All 2 entries tagged Brexit

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August 06, 2018

Brexit and the Rights and Wrongs of Austerity

Writing about web page https://warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/381-2018_fetzer.pdf

A great new paper by my CAGE colleague Thiemo Fetzer was in the news last week. It asks: Did Austerity Cause Brexit? Thiemo is one of those that know how to write a good abstract so, rather than try to summarize the paper in my own words, I’ll use his:

Did austerity cause Brexit? This paper shows that the rise of popular support for the UK Independence Party (UKIP), as the single most important correlate of the subsequent Leave vote in the 2016 European Union (EU) referendum, along with broader measures of political dissatisfaction, are strongly and causally associated with an individual’s or an area’s exposure to austerity since 2010. In addition to exploiting data from the population of all electoral contests in the UK since 2000, I leverage detailed individual level panel data allowing me to exploit within-individual variation in exposure to specific rules-based welfare reforms as well as broader measures of political preferences. The results suggest that the EU referendum could have resulted in a Remain victory had it not been for a range of austerity-induced welfare reforms. These reforms activated existing economic grievances. Further, auxiliary results suggest that the underlying economic grievances have broader origins than what the current literature on Brexit suggests. Up until 2010, the UK’s welfare state evened out growing income differences across the skill divide through transfer payments. This pattern markedly stops from 2010 onwards as austerity started to bite.

Thiemo’s paper has already been widely reported (e.g. hereand here). The reports have tended to sustain a simple political narrative: In 2010, as Chancellor of the new coalition government, George Osborne set the course towards austerity. Austerity provoked the rise of UKIP and anti-EU sentiment. By implication, austerity was a mistake for which we are paying now with Brexit.

Not so fast.

Thiemo’s findings should be considered in the context of another story in last week’s news. In the Financial Times on 2 August, Chris Giles reported on the latest fiscal sustainability report of the Office of Budget Responsibility The report showed that, if the economy grows and if we continue to tax and spend on pensions, long-term care, health, education, and welfare at current rates, by 2050 there will be no funding for anything else. The government will be unable to pay anything towards defence, police, transport, arts and museums, business, and local authority services such as bins, libraries, and parks.

Driving this conclusion is two problems. One, the British population is ageing. Two, the economy is growing more slowly than in the past. Spending on old age will necessarily encroach more and more on a pool of resources that is finite and will fail to keep up.

In an era of low-interest rates it is tempting to suppose that the government can simply borrow more to pay for these things. Certainly, it can do this for a while. But that can only kick the fiscal can down the road. As deficits rise and once more accelerate the growth of the public debt, the burden of debt interest payments will also grow more rapidly, tightening the screws ever more harshly.

What does this have to do with Thiemo’s paper? It affects the implications that may be drawn.

First, when slow growth makes deficits unsustainable, austerity is inevitable at some point. Certainly, this does not deprive us of all choice. For example, we can choose to have austerity now or later. But for every unit of austerity that we postpone now, we will have more than one unit down the road; that's in the nature of the accumulation of debt. As Chris Giles points out, the government’s relaxation of fiscal targets in 2016, and its more recent boost to health spending, have brought forward the point at which the government will run out of money for “other” spending by six years. We can also choose who will bear austerity’s burdens. Are welfare benefits too generous? Should graduates pay higher contributions? Should companies pay higher taxes, or their shareholders, who include both relatively wealthy households and the pension funds responsible for the retirement incomes of the middle and lower classes?

These are all choices that could have been made differently, and that we can still make. But, as growth prospects diminish, what we cannot do is choose not to have austerity at all, ever.

Second, if you’re thinking that the government should not have imposed austerity in 2010 because that policy induced people to turn to UKIP and Brexit, think again. Rightly or wrongly, George Osborne was trying to return the UK economy to fiscal sustainability by following transparent targets and rules. The purpose of such rules has been to try to bind governments, so that they do not exploit their discretionary powers to time taxing and spending decisions in order to reward supporters, win their votes, and so manipulate elections.

Which is a good thing—right?

If your present thinking is that Thiemo’s paper shows that austerity was a bad policy, ask yourself what you thought of austerity before you knew his findings. If you already had reasons to believe that austerity was a bad policy, then stick to them, whatever they were. Thiemo’s findings have not added to them.

If, perhaps, Thiemo has changed your mind—previously, you thought austerity was necessary, and now you have turned against it—then be careful. The risk you face is that you may soon get what you now wish for: a government that systematically manipulates its electoral base with fiscal generosity that must be paid for later.


October 20, 2017

The Past and Future of Free Trade, or How Partisan Preferences Spread Foolishness

Writing about web page https://twitter.com/nickdearden75/status/919871698236829697

I woke up on October 16 to a learned debate on Twitter about economic history. Daniel Hannan, who is a Conservative Member of the European Parliament, had posted this:

What made us the world's richest nation? We removed trade barriers and so put money into ordinary people's pockets.

In response, Nick Dearden, who is the director of Global Justice Now, a campaigning organization, replied:

No. We plundered & pillaged. We sold people by the millions. We forced China into opium addiction. We decimated Bengal's textile industry.

(At the time of writing, both of these tweets were well liked, with Dearden well ahead: Hannan 982, Dearden 1.9K.)

Maybe you've guessed: this dispute was not really about economic history. It's about Brexit. Hannan urges Britain to go it alone as a free-wheeling, free-trading nation state, as in the past; that, he maintains, is what made us rich then, and it will work for us again. Dearden maintains that we owe Britain's wealth to the world, from which we once stole it. I'm not sure what that implies for Brexit, but for sure he doesn't seem to like free trade.

Considered as economic history, which version is more plausible? Neither account would pass even a low bar, say, that of an undergraduate multiple choice test. But, of the two, I prefer Hannan's. Here's how that works:

Why Hannan would not pass: he is wrong to imply that free trade was the key factor. Britain's relative advantages can be dated at least back to the fourteenth century, long before free trade; in fact, long before foreign trade represented a substantial share of Britain's economic activities.

Why Hannan deserves some credit: he is right to suggest that in the nineteenth century free trade further promoted British productivity and prosperity. He is also correct to remind us, as many forget, that trade is primarily about wages and prices, and that the gains from trade stem from higher productivity in the jobs we have, not from more jobs.

Why Dearden would fail -- on every count. Plunder, pillage, and the slave trade have little or nothing to do with Britain's modern competitive advantages. These advantages stemmed from factors that came into play long before the eighteenth century. Even in the eighteenth century, Britain's foreign predations were not on a sufficient scale to explain the continued growth of the economy at home, for at that time the total of foreign transactions was not large enough relative to the size of the economy, and all profits on trade did not represent a significant share of British investment.

At home, the revenues from British colonies and plantation enriched a few, but they did not generate economic growth. Britain's industrial revolution was made by mill owners and ironmasters, who were not especially enriched by their entrepreneurship because competition continually drove down their prices and profits. Those enriched by the cotton trade were the many who gained from falling textile prices and cheap imported food.

That's at home; what about the rest of the world? The cotton trade did not only enrich Britain. It also enriched others. It did not, as Dearden claims, "decimate Bengal's textile industry." That was done by Indian mill owners. In India as in England, some lost but many gained. This is shown by the fact that, throughout India's so-called deindustrialization, both production and consumption of textiles rose decade by decade.

So . . . if Hannan had the better case for Britain to have embarked on free trade in the nineteenth century, does he have the stronger case for Britain to leave the EU in the twentiy-first? Absolutely not.

The gains from free trade in the nineteenth century arose from exchanging basic staple commodities: food and raw materials, textiles, and simple machinery. These goods could be described by simple standards, and contracting for them was largely free of regulation. Trade in the twenty-first century is radically different.

Today, trade in complex machinery and electronic devices relies on common standards for quality, safety, and networking. Trade in services, where there are the greatest unrealized gains, relies even more on common regulatory standards for consumer protection and contract enforcement. These things are not provided by the WTO, or by free trade, or by free trade agreements. They are provided by international regulatory harmonization, such as by the EU's Single Market.

If you want to import, you have to export. By leaving the Single Market, we throw up a trade barrier between ourselves and our largest, most competitive market.

So, to the extent that Hannan is correct on free trade, his is a powerful argument against Brexit.

More generally, the exchange between Hannan and Dearden illustrates how the desire to defend or attack prompts the opposing sides to oversimplify history and to spread half-truths and "alternative facts." Partisanship makes idiots of us all.


I am a professor in the Department of Economics at the University of Warwick. I am also a research associate of Warwick’s Centre on Competitive Advantage in the Global Economy, and of the Centre for Russian, European, and Eurasian Studies at the University of Birmingham. My research is on Russian and international economic history; I am interested in economic aspects of bureaucracy, dictatorship, defence, and warfare. My most recent book is One Day We Will Live Without Fear: Everyday Lives Under the Soviet Police State (Hoover Institution Press, 2016).



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