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?

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!

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.

Brexit Referendum: So it all begins!

As was fully expected, the UK In/Out referendum will happen on June 23. Which way will you vote?

If the 48 hours or so since this was announced is anything to go by, it promises to absolutely dominate all news headlines between now and then. So expect to be thoroughly bored by it all by the time June comes around.

However, please as students of the economy, don’t get bored and switch off until you’ve worked out what the right decision is on June 23. This is a huge decision for the UK economy, as hopefully what we’ve learnt in Intro Macro has taught you already.

Everything we’ve learnt about has had implications and applications in the EU debate.

We started with economic growth, and the kinds of conditions that would foster higher trend economic growth, looking at the supply side of the economy, and Total Factor Productivity. This is the most fundamental question we have to ponder: what impact does EU membership have on our trend growth rate? At the moment, most commentators are focussed on relative positions in the business cycle (UK better, EU not so good). But (1) the work of Robert Lucas was cited in our lectures to point out that trend growth is hugely more important than business cycle fluctuations, and (b) it’s been far from always this way, and indeed for much of the post-war economic history, European growth has been stronger than UK growth. Is that a reason for thinking about staying then? I’d argue probably not, I’d suggest you should think about why it might be that trend growth might increase or decrease.

We covered unemployment after that. Isn’t unemployment higher because of free movement of labour, meaning that cheap labour from Eastern Europe can come over and take all “our jobs”? This argument covers over a lot of important detail. Firstly, there isn’t some fixed supply of jobs, which we alluded to by thinking about shifts in labour demand curves. Hence it may be that by having Eastern European migrants here, more is produced in the UK economy, and hence more jobs become available.

Which jobs are being taken? By and large, it’s lower skilled (or unskilled) jobs. And the problem with these kinds of jobs is that they are equally the first to go in economic downturns, and are the easier jobs to be replaced by computers and automation. Hence unskilled labour is under threat from immigration, but equally it’s under threat from the machines.

We can carry on going through the course so far, and I’ll be trying in lecture to relate things we cover to the EU Brexit debate, since it matters hugely. At the outset I’ll make it clear: I think, having thought a lot about the issues, and looked at the arguments in favour of leaving in particular, that the UK is much better off inside the EU. That doesn’t mean some killer argument for leaving isn’t lurking around the corner, and I’ll encourage you to find that killer argument – it’s very important you, and we as a class, have considered all possible arguments, and been rigorous about them, before deciding which way to vote.

Brexit – The other side of the coin

The Brexit debate is cast always in terms of what affects us here in Britain, and often very narrowly in terms of actual monetary flows (which are relatively trivial and hence laughable as the Economist points out). But what about those elsewhere that it affects? Of course, our press scoffs at the Polish government complaining about the measures the UK proposes to cut benefits to recent arrivals in the UK, but what about the Brits abroad?

There are 800,000 Brits in Spain alone, and many more elsewhere who have enjoyed the EU’s freedom of movement of labour to work and live elsewhere, where they are most efficient (with efficiency defined liberally, but it must be the case that if you are happiest somewhere, you’ll work best there). Indeed it may even be that there are more Brits elsewhere than EU citizens in the UK. Memes abound about the Brits in Spain who never learn the local language, never engage with the local culture, and so on, all the things that immigrants in the UK are accused of, and so if the UK decides to treat our migrants with a much shorter shrift than we can in the EU, why would other countries behave any differently?

Those not in the UK but elsewhere in the EU cannot vote in the coming referendum either, if they’ve been out of the UK for 15 years (which many have). Has the Vote Leave campaign considered the impact of the return of these workers, thoroughly demotivated by being forced out of the places they chose to live? The return of many older folk from Spain, and their subsequent need for healthcare?

These are all undoubtedly short-term hits, but there’s little reason to believe that by making immigration harder, the longer term hit will be any less. Those coming to this country to work are overwhelmingly young people, fiscal contributors. The UK birth rate is not high enough that there will be enough British young adults in the coming years to support an ageing British population.

And students elsewhere may find it harder to remain elsewhere in Europe, and future generations of young people will be deprived the opportunity current young adults have to spend time studying abroad. The list goes on. Folk from other countries make personal gains from coming to live and work in the UK, just as Brits make personal gains from living and working elsewhere in the EU.

The UK-EU Deal

Today we have found out what all the renegotiation was about: the possibility that the UK might be able to put a stop temporarily to in-work benefits being paid to EU nationals working in the UK (assuming other EU countries are happy with this happening in any particular situation).

If that sounds a little underwhelming, it is probably because it is, which must be both good and bad.

Good, since there is no dramatic altering of the right of free movement of labour within the EU, as was hoped by some in the Conservative Party. As we’ve just covered in unemployment in our lectures, labour mobility is a good thing. Yes, it does lead to more uncertainty for us since there’s a larger pool of labour potentially for any job we do, but equally it gives both us, and firms, great opportunities to move into new jobs that are better suited to us, and better suited to firms. Workers aren’t restricted simply on the basis of a passport within the EU from taking their ideal job, and equally, firms aren’t stopped from recruiting the ideal worker for the post they’ve advertised because the ideal worker doesn’t have the right (European) passport.

Bad, since those hoping for big reforms in order to vote to remain may well be unhappy with this rather weak deal. Those seeking the UK’s exit claim that the UK gets little back from the EU, and simply gets told what to do. Rules and regulations we just have to accept are made in Brussels, not Westminster. This outcome, which reflects on Cameron’s inability to get what members in his party would ideally have hoped for (ability to stop inward migration unilaterally, plus other grabs back of national sovereignty). As I’ve written before on this blog, and mentioned in lecture, such issues regarding sovereignty clash with the reality of a common market – we can’t be involved in a common market without a common regulatory structure determined by some central regulatory body.

On balance, will it leave the UK any closer to the exit door? This is obviously impossible to say; even opinion polls can only give so much insight.

Will it even matter? Clara Sanderlind makes the point here that since most EU migrants working in the UK don’t claim in-work (or out of work) benefits, the deal will make no difference whatsoever to actual flows of migrants.

This week in lectures we’re covering trade and globalisation, topics which have so many obvious applications into the current UK relationship with the EU. See you later in the week!

Remaining in the EU “disastrous”

It seems increasingly likely that the EU referendum we’ve been promised is going to happen sooner rather than later – potentially this year, not 2017 as originally expected.

Given that, the messages being put out by ministers are becoming louder and louder. A prominent Eurosceptic in the Conservative Cabinet, Chris Grayling, yesterday wrote in the Telegraph that staying in the EU would be “disastrous” for the UK.

It’s not clear exactly what it is about “more Europe” (vaguely defined) that would be particularly disastrous as far as Grayling is concerned – this isn’t made clear. Reference is made to immigration, although again immigration is simply implied to be a bad thing, since apparently the current levels should not be sustained moving forward (only half of our net inward migration flows are actually from the EU, it’s worth bearing in mind).

Grayling talks about some aspects of the economic idea behind the EU: the single market, or common market: common standards across countries so that exporters aren’t having to match a whole range of different standards for different countries. There then appears to be a misunderstanding about exactly how that would be achieved, because Grayling complains about “giving the EU more and more scope to involve itself in matters that were once the preserve of national governments.”

If a group of countries all have different product standards and regulations, and they agree a common market where these must be harmonised, then clearly each of those countries must give up powers that were once their preserve. It cannot be that a common market can exist where each country can still decide to set its own regulations a bit different for a bit for some reason or another – that would then cease to be a common market.

Science, Innovation and the EU

Image from www.rand.org

As you are all hopefully well aware, there’ll be a referendum on the UK’s membership of the European Union either this year or the next.

Both sides of the debate are throwing around numbers, not least about science. This means it’s more important than ever to understand the economics surrounding such a huge decision for the UK economy, because often those most involved in political campaigns tend to be more casual with their facts, and their reasoning.

The impetus for this post is this Tweet from Douglas Carswell: “Innovation and science need Brexit”, with a link to his own blog article on the matter.

I tried to get Carswell to talk to last year’s EC114 group as part of a series of election-related talks, but unfortunately after accepting my invitation, he subsequently pulled out. I had thought from much of what I’d heard him say, that he was more reasonable and reasoned than most in his new party, Ukip. However, his blog causes me to question that analysis; if you follow the link to this article, the title is “Small business is not for staying”, and is based on one opinion poll in which, remarkably, 40% of small businesses think we should leave (higher than usually found in polls), but 47% think we should stay. That is, small businesses are 47 to 40 in favour of staying, yet the title of the article says small business are “not for staying”.

Regardless, let’s think a little more about science and innovation and how they would function inside and outside of the EU. What would the differences be? Currently, small businesses can export into a common market covering 500m+ customers without tariffs or (much) hindrance. They can employ whoever they wish from a labour market of 300m+ keen workers without (much) hindrance. Universities, and private sector research labs can do the same – they can discuss their research more easily with researchers at hundreds of universities across the continent as opposed to just our own universities here in the UK, and universities can employ productive staff from all over the continent rather than being confined to just applicants with particular passports.

If it happened to be that the most productive people in Europe, and the most innovative, were all located in the UK, and this was likely to always be the case, then clearly there would be no loss from Brexit. Brexit would increase the barriers to employing staff from all over Europe (indeed, the main cause of increased bureaucratic burden on our universities is not the EU, but is increased British government regulations on employing staff and recruiting students from outside our borders) – what reason is there to believe this would not be the case? Brexit would make it harder for universities to collaborate with other universities around Europe since much funding is based on cross-border collaborations, and there is no reason to believe this funding would be unaffected by Brexit.

Small businesses would face impediments to trading with our closest geographic neighbours, and the ones in which they likely already have close links due to that geographic proximity – again, why should we believe otherwise? Even if, after various trade negotiations to set up free trade agreements were concluded miraculously quickly, it is hard to imagine there would not be other impediments put in place that would restrict such trade both here and in Europe (exhortations to “trade locally” to “keep the money in our economy”, for example). Small businesses would also face yet more restrictions on who they can employ. Rather than the most suited worker, it would be the most suited worker provided they had a British passport (or were willing to go through the increasingly highly costly, lengthy and discriminatory process of getting a visa). It might be that this would not affect hiring patterns, but this seems highly unlikely.

The retort to this entire analysis would be it’s one sided in that it’s not including the effect of red tape. It’s argued that the EU imposes a huge amount of restrictions which stifle innovation and creativity. This blog post isn’t the place to expand this particularly much, other than to say that regulations, by their nature, regulate activity and hence based on some analysis will restrict particular economic activity deemed to be socially undesirable. There’s little doubt some regulations will thus make some producers (and free market believers) less happy than others, but the important question really is: would UK regulation be any different to EU regulation? As mentioned above, UK regulation is getting tighter and tighter for employment and student recruitment, both of which must stifle innovation and creativity – would the UK actually be any better?

Wouldn’t these effects all be very short term? Indeed, but what about the longer term effect? If in the longer term small businesses were somehow still able to trade without impediments to a market of 500m+ customers, and recruit without restriction from a labour market of 300m+ people, then clearly they would not be negatively affected, longer term. It’s very unclear though how this would be the case if Britain exits the EU. Equally, universities may flourish outside the EU, but it would need restrictions on their activity, and funding arrangements to be such that big international collaborations can still take place and thrive – the kinds of absence of restriction, and funding opportunities that currently exist in the EU.

Indeed, to increase productivity further, it would be better still if that labour market was larger, if those funding opportunities were wider to include the most innovative people from around the world – the EU is only so large, and must exclude a great many productive and innovative people. But it’s very hard to see how exiting the EU can bring about a UK system that is less restrictive in terms of international movements of people, capital, and ideas.

Finally, hasn’t my analysis been a little business/university focussed, at the expense of workers themselves? Indeed, workers are not just factors of production, are not just units in an analysis, but instead human beings whose productivity and innovativeness depends on a huge range of complex factors. We are risk averse people who instinctively dislike uncertainty. We like to think about our identity, and how that fits in with a particular group of similar people (fellow nations, often). All this is true, and forms the basis for anti-EU sentiment – we want to be protected from immigrants taking our jobs, and threatening our “way of life”. However, it’s a very narrow way of thinking about it. Anyone who has travelled, or been exposed to people from different cultures around the world, will have realised that this does not diminish their own identity – if anything, it makes it clearer and more distinct. It also fosters the ability to think more critically about aspects of one’s own identity and culture that perhaps need challenging. It’s a hugely positive and enriching experience, leading to much more developed people much more ready to operate both within our national environment, but internationally, too.

Would exiting the EU really ensure we keep experiencing the best from around the world, as we are currently able to? How would we ensure that keeps happening?

Challenge yourself, first edition

University is entirely about personal development in all areas of your life. Developing almost always involves having preconceived ideas challenged. This can be a disconcerting experience – things you previously thought to be true you may find are anything but.

As students of economics, your lecturers and class tutors are most likely to do this in the sphere of economic ideas. It’s very easy, too, as there’s a huge range of economic ideas once you start looking, and the internet makes these much easier to come across than ever before. Every economist, or everyone who would like to think of themselves as an economist, can write a blog.

While this presents risks (who are the ones to believe and treat with respect, which ones are we safe to ignore?), it presents huge opportunities. One particular school of thought, much more common in the US than here, is libertarianism. Libertarian economists place a huge amount of attention on individual liberty, questioning the ability of others, and in particular institutions, to make decisions on behalf of individuals.

If you think that needn’t challenge you, it’s worth thinking a bit deeper. That the government sets a minimum wage is an example where an institution (the government) thinks it knows better than firms and individuals about how markets work, and what the right price would be. It impinges on the liberty of a firm to set a wage, and for an employee to accept a particular wage – if it’s below what is legally mandated.

Here’s an article from today on immigration, which is written by a libertarian economist: “Schengen, Adieu” by Alberto Mingardi. It’s written at the blog of the Library of Economics and Liberty, which gives a strong hint that it is libertarian. It asks the question: how do we “control” borders? Can we really think about controlling borders? We probably can if we erect big walls, and employ huge amounts of people to police the border. But we probably also then need to police things inside our country too, in order to make sure that those that have arrived aren’t doing certain things we don’t like (say, claiming benefits, or access to healthcare).

The problem with all of this is that it will impinge on the liberty of those of us native here. We’ll have much more faff and hassle when leaving the country to go elsewhere – for example,longer queues at the border, as anyone who has taken the ferry or Eurotunnel to France will testify. Additionally, we will find much more stringent checks when we do things we used to take for granted. We’ll be asked when applying for jobs to prove our immigration status even though we come from this country and always have.

Employers will have to devote much greater attention to compliance; the University of Reading has to check what its students from overseas are up to, which then eats into the time of lecturers to lecture, and class tutors to teach (and research). Governments have to employ more and more people to police borders and monitor those that enter, causing greater costs and a larger state.

None of this is to say that “controlling” our borders is not a bad thing; clearly nobody wants to have terrorists from overseas entering our country and prowling our streets without any checks taking place. But it’s to say that the controlling will have implications.

And more broadly, it’s to challenge any preconceptions you might have when thinking about immigration, a very real issue facing us at the moment. Should you do this? You certainly should challenge those views if it means you are less likely to support policy proposals that may be ineffective and have a lot of unforeseen consequences.

Global Monetary Policy

While our focus is often just on what the Bank of England is up to (speaking of which, today is December’s interest rate announcement from the Bank of England), there are other more important central banks out there, most notably the European Central Bank (ECB), and the Federal Reserve, representing the eurozone and the US respectively.

This article in the Guardian worries about what seems likely to happen this month: the US will tighten monetary policy while the ECB will loosen policy further.

Why does this matter? The worry is of considerable exchange rate movements. As we’ll learn towards the end of next term, one of the ways in which we believe exchange rates move in the shorter term as economists is via relative interest rate movements. This is because rates of interest reflect how much an investor could earn by moving their wealth into that country.

Hence, everything else being equal, if interest rates are higher in the US than in the eurozone, it is feared people will move their wealth out of European assets into US-based assets, increasing the demand for US dollars, and reducing the demand for euros. This would then lead to an appreciation in the value of the dollar (more demand), and a depreciation in the value of the euro (less demand). This need not be a bad thing, since a recovering economy ought to be aided by a weaker currency.

Of course things aren’t necessarily that simple; if eurozone producers use goods imported from the US to make their goods, and if eurozone consumption is often of US-produced goods, then eurozone economic activity would likely be negatively affected by the movements.

The bottom line is that larger than normal exchange rate movements ought to be expected in the coming months…