Brexiters' blind-spot

Tony Yates and Andrew Neil were debating gravity models on Twitter this morning. Tony was right. The gravity model isn’t some hi-falutin theory without much factual backing. It is in fact (pdf) “one of the most empirically successful in economics”.

Even so, talk of “models” is a bit fancy. Let’s instead look at some facts. According to the World Bank Germany exported $118.6bn of goods to the US in 2016. That’s $1434 per person. The UK exported $61.6bn, which is $939 per person. That's one-third less. Germany exported $85.4bn to China, or $1032 per person, whereas the UK exported only $18.1bn or £277. To Russia, Germany exported 5.4 times as much per person as the UK. To Japan it exported 2.5 times as much, and to India twice as much. Even to Canada Germany exported one-third more per person.

These facts tell us something important. They tell us that membership of the single market/customs union is NOT a great obstacle to trade with other nations. It is not the lack of good trade deals with China, the US, or Japan that is restraining exports. Germany has exactly the same deals with them as us and is exporting far more.

What is stopping us exporting? There are countless possibilities: poor management; lack of animal spirits; insufficiently skilled workers; lack of investment; financing constraints; exchange rate volatility; a lack of price competitiveness; and so on. Many of these are, unsurprisingly, the same factors that lie behind our poor productivity.

And these will be the same after Brexit as before. They will continue to hold back exports even if we do sign free trade agreements with non-EU nations. Monique Ebell (pdf) and Silvia Nenci have shown that such deals do little to boost trade. Even if you cut legal barriers to trade, real ones remain. I am free to do a park run on Saturday, but I’ll not – and certainly not in a good time.

Why do Brexiters find it so hard to grasp this?

In part, it’s because some of them do “violence to basic facts of economic life.”

But I suspect two other things are going on. One is that many support Brexit for non-economic reasons and – motivated reasoning being so powerful – they then invent reasons why it will be a good economic thing, like a man putting lipstick on a monkey and pretending it’s Rachel Riley. They forget that there are trade-offs – not least between sovereignty and the regulatory harmony that facilitates trade.

Also, support for Brexit is a way of avoiding unpleasant realities.

Since the 80s, the right has got pretty much want it wanted: weaker unions, more power for bosses, lower top taxes, less regulation and so on. And yet the UK’s macroeconomic performance has remained unimpressive, not least because many structural weaknesses in British capitalism remain – weaknesses that contribute to our lack of exports.

Brexit allows the right to avoid having to acknowledge these weaknesses, however, because they can pretend instead that we can become a great trading nation if only we are free from the shackles of the EU. This prolongs the right’s longstanding belief that British capitalism is fundamentally dynamic if only the right legal framework can be imposed. This, however, is a fantasy.

Comments

[e]

Top marks for clarity. A great post, only you forget to note that for some, possibly even many, voting Brexit was seen as a way of forcing unpleasant realities out into the open. This being a first step on a road to a recovery.

[BiranJ]

1). "Germany exported $85.4bn to China...whereas the UK exported only $18.1bn"

Is the Chinese market equally open to goods and services? The profiles of German and UK exports are different.

2). "the same factors that lie behind our poor productivity...And these will be the same after Brexit as before"

See the recent comments by David Goodhart on why the free movement of people undermines the training of young people in the UK (and thereby is a brake on productivity).

3). "many support Brexit for non-economic reasons"

Of course. The EU is fundamentally a political - not an economic - project. This is something that many Remain supporters affect to ignore.

[Bill Posters]

The references to Germany may not say much about the single market/customs union.

The German car industry is very strong despite VWs recent trouble. The UK car industry is largely foreign owned.

If you want to kit out a factory you generally have a choice between German and Japanese equipment. The UK machine tool / production equipment sector was more or less killed off decades ago. There are some heroic exceptions see RENISHAW RSW (4842). It would take decades for the UK rebuild a machine tool industry.

A realistic debate would be about how Brexit effects UK exports of microwaveable ready meals. Would a UK trade deal with China allow us to export billions of microwaveable shepards pies to China. Would the chinese eat them?

[Chris E]

"A great post, only you forget to note that for some, possibly even many, voting Brexit was seen as a way of forcing unpleasant realities out into the open"

I think this line of thought represents the triumph of hope over experience.

All the evidence points to the right doubling down and finding another set of scapegoats to blame, and demanding an ever more repressive set of policies.

And because of the toxic media environment in the UK - they'll get it.

[d]

In the Scottish independence debate, it was suggested that small countries tend to have potiticians that are more focussed on doing the right thing than partisan politics (as compared to larger countries), and that this has economic benefits.

If this is true, might Brexit, in the long run make the UK behave more like a small country in this respect? And so perhaps address some of the productivity issues Chris lists?

[Amb]

Brian J. There’s not a thing you’ve said there that a remainder doesn’t already know. There is no such thing as a free meal, and the politics of the EU are the most effective way of dealing with all sorts of relations with the people the other side of the channel. That realpolitik.

[Amb]

E. That’s a interesting thought to add.
Okay, you’ve got our attention now. How about sorting out the real problems before your act of attention seeking creates even bigger problems?

[e]

@ Amb
Not my act of attention seeking. That being the case, our (elites) our professional politicians and commentators, of whatever stripe would never choose: to prop up weak right-wing administrations implementing evidently damaging, and polarising policy; blaming, in particular the EU for its weakness/lack of imagination, and then to top it all, calling for a yes no referendum on the issue.
Stop treating any and all alternatives to right-wing economic 'success' as a national calamity which will lead directly to the collapse in our way of life, would be my advise – the means by which those actually responsible for this mess might find a path back to democratic/international respectability.

[Umust B joking]

As E. points out this is the reality of the situation; most people voted Brexit to force other issues.
And they were correct to do so.

The 'left' was in power from 97-10 while the situation for ordinary people (outide the Westminister/south east/finance bubble) declined rapidly.
A generation later people find their children homeless and indebted while immigrants drive wages into the ground.

I voted Brexit to fuck this social and economic model and its working exactly as expected.
Any fool who 'congratulates' me on allowing a right-wing govt into power is just a short-sighted muppet. I know they're going to fuck the economy;
Thats. The. Whole. Point.

Too bad you dont like it but I guess you have the most to lose. And, please, spare me the pithy vignettes about how stupid I am; thats what got you here in the first place. Besides, a year or 5 of Rees-Mogg and Johnson will scupper the Tories for 20 years.

Its win-win. I get to see the fake, QE supported, house price ramping, asset inflating, austerity-led economy implode and I get to enjoy the high pitched whining of the egg-headed idiots as their stupid fucking notions of how an economy works deflate - Cathy Newman style.

....pleasures all mine. Seriously.

[Dafydd]

Less regulation? You must be joking. Just consider compliance spend and headcount in the financial sector. The problems in the sector don't stem from too little (or too much) regulation, but from poor regulation poorly administered.

The most one can argue us that there has been less regulation than there would otherwise have been, but in absolute terms the years since 1979 have been a boom time for regulation - as Keith Joseph intended.

Politicians on the Right (post-Joseph) pay lip-service to the idea of less regulation, but never do anything about it.

Big business moans about regulation but they don't really mind it. They can live with the costs (and they are hyper-regulated internally anyway because of the command and control ethos of managerialism, so compliance with statutory regulation adds very extra burden), and they recognise that regulatory hurdles create considerable barriers for disruptive challengers so at the strategic level there is probably a net benefit for them.

[Alex]

"Is the Chinese market equally open to goods and services? The profiles of German and UK exports are different."

So you think the services/finance centre let 'er rip model isn't working but you want to double-down?

*Interesting*....

[Dipper]

"They tell us that membership of the single market/customs union is NOT a great obstacle to trade with other nations. "

Well it tells us it hasn't been an obstacle for Germany.

A number of comments on here already pointing out that voting to Leave is a way of making these issues be addressed. I agree with those and will just add that staying in the customs union and accepting FOM means an increase in population of 16 million in 40ish years. Odd how amongst all the guff about economic forecasts this forecast of the EC never gets mentioned. good luck addressing any issues whilst we experience a 25% increase in population.

[Dipper]

@Amb "Brian J. There’s not a thing you’ve said there that a remainder doesn’t already know"

well if they do know it they've been keeping very quiet about it. It is almost impossible to get any Remainer to discuss creeping federalisation, mass migration, the ability to address domestic issues or any other problems of the EU. the Remain analysis just goes "leaving is difficult, will probably leave us worse off, so we should stay" without any consideration of what staying is likely to mean.

[gastro george]

As if Germany hasn't absorbed far more migrants in recent years than the UK. FFS.

[rogerh]

Good post.

We are in the s^&t inside the EU and we will almost certainly deeper be in deeper s^&t outside. But to see what is going on take a look at America. Trump now heads the Vulgarian Party, he draws his vote from those disadvantaged by globalisation and he gives money to and is funded by those who gain from globalisation. He plays one off against the other, the vulgarians think he is their man and he is scewing them royally. In reality he has no choice, they are going to get screwed by global economic shifts anyway. In the middle sits America's middle class, well pressured to work hard and well taxed to fund the vulgarians.

Translate to the UK. The Tory Brexiteers are playing the same vulgarian game, promising all manner of goodies to those disavantaged by global shifts (and lousy non-policies) whilst giving much to those at the top of the pile. Just as in the US the middle classes are flogging away hard to pay the taxes. Meanwhile Labour sits in the same position as the Democrats, an unelectable leader and a broken fractious party.

As already said our economy is quite different from Germany etc, we do services - for now. But any fool can do insurance, there are many competitors in big finance and it is a global industry anyway. Legal services are are good racket but again all you need is a small elite talent pool backed up by grunts or AI. Worse, the talent is international and offshores the profits. We can produce intellectually property, but not many of us are able to do that and our record is not outstanding. Tax receipts headed south.

Our rich elite can see the common herd is headed down the pan. Brexit makes a nice diversion and might even hold off the UK's housing crisis and keep England for the English. That way we can stay a museum of a country, full of heritage centres, a cheap tourist attraction for those who like cold and rain. Meanwhile the state schools can be starved of money, the councils starved of money and the NHS starved of money. Of course it is not worth spending much educating the vulgarian masses, the middle classes will do enough for themselves and we can import any extras.

The key problem is that either in the EU or out of it our prospcts are not good. The name of the game is political power, that's all.

[Noah Carl]

Chris, I would be very interested to hear your take on the claim that "a vote to Remain wasn't a vote for the status quo; it was a vote for further integration".

In particular, do you agree with the claim as a matter of fact? And are you in favour of building a United States of Europe by gradually transferring more powers to the EU institutions?

[Dipper]

@Amb "That['s] realpolitik"

this is at the heart of the civil-service Remainer view. That a group of immensely skilful diplomats are expertly navigating the UK through the choppy waters of international affairs by doing a deal here, having a quiet word there. It is completely delusional, a hangover of empire. The EU does not do business like that. They hammer their interest until they get capitulation, and then say what a great negotiating job you did.

[Dipper]

@gastro george "As if Germany hasn't absorbed far more migrants in recent years than the UK. FFS."

Completely different population dynamics.

Firstly, the EC report showed German population declining to 70.8 million at 2050/60, a loss of 10.5 million. Hence inward migration is needed to pay for the ageing population.

Secondly, it depends what you mean by "absorbed". i am told that at the Wegburg where the VW plant is the main employer there are parts of the town for turks, part of the town for Russians, and the rest for Germans, and generally you don't go from one to the other. In the UK we don't like that kind of segregation and much prefer an integrated approach.

[Dave Timoney]

I think there is a lot to be said for the avoidance theory. Not only did the 30 years between 1979 and 2009 conclusively prove that a more unfettered capitalism was no solution to the UK's problems, but the subsequent turn to austerity proved that the retreat of the state was neither energising nor responsible.

The rise of euroscepticism was a further attempt to avoid the issue of the UK's structural weaknesses by conjuring up an enemy without to substitute for the enemy within (New Labour's wrinkle was merely to recast workers from malign to deficient, in classic liberal fashion). As such, austerity was as much a placatory policy directed at Tory ranks as the concession of a referendum.

We're living inside a long-running psychodrama that, at root, is about the Conservative Party's ambivalence towards capitalism. That a patrician Tory like Jacob Rees-Mogg is a committed free-trader is not just a historical irony but evidence of this derangement. The one thing we can be confident of is that we're approaching a point of crisis.

[A.J. Maher]

For good or ill imports are very important to the UK economy. If we import at world prices there will be a step change reduction in UK output costs and in consumer prices. On our current structure a 5% reduction in import prices will stimulate more of the UK economy than would a 5% increase in our exports. More importantly that GDP stimulus is also far better distributed regionally and socially than the smaller improvements in GDP that would be delivered by an export drive - as Germany demonstrates......

[Ralph Musgrave]

The Merkel / Macron plan is to turn Europe into something resembling the Islamic part of Nigeria in 50 years time. I want no part of that, so I voted Brexit. I notice that much of Eastern Europe doesn't want any part of that either.

But what's truly hilarious is that Merkel and Macron's schizophrenic supporters don't want that either, is is evidenced by the fact that not one in a thousand of them chooses to migrate to the alleged nirvana that is the Islamic part of Nigeria.

[Dipper]

just so I understand the latest "progressive" thinking on elections:

- all elections are really about economic outcomes.
- the best people to determine economic outcomes are economists.
- There are a few rogue economists, so the best people to determine outcomes are a consensus group of economists who decide they are the best economists.
- all elections in future will simply be decided by this group of economists who are the best people to make decisions on behalf of the people.

Have I got that right?

[Guano]

"For some, possibly even many, voting Brexit was seen as a way of forcing unpleasant realities out into the open."

So let's start with the unpleasant reality that, if the UK leaves the SM and CU, the UK will have created a hard border across Ireland (contrary to the spirit and letter of the Good Friday Agreement).

Then let's move on to the unpleasant reality that, if the UK leaves the SM and CU, the UK is harming its economy because at present the UK has an economy that was developed around its membership of the SM and it does not have a plan for how it will adapt the economy to being outside the SM.

As yet, Brexit politicians are denying these unpleasant realities: they won't happen or are saying that it is the EU that is imposing them on the UK. If Brexit is supposed to force unpleasant realities out into the open, it has got off to a bad start.

[e]

@ Guano
You'll get no argument from me on the issues you cite.
Perhaps I could have been more precise, said something like: unpleasant realities as experienced, which of course, doesn't necessarily coincide with complete knowledge of the facts, figures and an understanding of fault, or indeed, all possible consequences of an action. I'm guilty of taking this as a given.
My point, if I had one, was the cost to our parliamentary democracy when its stupid enough to enable a weak administration to resort to a plebiscite in order to do nothing more than sustain its leadership's position. And to point out a positive. It got a kicking, and as a consequence we're all getting an opportunity to know and understand more than we would otherwise re, how stuff works.
When things get put back together, however the chips fall, newly enlightened is something...is it not?

[Nick]

So free trade agreements "do little to boost trade" when you're talking about non-EU agreements; yet "regulatory harmony...facilitates trade" when you're discussing the EU.

Unless you're taking the view that FTAs don't address regulatory harmony (which they do), it looks like you're showing signs of cognitive dissonance yourself.