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.

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.

Tis the season?

overseas-aid

You may have seen this graphic, or some similar sentiment, doing the rounds at the moment.

As you may be aware, successive governments have committed to spending 0.7% of GDP on aid to some of the poorest and most needy people around the world. It’s also a tiny amount of money. The plot below makes this clear: it’s a small amount even of the interest the government pays on its national debt, and (not plotted) about a twentieth of what we spend on pensions each year.

Foreign Economic Aid and Interest on National Debt since 1993

So, practically, firstly, stopping this money would make little difference to the government’s overall budget. Bear in mind that the deficit is still much larger than 0.7% of GDP.

Secondly, there are many, many things that the government spends lots of money on that might be better reconsidered if there is a need to cut other things before we spend more money on flood defences (and helping those affected by the floods).

Third, as we’ll learn about this coming term, governments have budget constraints, and if they spend more than they get in tax receipts they run a deficit (as the UK government has done for a long time now), and need to borrow. As such, if something is important (hence has a good rate of return, however measured), and can be financed at a low interest rate (as is the case at the moment), then a better argument is that it should be funded by more borrowing.

Finally:

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.

The Price of Petrol

Oil price

As students, I suspect there is little likelihood you (a) listen to Radio 4 in the morning, and (b) listen to it before 8am. However, if you do, you’ll have heard a section of the Today programme on petrol prices, which the RAC expects will fall below a pound before Christmas.

This is, of course, music to the ears of anybody who drives a car. But as you’ll be increasingly aware as a student of economics, the demand side of the market is only one side – there’s also the supply side. Contrary to how we might view large oil companies, the huge range of fluctuation in the price of oil makes it clear that they are price takers, rather than price makers, when it comes to the price of oil, and subsequently the price of petrol.

The graph above shows why petrol is so cheap again – the price of oil has fallen by close to 60% over the last 18 months, and this is part of a general fall in commodity prices over this time period. This raises questions, and perhaps the most pertinent are (1) why? and (2) what does it mean?

On the why, one explanation that Vince Cable (who came to the university earlier in term) put forward was that China and other strong growth economies of recent years like Russia and Brazil are all either slowing down or in recession. This removes a huge amount of demand for commodities.

On the what does it mean: the likelihood is it means job losses as firms that mine and trade in these commodities have to cut back given decreased revenues from their activities. It seems more than likely this would affect the UK, and Scotland in particular where the oil industry resides. But equally, other large mining companies are headquartered in the UK, and this may result in job losses.

It’s not all good…

Immigration up (a little bit)

As well as the aftermath of the Autumn Statement, there’s another bit of news today: net migration (immigration minus emigration, those coming minus those leaving) is at a record level of 336,000.

This number, actually identical to the number from the previous quarter, is higher than it was at the same point in 2014 – we usually try and compare the same point in the year since there are often seasonal effects (for example, higher sales near Christmas hence more demand for jobs).

A lot of people care a lot about this number. The government talked about getting this number down to “sustainable levels”, without ever defining what “sustainable” would actually be. It suggests that the current number is unsustainable – which undoubtedly it is since it cannot continue at that rate indefinitely. But by that logic, any positive number is unsustainable since there is only a finite amount of land in the UK. Of course, a more sensible approach to finding a sustainable level would consider the rate at which aggregate demand outstrips aggregate supply, since immigrants form part of the supply side of the economy (as well as the demand side).

Other parties, most notably, UKIP, have tried to make political capital out of this.

What is curious however is that this number isn’t being celebrated – it shows what a great place to be Britain is! People are desperate to come here to contribute towards the growing economy, and fewer folk are deciding to leave at the same time. It’s important to note, of course, that few if any of the immigrants considered here are refugees such as those coming from Syria.

The final thing worth noting is that less than half of this number is EU migration, which hardly makes a convincing case that renegotiating our EU membership on terms related to free movement of labour will make any meaningful difference.

Blow for Brexit?

The Guardian’s pic of British and EU flags

As you’re no doubt aware, there’s going to be a referendum on the UK’s membership of the European Union (EU) sometime between now and the end of 2017. Europe has always been an important and emotive topic, now as much as ever. We will, of course, spend time thinking about the issues surrounding any UK exit, or “Brexit” as it’s commonly dubbed, in the Spring – it’s a huge macroeconomic issue.

Those who suggest we ought to leave argue that the economy – the macroeconomy – would function much more effectively outside the EU. Our firms would be freed from red tape, our energy would be cheaper, we could sign our own trade deals and just more generally, do what we like. Of course, that “we” is very much the subset of us that thinks we should leave, but even then there is disagreement on what being outside the EU would look like. Would it mean we look like Switzerland (with its similarly bank-heavy economy, as Vince Cable pointed out last night), or Norway? Or even Turkey?

One of the planks of this argument though is being able to direct our own trade policy – who we have free trade agreements (FTAs) with, mainly. At the moment, trade deals are negotiated and signed at EU level, since the EU is a customs union where within the union no tariffs are levied on traded goods, but outside it a common external tariff (CET) is applied.

What would directing our own trade policy look like? Practically, the first step would be to negotiate all the FTAs we need with countries we currently have FTAs with, unless we want to increase the costs of trading for our firms. This is a non-trivial undertaking of a lot of diplomatic resources; FTAs aren’t agreed and signed overnight. Clearly a great expense of government resource, which would have to take place in the period after any Brexit vote and when we actually leave.

This first step, however, is made all the more fraught when we think that actually, those potential trade partners also have to stump up a load of their own diplomatic resources to negotiate these extra trade deals which while the UK was in the EU, weren’t necessary. Why would they be willing to do this? What if they are a big country whose share of trade with the UK is small, while at the same time the share of our trade with them was large? Like, say, the USA?

The news today is that a senior US trade official (it’s hard to imagine such an official being permitted to speak to the media without the consent of his/her superiors) has said that the US probably wouldn’t be particularly willing, if push came to shove, and that in reality, the UK would have to join at the back of the queue.

Those favouring Brexit like to point out that it seems likely a number of EU countries would wish to sign FTAs with the UK since they export more to us than we export to them (Germany being the prime example). Again, though, this does rely on that proportion of their trade being sufficiently large that it warrants the expense of resources necessary. From here we find that the UK accounts for about 6% of all German trade, below France, the Netherlands, China and the US, and 7% of all German exports. Not trivial, by any stretch – but essential? The Germans may be first in the line to negotiate a trade deal, but they may also not be: there’s a huge, vast amount of uncertainty surrounding the various building blocks required for the UK to succeed outside the EU.

Yesterday’s News: Carney and the EU

This week the Bank of England Governor, Mark Carney, gave a speech on the EU in Oxford. It’s well worth reading the whole thing, rather than the various responses to it. It’s not particularly long, and there’s even a bit of humour injected in places.

Firstly, why does it matter that the Bank of England Governor has given a speech? It matters because he is head of the institution tasked with carrying out monetary policy – what happens to interest rates, essentially, to keep inflation at around 2%, and also financial regulation – to try and ensure another financial crisis doesn’t occur.

What is the context? As you’ll be aware, the UK is holding a referendum by the end of 2017 on its membership of the EU. The UK, as a very open economy, is highly affected by international events – both good and bad. At times, high demand from Europe and elsewhere has helped drive UK growth, but at other times instability in neighbouring countries has inhibited our growth. Additionally, it means our policy decisions affect others in the same way that many decisions we make on a crowded train impact those who happen to be sat/stood near us.

What did Carney have to say? Essentially, he said that the founding principles of the EU: freedom of movement of goods and services, capital and labour, have been a good thing for the UK economy. These are arguments we’ll cover in much more detail next term, but here’s some food for thought in the meantime. However, he did add caution (something Eurosceptics have been quick to seize upon): financial regulation may threaten the UK economy in the future, as may the unwillingness of other European nations to reform and become more competitive.

All things we’ll be talking about in much more detail in the Spring: see you then!

Migrants, refugees and macro

The huge flows of displaced people across Europe continues, and is likely to continue for many months, irrespective of the interest the news media outlets attach to it. This morning the headline is that the EU has secured a deal with Turkey on refugee flows through that country. It appears that the EU wishes to ensure refugees remain in Turkey rather than entering the EU.

It’s perhaps worth pointing out the numbers of refugees registered (likely a fraction of the numbers in countries), in the following info-graphic:

Turkey already has about 2m more refugees within its borders than even the EU’s most generous country, Germany, and probably has more than the entire EU put together. Turkey is also a much poorer country than most parts of the EU, Germany in particular, and hence it’s quite likely that the impact on that country is dramatically more than what any EU country can complain about.

Nonetheless, the essence of this deal appears to be the EU telling Turkey that they’ll give a load of concessions, even lots more money, if they can just keep all those millions of refugees within their borders. The Guardian talks of “repressive” border measures, while the BBC’s report makes no mention whatsoever of what Turkey might do to keep the refugees within their borders.

Why does this matter for macroeconomics? Very simply, it must affect the various macroeconomic numbers we are interested in. Here in the UK, GDP growth has been mainly driven by population growth due to migration for a number of years now – we can get this sense by looking at the difference between GDP growth, and GDP per head growth (0.7% and 0.2% respectively from here). Refugees will be added to the population, and also to the labour force in the countries they arrive in.

If the supply of labour is expanded, the instinctive reaction is to ask about the impact on the price of labour; many worry that wages will be forced down. Most studies that have looked at this (see these search results as a starting point) have found that the impact isn’t negative on native workers, apart from those at the lowest end of the market – unskilled labour. The reason the effect isn’t negative on wages is that the effect is not static – it’s not a one-off impact on the labour market. New entrants to the labour market ensure many vacancies are filled, leading to more being produced, more incomes being earned, and hence more demand for labour to produce more things that people want to buy with these higher incomes.

The impact on unskilled labour from immigration (or from refugees, and it’s hugely important to be clear about the difference – in fact from here, we should probably refer to most refugees in Europe as displaced people) is probably negative: migrants are often more willing to do those jobs, and at a lower rate of pay. However, migration is not the only source of pressure on unskilled labour; machines are probably a much more likely source of their problems, as many basic jobs are now being done by machines, or robots.

We’ll spend time next term looking at globalisation and its impact on the UK economy, in week 4 of term. In the meantime, you can look at Chapters 8 and 9 of our textbook to get a head start, if you want to…