A non-extreme view of Brexit

To those vociferously advocating we leave the EU, those of us who argue against them and suggest we’re better off staying are lefties. The central policies of the leave campaign are to erect barriers to economic activity – block free movement of labour, and without non-trivial trade negotiations, an increase in tariffs. These are protectionist, they are market interventionist, and might, thus, be thought of as lefty. Of course, it is a much better strategy to argue on the basis of whether a policy is good or bad in terms of delivering better outcomes (measured somehow) for some number of people (measured and determined somehow), rather than dismissing them for being lefty or right-leaning.

Someone who is unabashedly lefty is Chris Dillow who writes at the blog Stumbling and Mumbling. If you ever need something to do whilst you procrastinate so you can still feel productive, this is a blog you should bookmark. As his title states, he is “(Mildly) against Brexit”.

He is unconvinced about the EU in many areas, such as its ability to carry out macroeconomic policy, and implicitly to make trade deals (I think). However, the kinds of better economic world he is looking for is unlikely to be delivered by Brexit because those associated with it, as mentioned at the start, favour restricting free movement of factors of production, and of goods.

Related, John Kay at the FT has written in detail about the UK’s trading arrangements and Brexit. He does so in a way that he does not reveal his preference regarding Brexit, but points out that the UK is heavily engaged in trade in services – half of our trade relative to 20% of world trade. This means two things: (1) the common market is more important to us since its main thrust for a long time as been non-tariff barriers in areas like the service trade, than it is for our trade partners in Europe who export goods to us. (2) nonetheless, there are crucial differences in UK trade makeup not shared by other EU members that may make EU trade deals less suitable to the UK than the rest of the EU.

Today in Economics Conversations (1pm, HumSS 125), we’ll be debating Brexit and Trade – see you there!

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.

Snooker and Rent Seeking

A fellow economist, Rob Taylor, challenged me on my risk aversion interpretation of Ronnie O’Sullivan’s refusal to take a black for a maximum break (which would have got £10000+£2000 for highest break) and instead opt for a pink and a 146 (getting £2000 for highest break).

It stretches credulity a little to think about Ronnie O’Sullivan, one of the most talented snooker players that has ever played the game, as in any way risk averse on the table.

A better argument, and one that covers a concept we covered earlier on term, is to think about rent seeking. If you recall, rent seeking is where some agents rather than creating value, seek to apportion the value created by others for themselves. Music piracy is one example – the value is created by the artist, and rather than the artist getting any money, if we obtain a pirated copy of their music for some cheap price, we have paid someone other than the artist who has made available the artist’s work at a fraction of the true value of it – at the same time depriving the artist of any return for their value added.

In snooker, big breaks are a huge part of the game – anyone who watches the games loves to see a big break being built. Sure, safety exchanges can be fascinating, but the reality is that great pots followed by great positional play are what draw in the crowds. Nothing more than a 147, the maximum break which requires a player to keep position on one colour after each of 15 reds potted – the black, a colour that is usually mired in amongst the 15 reds due to its position on the table. To see a 147 is very rare also, if increasingly common.

However, the prize for a 147 is not particularly large. In 2010 at the World Championships, O’Sullivan needed persuading to pot the final black on being informed the prize was £4000. In the case the day before yesterday, the prize was £10,000, five times that for the highest break, yet it is hard to argue that a 147 is worth that little relative to any other high break.

The suggestion thus is that snooker authorities are pocketing (pun intended) the revenues from crowds flocking to watch the game, rather than rewarding the players, who are the reason fans watch the game. They have extracted rents from the process over and above what is due to them for their role in ensuring snooker is a game we can all watch around the world.

Risk and Return: Snookers

Snooker players have to be very good at maths. When building breaks, it helps them if they can determine how many points remain on the table when making a choice of next shot (and subsequent ones). When in deficit, maths is all important in terms of how many snookers a player needs.

What is perhaps less well appreciated is the strategy involved, and the attitude towards risk. Every decision has some risk attached to it, but also some potential return (with some probability). Each pot could be missed, each positional shot could turn out badly. The more difficult the pot, the less likely that the next position the player finds themselves in is a good one.

Ronnie O’Sullivan, one of the most successful, controversial and flamboyant players of our generation, is being criticised for a sensible decision when faced with risky options. Having built a large break (putting the frame beyond doubt) of solely reds and blacks, Ronnie had the choice between a tricky black and an easier pink. Taking the black would keep him on course for a maximum break of 147, a highly prized outcome. Taking the pink would remove the 147 as an option, but leave him on for a 146, still overwhelmingly likely to be the highest break of the tournament (thus gaining him a prize – financial reward).

Hence this decision was one about relative risks and returns. Wisely, O’Sullivan asked about the reward for a 147 relative to a 146. He found it to be £10,000, with £2,000 for the highest break. Either pink or black potted would almost certainly get the £2,000, so it was the £10,000 that was at stake. Take a riskier black, risk getting nothing with a higher probability than taking an easier pink which yielded a higher probability of £2,000.

The moral of the story is: if we want to reward risky behaviour (which the fans and viewers love), it has to be rewarded adequately to reflect the risks involved. Rather than criticising Ronnie, we should be applauding his decision not to be recklessly risky for small rewards, something we criticised the bankers for in 2008.

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 Economics of Crime

Economists apply economic theories to all sorts of walks of life, not least crime and organised crime (organised crime should reduce overall crime, just as a monopoly reduces output in a market). It might be of interest to find that something as mundane as the money supply, and even the denomination of bank notes, can be hugely important when it comes to organised crime.

This article, by Mike Bird at The Wall Street Journal, points out two things about the money base – the amount of money that a central bank prints and puts out into general circulation – and in particular, the existence of large denomination notes. By large, the main target are the €200 and €500 notes the ECB circulates.

It’s long been accepted that such sized notes are the preserve of organised crime, since such people need ways to carry around large amounts of cash to avoid detection. As such, in the UK we only have a £50 note and nothing larger, and the largest note, er sorry, bill, in the US is the $100 bill.

But there’s another issue at the moment, namely the problem with negative interest rates. The Bank of Japan, Japan’s central bank, recently adopted a negative interest rate. Hence the central bank charges banks who deposit cash reserves at the central bank, rather than paying interest. It is to be expected then that banks will do the same with their customers.

Faced with a negative interest rate, i.e. a charge on depositing money with banks, cash then becomes a better option since it has a zero rate of interest (well, it loses value with inflation but if inflation is low or negative, as it is in Japan, then its value is not changing much or increasing). If large denomination bills like €500 exist, then millions of euros can easily be transported around without requiring large briefcases…

Who said the economics of large denomination notes was boring?…

What’s wrong with populist policies?

Last year Jeremy Corbyn overwhelmingly won the Labour Party’s leadership contest here in the UK, on what is widely regarded as a “populist” platform – a range of policies that are popular amongst those on the left of the political spectrum. These include the renationalisation of utilities and other industries like the railways, and a more pacifistic approach to national defence. Corbyn also had the advantage of not being the “establishment” candidate, the one tainted with previous government, and the one perceived to be a “typical politician”.

This year the next President of the United States of America will be determined in a November election, and as current incumbent Barack Obama has served his two terms, both Democrats and Republicans are currently determining who will be their nominated candidate for the November election.

Last night, both of the non-establishment candidates won handsome victories in New Hampshire, one of the many contests around the US that contribute towards determine who is nominated by each party. For the Democrats, Bernie Sanders won apparently by a 20 percentage point margin – a huge win. For the Republicans, the controversial Donald Trump won, again by a large margin.

What does this mean? The common thinking is that as both candidates are more populist, and appealing to non-standard political audiences (Sanders, aged 74, is massively popular amongst younger voters, something that happened for Corbyn here), that the likelihood is of more populist policies in the future.

What are populist policies? Very simply, they are ideas that are popular amongst a substantial proportion of the population. As such, can this really be a bad thing? Populist policies are often disparaged by mainstream, or “establishment” politicians, because although they may be popular, they are probably quite unrealistic in their nature. Those “tainted” by government likely know the kinds of compromises that need to be made in order for policies to be practical and workable, and the kinds of interest groups and power factions that impact eventual policy outcomes in the political decision-making.

Perhaps as a result such “establishment” politicians tend towards promoting what they view as more work-able policies, which are less popular due to appearing watered down. This maybe explains why many people felt at the last General Election here in the UK that there wasn’t very much between the two major parties.

Hence if populism simply means some candidates proposing popular policies, with others arguing against them, this can hardly, in itself, be a bad thing? Debate about policies is surely important, as is a wider engagement in the political process, since the outcomes of elections do matter so much to many of us. Jeremy Corbyn has ploughed a lonely furrow in recent months arguing in favour of refugees displaced around the Middle East and Europe, even visiting the camps in Calais and Dunkirk – and being mocked in the press and by other politicians, including the Prime Minister, for doing so.

There is an additional element, however. Even if Trump and Sanders become the party candidates in November, only one will win, and even if they win, there is the likelihood they could not enact all the populist policies they wish because of the role Congress plays in decisionmaking in the US – current president Obama has repeatedly be blocked in attempts to take action by a Congress dominated by Republicans. The Labour Party in the UK is widely expected to perform miserably at the next General Election, meaning that for all the time spent developing interesting policy debate, there may really be little actual impact on policies, which will be conceived by and put into place by Labour’s opponents, the Conservative Party.

The big question, as it is often put, is whether politicians should follow their “principles” given that those principles risk making them “unelectable”. If unelectable, then the policies in question will never be put into practice, it is argued, and hence to a large extent any ensuing debate is pointless.

Regardless, these are interesting times when it comes to political events, and given that so much of politics is policies, and so many policies are economic in nature, there’s never been a better time to be studying economics!

What is a “theory”?

I’ve mentioned this a number of times in lecture: as we try and follow a scientific approach to macroeconomics, it is important to be aware of what are theories, and what are facts. The BBC today has an article asking “when is a theory ‘just a theory’?”.

The article points out the general point of confusion – when something is so well accepted that it becomes essentially a fact, using evolution as an example. However, evolution remains a theory because it is a theory – a set of ideas about how the world became how it is now from what it previously was, and it is possible (albeit mind-blowingly unlikely) that some new evidence or discovery (some data) might disprove the theory.

Economic theories, in all likelihood, will never reach the same level of acceptedness (to be more accurate: non-rejectedness) as evolution, and as such we should be very clear about what theories are: theories about a “natural rate of unemployment”, for example.

Facts, on the other hand, are events that occur, or as Google defines, “a thing that is known or proved to be true”. The financial crisis, the Second World War, the closing price of the FTSE100, the time of day, are all facts.

Universal Credit: Who Should We Trust?

Last week we covered unemployment benefits, and looked at the extent of Job Seeker’s Allowance (JSA). We also looked at the existence of in-work benefits, and discussed how they are an attempt to avoid a poverty trap – where people can end up worse off when taking a job relative to their position out of work with JSA.

The last government, driven in particular by Iain Duncan Smith, announced plans to replace six benefits with one single payment, called the Universal Credit (UC). Those six benefits are “income-based jobseeker’s allowance, income-related employment and support allowance, income support, child tax credit, working tax credit and housing benefit“.

We discussed in Monday’s Economics Conversations the impact of complex systems administered by governments – they tend to create loopholes and confused incentives, and likely discourage use of them as was originally intended (i.e. to help those out of work to get back into work). Hence simplifying such a range of different payments – which in general are in-work benefits in addition to JSA – ought to, in principle, be a good idea.

However, big changes are being made, and to big complicated systems. Different people will be affected differently by the changes, and what matters most to people is whether they’ll be made better or worse off as a result. We care, by and large, as a people, if those seeking to better themselves and work hard find themselves worse off by changes like these – it makes little sense to discourage people from trying to do better.

But how can we know what the impact will be? Can we trust the government’s own figures on the matter? Can we trust other attempts to understand the impact of changes? Doesn’t everybody have an axe to grind, some bias in their analysis? By and large, over the years, the Institute for Fiscal Studies (IFS) has established a reputation for being as thorough and objective as possible in its analyses of the things governments get up to (and the proposals made by oppositions around election time). As a result, their intervention today on Universal Credit is important.

The title of the press release is informative: “Universal credit cuts support for working families, but helps make work pay where current system creates worst problems”. The UC will be effective in reducing the overall spend on benefits by £2.7bn, the report finds, hence it’s clearly effective in that regard, and further it will “make work pay where current system creates worst problems”: so it will address some cases of the poverty trap. However, the report states that 3.1 million households will be worse off as a result of UC, and 2.3m will be better off, hence the BBC leads with the assertion that “The introduction of Universal Credit (UC) will leave working families worse off on average, the Institute for Fiscal Studies has said”.

It’s well worth a read of the IFS’s actual report, to get a sense of how we go about evaluating public policy as thoroughly and objectively as possible. Not least, it will help you to determine whether indeed, as the government asserts, the IFS “ignored other benefits such as extra childcare”. Usually a quick CTRL+F to search the document is informative. I did a search for the term “childcare”, and found five references to the term in its entirety. On page 9 of the linked PDF document (only 28 pages), the report states “One area where the UC system has been made more generous relative to the legacy system is in the level of subsidy given to childcare costs”.

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!