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?

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?

Hate quants? But it’s awesome!

If you’re the average first year undergraduate student (yes, I know, nobody’s really the average, but anyhow) you’ll either really hate quants (econometrics), or you’ll feign dislike in order to avoid seeming to be a geek.

My hope is that as you learn more about economics, you’ll learn to enjoy and even love the subject more, but also realise that data, and hence econometrics, is utterly central to all of it. All of the theories we teach you in micro and macro need to be verified out there in the real world, and the only way to do that properly is to collect data about the real world. Testing theories properly also requires that we learn appropriately what the data can, and is, telling us. This bit is econometrics. It’s absolutely essential if we’re going to determine which economic theories are worth taking seriously, and which we can safely discard.

Data can be pretty awesome at times, too. For example, in this day and age betting is ubiquitous on all kinds of events – see www.oddschecker.com/ if you want to get some sense of this. Data on the bets multiple bookmakers offer for events as diverse as the Premiership (Leicester City, really?!), and the next elimination on Strictly Come Dancing. These are predictions, or forecasts, about unknown as yet future events. Economic activity relies entirely on predictions about future events – how many sales will my company get with that new product, will that job be just right for me, should I take out insurance on my new phone, and so on…

If you’re concerned about more conventional data though, and the important messages we can learn from a proper and detailed look, here’s an example from yesterday on earnings. Hopefully it makes the point really clear: it’s vital for our good as a nation, and as a society, that we know about our statistics. Stagnant earnings growth that spawned the whole “cost of living crisis” (however real it felt for your dear lecturer over that period ;-)) may well have been bad statistics caused by a misleading calculation of the average that treats new entrants to the labour market, on low wages, equally to existing members of the workforce who are receiving more “normal” pay rises. Worth a read.

It makes the bigger point though: there’s an issue with how our statistics are calculated, and that needs to be investigated. Thankfully that is happening; I’m no fan of the Chancellor of the Exchequer, but this is one of his better moved by some distance: he has set up a review into how statistics like GDP are being calculated, particularly in this day and age of masses of data (think about how much data Tescos and Sainsburys must have on you). Dry stuff I’ll grant you, but this section is particularly relevant for the first week of term after Christmas:

The Review was prompted by the increasing difficulty of measuring output and productivity accurately in a modern, dynamic and increasingly technological economy. In addition, there was a perception that ONS were not making full use of the increasingly large volume of information that was becoming available about the evolution of the economy, often as a by-product of the activities of other agents in the public and private sectors. Finally, frequent revisions to past data, together with several recent instances where series have turned out to be deficient or misleading, have led to a perception by some users that official data are not as accurate and reliable as they could be.

Fracking: Economics and Externalities

From Huffington Post

The BBC headline this afternoon communicates the outcome of a vote in Parliament to allow fracking in National Parks. This would appear to be a doubly controversial outcome. Fracking is a means to extract gas from deep underground, and is controversial, as is any kind of economic development in National Parks.

Fracking is unpopular amongst many because of concerns regarding the amounts of water used in the process, which must be transported to fracking sites at great cost, and also concerns about fracking causing small earthquakes, or tremors. Nonetheless, it is a means for producing energy, hence increasing its supply, and bringing prices down. It’s generally acknowledged to have played a considerable role in energy prices falling in the US.

The government’s own website for National Parks says they are “areas of protected countryside that everyone can visit, and where people live, work and shape the landscape”. Anybody who has visited any of them knows how beautiful they are, and rightly protected. Nonetheless, at the same time they provide a valuable place where economic activity could take place; not least there is likely plenty of natural resources beneath them, but also, wouldn’t it be nice to be able to study at university and in the afternoon take a walk, or go for a jog in one of our glorious National Parks? Many companies would jump at the opportunity to provide such a working environment for their employees (of course, many wouldn’t also). However, these are areas that are protected for a reason – primarily their outstanding natural beauty. The tragedy of the commons teaches us that more than likely without this protection, we’d overuse such areas.

Now, of course, the fracking bill passed in Parliament restricts digging to areas of non-outstanding natural beauty, but once 1.2km underground, then frackers (so to speak) can drill horizontally to get underneath the areas of outstanding natural beauty. This, naturally, is concerning – will it have no effect whatsoever to be doing things underneath the ground?

What this fundamentally boils down to is the difference between private net benefits of actions, and social net benefits. When making decisions, we will usually consider the benefits and costs that accrue to us individually and pay less attention to benefits and costs that society at large may feel as a result of our actions. When there’s a difference between the two, like for example if I choose to play music very loudly in my neighbourhood, we say there’s an externality. In the case of economic activity in National Parks, there are clearly private benefits: mining companies, and energy providers will get private benefits, as we all will, if energy prices fall. But equally, if damage is done to our National Parks as a result, we will all suffer since we can no longer enjoy those National Parks as we previously did.

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…