Trade, No Deal Brexit and Coronavirus

Brexit’s been off the agenda for some time now given the spread of coronavirus, but its impact on trade may still yet be felt. Particularly if we start to live in a world where global pandemics become more common.

The discussion surrounding trade and coronavirus appears to be in terms of us producing the necessary medical equipment (ventilators), and also being able to buy them – import them.

It seems crazy to think that should ventilators be available for export by another country and hence import to the UK, that trade wouldn’t take place – and it’s silly to think that import duties would be placed on such imports.

Nonetheless, it’s all couched in an “us vs them” narrative – they need us more than we need them (to sell to us, or to buy from us, depending on which angle suits). But trade isn’t about us vs them, it’s about what we can all do together. By doing what we do best and sharing, more is produced and we are all better off. By producing what the UK is best at, and trading for other goods, GDP is growth is higher and we’re all better off.

So the bigger point, really, is about trade more fundamentally. We talk about turning car manufacturing plants, brewery and distilleries into production plants for ventilators and hand sanitiser. But the principle of trade is that it does this for us – we produce the things we’re best at, and we trade them for the things we’re relatively less good at.

Sure, we can turn those plants into ventilator plants, but they’ll be less efficient at that than they would be at producing cars, or vacuum cleaners.

Trade suggests let’s let the medical manufacturers around the world produce the medical equipment, and let’s trade with them, selling them our Rolls Royce’s, our Jaguar’s, our Brewdog and our Dyson vacuum cleaners.

That’s the longer term principle with coronavirus. Clearly right now very little trade and spending at all is taking place, due to the nature of the global lockdown. But the way to be better prepared for the next pandemic isn’t to make sure we all produce the same things – the UK produces, France produces, Japan produces, the US produces, China produces. It’s for us to all produce what we’re best at, and trade with the country best at making ventilators.

That way we’re all rich enough to be able to afford to buy in those ventilators in sufficient capacity.

EUref: What are the facts?

Both official(ish) sides of the EU referendum campaign are under fire for supposedly misleading voters by presenting opinions as facts. Vote Leave produced an official-looking “facts” leaflet that hid their campaign name into small font on the back page, while the government has spent £9m producing a leaflet setting out its position.

The common thing whenever “facts” are referred to is that one side considers them facts, and the other propaganda. Propaganda is defined as “information, especially of a biased or misleading nature, used to promote a political cause or point of view” – it’s information used to influence others, and naturally both sides assert the other side is misleading people into voting against their cause.

Is there then any real hope for clarity in this debate? I think there is, if we try and boil down to particular dimensions of the question. We won’t necessarily get numbers, but we’ll get directions of effects, certainly if we’re thinking in the economic sphere.

For example (and in a private correspondence with Leave.EU they have conceded this point), at the moment firms can employ people (relatively) freely from all over the EU, rather than just from within the UK. Try to employ someone from outside the EU and that likely involves a costly interview process to determine suitability of match, and then another costly process of getting a visa, a process to be repeated every time the visa expires.

It stands to reason then that given firms can employ people from a much larger pool of potential workers, they will be able to find a better match as an employee than if restricted to just UK workers (and of course, if they could employ anyone from anywhere in the world, then they’d likely find a better match still, but that option isn’t on the cards at the moment, if ever). Hence British firms, and indeed firms elsewhere in the EU that have hired workers from another EU country, have done so on the basis that that non-native is the best possible person for the job – and equally, that person has figured that company is the best company for them to be working for.

If we then apply non-EU rules to EU workers, this has to have some impact. It means it becomes more costly to appoint the best person for the job if that person is from another EU country, reducing the likelihood that that person is appointed. That then reduces output from that firm as the firm must be less efficient as a result. Even if they still hire that EU worker, the HR costs of appointing that person, renewing their visa and associated bureaucratic costs and uncertainty, that is still time and effort that could have gone to productive purposes within the firm.

Since there are over 2m such EU workers in the UK, and a similar number of UK workers elsewhere in the EU, that is a lot of people immediately affected by such changes. That likely is a much greater number when families are taken into account. They may well stay, and indeed many of the EU workers here in the UK that I know well are taking steps to ensure they can stay (applying for British citizenship, at significant costs to themselves and indirectly to their workplaces). The point though is that these are actions that otherwise would not have been taken.

In addition, what is the effect on hiring decisions in the coming years, in the event of Brexit? Will EU workers better suited to UK jobs than any British worker be suitably discouraged from applying? Will EU workers in the UK be discouraged from changing jobs to a better suited role by the increased bureaucracy involved in any such step?

All in all, these are not numbers, which we commonly associate with “facts”, but they are directions. The impacts described here cannot be positive on productivity in the UK, nor on stress levels, nor on levels of red tape and bureaucracy. Hence the only real question is whether they are a price worth paying for some greater benefit from leaving?

WhatsApp and Encryption

Encryption is in the news; last night you may have noticed WhatsApp inform you that your messages are now “end-to-end encrypted”, and it’s hard not to link this to other events such as repeated attempts by the FBI to get Apple to let them inside its products.

The issue is one of privacy – should your messages to others on your phone be subject to warrants by governments and law enforcement agencies to access them? By adding this level of encryption, WhatsApp cannot see the messages we send, and hence cannot comply with any such warrant. No “wire tap” can be put on your WhatsApp messages, and nobody can “overhear” them, or “eavesdrop” on them any more.

For many people, that’s a great thing – nobody wants others muscling in on private correspondence. Equally, of course, it comes at the same time as another vast tranche of private correspondences regarding tax avoidance and offshore tax havens, were made publicly available in the Panama Papers. Which illustrates the tension: having privacy is great provided we are all nice and law abiding citizens doing nothing wrong. The moment we start doing things that are wrong, then our private correspondences are where we will discuss that wrongdoing.

And of course, on a much more sinister level, it is alleged that terrorists use apps like WhatsApp to communicate in order to avoid the attentions of law enforcement, and hence the desire of the FBI to get hold of the iPhone of a US terrorist. Hence should we afford terrorists more protection by allowing WhatsApp to encrypt like this, or should we, as the UK government has spoken of doing (although not in light of the Panama papers, it might be noted), in the interests of national security?

What could economics shed on to this? One insight economics often affords is that there is an optimal level of everything. We might assert the optimal level of illegal activity is zero, but when there is a private benefit to engaging in illegal activity, and a cost to law enforcement, then there must be a trade off such that the optimal level is not zero. It would take a practically infinite amount of resources to stamp out every kind of illegal activity and as such is impractical. Hence we cannot expect to stamp out terrorism completely, and we must accept that it will always exist. If end-to-end encrypted messaging services exist, they will be used by those engaging in illegal activity. But by and large there will be other ways in which to catch such people in the act of carrying out illegal activities such that impinging on the civil liberties of the masses need not be a necessary cost of making the job of law enforcement much easier.

Equally, a little reasoning from statistical or econometric thinking might help here, too. With any decision in econometrics, there is the risk of a Type I or Type II Error. These are false positives, and false negatives, respectively: incorrectly rejecting something that is true, and incorrectly not rejecting something that is false. With easier ability to eavesdrop on people, will law enforcement agencies use this to pursue the wrong people, people who are simply going about their day-to-day activities without engaging in any kind of terrorist activities? Of course greater surveillance means that catching terrorists will be easier, but will it mean that innocent people are caught up in the machinery set up to catch terrorists?

Avoiding Tax and Panama

The big story at the moment surrounds Panama, which many folk may know best from Prison Break rather than its financial sector. A truly massive leak of confidential files from a law firm (terabytes, not just gigabytes…) is causing embarrassment and more for many leading global figures. UK Prime Minister David Cameron is fending off questions about his family’s involvement with the law firm via his father, while the Icelandic Prime Minister was more deeply embroiled and has already bitten the bullet. Links to Vladimir Putin do not appear to have caused quite so much shock and consternation

What exactly is going on, and why does it matter from a macroeconomic perspective? It must matter, since it pertains to billions of dollars. Economies have billions of dollars (or pounds, or euros) moving around within them, and hence that billions ended up in Panama rather than the places that the people mentioned above are located is of interest.

Towards the end of term we covered the Balance of Payments, which is the financial account of a country – what financial flows go in and out of a country. Clearly, it seems, considerable flows went out of the UK, Iceland, and Russia to Panama, and for what? Money is moved from one place to another usually for some purpose – for example an investment, or to pay for imported goods. The claim, however, is that much of these financial flows were “offshore” – moving of money primarily for the purpose of avoiding paying taxes.

In the case of Ian Cameron, the PM’s dad, their company Blairmore Holdings was based in Panama, it would seem, to avoid paying as much tax as would be paid in the UK. However, as the leaks appear to make clear, major decisions about the firm were still made in the UK (based on documented meetings of board members revealed in the leaks) – which apparently is the test of where a company is “located”. What this makes clear is the difficulty of regulation – definitions have to be made for things that are easy to think about, but harder to pin down the detail of – what is the definition of where a company is located? And once a definition is made in a country’s law, it will provoke those in that country to consider ways in which that law can be avoided. As a result, it’s likely that those involved will claim nothing illegal was done, regardless of the wider moral implications about doing right and wrong.

Economic activity, you’ll learn more as you study further in microeconomic topics, tends to need some level of regulation. However, that regulation need not be a panacea, and need not lead to unintended consequences. The rise of offshore tax havens came primarily in response to higher tax rates in major Western economies, particularly in the 1970s, and of course regulation is something that many in favour of the UK leaving the EU cite as a reason to leave. A very thoughtful friend of mine has noted the link between these two – the UK remains a place for lots of finance taking place onshore, and is so at least in part because of its position within the single market (single market = more customers = more revenues). If that attraction was lost, the UK may need to consider other ways to retain its position, which may include more favourable tax and regulatory arrangements for finance – yet financial markets are precisely the markets where the clamour for “more regulation” has been greatest since the financial crisis.

As with anything in macroeconomics, it’s complicated, but it’s well worth studying!

Run run run… leisure?

Yesterday morning I took part in the Reading Half Marathon. Safely ensconced back home, you may be blissfully unaware of this event, which wormed its way through the university campus. We entered via the Pepper Lane entrance, took a right through the various science buildings, then back up between Park House and Chemistry past Maths and taking a left just behind the Library up the hill, then a right and out via The Queen’s Drive. If you run, you should certainly consider the Reading Half Marathon before you leave the university.


Picture found online of runners running very close to the economics department during the half marathon

But what is a Half Marathon? It’s a LOT of people (estimates at around 16,000) running a relatively LONG way (13.1 miles, or 21.2 kilometers). It’s thus a huge logistical exercise, with many road closures all around the town, a huge number of volunteers to set up the facilities at the start and finish (lots of portaloos, and also dotted around the course). It’s also a great opportunity for sponsorship, with Garmin’s name dotted all over various parts of the course, and Lucozade handing out hundreds of thousands of bottles at numerous drinks stops around the course. Buses diverted from their usual Sunday morning activities to shuttle thousands of runners from the railway station and other focal points to the race start/finish, and so on. Photographers dotted around the route trying to get the best photos in order to convince runners to buy pictures of themselves, organisers handing out free T-shirts to “Finishers” replete with sponsoring company names, and the organisers trying to sell additional “technical” shirts sufficiently attractively that people part with their cash for them (I didn’t).

It’s thus a huge event, and occurs once a year during the Easter vacation. Other colleagues have run the race in the past, as have students. Did you? Is it macroeconomic? It’s hard to argue given the vast number of different markets referred to in the last paragraph that it’s microeconomic – there are huge co-ordination issues between these various different markets that come together each year for the event. But even though it’s macroeconomic, can we really learn anything that might help us to think about the things we learnt on Intro Macro last term?

Basket Case

Enticing picture of coffee from the BBC’s story

In recent weeks we’ve covered inflation, and back at the start of the term discussed the importance of prices in determining all sorts of important economic variables, from national output (GDP) to most recently, the exchange rate.

Inflation is the rise in the general price level over some period of time. What is the general price level? This is determined via a “basket of goods”, supposedly what the average person buys and hence representative of prices the average person faces.

What is the “basket of goods”? The Office for National Statistics regularly updates the basket, which is reassuring, and the most recent updates were announced today: coffee pods are in, but nightclub fees are out. As a nation we are more in a hurry, making our real coffee via Nespresso machines and the like rather than the longer and more drawn out approach using a real coffee machine/pot, while we’re going to nightclubs less, apparently. What do you think?

Uber and Reading

Apparently the taxi company Uber has been denied a licence to operate in Reading. Uber is a mobile-phone based taxi company: potential users are matched to a taxi via an app on their phone. As a result, it operates differently to conventional taxi firms. Conventional taxi drivers have been opposed to Uber’s presence in London, supposedly on the grounds of consumer safety, and there are controversies about how much tax the company pays (although it should be said, not to anything like the same level as much larger, more developed multinational companies), and the contractual arrangement it has with drivers.

Alternatively, Uber provides a model that enables greater supply of taxi drivers, and even a surge price algorithm in peak times that encourages an increase in supply of taxis. It breaks into an industry that is heavily regulated and seemingly well protected (resulting in, in places, very high fares).

What’s probably most interesting is that some the objections Reading Borough Council put up reflect a lack of understanding about mobile phones and apps. The council suggests that evidence of 20,000 people in the Reading area having the Uber app on their phones does not constitute sufficient evidence of demand for the service, with one councillor saying Uber might be “trawled by phone app junkies who if they don’t have their phone in their hand they think they have had an amputation”.

In addition, given that Uber operates via the mobile phone app, it doesn’t need a traditional taxi rank like existing taxi companies, something else the Borough Council appear to have failed to grasp.

This highlights a problem with regulation when market innovations arrive – regulators are often the least well equipped to make judgements, and will often stifle innovation. Undoubtedly some concerns are legitimate about Uber, and the weaknesses in its business model will be refined in time. But it presents the kind of innovation to the taxi industry, for example, that Skype presented to telecommunications providers. The usual reaction of existing providers is to try and restrict the competition, and arguably that is what has happened here.

The Losers from Free Trade (and Donald Trump)

Thomas Frank writes in the Guardian that when Donald Trump “isn’t spewing insults, the Republican frontrunner is hammering home a powerful message about free trade and its victims”.

It’s a challenging point about a central aspect of what Frank calls “Econ 101”, but we understand as EC114, Introductory Macroeconomics: comparative advantage. The idea that all countries specialise in the things they are comparatively better at (rather than absolutely better at), and as a result we all do better. So Mexico produces air conditioning units, while America produces the designs for awesome Apple computers (made in China).

However, what does that mean for those who used to produce air conditioning units in America? Or those here in the UK who used to build ships?

As we pointed out in the lecture, free trade doesn’t mean all benefit. However, free trade does envisage that those displaced from industries that a country is not specialising in are able to move into those industries that a country is specialising in. So why hasn’t that happened in so many parts of the UK, and the US? Undoubtedly the article written by Frank could be applied here in the UK to the rhetoric of Nigel Farage and Ukip.

It’s tempting to say that we’ll find an answer at some point in the rest of the course, yet the reality is that depressed parts of the UK have been depressed for decades now, and things never seem to change – which suggests that the problem hasn’t really been solved as yet… or has it?

Frank concludes with a tirade against free trade but more: “Ill-considered trade deals and generous bank bailouts and guaranteed profits for insurance companies but no recovery for average people, ever – these policies have taken their toll.” To what extent have bank bailouts left us with a banking system unwilling to extend credit to firms willing to move into depressed areas of the country and create jobs?

Even if that’s true, however, most depressed areas of the UK have been depressed for longer than just the time since the Financial Crisis…

The Bank and Brexit

On a regular basis representatives of the Bank of England meets with the Treasury Select Committee, a body of MPs that examines the expenditure, administration and policy of HM Treasury, HM Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Conduct Authority”. Today there has been a hearing at the Treasury Committee on “The economic and financial costs and benefits of UK’s EU membership”, in which governor Mark Carney gave evidence.

At the meeting, Carney was accused of being “pro-EU”, apparently because he wrote in a pre-hearing letter to the committee: “EU membership reinforces the dynamism of the UK economy”. As definitions and details are all important, particularly in the Brexit debate, thankfully the report then states: “A more dynamic economy is more resilient to shocks, can grow more rapidly without generating inflationary pressure or creating risks to financial stability and can also be associated with more effective competition. ”

It’s hard to imagine how an evaluation of the costs and benefits of the UK’s EU membership could avoid being pro-EU whilst making statements about the benefits of EU membership, and highlights the difficulty of providing any kind of appraisal in these politically-charged days. Nonetheless, it is important to do so, and also important to go to the source and read/listen to what’s happened. The link above is to the pre-hearing report put together by the Bank, and is well worth reading on the costs and benefits of EU membership.

A non-extreme view of Brexit

To those vociferously advocating we leave the EU, those of us who argue against them and suggest we’re better off staying are lefties. The central policies of the leave campaign are to erect barriers to economic activity – block free movement of labour, and without non-trivial trade negotiations, an increase in tariffs. These are protectionist, they are market interventionist, and might, thus, be thought of as lefty. Of course, it is a much better strategy to argue on the basis of whether a policy is good or bad in terms of delivering better outcomes (measured somehow) for some number of people (measured and determined somehow), rather than dismissing them for being lefty or right-leaning.

Someone who is unabashedly lefty is Chris Dillow who writes at the blog Stumbling and Mumbling. If you ever need something to do whilst you procrastinate so you can still feel productive, this is a blog you should bookmark. As his title states, he is “(Mildly) against Brexit”.

He is unconvinced about the EU in many areas, such as its ability to carry out macroeconomic policy, and implicitly to make trade deals (I think). However, the kinds of better economic world he is looking for is unlikely to be delivered by Brexit because those associated with it, as mentioned at the start, favour restricting free movement of factors of production, and of goods.

Related, John Kay at the FT has written in detail about the UK’s trading arrangements and Brexit. He does so in a way that he does not reveal his preference regarding Brexit, but points out that the UK is heavily engaged in trade in services – half of our trade relative to 20% of world trade. This means two things: (1) the common market is more important to us since its main thrust for a long time as been non-tariff barriers in areas like the service trade, than it is for our trade partners in Europe who export goods to us. (2) nonetheless, there are crucial differences in UK trade makeup not shared by other EU members that may make EU trade deals less suitable to the UK than the rest of the EU.

Today in Economics Conversations (1pm, HumSS 125), we’ll be debating Brexit and Trade – see you there!