Resist, rebel, and Remain

John Van Reenen 07 December 2018

David Holt/flickr

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Members of Parliament will vote on British Prime Minister’s Theresa May’s Brexit deal on 11 December.

Without hesitation, they should vote it down.

More and more people have realised that Brexit was built on a fantasy that we could keep all the benefits of being in the European club without paying any of the membership fees – what leading Brexiter Boris Johnson called the ‘Have Your Cake and Eat It Strategy’. Well, it turns out that having a cake after you have already eaten it once is not so tasty after all.

Mrs May has brought back an unpalatable deal that no one likes because it crystallises the reality of what leaving the EU actually means. To get easy access to European markets you have to play by the rules of the club – and once a country leaves the club, it no longer gets a vote on what those rules are. So much for taking back control.

The argument for remaining in the EU is fundamentally moral and political, not economic. However, it is important for lawmakers to know that Brexit will make their constituents poorer. Whereas the wealthier can ride this out, it is families on middle incomes and the less well off who will feel the fiscal pain most sharply.

The economics of Brexit are very simple. Being outside the EU inevitably means higher costs of doing business with our nearest neighbours – so there will be less trade, and less trade will make us poorer. The more distant a relationship we have with the EU, the bigger will be our pay cut. This will be hugely painful if there is a disorderly ‘No Deal’; it will hurt to a lesser degree with a softer approach. The formal amounts that the UK pays into the EU disappear in the rounding error compared with these economic losses.

Oh, why EU?

The EU was born from the carnage of the Second World War and has cemented together 28 fractious nations in our troubled part of the world. For thousands of years, European tribes were killing each other in war after war ending in the bloodbath of the first half of the 20th century. Cooperation within the EU has meant that the fights are now over fishing quotas rather than in battlefields.

The challenges facing the human race todayrequire the same spirit of cooperation – on climate change, terrorism and mass migration. These are global problems that cannot be seriously tackled by the UK in glorious isolation – a nation with under 1% of the world’s population (and shrinking).

It has now been well over two years since the EU referendum and the political tectonic plates of the world have shifted. President Trump is the cheerleader of a crude nationalism that reflexively blames all ills on foreigners. His solution is to build higher walls and wreck international agreements. Political bosses in Brazil, Hungary, the Philippines and Russia are stomping their boots to the same beat. They and their cronies are actively undermining global cooperation on climate, trade and terror. This rising tsunami of bile manifests itself differently in different nations, but in the UK, its name is Brexit.

It is our duty to fight against it with all our might.

A plague on pragmatism

The British people are usually a pragmatic bunch. Many pro-Remain MPs may be tempted to support Mrs May’s paltry deal fearing that the alternative is a disruptive No Deal, which would be much worse. But the risk of this is low – if Parliament votes the current deal down, Article 50 can be put on hold. This will then create an opportunity for a coalition of MPs to pass legislation for a People’s Vote – a new referendum where the choice is May’s deal, No Deal or remaining in the EU.

I believe that Remain will win this vote. But even if it does not, it is the right democratic course of action. We do not hold an election and then have an eternal dictator. Leavers voted for Brexit because it meant a myriad of different things to different people. Now we have concrete alternatives, it is right that citizens have the choice to decide whether this is really what they want.

Some say that another vote will create more anger and conflict. The reality is that we already have a lot of anger and conflict, which will persist for a long time to come. Many people voted for Brexit because of their fury that they had been failed by the status quo. And they were right to be angry – after inflation, wages are no higher than they were a decade ago. This is a worse performance than during the Great Depression, and radical things are needed to change this. Leaving the EU will do nothing to improve this situation: indeed, by depressing productivity, trade and investment, it will make things much worse.

Others worry than a narrow Remain victory will embolden the far right. But I have news – they are already emboldened. After a Brexit win, they will push for an ever-greater split from our European neighbours, ever-greater attacks on immigrants and ever more authoritarian laws. Throwing meat at a vicious dog does not make it go away. It whets the appetite for something closer to the marrow.

But isn’t it all worth it to reduce EU immigration? As she did when she was Home Secretary, Mrs May will promise immigration reforms to create a more hostile environment for those wanting to come here. Playing the migration card is Brexiters’ favourite tactic when all their other arguments have lost. But all this ‘taking back control of our borders’ is codswallop, as we never lost control.  We allowed EU citizens to come here in return for the right of our citizens to go there – and because free movement is the condition of being part of the largest single market on the planet. EU immigrants have not harmed average pay or jobs. In fact, since they are younger, healthier and better educated, they pay in more in tax than they take out in welfare, so they have been subsidising the schools, hospitals and police services enjoyed by us native Brits.

A radical future for rebels

The EU is not a perfect organisation. A commitment to our place within it also means we have a duty to reform European capitalism, which has failed many ordinary people. This requires radical measures to make markets work better for all people. The growth of mega-firms has pushed the balance of power too far away from working families and customers. And the growth of mega capital cities, such as London, has sucked up too much power compared with localities. 

Redressing this imbalance of power is helped, not hindered by being in the EU. Taking on the tech titans and insisting on protecting our data are better done with a single market of half a billion people than the less than 70 million inhabitants of the UK.

Populist anger can be cathartic. It reflects a hunger for change, especially among the young, and this makes politics more exciting, more febrile and more plastic than I have known in my lifetime. The movement for a People’s Vote has not come from the main political parties, who remain timid. It has come from civil society, from social media and from the streets where 700,000 people marched only a few weeks ago to demand a say on the Brexit deal. 

By really committing ourselves to Europe, we can reinvigorate our continent and ourselves. Let us fight for the cause of decency and fairness rather than succumb to this tawdry deal and slouch into a gradual and irreversible political, moral and economic decline.

Dumping May’s deal is not without risks. But nothing in life ever is. It is clear that we are at a pivotal moment in history. The UK has a chance to forge a new path with our allies in Europe and reject the crude nationalism and empty slogans of the Brexiters. The British people are better than this. The nation deserves and demands a second chance.

Now the economics bit

Even though the economic arguments for EU membership are less important than the political and ethical case, I am a professional economist, so here are a few notes for the interested. 

It is abundantly clear that Brexit entails an economic loss. The only real question really is how big the loss will be under different forms of Brexit. The best discussion of this is here from the politically independent think-tank ‘UK in a Changing Europe’.

The conclusions are similar to my pre-referendum analysis as well as the recent Brexit assessments by the government, the Bank of England and NIESR. Indeed, all credible independent studies are in broad agreement that Brexit reduces average incomes, but the softer the Brexit; the lower will be the economic losses. This is why there is such a strong consensus among economists that leaving the EU will economically harm the UK.

The strength of this consensus is similar to that among medical experts about the harm caused by smoking or among meteorologists over the reality of climate change. This is why it is so ridiculous that the BBC and other broadcasters in the name of ‘balance’ give equal prominence to pro-Brexit economists as they do to those reflecting the profession’s opinion. The bulk of the UK press is virulently pro-Leave so also heavily promotes the motley Brexit crew, whose models have been thoroughly repeatedly debunked.

Often one hears the refrain that ‘economic forecasts are always wrong’ so should be ignored. A doctor cannot predict the age at which you will die if you start smoking two packets of cigarettes a day, but she is on firm grounds forecasting that your new smoking habit will be bad for your health.

Brexit economic analysis is generally not a forecast of what will be the exact size of the economy post-Brexit, but rather an analysis of the difference in economic outcomes if the UK leaves compared with if the UK remained. Brexit will not abolish the technological progress that the economy has managed to exploit over the last 250 years in order to grow. It will just mean that we are poorer given whatever the state of technology and world demand conditions that emerge over the next few decades.

A variant of the above argument is that economists’ forecasts have all been proven wrong by how well the UK economy grew after the vote in 2016. For example, David Davis the former Secretary of State for Brexit said that ‘previous Treasury forecasts had been proved wrong and were based on ‘flawed assumptions’, citing in evidence that the UK economy had grown by over 2.8% in the 18 months since the referendum whereas the Treasury had forecast it would shrink.

This is an example of (surely wilful) misunderstanding. The general prediction was that the economy would grow by 2% less than expected because of Brexit. And in fact, this is broadly what has happened since the vote – the UK economy has slipped from being at the top of the G7 growth league to the bottom. Moreover, observers reckon that GDP per capita is about 2% lower than expected due to the Brexit vote.

It is true that economists thought that there would be a bigger immediate hit from the Brexit vote, whereas it took a few quarters before the economy started to slow down significantly relative to other countries. Therefore, although the forecasts got the overall hit about right, they got the timing wrong.

There were probably two reasons for this. First, modelling assumed that the negative immediate impact would come from the rational expectations of consumers of lower future real income growth. However, many people actually believed the propaganda on the Leave side that there would be no economic fallout from Brexit, so they continued spending much as before. It was only gradually when reality dawned that consumer confidence took a knock (for example, when the large fall in the value of sterling started to feed through into higher food prices and more expensive foreign holidays).

The second reason was that the Treasury analysis assumed that Article 50 would be activated immediately, whereas it was nine months later when Theresa May did this. The slowdown of the economy followed this as uncertainty started to spike.

Finally, it is worth pointing out Brexit has not yet happened. The majority of work, including my own, focuses on what happens after Brexit occurs, which is currently slated to be after the ‘transition period’ ends in 2020. Negative effects now are due to expectations about what might happen in the future, and these are notoriously hard to model. 

The trouble will really start when true Brexit hits the fan.

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Topics:  Europe's nations and regions Politics and economics

Tags:  Brexit, EU, UK, No Deal, Remain, People's Vote

Professor of Applied Economics, MIT

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