The economic costs of Nigel Farage

What is it with the current generation of political (so called) leaders? Following last week's abrogation by Boris Johnson of his responsibilities, UKIP leader Nigel Farage has today followed him into the political wilderness. The mass resignation of Brexiters smacks of a political movement that having achieved its aim of winning the referendum, has no idea of what it wants to do next. It is rather like watching a bunch of children who, having screamed at the top of their lungs to get what they want, suddenly decide they are no longer interested. Whilst I have no truck with the policies of Farage, surely he owes it to the Brexit camp to figure out how his plans should be implemented?

It seems not. For an alarmingly large number of Brexiters, the referendum itself was the prize. Like the bunch of screaming kids, they now have to leave it to the adults to clear up the mess they created. 

One of those who must wade into the mess is BoE governor Mark Carney who tomorrow will present the biannual Financial Stability Report. This will be the first official report on the health of UK banks since the referendum. Although we can expect the Bank to say that the measures it has put in place have held up well so far, there are significant downside risks. Today's news that Standard Life has suspended trading in its property fund is perhaps the first indication that investors are beginning to get cold feet regarding their UK investment strategy.

The UK economy is going to need all the help it can get in the weeks ahead. If the BoE does not cut rates next week, it will almost certainly do so in August. Just when you thought they could not fall below their already record lows, the referendum result has wrong-footed us all. And the bad news is that this puts further downward pressure on the investments which form the backbone of our pension income. One of these days Nigel, Boris et al might like to explain to those whose pension income they have effectively robbed, exactly what the economic benefits of Brexit are. I am struggling to figure it out.

Malcolm Tucker had it right

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

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

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

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

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

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

Aftermyth

There is no real sense that the Brexit dust is beginning to settle. As I warned all along, there never was a Plan B and that if Johnson, Farage et al were to carry the day, they would have to think clearly about what they wanted to do with their new found power. And they haven’t. We have been treated to the spectacle of Johnson backsliding on some of their initial promises and Farage grandstanding from the Brussels bully pulpit.  Meanwhile, the EU leaders try to close ranks and carry on as before and this is where things might get dangerous. The Leavers might have been able to carry off their shtick at home, but it will be whole different set of negotiations to get the EU to cut any sort of deal without triggering Article 50 and I rather think the Brexiters are out of their depth.

Short of actually remaining within the EU there is no alternative deal which offers anything like the same advantages as the one we have now. The so-called Norwegian solution offers most of the costs and all of the benefits bar one – the ability to set the rules of the game, which is by far the most important of the lot. The Swiss option, which involves making a series of bilateral agreements with the EU on a range of subjects, is cheaper (around 40% of current UK levels on a per capita basis) but less efficient, because each subject area has to be dealt with separately, and in any case excludes financial services. Perhaps the UK could do a deal in this area but the costs would likely rise correspondingly. In any case, both of these options would require the UK to keep the borders open to an extent which many voters thought they were voting against. Whilst many people argue that the Norwegian option is economically the best, it would be the height of stupidity to take that deal. Why would any government accept not being to influence the rules and still pay costs which are 90% of current levels? It just defies logic. 

As for what the Leavers are trying to sell at home, they are apparently convinced that they can trade with the EU as before and control borders. But it is not in the gift of any British government to make that promise. The single market belongs to those who remain in the EU and they will determine who trades in it and on what terms.

So what happens now? The EU seems convinced that Britain should do what it promised and trigger Article 50 of the Treaty of the European Union. In other words, start a process of negotiation with the EU on the terms of the post-membership trading arrangements. Naturally, the British don’t like this prospect because they don’t know what the outcome will be and are holding fire. Legally the British have to make the first move. And let’s not forget that since the referendum was not binding on the UK government in the first place, it is rather difficult to envisage the EU being able to railroad the UK into triggering what is an unstoppable process. One you pull the trigger, this baby is well and truly armed.

So what to do? From my perspective the best option would be to not start the exit countdown clock. It may be a live hand grenade but the pin is still in, so put it in the cupboard and forget about it. That, however, is not what the electorate think they voted for. But they will soon realise that the longer the government leaves it, the more they have been taken for a ride. There has been speculation that a new election should be called, which would act as a proxy second referendum. We’ll skip the details but suffice to say it opens up a whole new can of worms, notably a surge in support for fringe parties such as UKIP when the electorate realises that the established parties don’t really want to leave the EU after all. 

Undoubtedly, the other EU countries want to make Britain squirm. It is after all, only natural that after a bitter row during which one threatens to storm out that the other one says “off you go then.” As an exercise in bluff calling, it never fails. But if the Brits don’t really want to go, then you can be pretty sure that the rest of the EU does not want the UK to go either. 

So how about this for a plan: Sack Jean-Claude Juncker and reset relationships. After all, he is a hard liner whose views do not seem to chime with those of Angela Merkel. He is apparently not well liked in parts of central and eastern Europe and he and Cameron famously do not see eye to eye. Thus, for the greater good of the EU, the big nations conspire to get rid of him (don’t forget that the whole Commission was forced to resign in 1999). They find a more emollient candidate who offers Britain most of what it wants; the Brits sell the deal at home that it was Juncker’s fault all along and Article 50 is quietly shelved. Everyone saves a bit of face, the EU is preserved and we move on.

As Peter Cook put it in the famous Beyond the Fringe sketch, The Aftermyth of War:

“I want you to lay down your life, Perkins. We need a futile gesture at this stage. It will raise the whole tone of the war. Get up in a crate, Perkins, pop over to Bremen, take a shufti, don't come back. Goodbye, Perkins. God, I wish I was going too.” 

Jonathan Miller: “Goodbye, sir — or is it — au revoir?” 

Cook: “No Perkins.” 

Sometimes sacrifices are necessary for the greater good, and this may be one of those times.

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?

EU debate: Depressingly familiar

The EU referendum campaign rolls inexorably on but we are none the wiser after the big TV debate last night which was very much a classic case of much heat but little light. Indeed, this summed up the whole campaign. Claim and counter claim, met with spin and counter spin. As an economist, I am totally unpersuaded of the case made by the Leavers. They appear to be adopting a naive belief that in the event we leave, our erstwhile EU partners will be only too willing to do a deal with us. It would be foolish in the extreme to assume this, since one of the motivating factors in their dealings with the UK will be to persuade other countries not to go down the same route and will be in no mood to offer any concessions. 

When it comes to immigration, the Leavers have been somewhat disingenuous. It is true that the number of net immigrants into the UK hit record levels last year but less than half of them were from the EU. If we have an immigration problem it is that the UK, in common with other EU countries, has failed to control its borders with countries outside the region. The bigger irony is that a large proportion of non-EU immigrants come to the UK to study. To the extent that these students pay much higher tuition fees than EU students, they contribute significantly to the finances of the higher education sector at a time when the government has been cutting its own university funding. As an aside, I am struck by the irony that one of the key protagonists in the Leave campaign is Gisela Stuart MP who is herself German-born. I have nothing against Ms Stuart, who is a perfectly competent MP, but in effect she is seeking to deny those from a similar background the same opportunities which were granted to her. 

Ultimately the EU referendum has proven to be a debate in which both sides are talking at cross purposes. The Remainers argue that the economic costs are too high (they're right) whilst the Brexiters argue that this is about regaining sovereignty (they're wrong). We live in a globalised world in which countries such as China are awakening giants. I believe we are indeed better together with our European partners, with Britain's voice more likely to be heard if we act in concert with our neighbours. 

Last week's murder of MP Jo Cox was a symbol of the divisions in British society - divisions which have been exacerbated by the ferocity of this debate. Whatever happens tomorrow, the divisions which have been opened up will be slow to heal. The referendum is not just about Europe: It is the chance for the British electorate to vent its spleen along the same lines that Donald Trump has been elevated to become the Republicans' candidate for the US presidency. If we could hold up a mirror to our society, we might not like what we see. I, for one, certainly do not. 

RIP Jo Cox

I never knew Jo Cox nor had the privilege of meeting her, but I understood what she stood for. And  her senseless murder should give us all pause for thought. We may criticise MPs, but they are after all simply community representatives doing a job on our behalf. And when one of them is slain by a member of the community which she served, it brings home the fact that there are risks involved in taking a position with which members of that  community may not agree. Perhaps even more desperate is the fact that Jo was also a wife and mother and as she has done countless times before, she will have waved her family goodbye and set off for another day's work. And like the rest of us, she will have expected to return home to them when that day's work was done. But it was not to be. It serves as a reminder of the randomness of life, and every day when we return home to our own families, perhaps we should reflect on the fact that we have beaten those random odds for another day. For Jo Cox, it was not meant to be. And even though I do not know her family, my heart goes out to them for their lives have been destroyed by an act of random violence. Sometimes shocking events reach into our consciousness and bring us back to earth with a jolt. Today was one of those days.

Euro countdown

In less than two weeks the fate of the UK in Europe will be decided. The referendum campaign has been an unedifying spectacle, characterised by the distortion of the facts by the Brexiteers on one side and the relentless negativity of the Remainers on the other. In a sense, the latter has been dictated by the former. The idea advanced by the Leave camp that the UK will somehow find its way to economic nirvana by leaving the EU is not just a distortion of the truth, it is a torturing of the facts until they say anything you want them to. Naturally the Remainers have been forced to counter these untruths by pointing out the reality of their opponents views. And yes, it comes across as negative. And perhaps some of the arguments are a bit overdone in the opposite direction. But one thing is clear: The Remainers position has not been helped by their failure to make a positive case for the EU.

So what might that positive case be? Let's try the obvious tack that by tying economies together in the world's richest trading bloc, you make everyone better off. Those are the gains from trade that all economists are taught about early on. Another simple idea that there is strength in numbers. Britain gets a far bigger hearing on the world stage thanks to its EU membership than it ever would if it were acting alone. The US and Chinese won't be falling over themselves to offer us a trade deal in the event of Brexit. If they offer us anything at all, it will be a series of demands on their terms which will not be designed with British interests in mind. It may not be what BoJo and his cronies want to tell the British electorate but it's a damn sight closer to the truth than most of their economic ramblings.

The referendum will, of course, be won and lost on the issue of immigration. It is hard to refute the Brexit claim that so long as we are a member of the EU we can control our own borders. But it is interesting to note that over the past decade around 80% of net immigration into the UK has come from outside the EU. Even now, more than half does. You can argue about whether this is a good or a bad thing, I will leave that to you. But it suggests that leaving the EU will not serve to reduce immigration levels to the "tens of thousands" promised by David Cameron in 2010. Moreover, the largest proportion  of non-EU immigrants come here to study. To the extent that they are charged higher fees than domestic students, they help to subsidise the education of British students.

There are no easy answers to any of the questions raised by the referendum. But there is truth and there are lies. And our politicians owe it to the electorate to be more honest about the pros and cons of the EU than the antics we have seen so far, which are often more worthy of the playground than the debating chamber.