BREXIT: Should we?

My family
It is their future

 

In economics there are a number of things about which I am certain and the fun of economics for me, over the years, is that in some areas of the subject, mainly macroeconomics, I am certain that the majority of economists are wrong and many of these issues are dealt with on my blog. When you have a minority view it is important that you understand both why you are right and why the majority are wrong. If you hold a majority view then it is easy to rubbish the minority and never have to understand anything so I am always pleased when there is an intelligent response to my challenges.

In the programme QI there was one question the answer to which was “nobody knows” and I am afraid that this is the answer to the BREXIT question. I am not certain and I do not know of any academic who is certain about in or out. We all have our opinions and I shall give you mine after this little story. I have always had fun with my students when I told them that there are no facts about the future and therefore we can only view forthcoming events with probability. I was reminded of this recently at a funeral when a top man from one of the world`s largest companies told me he had never forgotten that lesson on probability. He had become so animated in arguing for future facts that he said “if I drop this ruler it is a fact that it will hit the ground”. He did and Geoff who was sitting next to him caught it. A lesson I have never forgotten he said.

If nobody is certain then how should we approach this vote? I suppose we must ask ourselves two questions:

  • Is BREXIT good for me and my family?
  • Is BREXIT good for the economy and the country?

With no facts about the future I can only offer you my conclusion as an economist where my answer to the second question also answers the first question, but I recognise that this will not apply to everybody and I make the point by referring to UKIP MEPs who risk losing their place on the gravy train when they vote to leave.

In 1973 I supported UK entry into the European Economic Community (EEC) and in the 1975 referendum I voted to stay in. The reason for this was quite simple. As an economist there is one convincing argument: on average we will all be better off if the world trades freely rather than hides behind protective barriers. The EEC was a customs union and inside the union trade would be free from restrictions and outside the union there would be a common external tariff which would be the lowest of all the member countries. This was therefore a considerable step towards free trade. I was concerned that the Common Agricultural Policy ignored all the rules of free trade and tried to overrule the market place by setting minimum price guarantees but I hoped the Common Market would see sense and bring this industry into line.

In one sense the current issue is the same but in reverse: can we leave the European Union (EU, note “economic” has been removed from the union) and still maintain a free trade position with EU countries and perhaps even improve our free trade position with the rest of the world? Reading around the debate there seems to be a higher probability that this can be achieved outside the EU.

Now the next question that economists would like answered is, that given all that has gone on since 1973 which is nothing to do with the principle of free trade, can we complete an effective analysis of the total costs and benefits of staying in or leaving the EU? The answer to this question is no we cannot. So how do we make up our minds? We need to listen critically to the in-campaign and the out-campaign. We need to listen to independent experts who are analysing individual components of the in and out decision. We need to evaluate carefully what is being said and see through any political spin. For example the Bank of England has reminded us that it will do its job and maintain liquidity in the banking system should there be any financial disruption in the run up to the referendum or after the decision is made. Being independent they say they are not supporting either campaign, but they have just referred to a rise in mortgage rates and a fall in the exchange rates as if they are bad things that will happen if we leave the EU. In fact they should have shown indifference with regard to these statements as both are inevitable and can be looked upon as good things that will happen: a lower exchange rate will benefit exports and make imports less competitive and higher mortgage rates will address the housing bubble.

As there cannot be any definitive answer before or indeed after voting day perhaps we should rely on James Surowiecki`s “The wisdom of crowds” and hope that each person, who feels that they have enough information to make an informed decision which is best for them and their family, will tender their vote and the right collective decision will be reached without any one person knowing what the best solution was.

To this end, and given this reasoning, I will vote to leave the EU based upon my position as an economist and these following thoughts:

    • On my blog in “Unwinding the euro” and “The cause of the Eurozone/EU/worldwide continuing crisis” I have raised significant doubts about the survival of the euro and the union.
    • Politics is very prone to resource misallocation through waste, a lack of market discipline and its access to a source of compulsory financing for its actions. Therefore I hope that by leaving the EU we can remove a layer of political waste from our budget and redirect resources more efficiently into productive investment and faster economic growth.
  • I have no doubt that free market capitalism will make us all better off in the future and I explained this on my blog in “Capitalism: is it worth fighting for?”. I further made the point that this can only happen with limited government that accepts more constraints on its ability to intervene in the economy. This was explained in “A balanced budget: goodbye fiscal policy” and “A reappraisal of interest rates and market interest rates”

 

  • There is a lot of criticism of what is now being referred to as the “Shadow Government” which is that group of unelected decision makers, experts, bureaucrats, administrators etc. that sit behind government. If we are worried about those behind the UK government then think how many more there are to worry about in the EU. This leads me to think that in our democracy I have less control over our politicians as they are now more controlled by their EU political overlords. I have often heard the line from politicians that they would like to do something but their hands are tied by Brussels.

As an individual I have always considered advice, but I do like to make up my own mind and not be instructed how to act by unelected people who think they know better. In the same way I like to be left alone to do the best I can for my students, my family and myself, and I hope that on June 23rd the wisdom of crowds will continue to limit political power by taking us out of the EU.

John Hearn 31/3/16

 

 

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2 thoughts on “BREXIT: Should we?

  1. An interesting approach (I don’t know if anyone has done it yet) to evaluate the impact of Brexit is to look at the market expectations (wisdom of the crowd).

    If we take the risk premium market impose on British sovereign funds while Brexit looms, as a proxy of the economic impacts of Brexit, then all we need to do is model the rate of CDS on British sovereign (Y) with the betting market odds on Brexit (X).

    If after some Bayesian modelling (a hierarchical model to rule out other factors), increase in Y can be attributed to increase in X, then we have to conclude Brexit would be bad for the British economy.

    However, I personally suspect such effects (if any) could only be marginal. In the short term, some adaptation costs should be anticipated, in the long term, well you only need to see how Britain traded with the world before 1970s.

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    1. Thanks for your comment Paul. As you suggest, put in a limited number of assumptions and you can get any answer you want. Also I would not think that a pre70s comparison would help as our movement into the customs union came from a base of many different forms of protection with the rest of the world. Now we would hope to maintain and increase the amount of free trade that we currently benefit from.

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