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?

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.

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.

Conversations on Refugees: NOW!!

Our latest Conversations in Economics session is about to begin, on perhaps the hottest topic of the (increasingly chilly) Autumn: Refugees.

It promises to be a challenging hour: who are refugees? Are they who we think they are? Are we who they think we are? Can we and should we apply economic reasoning to the situation?

Here’s the slides I’m using to introduce the discussion in a few minutes: https://docs.google.com/presentation/d/1NbBdk04FzH6OJHqEVMJyuM8MhtkaZ2HEHlHsm1_itYA/edit?usp=sharing

See you there 🙂

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.

Immigration and Sport

At a time when public sentiment regarding immigration has perhaps never been more negative (in recorded times at least), the Rugby Football Union has just started a global search for its new head coach. Apparently South African Jake White is favourite. The appeal is obvious, as White won the World Cup as South Africa coach in 2007. The explanation also, of course, is straight forward in terms of the apparent contradiction: we don’t mind skilled foreigners coming here, it’s the non-skilled ones we apparently have an issue with, and the illegal ones.

This is, of course, labour economics, and feeds into macroeconomics as one of the key macroeconomic variables we’ll spend some time looking at is unemployment. We’ll also spend time thinking about globalisation, too. Unemployment, most simply, is an excess supply of labour: more people looking for work than there are firms looking for workers – at the current market price.

This simple description covers over a multitude of complexities; different types of work have different supplies of labour – hence governments worry about skills shortages, which are insufficient levels of the supply of labour in particular industries. Most people support the idea that we should allow immigration in areas where skills shortages are most acute, and one could quite easily make the case that in elite sport management, that is the case. In football, no Englishman has won the Premier League since its conception in 1992, and in rugby we all know the abject failure of the England team at their World Cup in the last few months.

However, even this is debatable. Some would (and do) argue that English candidates could still do a perfectly good job; after the last non-English football manager, Capello, the Football Association felt compelled to search only for an English candidate. It may well be true: the labour market is one characterised by huge uncertainties: will somebody do well in this job? Can those looking to fill positions necessarily identify the best workers for those roles?

Faced with all these difficulties even at the firm level, it seems very optimistic to think that at an industry level it’s possible to know whether there’s a skill shortage or not?

All sorts of questions you can start to think about asking as you study economics…