Brexit: how big an issue?

Just how big an issue is Brexit? Cameron says it is “one of the biggest decisions this country will face”. Gove says it’s “the most difficult decision of my political life.” But is it?

The best economic case for exit I’ve seen comes from Patrick Minford, who estimates the gains to leaving at around 10 per cent of GDP: these come from less regulation and freer trade with non-EU countries. On the other hand, John Van Reenen and colleagues think Brexit might cost us up to 10 per cent of GDP, as we face trade barriers with the EU.

There are big uncertainties here, such as what sort of trading regimes we’d face outside the EU, and how big are trade multipliers: to what extent does trade (pdf) encourage innovation?

Two things make me sceptical about big estimates, however. One is a paper by John Landon-Lane and Peter Robertson. They point out that, give or take a standard error, rich national economies grow at pretty similar rates over the long-run. This, they say, implies that “there are few, if any, feasible policies available that have a significant effect on long run growth rates.”

The second concerns the maths of economic growth, described by Dietrich Vollrath. Even if Brexit does raise our potential growth rate, it would take many years for the economy to reap those gains. He says:

Even if [insert policy here] opens up a big gap between potential and actual GDP, this doesn’t translate into much extra growth. In fact, the effects are likely so small that they would be unnoticeable against the general noise in growth rates year by year…Massive structural reforms are not capable of generating immediate short-run jumps in growth rates.

Let’s, though, put my scepticism aside and put those 10 per cent-ish numbers into context.  Even 10 per cent might well be less than the cost of the financial crisis and subsequent bad economic policy: if GDP per head had grown at its 1990-2008 rate since 2008, it would now be 14 per cent higher than it actually is.

In macroeconomic terms, therefore, the Brexit debate is less important than the question of how to close the GDP gap that’s opened up since 2008.

Which poses the question: why is the Tory party fixated on the former whilst paying so little attention to the latter? The most respectable reason is that Brexit isn’t just an economic issue at all, but is instead about sovereignty and national identity. A less respectable one is that it is about tribal fissures within the Tory party, and careerist manoeuvring to exploit those divisions.

This is one reason why, if we must have a referendum on this matter, I would rather it were a demand-revealing referendum in which people vote not  simply “leave” or “remain” but rather a sum of money to express their estimate of the cost of them of leaving or staying.

One great virtue of such a scheme is that it forces the protagonists to maintain a sense of proportion. Picture the scene. Someone on the Today programme is putting the case for leaving. John Humphrys then asks: “OK Mr Gove/Farage/whoever. How much will you pay to leave?” The nature of the debate is thus transformed, from high-blown hyperbole to a sober assessment of the costs and benefits.

As it is, I fear we’ll be hearing too much hyperbole and misplaced certainty and not enough perspective and doubt. Worse still, I suspect that the media – including much of the BBC – will be complicit in this distortion of the debate.

Comments

[Luis Enrique]

this is after a benign social planner has redistributed income?

otherwise what would we learn by asking Gove how much he'd pay to leave other than Gove has more money than most of us?

[Magnus]

I'm all for seriously incorporating uncertainty into the analysis.

Hence, _potentially_, Brexit IS a big issue.

Moreover there is greater uncertainty with Brexit than staying in the EU, crap as it is. Simply because we know what EU membership for the UK means.

It follows that a serious recognition of uncertainty leads, all else equal, towards voting yes in the referendum.

On demand-revealing referenda I think you've lost your critical faculties. Are you serious that the rich should have greater say in a democracy? I wonder what the policy outcome of that will be....

[aragon]

The case for exiting the European Union is that we do not which to be subsumed into a Superstate whose rules were written in to treaties at the height of neoliberalism.

We have only to look at the unilateral decision by Angela Merkel on immigration, and the, the way the European (German) Elite behaved over the financial crisis, Southern Europe, and secrecy about the transnational treaty: TTIP (The arrogance of an international elite).

We may not like our own elite, but they are more accessible and accountable than the international elites.

[chris]

@ Magnus, Luis - the rich already have a greater say in politics than the rest of us, via several channels. I just think that if money must affect politics, it should at least do so in an efficient way. (Ideally, of course, a demand-revealing referendum would follow other policies to reduce inequality).
Granted, the problem would remain of whether a big monetary vote showed a high value of the issue or a low value of money. But there's a similar problem with existing votes: a mild preference for "remain" counts as much as a strong preference, which isn't necessarily welfare-enhancing.

[Magnus]

Right so because the democracy that we have is corrupt it is ok to make it more so.

I recognize the problem with existing votes. But there exists the possibility that under some circumstances the institution of complete equity: one-person-one-vote is less objectionable than the institution of complete efficiency: one-dollar-one-vote.

This is slightly tangential but on strong versus weak preferences can you be sure that your strong preferences for Brexit are based on rationality and full-information? In fact, given the (better) argument that you make in your post - that uncertainty should be taken seriously - then unequivocal democracy (one-person-one-vote) could be an insurance against strong-preferences, which a priori seem unconvincing given how much is uncertain in this instance.

[Dave Timoney]

Surely the question should be: "Ok Mr Gove/Johnson, how much will you pay to become the next leader of the Conservative Party?"

[Luis Enrique]

"the rich already have a greater say in politics than the rest of us, via several channels."

well not in a one-person-one vote referendum, at least not directly. Unlike a one-pound-one-vote referendum.

anyway, I think what you call the problem of "whether a big monetary vote showed a high value of the issue or a low value of money" would undermine that question as an interviewing tactic. I don't think we would get a sober assessment of the costs and benefits.

[D]

I suspect tactical voting might spoil the demand revealing aspect of the demand revealing referendum

[Curly Braces]

"The case for exiting the European Union is that we do not which to be subsumed into a Superstate whose rules were written in to treaties at the height of neoliberalism."

This sounds like a good reason to stay in if you ask me.

The question about the EU should surely be one of economies of scale vs too big to be effective.

All the crap about democracy fails to mention we have no real democracy anyway. If you are interested in real democracy leaving the EU is not where your focus should be.

So if the argument against the EU is that it strips us of our sovereignty then I say who this us and what is this sovereignty. And really, who cares about that?

[Churm Rincewind]

"Worse still, I suspect that the media – including much of the BBC – will be complicit in this distortion of the debate."

I know. Those bastards at the BBC get it wrong so often that it's right to single them out for censure. Best to close it down and rely on Sky News/RT/Al Jazeera/etc for accurate comment.

[Curly Braces]

"Those bastards at the BBC get it wrong so often that it's right to single them out for censure. Best to close it down and rely on Sky News/RT/Al Jazeera/etc for accurate comment."

At least I am not forced to pay to be lied to with Sky News/RT/Al Jazeera etc. And given the abysmal bear faced ideology of the BBC news output you couldn't do worse than ignoring it and watching Sky News/RT/Al Jazeera. The BBC would be just one more distorter that you really don't need.

[rogerh]

Brexit is frightfully important. A unique opportunity for some to get a boost to their political career - not to be missed. Then just think of the important work to be done issuing Union Jack pencils to the entire civil service. Added to which will be important revisions to the HoC wine lists and menus not to mention the stationery.

So we can look forward to the 2020 election with absolutely nothing useful achieved, yet another wasted parliament.

[Keith]

This is a joke.

Obviously there is no real way to decide if Brexit is actually a good economic idea as all forecasts /assumptions by the forecasters /"experts" are infected by rampant political bias driven by wishful thinking. Probably it is almost impossible to affect the long run growth rate of a mature economy much. And other issues such as the failure to regulate finance, have adequate demand, or other policies such as addressing the productivity drought are far more important.

What we have is a game where all the real failures of the Tory, and Labour, and Lib Dem establishment are happily forgotten for a deranged bust up over the EU. Lots of heat, hype, and some red faced bluster, and may be a new proper job for BOJO if he can get the bastards to replace him for Cameron. All totally a waste of time and money.

The fact lots of people have a problem with living in the modern world and project all their problems onto the EU is merely a sign of human irrationality. It is the Trump effect; find a scapegoat for the plebs to distract them for a while. I note the ruling class never offer a referendum on anything that might affect their interests, such as tax avoidance by multinationals or privatising the NHS or destroying Council housing, how about a vote on the treatment of the Disabled and weather they should lose their Motability cars and social care? The quality of life matters far more than abstract growth statistics and that Quality is being reduced for the majority by policies made in Number ten.

[Keith]

sorry I meant

"Whether they should lose their Motability cars and social care?"

I must lie down while I try to ignore this driviel of IDS and Gove pretending they give a fuck about any one in the UK and want to help us have a better life.... hibernating under a hill is the best response until it is all over.

[Lee]

A bit of uncertainty might well be good for me. All my life I've been disabled and unemployed. Brexit won't provide a cure for me, but it could result in some new policies that might mean that there's a place for me in the world.

[Dinero]

"close the GDP gap that’s opened up since 2008"

is that likely to be actually possible. It would require a growth rate higher than the 1990 to 2008 trend and sustained for decades.
It didn't happen for previous downturns.

[theOnlySanePersonOnPlanetEarth]

"All my life I've been disabled and unemployed. Brexit won't provide a cure for me, but it could result in some new policies that might mean that there's a place for me in the world."

Or it might not.

[Bob]

"All the crap about democracy fails to mention we have no real democracy anyway. If you are interested in real democracy leaving the EU is not where your focus should be."

You can throw a parliamentary dictatorship out after five years. You can do nothing about the unelected EU commission that makes EU laws.

[Bob]

http://www.ibtimes.co.uk/eu-referendum-business-boost-cameron-they-say-brexit-will-hurt-uk-jobs-1545373

“Business needs unrestricted access to the European market of 500 million people in order to continue to grow, invest and create jobs. We believe that leaving the EU would deter investment and threaten jobs. It would put the economy at risk,”

Lol. Why do we have such inept businesses in the UK?

[Keith]

Your argument is flawed in several ways chris. If Gove was willing to gamble £500 to leave the EU and that increased his future income by more than £500 in a reasonable time frame for him, paying to leave would be rational for him. But unless he is a representative agent and that same calculation works for more than fifty per cent of the whole population it is not rational for the population as whole and is not consistent with Utilitarian ethics of maximum welfare.

If some people gain more than they wager and some gain less than they wager how do you balance the welfare gain? Gove is rich, I am poor, so should my gains or lose, net, be given more weight than Goves? If so you need to do the calculation of net marginal gain or lose bearing in mind poor peoples gains have more welfare effect by applying the theory of diminishing marginal value. So a preference revealing referenda cannot produce maximum welfare unless the full distribution of the net gains and loses can be calculated for the whole population. Since my personal choice affects all other members of the population that effect should be taken into account. But voting cannot do so unless every vote was weighted to reflect the externalities.

This is also a fundamental problem with the idea that voting is "Democratic". Every vote in a system of elective democracy affects other voters as well as the person voting and the other may be more adversely affected by my vote than I am!

Rich people who vote to cut their tax bill harm other people by more than they gain by virtue of Marginal value of income theory; so voting power should be weighted so poor people who gain from public spending have more voting power. Very wealthy people should have no vote as they distort the calculation exponentially.

Gove and co. off course may gain from destroying the EU as their rich paymasters will get an advantage, and pay them more, but that is not the same as the public gaining. If you cannot know what the net result will be in theory any wager is just an irrational gamble which reflects how much confidence you have in your own ignorance. Or in the case of Boris Johnson how much confidence he has in becoming Tory leader by pandering to the bastards.

[Luis Enrique]

I wonder if Brexit is also an interesting test of the idea that British politics is in the pocket of bankers. Afaik, the City is squarely in the remain camp, so if Brexit wins, would be a demonstration of the limits of banker power.

Do we think Cameron is pro-EU because of City influence?

[leslie48]

Agreed on the BBC since last week the main coverage has been with the very Right wingers: Farage, Gove, Johnston etc., who seem to be daily dominating the BBC's news agenda and can hardly wait to create their post Brexit Neo-Liberal state.

Meanwhile the plunging pound, and the coming capital flight, falling shares, falling pension pots, extra costs faced by tariffs imposed on our traded goods with Europe's 500 million consumers, changes to our debt rating by Moody's , UK leaving the 28 country European bloc, Scotland leaving the UK , the incredulity across the world at our actions are not important news for the BBC now called the Boris Broadcasting Company and who hang in London for more shots of this soon to be ex-Mayor s he leaves his house. How low the tabloid BBC has fallen from when it was seen as an objective source of news

[Trofim]

You know why many women stay in an abusive relationship, don't you? It's fear of the unknown - in other words, better the devil you know. That same spirit underlies most of the pro=EU propaganda.

[Bob]

"Meanwhile the plunging pound, and the coming capital flight"

There is no ‘plunging pound'. There is a move towards the US dollar from all currencies.

Here is the 10 year graph rather than the 10 minute one – preferably against the Euro:

http://www.xe.com/currencycharts/?from=GBP&to=EUR&view=10Y

Plus these are the same people that were "worrying" about the trade deficit last week.

Seriously, where do you people get this stuff?