How to ensure the UK’s EEA membership

I voted to Remain in last week’s EU Referendum. As attractive as the “liberal leave” agenda of internationalism, deregulation, and freer trade was, there was too great a risk that the driving forces behind a Leave vote would be anti-globalisation and anti-migrant sentiment.

I also feared that Europe’s leaders would harshly punish the UK to disincentivise anyone else from departing. Although Project Fear was hyperbolic, the concerns over our place in the Single Market and the threat to business, finance, and trade were real.

My worries have not been put to rest. Asides from the appalling upsurge in racist incidents, the referendum result has produced ambiguity, uncertainty, and instability. Still, a few things seem clear. We will leave the EU within the next five years. Leave supporters have divergent agendas and expectations. There is some (limited) flexibility for how the UK responds. And an attractive liberal position, namely remaining within the European Economic Area, may actually be viable.

If the Conservatives can select a reasonable leader and assemble a cabinet containing leavers and remainers, they can unite around ensuring the UK remains within the Single Market. Europe will not compromise over free movement of labour. But, given the enormous damage the UK’s withdrawal from the EEA would do to their economies and the electoral repercussions of this, the leaders of the remaining 27 EU Member States will not make the mistake of rejecting this option if the UK accepts free movement.

It is true that this may require a struggle between the elected European leadership and the more vindictive and vengeful EU bureaucracy. However, so long as Britain capitulates on free movement, this should be sufficient to demonstrate that you can only be in the EEA if you abide by all the rules, and could serve to take the wind out of the populists’ sails by making it unambiguous that rejecting migration means embracing economic collapse.

The only question the referendum asked was whether we should leave the EU. The Single Market and immigration were not on the ballot. Nevertheless, is a UK government now in a position to save free movement, given that supporters and resentful opponents alike are trumpeting the leave vote as a definitive victory for nativism and closed borders? Before the referendum, I would have said no, but the political landscape has changed dramatically overnight. 

In particular, the Labour Party has completely imploded. The unprecedented resignation of almost all of the front bench and the no confidence motion in Corbyn’s leadership means that Labour has no short-term future. Either Corbyn goes, leaving a large part of the grassroots feeling betrayed. Or he stays, and Labour faces a bitter split or continuing as an emaciated, divided, and confused husk.

This situation provides an opportunity. If the government negotiates anything resembling a sensible deal, many leavers will attack them for ‘selling out’. Nevertheless, in the absence of an opposition, the fallout from this can be minimised. It would probably mean a few more UKIP MPs at the next General Election, but this may be a necessary price to pay for preserving trade, stability, the position of the city, and, indeed, migration.

The other problem is the difficulty of persuading remainers that good could, or even should, come from leaving. The Scottish Nationalists are poised to exploit this to ensure independence, and some on the left seem to want Brexit to result in economic collapse, isolationism, and legitimised racism, so that they feel vindicated. 

These risks can be navigated. Sturgeon is calculating and canny enough to appreciate that, so long as Single Market access was assured, remaining may be easier than fighting another referendum and struggling through a separate set of harder negotiations in Europe. I also expect that remainers will come to appreciate the necessity of realigning to work with liberal leavers to ensure that post-Brexit Britain can remain open, prosperous, vibrant, and tolerant, and is stopped from descending into nationalism, protectionism, and isolation. 

Paying for continued Single Market access isn't worth it

Now that we've decided to leave the EU talk is turning to how we maintain access to the Single Market. And we know what's going to happen there: demands will be made that we must contribute to the EU budget in order to gain that Single Market access. We also have a good idea about the amount that we'll be asked for. About the £8 billion of our current nett contribution.

This is not worth it, not worth it in the slightest.

Leave aside that everyone thinks of this the wrong way around, they all think like mercantilists, believe that exports are what make us richer. This is not so of course, it is imports that do. And of course the rules we have over our imports are for us to decide.

Think of this like a mercantilist. The savings that will be made by Single Market membership are the tariffs that will not have to be paid as a result. No, we agree, those tariffs would be paid by EU consumers, not us, but still, think like a mercantilist. So, how much would be saved by Single Market membership?

UK exports to the EU are some £133 billion a year. Average WTO tariff rates, which is what we would be stuck at sans Single Market membership, are around 3%. We would thus save £4 billion. This is less than the £8 billion cost. This is not worth it.

Now relax our conditions a little. The £4 billion is being saved by EU consumers. Or, if you want to consider elasticities of demand and all that, anything up to £4 billion is saved by UK exporters. At a cost of £8 billion to UK taxpayers. This is still not worth it.

We would even go rather further than this. When it is put this way these payments for Single Market access are quite obviously special deals, taxpayer support for, exporters. Something that is illegal under general trade rules and more specifically so under EU ones. So when do we bring the case against the EU Commission for the illegality of their charging access fees to the Single Market? Preferably before anyone in the UK starts to think of paying them perhaps?

 

Denmark may not be all that socially mobile

It's commonly thought that Denmark—and Scandinavian countries in general—are especially socially mobile. In these paradises, the theory goes, birth is not destiny. Because of high quality egalitarian education, healthcare, and progressive social attitudes, one's birth has less connection with one's life outcomes than anywhere else, especially the cut-throat conservative USA.

There's something to this view, but a new working paper from famed Nobelist economist, and education expert James Heckman (pdf), throws it into question. Heckman finds that Denmark does indeed have a more mobile society than elsewhere in terms of income, but that this does not mainly come from a generally more fluid and equal society in general.

In fact, the higher measured income mobility is "largely a consequence of redistributional tax, transfer, and wage compression policies". When it comes to educational mobility, the countries are more or less the same. To state that another way: those growing up with less advantage in Denmark don't do better than those in the US because they have high-flying careers and great labour market success, but because Denmark has higher taxes and benefits.

This adds to a large literature finding that there is little we can do to strike at the causes of inequality. Intelligence and the abilities that the labour market rewards come mostly from things we can't do much about. But we certainly can blunt the income effects of unfair endowments of skills through handouts from the state.

And it adds to another body of evidence finding that Scandinavian countries are not as magical—in policy terms—as we think. For example, the descendants of Norwegians, Finns, Danes and Swedes actually do better in the USA (pdf), under their relatively laissez faire hands-off policies, than they do under the relatively interventionist Nordic models. It just looks like Scandinavia is doing better because such a high proportion of its populace are Scandinavian, who tend to have good outcomes whichever system they're under.

There are some things that are just really hard to change!

Osborne won't be having an emergency budget then

Our word, a week really is a long time in politics isn't it? For George Osborne comes out of his post-referendum funk induced purdah to tell us all that he was just kidding. No, really, you didn't actually take the Chancellor of the Exchequer seriously did you? Ha, ha, gotcha

Mr Osborne will not publish an emergency Budget and says that while the outcome of the EU referendum will have an effect on public finances, it is sensible to wait until the autumn for the Office for Budget Responsibility (OBR) to assess the economy and for the new prime minister to be in place. 

Some 12 days ago we were being told:

George Osborne will warn that he would have to fill the £30bn black hole in public finances triggered by a vote to leave the European Union by hiking income tax, alcohol and petrol duties and making massive cuts to the NHS, schools and defence.

In a sign of the panic gripping the remain campaign, the chancellor plans to say that the hit to the economy will be so large that he will have little choice but to tear apart Conservative manifesto promises in an emergency budget delivered within weeks of an out vote.

Yes, of course, we know, the original threat and today's backtracking are both politics rather than economics and politicians do that. And that's why having politicians with power over the economy is such a bad idea - they will, inevitably, do politics not economics with the economy.

However, Chancellor is one of those jobs where the reality bit rather than the phantasms of politics is rather more important than it is in much of the rest of the Westminster circus. There will always be a blend between the buying of votes and doing what is actually correct but that blend has been, these past few years, far too populist and not enough reality.

Still, not to worry too much, only a couple of months to go now. For we rather do believe that the next Prime Minister will have a Chancellor, a different one, one who will eye up the balance rather differently. 

All political careers end in failure of course

But this is something of a new one on us, a move that is doomed to failure before it even starts. It appears that George Osborne is considering trying to replace Cameron as PM:

George Osborne’s allies are taking soundings this weekend among Tory MPs on whether the chancellor should stand against Boris Johnson to be the new Tory leader.

We're really pretty sure that's not one of those things that is going to work. And rightly so too.

Allow us to leave the politics out of this, as we should do, and consider only the performance as Chancellor. Most recently people will recall the outrageous slanting of the Treasury and other official reports about the effects of Brexit. The basic problem, as we all pointed out again and again, was that the inbuilt assumption of all those reports was that Britain would follow stupid policies on trade once we leave. And yes, following stupid policies leads to a bad outcome. But no consideration at all was given to what would happen if we followed sensible policies. Like Patrick Minford's insistence that we should simply move to unilateral free trade, the only sensible trade stance to have anyway, which would grow the economy, not shrink it.

Nominally independent, nominally expert, reports deliberately slanted for partisan political gain.

But sadly it's been worse than that Osborne has been a lousy Chancellor more generally. Two points particularly stick with us.  A higher minimum wage will cost jobs. Even the Low Pay Commission has been telling us this ever since they first started to set the level. Something called the Living Wage campaign starts to make political headway so Osborne decides to trump them, beat them. By bringing in a living wage higher than they were ever asking for. This is a Tory? A Conservative? 

Then there's one more subtle. The Bank Levy. When this came in we cheered it as being obviously correct. Too big to fail is indeed an externality of having large banks. The correct answer is a Pigou Tax on said externality. You can also view it as an insurance premium said large banks must pay for that implicit insurance they get. The original implementation was excellent. The tax was on the right thing, liabilities, and it considered risk. Overnight deposits paid more than long term bond issues, both more than equity. This was a right and good answer to the problem. And the banks were indeed both shrinking and changing their funding models as a result, changing them in the right and desired manner.

That in turn meant that the revenue from the levy was falling so Osborne changed the calculation to maintain the revenue but not the pressure for the banks to change in the desired manner. That is, he entirely screwed up one of the few important things he had got right first time. And all for entirely political, not economic, reasons.

The basic problem with having politicians trying to run the economy is that of course they will do so as politicians, not economists. But Osborne is worse than most. Don't just listen to us of course. Keep looking to see how that campaign works out to be party leader.

Short and sharp we predict, short and sharp and not in a good way. 

We're really looking forward to George Osborne's emergency budget

We're now 24 hours in or so from the markets having to digest the implications of the Brexit vote. The pound is down, less so against the euro than the dollar. That is a nice  stimulatory effect for the British economy, as devaluations are. The stock market, using a number of different measures like the FTSE 100 or the FTSE 250 is all the way down at the depths of Thursday last week.

And so in the face of this catastrophe we have something else to look forward to. George Osborne has promised us an emergency budget:

George Osborne will warn that he would have to fill the £30bn black hole in public finances triggered by a vote to leave the European Union by hiking income tax, alcohol and petrol duties and making massive cuts to the NHS, schools and defence.

In a sign of the panic gripping the remain campaign, the chancellor plans to say that the hit to the economy will be so large that he will have little choice but to tear apart Conservative manifesto promises in an emergency budget delivered within weeks of an out vote.

No one's really seen hide nor hair of him since the vote so we must assume that he's off working on exactly what he's going to cut and which taxes he's going to raise. All slightly odd given that stimulatory effect of the currency movements but there we have it. He did promise us he would punish us if we were naughty little boys and girls and so given that we have been we must expect to suffer.

Yes, that must be it. For it couldn't possibly be that he's simply hiding among the rubble of a once promising political career. Nor that the threat was just that, a threat, a piece of politics. For of course no Chancellor would just play politics with something as important as the economy, would they?

Who would prefer to offer an over and an under on that resignation speech being difficult to write?

Time for the EEA Option

So it’s a Leave. Now that we’re getting out the challenge will be to get the best deal possible. I think that is, by a longshot, the EEA Option – membership of the Single Market without membership of the European Union. Our full case for the EEA Option is here, but here are some quick points worth mentioning:

  1. Markets are tanking in large part because of the uncertainty about what comes next. A quick and explicit commitment to the EEA Option would calm them and probably undo a lot of the damage that’s been done. It would tell them that (a) there is a plan, (b) that plan is probably politically acceptable to the EU and (c) there is no immediate short-term economic shock to worry about. 
  2. The EEA Option takes much of the risk out of leaving. Brexit means a huge change to the way Britain will be governed, including the prospect of rebooting the country’s political culture altogether, as well as forging better links with the rest of the world in the form of free trade agreements and perhaps even setting up a common travel area with the other Anglosphere countries like Australia and Canada. But a lot of that opportunity could be lost if economic fears dominate the first few years of independence. EEA gives us breathing room to make Brexit a slow, safe process — not a risky, sudden event. We need a strong economy to get the other changes we want.
  3. The referendum was about one question only: whether we stay or leave the EU. It’s tempting to treat Vote Leave like a political party whose pre-referendum promises must now be implemented like a party manifesto after a general election. No: Parliament is still supreme, and as long we Leave the EU, Parliament is what should and will decide what course we take in the years ahead.
  4. Nevertheless, cutting immigration was not voters’ only concern. A Lord Ashcroft poll of 12,369 voters found that only one third (33%) of Leave voters ranked controlling immigration as their top reason for leaving – that is, 17% of all voters – compared to 49% who said it was “the principle that decisions about the UK should be taken in the UK”. 
  5. For many Leave voters it was about having control over immigration, not necessarily reducing numbers. Article 112 of the EEA Agreement allows EEA states to take unilateral action to restrict freedom of movement in the event of “serious economic, societal or environmental difficulties”. This may be enough control to satisfy a majority of the British public, if it was the trade-off for economic stability in other respects. Those people who believe that voters will feel betrayed if immigration does not sharply fall should consider how betrayed those same voters will feel if we have a recession after being promised repeatedly that this was not a risk.
  6. Voters may be surprisingly open to the EEA Option. We commissioned a YouGov poll recently that asked voters whether they would support the EEA Option even if it meant adopting some EU law and keeping freedom of movement, as Norway does. By a two-to-one margin (54% to 25%) they said that they would either strongly support or tend to support this choice. And yes, a single poll needs to be taken with a giant pinch of salt, but it is still indicative that the public wants economic security above all else.

For the EEA Option to be viable we’ll need support from across the political spectrum, and from both Remainers and Leavers alike. In particular, liberals of every stripe should embrace this route’s pragmatism and commitment to maintaining deep trading links between Britain and the EU. 

The EEA Option can unite Britain. To avoid the same kind of polarisation that followed the Scottish referendum, the next government will have to try and find a deal that satisfies more than just the 52% of leave voters. We need a deal that will calm the people who are anxious about the future today and feel as if half the country is against what they believe in. That should be the one that keeps Britain open, trading, prosperous, and free.

Today is Cost of Government Day, but the bill's on you

Hooray! It's Cost of Government Day. Or maybe there isn't cause for cheer. Because unlike its flashier, happier sister Tax Freedom Day, Cost of Government Day isn't the first day of anything, but the last day of something. It's the day when government spending gives way to private spending. Let me explain.

Imagine that we spent an equal amount of our net national income each day: one three-hundred-and-sixty-fifth of the total every 24 hours. Imagine further that instead of splitting spending among all its different targets as and when you need the goods and services you're buying, the government did all of the spending until it had finished. Then, afterward, all spending is private spending. Friday June 24th—today—is the last day where spending is done by the government and from tomorrow—Saturday June 25th—all spending is private.

Let me caveat that claim a bit. Firstly, just to be clear, it's obvious that government spending does not proceed in this way, it's spread across the year according to programme needs and so on. Secondly, we're looking at projected numbers, and we've used financial year figures to calculate calendar years. Thirdly, we've compared government spending to net national income, not gross domestic product, and GDP is much closer to a measure of total spending (indeed, it is partly calculated from a measure of expenditures).

But all of these caveats come with good reasons. Presenting government spending as a single chunk gives people a clearer and much more tangible grasp on its size. Most people don't think in financial or tax years, and when we revise our figures in future years, the changes are mostly small, indicating that our estimates usually aren't far off.

We even think there's a good reason for using net national income. One reason we track Cost of Government Day is to give an indication of the sheer scale of the UK government. But another is to give an indication of where future Tax Freedom Days could end up—and net national income is more close to a measure of the incomes we'll use to bear that burden.

When there is sufficient demand in the economy, government borrowing, just as much as taxation, comes at the expense of private economic activity. Money that is lent to the government cannot be invested in other projects.

What's more, presuming we don't want to throw away centuries of governmental financial probity, or create very high and unexpected inflation, debts must eventually be paid. Yes, we can grow the debt away: if the economy expands at a higher rate than the interest on our debt, the burden will get ever smaller relative to the amount we are producing each year. But £10bn of extra debt is still £10bn more (plus interest) in taxes to raise at some point.

Tax Freedom Day is more immediately appreciable, but arguably, Cost of Government Day is even more important. Government projects are often nice, but they inevitably come with a cost down the line. This year there was around a month between TFD & COGD—a month of pure borrowing—and one day that will be your loan to pay back.

Jobs are a cost, not a benefit

We don't quite share the general love of birdchoppers found in certain sections of today's society but we're entirely aware of the various cases for more renewable energy and so on. We can even come up with some interestingly true justifications for such renewables ourselves - certain hydropower projects are rather cheaper and better than spewing coal dust all over the countryside for example. And yet we would still insist that jobs are a cost of doing something, not a benefit, as not everyone in this debate seems to have realised:

A SUBSEA cable to export Scottish wind power to Norway will cost the country jobs and investment, the head of a renewables firm has claimed.

Regulator Ofgem has approved a licence for the construction of a 400-mile underwater power cable linking Scotland and Norway.

The £1.3 billion project will see wind power generated in Scotland sent to Eidfjord in Norway, with hydro energy from that country received in Boddam, Aberdeenshire.

Developers hope the link will be operational by 2022 with connections eventually developed to Iceland.

However, Rod Wood, managing director of Community Windpower, claims Westminster policy means “Scotland will lose out” on jobs and income because of the project – by buying in renewables from overseas instead of supporting the growth of the homegrown sector.

The basic plan seems sensible enough. Send the excess variable windpower from Scotland off to Norway where they will use it to pump water up behind dams. When there's a dearth of windpower in Scotland then the water can be let out again and the electricity delivered to Scotland. Sounds entirely reasonable to us, it's largely the way that the Danes are making their grid work.

But our environmental hero here is insisting that this is not good enough. Rather than using the most efficient method of gaining renewable power he is insisting that instead a more expensive method should be chosen. We know that it will be more expensive - because jobs are an expense, we've actually got to pay people to do these things.

This is a direct argument that the people of Scotland should be poorer. As such of course it's a very bad argument.

That line between public health and Puritanism

We're not quite sure whether we should be saying there's only a fine line between public health pronouncements and Puritanism or no line at all. Can't quite weigh up the linguistic distinctions:

E-cigarettes should be banned from public places like bars and restaurants because of the risks of "passive vaping," medics say.

Senior doctors said that allowing people to vape openly normalises the habit, and could encourage children to take it up.

But public health officials immediately rejected the idea – saying it could be damaging as it might deter smokers from switching to e-cigarettes.

Speaking at the British Medical Association’s annual meeting in Belfast, Dr Iain Kennedy, a consultant in public health from Glasgow, called for a ban, warning that there is no evidence of the long-term safety of the habit.

Dr Iain Kennedy, a consultant in public health, from Glasgow, said: “It is a myth that there is no such thing as passive vaping.”

He said there was clear evidence that non-vapers living in households with vapers had higher levels of exposure to nicotine.

“There are new potential risks, and we don’t yet know the level of those risks,” he said.

Well, actually, we do know rather a lot about such risks. Nicotine, as per nicotine itself, isn't all that much of a danger to human beings. This is why such things a nicotine patches are widely available. Because there's not much danger to anyone from them. Smoking on the other hand we know is dangerous. It being the lighting of the stuff and sucking in the smoke which makes it so.

Absolutely any evaluation of the two practices is thus going to come down one the side of not just allowing but encouraging, possibly even subsidising, people to vape not smoke. That is, if we are to judge on public health grounds rather than those of Puritanism.

You know, that worry that someone, somewhere, might be enjoying themselves?