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?

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?

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!

The EU Referendum

The news this morning is that a new anti-EU group, “Vote Leave”, has been announced. This is apparently the second such group to be formed in recent weeks ahead of the EU referendum that will happen before the end of 2017.

As you’ll be no doubt aware, the UK is part of the EU, what Wikipedia describes as a “politico-economic union of 28 countries”. It’s what economists would refer to as an institution, and it’s supra-national in that it acts above national governments, overriding their ability to make their own decisions (sovereignty) at times.

That is the prime criticism of the EU, namely that it dictates things we must do here in Britain, rather than allowing us to make our own decisions. That does seem like quite an appealing argument – we should surely be able to make our own decisions as a nation?

We’ll have only about a lecture and a half to think really about international economics during EC114, but you’ll get plenty of chances in your second and third years to study this further, should it interest you; see the blog post earlier today, “You’re doing Intro Macro: what comes after it?”, for the options ahead of you.

The UK is a very open economy, which means we trade a lot, both in goods and in (financial) services. This means that what we do as a country affects countries around us for better or worse. It also means that what countries around us do affects us, particularly if those countries are economically powerful. Economists talk a lot about the Prisoner’s Dilemma, which illustrates a situation where by not co-operating, all individuals/groups in that situation can be made worse off, and points towards co-operation as allowing us all to be made better off.

These considerations have led macroeconomists to think about whether co-ordination between nations might be a good thing, and the EU is one example of such attempts at co-ordination. But in order for co-ordination to work, it must be that nation states forgo the ability to do what they want in all situations – they must accept less sovereignty.

The decision we as a country make in 2017 about our EU membership matters a lot, and it will be good to make sure you’re informed about what it means. That means looking at the objective facts as much as you possibly can; this will be difficult given that pro- and anti-campaign groups will attempt to convince you without necessarily using those facts properly. This is where learning the tools of macroeconomic analysis can help you, and we’ll start after Christmas!