Brexit and other harbingers of a return to the dangers of the 1930s

Avinash Persaud

26 August 2016

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In a national referendum on 23 June, Britons voted to leave the EU by 52% to 48%. The EU is a borderless area for the movement of goods, services, investment, labour, and more across 28 European countries. Those who voted for Brexit, the catchphrase for Britain’s exit, were often described as angrily rejecting the national and international elites that were rolled out in support of Britain remaining. These elites responded that this was a vote of ignorance, laced with xenophobia that would have enormous negative economic consequences. Confirming everybody's prejudices, Michael Gove, a leading supporter of Brexit, said in the middle of the campaign, “people in this country have had enough of experts”. Despite that, misreading the vote in favour of Brexit as a vote of the ignorant and trying to blame the Labour Party leader for the result is far more dangerous than leaving the EU. It is a denial of powerful forces that, left unchecked, will plunge us into the same economic hole that Europe and the US fell into in the 1930s, which in turn led inextricably to the horrors of WWII.  These forces are not uniquely British, but are worryingly international. Brexit, the rise of Trumpism in the US, and nationalism elsewhere are part of the same trend.

The referendum result can be broken down by Britain's 418 Local Authorities. The national census also records data on social class, education levels, age, and much else by Local Authorities. It is therefore possible to draw empirical observations on who voted to leave without having to ask them, which can lead to biases.  The data reveal that there was an unusually positive correlation (+0.60) between the percentage of those who voted to leave in a Local Authority and the percentage of non-graduates in that Local Authority. The much-touted correlation between age and the Brexit vote was also positive, but more modestly so at +0.15. Young graduates voted heavily to remain and elder workers who didn’t go to university voted heavily to leave.

Artuç et al. (2010) have shown that across a wide range of countries and time periods, the adjustment costs from trade liberalisation are borne most prevalently by the same group as those that voted to leave the EU:  less-skilled and older workers. Brexit was not an irrational vote of the ignorant, but a highly rational vote by the same losers from trade as everywhere else. Of course, the issue of whether you lose from trade is more nuanced than whether you have a degree or not. It is about whether trade liberalisation increases the relative supply of people with your skills. The consequence for those for which it does is that their wages and conditions worsen. In the US, average hourly wages have not risen versus inflation since the 1970s, and within that average, 70% have seen a fall.  In low-skill sectors, British firms have been able to introduce ‘zero-hour’ contracts in which they are not obligated to offer any hours of paid work but employees must be always available.

This is one of those rare occasions in economics when fact follows theory. Trade boosts a country’s net welfare. Precisely how firms respond to lower trade barriers is hard to capture in standard economic models, but there have been many natural experiments that point in this direction. The purest example is the closing of the Suez Canal, which took place the day after Israel launched a surprise attack on Egypt’s air force on 5 June 1967. During the closure, ships traveling to Britain from India had to travel an additional 4,800 miles and 16 days around the Cape of Good Hope. The reopening of the canal in 1975 was less of a surprise but shrouded in much uncertainty. James Freyrer’s study of the trade and GDP effects on over a dozen countries from the closure of Suez indicates that every 10% increase (or decrease) in trade adds (or subtracts) 1.6% of national income (Freyer 2009).

The net benefits from trade justify the winners setting aside part of their winnings to compensate the losers. But the trade liberalisation agenda fatally attached itself to a neoliberal agenda which said that it was the losers’ fault. The advance of trade liberalisation coincided with the withdrawal of unemployment benefits, tertiary education, retraining, and social housing. The winnings from trade have been increasingly concentrated, not distributed. Trade liberalisation has led to a convergence between countries and a divergence within countries. Brexit and Trump’s Republican nomination tell us that the inevitable reckoning has arrived. The solution de jour is easy monetary policy, but this merely lifts the prices of the homes and financial assets of the skilled elites and pushes them further out of the reach of others, resulting in little boost to consumption. The lasting solution is to use fiscal policy to compensate the losers through aggressive efforts to upskill displaced workers and build them affordable homes to rent in places where the new jobs are.  This costs money, the neoliberals exclaim, but the cost of not doing so is many times greater. If the rise of trade nationalism leads to 1930s-style trade and currency wars, trade and GDP will shrink, creating mass unemployment, despair, and worse.

References

Artuç, E, S Chaudhuri and J McLaren (2010), “Trade Shocks and Labor Adjustment: A Structural Empirical Approach”, American Economic Review 100(3): 1008-45.

Feyrer, J (2009), “The 1967-75 Suez Canal closure: Lessons for trade and the trade-income link,” VoxEU.org, 23 December.

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Topics:  Europe's nations and regions International trade Politics and economics Poverty and income inequality

Tags:  Brexit, trade nationalism, globalisation, Trumpism, EU referendum

Emeritus Professor of Gresham College; Non-Executive Chairman of Elara Capital PLC

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