Soros on my side, but economists I respect say LEAVE

Spookily,  a couple of day after I claimed on this blog that it would be economically foolish to leave the EU,  George Soros claims the same, citing pretty much the same reasons to my own, in the same order.

  1. UK currency could fall in value, making it poorer
  2. huge current account deficit means UK is in weak position
  3. manufacturing sector is unable to prosper following Brexit

On the other hand, some economists and economic commentators whose opinions I generally like and trust all suggest to vote for Leave.

Yesterday Professor Richard Werner stated his reasons, pointing out Norway and South Korea can prosper, and that the EU is a part of the USA’s sphere of influence which is likes to control and also covertly finance. The EU’s have recently, under the influence of the USA, led to economically counter-productive sanctions on Russia.  And the EU has not learned from the Eurocrisis which it was barely able to resolve.  The EU thinks future integration is the answer. The five Presidents’ report makes that clear – the wrong recipe, thinks Werner.

Professor Steve Keen also states his reasons for leave, citing the problematic Euro currency area and undemocratic nature of the EU, and the Eurozone’s insistence on budget surpluses , which cannot work.

Larry Elliot in the Guardian sees the treatment of Greece and the unflexible Eurozone elite as problems, and does not believe a democratisation, as envisaged by Varoufakis would work.

And finally, Ambrose Evans-Pritchard, from the Daily Telegraph, who, albeit only reluctantly voting for Leave,  cites a democratic deficit, and a abrogation of national law to the European system and European Court of Justice as his reasons.

So all of these commentators list valid and thoughtful reasons why the EU is not working well. It is irredeemable, and people should vote for Leave. I disagree, although the deficits of the EU are blatantly obvious.

As I said before, for me the inability to tackle unemployment is the over-whelming indicator of the EU’s failure. (The critics above also see that as a big problem). The ECB currently prints money, Euro 80 billion a month. Instead of using it fight unemployment, it buys bonds from governments and corporates.

The EU Juncker fund, a Euro 315 billion investment fund launched in November 2014, to spend that money to fight unemployment seems to have been singularly ineffective. The money was to be spent by the end of 2017. Where is it? Unemployment rates of 20% in the South of Europe, with youth unemployment at up to 50% remain a symbol for the failure of economic policy within the EU.

If you think that this will always stay that way, and there is little to no chance of redemption, as the critics of the EU above might think, vote for Leave.

If you believe, as I do that, eventually, the right policies will be taken to tackle unemployment (more balanced trade and less balanced budgets and employment programs) vote Remain.

Voting Remain will not endorse the draw-backs highlighted by the critics above. It will give us a chance to influence the EU (by influencing our government which influences others) and change them.

 

 

 

 

 

 

 

 

A Brexit vote will not mean Brexit

If we want to keep peace, influence and a healthy economy, we should all vote for Remain.

1) Peace

Millions died in wars in Europe over centuries. Since the creation of the European Union, former enemies have become friends. They have remained friends since, and 28 nations now are part of this club. More want to join this club which is built on co-operation and compromise.

The European Union is not the only guarantor of peace, but it is an important element.

2) Sovereignty and Influence

Clearly, most sovereignty can be exercised by staying part of a club, where European governments meet on an almost daily basis (different parts of government, of course) all aiming to enhance the well-being of its citizens.

Democratic deficits in Europe? Yes sure, too much power, perhaps, for the Commission, and “Five Presidents”, none of whom has been elected directly by the people of Europe. And the EU is too easily captured by lobby interests of industry and neo-liberal agendas. But that is true of most national governments.

But, by leaving, that place on the top table goes. But rules and regulations, as Switzerland and Norway find, have to be adhered to.

The EU is an institution where compromises are made and deals are negotiated. None have directly caused any harm (the high unemployment in the South of Europe is an exception), all have essentially as an aim to make us wealthier and cooperate with each other. An element of solidarity, to help the poorer nations is woven into the fabric of the EU. All agreements and treaties been entered into in good faith by the parties making these. The UK, as the second biggest country in the EU, has major influence.

Why give this influence up?

3) Economy

The UK is the fifth biggest economy in the world. But if the value of the pound falls by only 10% after a Brexit, it becomes the 6th, after France. If the £ falls further, by one third (much less likely), the UK could fall behind after Italy and India.

The advocates for Brexit promise a land of hope and glory devoid of manufacturing and based mainly on services (according to their loony economist Professor Minford). This is to negotiate trade deals all over the world more beneficial than what is on offer now.

Let us be realistic. The UK lives at the moment by selling its real estate to foreign tax evaders who buy up London where supply is artificially restricted by the government. That finances to a large degree the largest trade deficit of any economy anywhere at about 7% of GDP. The reason that deficit is so big is because the UK’s entrepreneurs and industrialists cannot provide sufficient goods and services which the rest of the world wants to buy. They are insufficiently competitive on the world market, compared to, say, Germany or China. Trade deals are irrelevant here.

Further, the historic track record of the UK coming to negotiated beneficial trade terms is poor.

a) It is hard to pretend the slave trade was based on negotiation.

b) England went to war with China to sell it opium – enforced trade by gunboat diplomacy.

c) Later it lost control of its colony in America, which did not like the fact that they had to pay duty on the tea which the English traders sold it. Another trade deal gone seriously wrong.

d) And more recently, having had the Empire or later teh Commonwealth as a virtual captive markets for its industrial goods, the UK  nevertheless managed to lose all its competitive advantages in its former colonies, rather than become a major supplier of cars, trucks or machine tools.

But all of a sudden now trade is to flourish, based on new trade terms with the rest of the world, whilst rejecting existing terms with our biggest trade partner, the EU. That is sheer lunacy.

Only fantasists and propagandists like Gove and Johnson believe that Brexit will be good for the economy and trade, to tear up existing arrangements which firmly embed the UK in Europe. It will prove to be impossible.

We will have an arrangement, at best, like Norway with the EU. All the cost, all the immigration, but none of the sovereign decision-making.

How does that take back control? If people want to vote for Brexit, brainwashed into believing by a jingoistic press that this is in their favour, fine. Risk peace, good-will, co-operation, and the economy, by all means, if you are foolish enough.

What to do if there is a Brexit vote? Kick it into the long grass

What should David Cameron do if there is a vote in favour of Brexit? He should not resign, as no leader should resign in a time of economic danger to the nation.

But he cannot immediately start Brexit procedures. About 172 Tory MPs are for Remain, with only 132 for Brexit. And the rest of the House of Commons is mainly for Remain.

MPS

So, no Brexit vote could muster a majority in the House of Commons.

Cameron will not risk  a General Election, so a Brexit will have to be postponed. Which is just as well, as the proposers of Brexit have not been able to say in detail what a Brexit will look like. Cameron could rightly say that the country has no plan for Brexit, no plan on “how to take back control” and the Brexit plan has to be drawn up first.

So Cameron could set up a “Brexit Commission” to look in detail at the feasibility of Brexit and provide the country a framework which it could possibly vote for at the next general election. This  commission (made up of  Gove/Johnson/Patel/Grayling as well as employer, union and other NGO representatives) is to report in 2019.

It would have to liaise with the EU and other countries, so see what deal would be possible. It is to set out a detailed change to the current immigration system, to see if that would meet the needs of the nation and the electorate taking into account the rules of the EU. And the Brexit Commission would need to specify where exactly the sovereignty of the nation is hindered by the EU, and where it is enhanced.

We will find that a Brexit plan will be lunacy and not enhance power or wealth of the UK. Nor will it reduce immigration. Nor will it “take back control”. A Brexit plan will not be part of a Tory manifesto for 2020.

So the Brexit plan will be quietly shelved, along with Gove and Johnson. They can then join UKIP , if they want.

 

Economists and immigration – No wonder people vote for Brexit

Finally immigration becomes an issue which is openly acknowledged by at least the Labour party in the current Brexit discussions.

Economists have missed most of the underlying issues here. Their analysis has been less than helpful. The commentary by Reenen et al, Portes, Wright-Lewis, or here from the Institute of Fiscal Studies and others has been all along the lines of:

a) immigrants pay their way and pay into the tax system more than they take out therefore they are good for the economy
b) lack of housing, school places, NHS services has nothing to do with immigration, that is all due to lack of government investment
c) smaller wages through immigration, no evidence, maximum 1 penny less per hour each year through increase in immigration

This breathtakingly simple analysis is really astounding and is, of course further indication that economics is the science of mixing up stocks (in this case national wealth) with flows (let us call it GDP for these purposes). The cost/benefit analysis of immigration deserves more analysis.

Each immigrant, for a start, needs housing, a very scarce and expensive resource currently in the UK. This housing is becoming more scarce and more expensive with each new immigrant. Each newcomer needs to take up, say, £100,000 of housing stock, which will mean that less is available for everyone else. Even working full time, someone will have to work many years to accumulate enough to be able to pay for the construction of a new property. Many on the minimum wage will never be able to do so.

We also know that no immigrant will first build or pay £100,000 for his new accommodation. However, before he or she starts his/her first shift either a house, flat or shared room has to be available. So the wealth (stock) per person, here the amount of housing per person, goes down with each new immigrant. We all have to squeeze up or pay a significantly higher amount for rents or property, driven higher by more demand. Each immigrant makes us poorer – when measured in available housing per person.

So that is, of course, what everybody is complaining about, justifiably. Wealth per person (housing/schools/NHS) is ignored. GDP is all what counts for our myopic economists. Average stock of national wealth per person is brushed over, only the flow into the economy by additional GDP counts.

Now, social housing, schools, and additional NHS services can, of course, be provided, but at a cost of taxes from all of us, which includes to a very small part also the immigrants. But just last year a government was voted in keen on reducing taxes. So nothing adds up.

So justifiably, Brexiteers are intent on voting against immigration.

Further, there is the second problem. The Paradox of Immigration, just like the Paradox of Thrift, could well mean that the economy is better off with immigration, while the individual loses out significantly. Immigrants allow us to generate more GDP, no question. But to insist, as Jonathan Portes does, that it reduces wages by only a penny per hour cost is a highly dubious claim.

This relies on the Bank of England analysis by two economists, who could tell us, allegedly, exactly what effect the additional supply of labour through immigration had on wages.

Now, although that is an interesting stab in the dark, it relies on the model being correct. What the Bank of England economists are essentially doing here is forecasting prices in a freely traded commodity. Their analysis went trough boom and bust cycles of the economy, but whatever the cycle, apparently immigration costs the economy not more than 1 penny an hour off their normal wages.

If economists were that brilliant with their pricing models, they could, of course, predict the price of copper, oil or other commodities. However, as we all know, prediction of market prices is more complicated. But for immigration we are all supposed to believe that two economists at the Bank of England know what the effect of immigration on wages are. That is just ludicrous. The model tells you an penny an hour, but it could of course be much more. The model could be completely wrong.

Further, economists are working with averages. So the average immigrant works for up to 13.5% less wages than the average UK worker in some industries. (see Table 6 of the Bank of England study) However, in some circumstances immigrants will be happy to do the work for less than 50% of the previous going rate.

For the individual employer it is the marginal costs which counts. Immigration allows employers to take advantage of a marginal cost reduction in the price of labour which would not be there if there was no immigration and leads to smaller pay-increases.

This graph comes out of the  LSE study (Reenen at al.).

wages

It shows a very huge association between increased EU immigration and lower wages. How come that before 2004 wages were rising, only flattening out when immigration from EU countries started? And as immigration continued to climb after the 2008/09 recession, wages were actually falling? This correlation is difficult to explain, other than immigration has a significantly detrimental effect on wages. Higher supply meant that the price of Labour fell. (The LSE does not provide a satisfactory answer and brushes over the issue.)

Brexiteers are right to feel that the impact on wages on immigration is far higher than estimated. The graph seems to confim that, showing a significant decline in wages going hand and hand with increased immigration after 2008.

Summary and way forward

Economists only assess the effect on increasing GDP (flow) and not on decreasing average wealth (stock) when assessing impact on immigration. For the individual in the job market it is the marginal impact of immigration is the effect they see. Economists ignore that marginal impact on immigration and look at the average. They have a model which suggests the cost of immigration on wages is minimal, but as any model, it is unlikely to accurately predict prices in a market economy.

The cost of immigration is externalised. A fund, as Labour and Jeremy Corbyn suggested, to deal with the cost of immigration makes that very explicit. The fact that no analysis has been performed on how high the cost is. That is more than surprising, given that immigration has been a concern for voters for a long time. At least some economists have acknowledged that there is a cost. If my estimate is correct, and each immigrant needs at least £100,000 of housing, the cost of providing that housing is approximately £30bn before they start to work. The addition to GDP from these immigrants would perhaps be £6bn a year.

Paul Mason makes some good suggestions here how this issue of immigration should be dealt with. He suggests, among other things, increasing minimum wages and a levy on employers who employ immigrants. Yvette Cooper makes other points in the Guardian today, again explaining what an impact fund would look like. Maybe this thinking should go further. If employers (who are the main beneficiaries from immigration) were forced to provide housing (or pay into a housing levy) for immigrants, the relative attractiveness of immigration labour would of course fall.

We might be stumbling into a Brexit. The inability of the political classes to address immigration will have been the main driver for Brexit.

Economists are guilty, as their perfunctory analysis which addresses only some of the issues with immigration (the benefit to GDP), should have been much more thorough. Clearly the country must be able to address these issues thoroughly, aided by detailed analysis, even though an analysis which also addresses the costs of immigration could be seen to help bigots and racists. To avoid that analysis will back-fire.

The costs of immigration (loss of average wealth) should have been made much more explicit, and remedies to deal with these costs should have been advocated earlier than one week before the referendum. Concessions by a Labour party, which is not even in government to implement them, will not change the mind of Brexiteers, I fear.