it faces were contained in one sentence from the prime minister: “I want this United Kingdom to emerge from this period of change stronger, fairer, more united and more outward-looking than ever before.” It’s hard to see how we will emerge stronger given that most of the evidence suggests that there will be significant economic costs. Unless, of course, any trade deal with the EU offers most of what we have already, in which case what is the point? More outward-looking? We have just announced a withdrawal from the largest, and arguably most successful, single market in the world. I am not sure how that is consistent with the outward-looking vision she espouses. As for being united, that is a bitter irony. Almost half those who voted do not want this policy at all, and the Scots want to secede altogether. The UK will have to negotiate a hell of a deal with the EU to persuade the disaffected minority that Brexit is a risk worth taking.

The biggest problem that the government will face in the long-run is how to take back control in an increasingly globalised world. One of the great ironies of the post-Brexit world is that sterling is around 10% weaker than it was pre-referendum. Aside from the fact that this impacts upon the living standards of ordinary citizens by raising the costs of imported goods, it also makes British companies more attractive takeover targets by reducing their price in foreign currency terms. An article in The Economist noted three weeks ago that although the UK accounts for 3% of world GDP and its companies account for just 5% of global market cap, UK corporates have accounted for a quarter of all cross-border M&A activity since 1997.

This is a result of the laissez-faire approach of successive British governments towards market intervention. Moreover, over the last 10 years, foreign companies have bought significantly more UK companies than the other way around. The most high profile of these cases was the purchase of Cadbury’s plc by Kraft Inc in 2010. Just a week after promising to keep one of Cadbury's local plants open, Kraft backtracked and said it would close it. Although this resulted in a major revamp of the takeover code in 2011, it came too late for Cadbury’s workers and prompted howls of popular outrage. But here’s the rub: The UK is running out of attractive takeover targets. Admittedly, it still has attractive companies such as AstraZeneca, which beat off a bid from Pfizer in 2014, or the London Stock Exchange, whose proposed merger with Deutsche Börse was today blocked by the EU competition commissioner (of all people).

All this is a prelude to the question of what will attract global capital to the UK in future? It has fewer takeover targets and it is about to leave the EU, which will make it less attractive to firms which want a European base when they can go elsewhere. The attractiveness of London as a business location will not diminish easily: It is still a world-class city with all the amenities that the global community requires. The attractiveness of the legal system and use of the global lingua franca are added bonuses.  But depending on the nature of the deal with the EU, the London financial services industry may be in for a torrid time which will impact on the ancillary services that depend on it. Only time will tell how the likes of the Japanese and Americans will react to the prospect of having their European headquarters located outside the EU. Tax competition would certainly be one option to enhance the attractiveness of the UK but that is a race to the bottom which could put even bigger holes in the public finances.

The Economist notes that “even the free-market wing of the ruling Conservative Party … backs a change [to the takeover code] ... Britain’s 30-year experiment with a free market for takeovers is quietly coming to an end.” But the real irony is that if Brexit is at least in part a backlash against globalisation, this policy change could have been implemented years ago and saved us a lot of grief. And to double the irony, making it more difficult for foreign investors to buy UK companies is now precisely the wrong policy response when (a) most of the assets have already been sold and (b) the UK needs the capital inflows. You almost couldn’t make it up. Unfortunately that is the result of 30 years of short-sighted policy.