The Cabinet has been told that Brexit will be bad for trade, very bad. The problem here is that the sources of this information are the same scaremongering reports that were passed around before the referendum, those reports that were part of Project Fear. And the current precis of them doesn't include the most important part of the Treasury report, which is the mechanism by which trade makes us richer in the medium to long term.
The Cabinet is thus being feed information that is not entirely and wholly true:
Cabinet ministers have been given detailed warnings that the UK pulling out of the EU customs union could lead to a 4.5% fall in GDP by 2030 and the clogging up of trade through Britain’s ports.
The predictions were contained in a paper circulated at a meeting of Theresa May’s special Brexit cabinet committee, which concluded that ministers were not yet prepared to decide whether the UK should withdraw from the EU’s free trade bloc.
The 4.5% cut is the average prediction made in three studies that were carried out before Britain’s EU referendum, in a move that could anger Brexit supporting MPs who believe that the old estimates are out of date.
To get to this result people are just doing sums. Exports are positive in GDP, imports negative, add up what you think the volumes of them will be and there's your answer.
But the Treasury report itself was very clear that this is not the medium nor long run effect of trade. Rather, there, the real effect is upon the productivity of domestic producers.
It's only the top 10 to 15% of companies, or producers, in any economy who partake in international trade. Why ship mediocre goods half way around the world when there're plenty of local mediocrities to be dealing with? Imports thus represent competition from the most efficient producers in the world - being exposed to such competition means that local producers either buck up their own productivity or they go bust.
Imports thus boost local productivity - and as Paul Krugman has said, productivity isn't everything but in the long run it's pretty much everything. Increased productivity is the very thing that makes us richer.
The sums being done in these reports do not take account of this effect. They are, essentially, doing sums not economics.
When we do economics, and take account of this effect, then we get to Patrick Minford's result. Assume that our exports face the usual WTO barriers. But that we offer unilateral free trade on imports to us. This exposes the British economy to that productivity enhancing competition from the best of the whole world's producers, not just those from the rather sclerotic economies of mainland Europe. The net result is a 3% addition to British GDP in this timescale, rather a far cry from the 4.5% contraction given here.
Which leaves us with a rather important point. The effect of Brexit upon trade and thus GDP is an economic question. We should therefore be doing economics in trying to answer it, not just sums.
Nick Clegg has been doing the rounds insisting that a hard or clean Brexit will lead to a rise in British food prices.
Nick Clegg is wrong, entirely so. The claim is:
He said: "A hard Brexit will lead us off a cliff edge towards higher food prices, with a triple whammy of punishing tariffs, customs checks and workforce shortages.
"We must hold Theresa May's Government to account and fight to ensure what comes next is best for British consumers and businesses.”
The claim that food exports could face higher tariffs is at least potentially true. But that would of course mean that British food prices would decline. For some of what is now exported would remain available for consumption domestically.
However, their real claim, from the full report, is this:
In the case of such a “hard Brexit” the UK will be obliged to impose tariffs on imports, while the EU and the rest of the world will be obliged to impose tariffs on our exports.
This is simply not true. To check our understanding we bothered to call a source in Geneva, something that perhaps Clegg and the Lib Dems should have done.
The claim is that a clean Brexit will mean that we must revert to WTO rules. Just for the avoidance of doubt yes, Britain is a member of the WTO in its own right, so definitely and definitively WTO rules would apply.
Those WTO rules say that there are ceilings to the tariffs which can be applied to imports from other WTO members. All British exports could and would face duties up to but possibly below those ceilings. Clegg is claiming that Britain would thus have to impose equal tariffs to imports into Britain. This is nonsense. We cannot apply higher tariffs than those ceilings, but we can apply any rate that we wish below them. Yes, we did check, 0% is an allowable rate below those ceilings.
Further, all that Most Favoured Nation means is that whatever rate we do decide to apply must be applied equally to products sourced from whatever WTO member nation. We can have a special low rate for camembert if we wish - as long as camembert from France gets charged the same rate as that from New Zealand then we're obeying the law.
The central contention here is therefore wrong. WTO and MFN rules allow us to increase tariffs up to the agreed ceilings on imports into Britain on the understanding that whatever rate chosen applies to all sources.
WTO and MFN rules do not insist that tariffs must be imposed upon imports. We are entirely at liberty to impose any rate we wish below those ceilings, including offering tariff rates of 0%. Which, given that we import some 40% of our food seems like a sensible idea. Why would we be so damn stupid as to make our own food more expensive for ourselves through our own actions?
Nick Clegg was once Deputy Prime Minister wasn't he? How well we must have been ruled back then.
Tim Stanley who, as a teenager, was an enthusiastic member of The Next Generation, and who, as a journalist, has been a featured speaker at it, wrote a typically good column in Saturday's Telegraph. He has a remarkably simple insight:
First, we all know what Brexit means. It means we’re leaving the EU. That’s all. Simple really. Lots of other countries apparently exist outside the EU, some of them are doing rather well. China, Japan, America… oh, the list is surprisingly long.
Yes, it is what more people voted for than have ever voted for anything in the history of our democracy. It is what I voted for. We voted to leave the EU and make our own laws instead of having them imposed from outside. People were fed up of having no say in whether their kettles had to take an extra minute to boil or their light bulbs another three seconds to light up. They were irritated that outsiders were banning the sale of packs of 10 cigarettes to poor people, or of packs of 16 or 17 in vending machines, or of menthol cigarettes, and they voted to stop it.
I added some economics to the sovereignty arguments because I want the UK to trade globally rather than remaining part of a narrow protectionist bloc of diminishing importance. We can do this outside the EU but not inside. As Tim Stanley says:
We are leaving the EU; the details will out as the process takes its course. Why is that so hard to grasp? It’s not, of course. Most of the high-profile critics of the Prime Minister are fiercely intelligent and they understand entirely how Brexit works. They just don’t want it to happen. So they take every bit of bad news, every bump in the road as an excuse to shout: “Stop the car! Reverse, reverse!”
He points out that the critics use a variety of specious arguments to thwart the democratic decision from being effected:
For instance, they are all now fans of parliamentary sovereignty and insist that Parliament debate Brexit. These are people who for forty years were happy to let Brussels dictate UK legislation. No, they are not reasserting the power of Parliament. They are using Parliament in a last ditch attempt to overturn the result of the referendum.
Tim Stanley accepts what he says Theresa May has accepted, that the UK's future will now be outside the EU. It is a bold step into an unknown future, and critics of it should now recognize that it will happen instead of hoping that it won't. They would be welcome on side to join those of us who are going to make it work.
Miles Saltiel is one of us, a Senior Fellow here at the ASI. He is also author of an interesting little new book available here. Given that Saltiel is one of us it is of course a perfectly formed volume and at a very free market price of only 99 p.
However, it's also rather more than that as it's a little bit of instant history. Saltiel was running a blog and discussion group of various connected and high level people in the run up to the Brexit referendum and beyond. This is a collection of pieces from those discussions. And the joy of such collections is that they are indeed that instant history.
All too often the historian is looking back, knowing how things turned out, and then fitting events into that knowledge structure. The advantage of something like this, a diary almost of the discussion, is that we can see opinions changing as they really did change, without that hindsight. How we all thought that leave got a head of steam up in that last couple of weeks to be derailed by the awful murder. The Remainiacs attempting to capitalise on it rather being ignored by the public - but even so, right on the eve of the vote most thinking that remain had won. And then the realisation that we really were going to be free and sovereign again.
Quite the most important part is the discussion after the vote. As it becomes clear that the EU will offer nothing without freedom of movement. And as that's the red line over on our side (while Saltiel and we think said freedom a jolly good idea that's not what either the people nor the government believe) then the rest of the decision is already taken for us.
As we are going to restrict immigration therefore we will be having hard, or as Eamonn Butler, also of this parish, puts it, clean, Brexit. For there isn't anything else to be had given the migration stance.
As a whole it's an interesting read as a record of how people realised and when what was going on. The important policy part is what is said after the vote has been won. And as a guide to what will happen that analysis seems spot on to us.
It's an odd thought, but a potentially true one, that how we leave that delightfully social democratic ideal of the European Union will reduce inequality here in the UK. As we say, odd but potentially true.
For there's something dreadfully underappreciated about inequality. It's not so much about certain professions or jobs getting paid more than others. It's rather more about certain firms paying better than others in the same field. We are, rather than inequality between say, classes, seeing inequality increasing between firms. This is true of the US and the UK:
The reason, according to a new paper from Harvard University’s Richard Freeman, is that over time inequality is growing between different companies.
“The earnings of workers with near-clone similarity in attributes diverged so much by the place they worked that rising inequality in pay among employers has become the major factor,” in rising inequality, Mr. Freeman said.
This may sound obvious: Of course some firms do well and others don’t. But if inequality is growing sharply among workers with the same attributes, it casts doubt on theories that peg inequality to primarily demographic, educational or geographic factors. The link is tighter than one might expect. From 1992 to 2007 (the period in which the data in this study was available, and also the period over which much of the rise in inequality occurred), the average worker at a given percentile, and the average firm of a worker at that same percentile had almost equal earnings increases.
The likely reason is that the economy is becoming less competitive. It is competition that makes firms scramble for productivity and it is productivity which enables higher wages to be paid. If we're finding that productivity is increasing only in certain firms, rather than across firms in general, then we are seeing the effects of too little competition.
Which brings us to Brexit. One potential outcome, one which we desire of course, is that Britain reverts to proper, even if unilateral, free trade. This exposes all domestic manufacturers to competition from the top producers around the world - it being, of course, usually the top 10 or 15% of any economy that even tries to export. Under the pressure of such competition the urge to increase productivity will bear upon all firms and thus both make us all richer and also reduce the inequality of pay across firms.
I have a lot of time for Shelter’s policy team, because apart from basically being in agreement with them about the evils of strict planning policies I think of them as being smart, open-minded people who are happy to debate with their opponents in good faith.
I’m not sure about their most recent report, though, which purports to show that four in ten homes in Britain don’t meet ‘acceptable’ standards. It’s not to suggest that the housing situation in Britain is all roses to question a few of the things they think are essential to living well.
Most of the 'essential attributes' are indeed pretty bog-standard – a house should have a toilet and a shower or a bath, should have plug sockets and not be easy to break into, etc. But some are dubious.
"There is enough space for all members of the household to comfortably spend time together in the same room" is important for families but not for co-habiting young people. I know lots of people who’ve had the option of a flat with a sitting room but have chosen one without, because the rent is cheaper and/or the bedrooms are bigger for the same price.
"The household has enough control over how long they can live in the home" – does this preclude assured shorthold tenancies of 12 months? I don’t know – the data is not available without emailing Shelter to ask (more on that below) – but if so pretty much every flat I’ve lived in since leaving university, even the decent ones, fails the test.
"There is enough space to allow all members of the household to have privacy, for example when they wish to be alone" – I shared a bedroom with my brother growing up, so I guess none of my childhood homes meet this standard. Well, OK, I thought they were fine. (These criteria are sometimes contradictory, because another point suggests that it’s OK for kids to share rooms.)
In many respects rental properties used by young professionals cannot hope to win. For example, to qualify as ‘acceptable’ one of these three must be satisfied: being allowed to redecorate the home (repainting the walls, etc), being allowed to have a pet, or being assured of being there for long enough to 'participate in the local community'. None of those three apply to my current flat, which I quite like and certainly do not think is an unacceptable place to live.
Remember: failing any one of these criteria would make a home fail the 'Living Home Standard'. And there are places that could fail or pass on the sole question of whether you're allowed to keep a pet hamster in your bedroom.
If I was raising a family then I would feel differently about many of these, but the point is that lots of people are not raising families. If four out of ten flats are ‘unacceptable’ by these criteria but most of those are inhabited by people who have no need for pets or redecoration, or even long-term security in that flat, then the problem is less than is suggested.
I don't need space for a dog, I don't want to redecorate, I don't care about making friends with my community. But because my flat doesn't allow me to do these things, it fails the Shelter test. How many other people are living in flats that have failed and don't care either?
I’m also a little bit annoyed because the actual data, the polling evidence that tells us how many homes are ‘unacceptable’ by Shelter’s standards, isn’t available except if you email Shelter’s public affairs team to ask.
That’s not how it should work: as I’ve written before, we cannot trust journalists to scrutinise academic or think tank research properly, and if we can’t do that ourselves conveniently we shouldn’t trust the work at all. It’s extremely bad form of the BBC to report on unpublished data like this, and bad form of Shelter and Ipsos MORI not to publish it so that ordinary Joes like me can read it without asking for permission.
I could of course make the argument that the real problem is people being on low incomes, and the solution is not to pass regulations that, in effect, force them to spend more money on housing that Shelter approves of, but to make them richer by cutting their taxes, by growing the economy, by giving them cash transfers, by cutting the costs of other expenditures like energy and childcare, or by relaxing planning laws so that land is cheaper. All of this is true but almost beside the point if Shelter's unacceptable homes include places that people are perfectly happy with regardless of their income.
To which you might say, why question this? We know the planning system makes things worse. But we don’t need to make flimsy arguments based on secret data to make this case, and doing so makes us all look bad.
Over at Market Urbanism (one of my favourite sites) economist Sandy Ikeda has a post on the links between markets and cities. In it he references a bunch of recent writing on the links between markets and cities: "Cities aren’t merely convenient locations for markets; a living city (which I’ll define in a moment) is a market, and the first cities probably originated as markets."
He points to Jane Jacobs' view that cities' strength is in their diversity: both in terms of land use—Le Corbusier look away—and in terms of their inhabitants. With different tastes, opinions, skills, abilities, and so on individuals can satisfy each other's demands and preferences. But it goes further:
Now, standard economics teaches us that the differences among economic actors allow them to specialize and trade for mutual gain. This principle is called “comparative advantage,” which is the idea that people should choose those lines of production in which they are the most efficient. That’s fine as far as it goes.
But more importantly Jacobs, and indeed most Austrian economists, see the essence of markets as not merely places that promote efficiency, but as places in which entrepreneurial competition spurs the discovery of new things. That discovery process entails fundamental changes in culture as well as in economic development. Joseph Schumpeter’s phrase “gales of creative destruction” better captures the essence both of living cities and of markets than the standard economic notions of efficiency, comparative advantage, and low-cost production, as important as those are in their limited context.
Living cites and successful markets bring intellectually and culturally diverse people together to their mutual advantage, but they also create conditions in which vast amounts of novel information—about science, technology, religion, music, the arts, and lifestyles—get dispersed very rapidly. That in turn allows all kinds of people, the ordinary and the extraordinary, to experiment and to make new connections among all that information, generating even more diversity and attracting even more people. In this way, cities become “incubators of ideas” and economic growth. The process is highly dynamic, but also very messy and, yes, in a sense inefficient. Most experiments fail. But someone who fails in a city, unlike her counterpart in less-urbanized cultures, need not starve as a result, and there is more likely to be some new opportunity just around the corner. We see the successes that drive innovation, but the failures are important, too.
Read the whole thing!
In the November issue of Wired, the Frontiers Issue, President Barack Obama contributes an editorial that shows him much more in tune with our outlook and our world view than we had supposed.
Firstly, he is optimistic about the present and the future. "The truth is," he says, "if you had to choose any time in the course of human history to be alive, you’d choose this one." Agreed. The world is better than it has been. "A smaller share of humans know chronic hunger or live in extreme poverty." Yes, indeed, and the future will be better still because we will make it so by doing more of what it took to achieve that.
"Humans—through our ingenuity, our commitment to fact and reason, and ultimately our faith in each other—can science the heck out of just about any problem." Well said. Human creativity can devise solutions to overcome challenges and improve the world. Technology can solve problems better, we think, than wishful thinking or pious resolutions. It can enhance and enrich the lives that future people will live.
Where we part company with him is on the methodology that can bring this about. He clearly thinks in terms of political action to solve pressing problems. "To clear these hurdles we’re going to need everyone—policy makers and community leaders, teachers and workers and grassroots activists." Actually some of the groups he mentions are going to be opposing the innovations that can solve problems, a brake on progress rather than a spur to it. What it is going to need is space for human creativity and ingenuity to develop and flourish. It is going to need entrepreneurs, and conditions that favour their talents.
Instead of big projects developed and orchestrated by governments, it is going to need a large measure of the personal liberty that allows people to break out from the norm and seek new things and new ways. It is going to need property rights, low taxes and regulations to foster growth and innovation. It is going to need a culture that esteems and rewards innovative problem-solving.
Governments have a role to play, of course. But it will not be one of restricting and confining the lives people live and of limiting their choices and their chances. It will be one of embracing new technologies and allowing those who discover and develop them to be rewarded for doing so. It will be one that flows with the tide of an unbounded and spontaneous future rather than one that seeks to confine it to preconceived and pre-planned channels.
Marks for attitude, Mr President, but not for methodology.
See the full Wired article here.
Last Sunday's debate showcased attempts by Hillary Clinton and Donald Trump to outdo one another in their commitments to winning at trade, and punishing China for its inadvertent subsidisation of the American construction industry.
The universal acceptance of trade as a zero-sum game was both unexpected, and difficult to stomach. While Trump has promoted protectionism since the 1980s, fearful back then of unchecked Japanese growth, Clinton has long championed trade liberalisation. She supported NAFTA as both First Lady and Senator, contending that “everybody is in favour of free and fair trade. I think NAFTA is proving its worth," and later deeming the Trans Pacific Partnership the “gold standard” of trade deals.
In a reversal of her earlier positions, Clinton has publicly embraced protectionism during her current presidential campaign, disavowing past support for TPP and NAFTA. During Sunday’s debate, she announced her intent to empower a trade prosecutor to hold China accountable for “illegally dumping steel in the United States” and “putting steelworkers and American steel plants out of business”. While this commitment would seem to put her squarely at odds with her past beliefs, recently leaked excepts from private speeches given to bank executives call her commitment to protectionism into question.
Addressing the Brazilian Banco Itaú, Clinton expressed her desire for “a hemispheric common market, with open trade and open borders”, and went on to describe the tremendous effort and cooperation required to advance pro-trade policy. Another leaked email, written by campaign pollster Joel Benenson, evidences that Clinton’s decision to oppose TTP was motivated by political, rather than ideological, concerns. Benenson writes; “I accept the position we’re taking but she has generally been more pro-trade than anti and we get (sic) we need politically by opposing this”.
Her public positions are therefore a far cry from those she’s willing to support with friends in the privacy of her living room. While John Cassidy, writing for the New Yorker, describes Clinton’s revealed positions as those of a “hard-headed centrist”, they are effectively neoliberal; removing restrictions on the international exchange of goods and services helps the global poor while providing for the more efficient use of scarce resources.
During a speech in Cincinnati, Clinton reiterated the protectionist themes presented in her debate speech, telling supporters she would “say no to bad trade deals like the Trans-Pacific Partnership and unfair trade practices like when China dumps cheap steel in our markets”. Leaving aside the fact that anti-dumping laws harm consumers far more than they help producers, or that WTO dispute panels have judged current duties to be illegally anticompetitive, Clinton’s stated opposition to free trade is electorally unsustainable in the long term.
While Trump may have been able to attract support by getting on TV and letting loose on foreign competition and trade deficits, Hillary can’t. She is supported by a coalition of beneficiaries of trade and immigration. While Podesta’s emails draw focus to the financial sector’s membership in this group, they are hardly the only pro-globalization group upon which Hillary relies. The tech sector requires a steady supply of highly skilled foreign workers, and while republican voters increasingly support protectionism, support for free trade among rank-and-file democrats has increased from sixty to seventy-four percent over the past decade.
While most democrats believe that globalization reduces domestic job security, they consider this an acceptable price to pay for increased standards of living, politicians don’t need to sugarcoat the tradeoffs at all.
Even Bernie Sanders’ supporters expressed skepticism at his claim that open borders were “a Koch brothers plot”. Just imitating conservative protectionism will bring diminishing returns as the gap between democrat and republican support of free trade continues to widen, and tariff-happy democratic politicians may find themselves facing primary challenges from free-traders unencumbered by Trump’s regressive social views. Hillary Clinton has expressed continuing private support for free trade, coming out about her beliefs will bring her in line with the majority of her supporters, and push her party toward a sustainable future.