The costs of Brexit are gradually becoming clear

After weeks of those gnawingly bland "Brexit means Brexit" assurances Theresa May finally caved in to the growing pressure last week and set out to clarify the Government's position. We now know that the UK will be leaving the Single Market, putting to an end to the hope that 'passporting rights' for banking services could be retained after Brexit. Since then most large banks have gone public with the worst-kept secret in the Square Mile - namely that they have been scouting various EU cities in the hunt for new locations in which to headquarter their European operations ("Citi plans Brexit job move", "Banks plan Brexit exodus", "City banks warn of Brexit job moves").

While there will not be many people shedding tears over the likelihood that tens of thousands of banking jobs may disappear from the City of London over the next decade, the loss of tax revenues should certainly concern them. The City contributes £60bn a year in tax revenues to the UK Treasury (11% of the overall tax take); the net cost to the UK of EU membership is £8-9bn annually. If HMRC were to lose only 15% of that £60bn tax revenue then the act of leaving the EU will come with a net cost attached. So much for £350m a week extra to spend on the NHS.

To look at the specifics, according to this article from the Daily Mail - "Anger over £250,000 average wage at investment bank Goldman Sachs" the average pay at Goldman Sachs is £250,000 per year. Now it's probably safe to assume that the Daily Fail has manipulated the figures somewhat for the purposes of the article, as is it's wont - so let's assume the average is closer to £200k. Someone earning 200k per year will be paying around £83000 per year in tax and national insurance contributions. By contrast, someone on the average UK salary will pay only around £5500 in tax and NI. So for every job permanently lost from the City, the UK will need to create 15 at the national average wage simply to replace the lost tax revenue. That's a lot of extra jobs to create in an as yet unspecified booming area of growth. And that does not even take into account the collective demand that the individuals occupying those new positions will place upon the national infrastructure - one taxpayer vs fifteen taxpayers, one taxpayer's children vs 15 taxpayers' children, one pensioner vs fifteen pensioners.

There is also the unanswered question of where the employees to occupy these replacement roles will come from - we are clamping down on immigration apparently, so are these roles to go unfilled, as we are already close to full employment? Will the hit to the Treasury's revenues therefore be permanent and, if so, which services will be cut as a consequence? Or is Theresa May going to have to renege on the promises made on immigration by Leavers during the campaign?

With each passing day, as more details of the post-Brexit landscape emerge, it is looking more and more as though we have taken a foolhardy gamble.

Idiocracy

So the Idiocracy has started [https://en.wikipedia.org/wiki/Idiocracy]. The worst choice in history for President of the USA has been sworn into office. The electorate set aside all the norms that should have prevented the election of a man who is a sexist, a misogynist, a racist, a fantasist, a conspiracy theorist, a liar, a bully, an utter ignoramus, and an overgrown child, and they voted him in anyway. And in the UK in March the Brexit process will be triggered - the biggest mistake the country has made in the last century, and one which will make it permanently poorer and less influential. In each case - Brexit and Trump - the 'shock' outcomes have been portrayed as a kick back against the political class and/or a metropolitan liberal elite by those 'left behind' by the march of globalisation. The warnings of the professional politicians and commentators were simply ignored and the maverick candidates were elected anyway seemingly on the basis that if your life is already crap, how much more crap can it get?

It is deeply depressing, but we are now in what has been called the post-truth era, where facts and evidence are irrelevant if they don't fit with preconceived opinions. I prefer to call it the era of wilful ignorance - rather than thinking through highly complex, nuanced issues with numerous shades of grey people choose instead to portray the same issues in simplistic black and white terms and propose blunt instruments as solutions. Professionals who spend their working lives getting to grips with these complexities are dismissed as bloated bureaucrats, experts and academics are denounced as parties to some unfeasibly wide and deep web of left-liberal conspiracists, and the entertainment of ideas is dismissed as ivory-towered elitism. The red-top electorate doesn't want to go to the effort of analysing anything longer than a headline so populist politicians gleefully offer up easy solutions rooted in misinformation.

The problem we will face in 2017 and beyond is that the 'populists' have been elected but they will be unable to deliver. The world is not black and white; it is painted in infinite shades of grey. Simple solutions inevitably fail in the real world; if the simple solutions worked they would have been tried already. Brexit will not reduce immigration, or if it does it will be at the expense of higher unemployment and a shrinking economy. Trump will not build his wall or lock up Hilary. Brexit will not result in an extra £350m a week being spent on the NHS, rather it will result in less money being available for the NHS and all other spending priorities. Trump will not be able to cut taxes and reduce borrowing and rebuild the nation's infrastructure - that circle cannot be squared. Brexit will not lead to a democratic renewal in the UK - we get the politicians and policies we vote for and for the last 40 years that has meant various shades of neo-liberalism. Trump won't quit NATO or start an arms race with China. Neither will he be able to improve the economic circumstances of the 'left-behinds' that voted for him - if he retreats into protectionism he will just make them worse off.

My concern is what happens when the populist politicians fail, which they will. Will they then swing further to the right and start another hunt for minorities to blame? Will they propose deportations as the next solution to their perceived 'problem'? Or will the electorates in the UK and the US realise they voted for a lie and that it is the system that is at fault - that neo-liberalism is to blame for the growing wealth gap and economic stagnation experienced by the majority of the population. Will they finally realise that the only way to truly address the cause of these frustrations is to continue to embrace openness and globalisation but to distribute the proceeds of the resulting national wealth more fairly - through wealth taxes, higher income tax for top earners, and the reduction or abolition of indirect taxes.

Improvements in the quality of people's lives will only come through investment in the services that the majority of us use and rely on (health, education, emergency services, childcare, social care, roads, railways, etc), through increased social housing provision, through subsidised public transport, through subsidised clean energy, through a genuine living wage or a universal basic income. It's not rocket science and I desperately hope the electorates on both sides of the Atlantic experience some sort of epiphany but I am not holding my breath - history leads me to believe we will simply double down on the collective madness that has led us to our current position.

Free Movement Of Labour

There has been a lot of debate prior to and since the Brexit vote around whether or not the EU's insistence on maintaining the right to free movement is a help or a hindrance to the further development of the EU. Farage and others blame free movement for forcing down wages though survey after survey show that it actually has negligible impact [Prime Economics - EU membership impact on wages]. Though it doesn't force wages down I believe it helps to restrain wage rises beyond what the market can bear and actually has the effect of pushing wages up on average throughout the EU, and is therefore a good thing.

So, how can Farage have got this so wrong? The reason is that he is focusing only on the local effects in the wealthier countries that have been the recipients of large number of Eastern European migrants and then putting the cart before the horse. If you take the EU as a whole, free movement ensures that the working population in each country is not geographically constrained. Being constrained in such a way would make the workforce exploitable by corporations/employers playing off one country against another in order to force down wages, or working conditions, or environmental protections, etc. The EU has a common set of laws in place to prevent these practices that would otherwise occur in the pursuit of the maximum return on capital. The fact that the workforce can relocate means that firms competing for labour in the countries vacated by economic migrants have to put wages up to retain the best staff - the ones that have a choice about where they work. This has the effect of raising the spending power of those citizens that stay-put and is a catalyst towards the re-balancing of the economies of the EU and standards of living across the EU. Firms will initially invest in those countries because they are cheap, and wages will rise to keep the best staff in those countries. This is a good thing - it means that on average free movement pushes wages up amongst skilled workers across the EU.

But how about in the countries that are the destinations of economic migrants - surely an influx of job-seekers will lead to more competition for jobs and therefore force down wages? As the referenced surveys have shown, this is not the case. Intuitively it is apparent that the vast majority of migrants relocate in order to find work so will target those economies that are growing, creating jobs and already have skills shortages. They are unlikely to target regions that have high unemployment or under-performing economies - to do so would just not make any sense. In migrating to countries that already have skill shortages they will certainly have the effect of constraining the growth of wages beyond a level that is competitive, which would normally be the consequence of a shortage of labour, but again this is a good thing as it holds down inflation and keeps the economies of the EU competitive. The idea that freedom of movement of people forces down wages simply does not fly - they would have to migrate to destinations that already have a surplus of labour and no minimum wage if they were to have the effect of reducing wages.

How about the fruit and veg pickers of East Anglia? Despite these workers not falling into the 'skilled workers' categorisation, the same analysis applies. Farmers consistently tell us that they hire migrant labour because they cannot get locals to do the work ie. the jobs already exist and the farmers are facing the same shortages in filling them. The wages they are offering must already be competitive across the EU as a whole, even if they are low, otherwise people wouldn't travel from the EU to the UK to fill them. Hence the wages for fruit pickers in East Anglia are already amongst the highest rates for the job in the EU. Preventing free movement will mean that farmers have to raise those already (relatively) high wages and will therefore become less competitive. Once we are outside the EU those farmers are going to have to put up wages to attract local workers and will require significant subsidies or else tariffs on fruit and veg imports from the EU if they are to remain in business. Or we continue to allow migration to fill these vacancies; ipso facto, Farage has sold the public a con - again.

Interesting refs:
Prime Economics - EU membership impact on wages
NIESR - Impact of immigration
Economics Help - The 'lump of labour' fallacy
Impact of EU migration
EU migration — the effects on UK jobs and wages

Will the last person able to leave Britain please turn out the light.

I felt compelled to write this post because amongst all the emotion and rhetoric of the Brexit debate the rationale behind the most contentious of the four freedoms on which the EU is founded - the free movement of people - seemed to get lost along the way. Of the four freedoms, I imagine that the free movement of goods and free movement of services are fairly well understood in general - they are designed to provide a more competitive single market with firms across the EU competing on a level playing field in order to drive out inefficiencies and increase productivity. Free movement of capital is also pretty straightforward - it aims to ensure that capital is deployed where it can be the most efficiently used and where it can find the appropriate balance between risk and return - this ensures that more investment funds are made available for business start-ups or for capital projects for expansion.

These three freedoms have a significant impact on EU citizens lives - they combine to make businesses in the EU more efficient, more entrepreneurial and more competitive. They have a significant impact but they do so invisibly - people are not particularly aware day-to-day of their effects and do not see any physical manifestation of those effects. Free movement of people on the other hand could not be more obvious to people - which is why it receives the attention it does and also why it is not always fully understood. So what benefit does free movement of people offer? Well firstly from a corporate point of view it allows firms within the EU to draw on a greater pool of labour which reduces supply-side constraints on the growth of their businesses. Obviously that's great for those firms as it allows them to grow faster than they may otherwise have done, and at a lower cost, but what does it do to benefit the people of the EU?  Let me explain by way of a hypothetical example ....

Imagine there are two countries within the EU one of which has free movement of labour but no free movement of capital (country 'A') and the other which enjoys free movement of capital but no free movement of labour (country 'B'). For country 'B', it's capital is free to move in or out of the country depending on whether or not it can get a better return elsewhere. Therefore in order to retain it's existing capital base and to attract more investment to its shores country 'B' needs to ensure that it is always minimising the costs to capital. This can be achieved by cutting wages, cutting environmental protections, removing health and safety guarantees, etc - to any extent it pleases as the workforce is unable to leave. Capital put to work in country 'B' has a captive workforce that cannot vote with its feet by going elsewhere to look for work and which is therefore ripe for exploitation.

On the other hand country 'A' has captive capital which cannot be redeployed elsewhere - it must work to generate a return within the country it finds itself in. In order to generate a return it will require a workforce to add value and generate exports. Those exports will bring money into the country and so generate the required return. The capital in country 'A' must compete with other countries in the EU to attract that workforce to come and sell their labour - and it must keep winning that competition in order to keep generating a return. So given that capital cannot move and the workforce can, what does it need to do in order to attract that workforce to its shores? The answer is plainly the polar opposite of the situation in country 'B' ie. it needs higher wages, better working conditions, shorter hours, etc. But it also means more infrastructure - schools, hospitals, housing, etc as that is what people come to expect as compensation for their labour.

Given the two situations described above it is self-evident that free movement of capital within the EU without the corresponding free movement of people is a flawed position to adopt and is why all four freedoms are so fiercely defended by the remaining EU members. They are right to defend them - free movement of capital without free movement of labour would simply mean a race to the bottom between countries trying to out do each other in minimising the cost to capital of their populations.

Unfortunately the people of Britain have just voted to put themselves in the position of country 'B' ie. a captive workforce with no right to leave the country to seek work elsewhere and with no restrictions on the movement of capital in or out of the country. I fear that those who voted the most fervently for Brexit (the unskilled) will ultimately be the victims of Brexit as a race to the bottom begins - the minority that do have sufficient qualifications and experience that they are able to get visas or work permits to work abroad may begin to leave the country and those who are not qualified will be left to scrape a living in a low-wage economy. The process of impoverishment has already begun with sterling's devaluation leaving Britons between ten and twenty percent poorer.

Of course, it could be argued that this is too simplistic and Britain could instead become a high-skill, high-wage economy. Unfortunately not only would this require massive and continuous investment in increased education and training (our productivity is currently woeful when compared to, for example, France or Germany) it is also irrelevant. Whether skilled or unskilled, any fungible worker will command a lower wage when his/her movement is constrained than when it is not - we may earn higher wages if we are skilled than if we are not but it is still less than we would earn with free movement in place ie. we have still managed to shoot ourselves in the foot.

I fear that what lies in store for Britain over the next decade or so is the gradual return of the 'brain drain' so damaging to Britain's economy in the 1960s and 70s.

"We just want our country back"

Supporters of Brexit cite a wide variety of reasons to explain their views.  These range from Brussels' alleged "meddling" in their affairs, to an objection to the size of the UK's contribution (almost always misrepresented in size and purpose), to the supposedly undemocratic nature of the Commission, and finally to the utterly feeble excuse of last resort which is emblazoned on their bus - "We want our country back".

Now I fully accept that some Brexit supporters use this slogan  in the context of repatriating democratic powers lost to Brussels, as they see it, but for a significant proportion it is just a poorly disguised call to racism.  Couched in terms of innocent, inoffensive simplicity it is actually just the opposite - it is in fact the secessionists' argument for withdrawal from the modern world.  What they "want back" is not a place but a time.  What they want back is the time before globalisation, before the Empire Windrush docked at Tilbury, before Idi Amin expelled the Ugandan Asians, before the fall of the Berlin Wall, and before the world shrank around them.

Today's world is characterised by technology that brings us all closer together and gives us far greater knowledge of foreign countries and cultures than previous generations ever had access to.  It is also characterised by increased travel for recreation and for work.  Wherever you settle in the world today you will hear all sorts of different languages and accents - this is a good thing as it reduces the fear of the unknown that people have about other nations and other cultures.  Unfortunately it seems to upset Nigel Farage.

In the past fears and demonisation of foreigners and of religions have allowed corrupt leaders to plunge their countries into the most horrendous of wars.  The sheer volume of travel and of cultural interaction today makes wars on such a scale less likely.  But pulling up the drawbridge and hiding behind the curtains will not stop this interaction from continuing in the rest of the world outside the UK.  It will however make the UK less relevant to and less engaged with the rest of the world.

UKIP-ers would like us to return to the Britain of the 1950s.  This is plainly not going to happen - the world has moved on, but it appears to have left UKIP behind.