#71 – A flat-earth debate


Early on Friday morning, a spectacular blaze engulfed a fireworks warehouse in Southampton. As far as I’m aware, no cause has yet been discovered, but no matter – I’m sure the authorities can blame it on the prospect of “Brexit”.

I’ve had not much to say here about “Brexit”, in part because I’ve yet to be convinced by any of the economic arguments thus far put forward on either side of the debate. If I’m moved to comment now, it’s because the escalating scare campaign, dubbed “project fear”, is so starkly at odds with the absence of solid, reasoned, factual discussion of the issues.

Even the economic debate is stymied by the implicit assumption that the economy, whether bigger or smaller after “Brexit”, will remain the same as now in structural terms.

To assume a static structure when making projections is the economic equivalent of assuming a flat earth when making maps. If I cannot provide an answer to the structural issue here, then at least I can point out what the question ought to be.

For those fortunate enough to have escaped the deluge of scaremongering and name-calling which has been inflicted on the British electorate, I should perhaps explain that “Brexit” is an ugly shorthand term meaning “British exit” from the European Union (EU). (I mention this because the word actually sounds more like the name of a new snack-bar).

The campaign to frighten voters into the “remain” camp divides into two parts. The first, domestic part is that peddled by supporters of continued membership, whose ranks include the government and much of the taxpayer-funded, supposedly-impartial state machine. The second component comes from overseas, both from foreign leaders (such as Barack Obama) and from international organisations (including the IMF). International contributors tend to concentrate only on the economic dimension of the debate, whereas home-produced scare-stories know few bounds.

The non-economic frighteners

There is, undoubtedly, an economic debate to be had but, thus far, it hasn’t happened, as I’ll explain shortly. First, though, let’s deal with the non-economic fears which have been canvassed by British opponents of “Brexit”. In passing, it is interesting to note that the “leave” side has not – yet, anyway – descended to retaliation-in-kind by indulging in the same sort of fear-mongering practised by their opponents. Of course, the “leave” camp still has plenty of time in which to retaliate, and could yet play the immigration card, though it is profoundly to be hoped that they don’t.

The escalation of “project fear” has been remarkable, and has pushed the advocates of “remain” out to the farthest reaches of credulity. Most of the non-economic claims are outlandish enough to be dismissed summarily.

The assertion that a British departure could lead to war is simply preposterous. Mrs Merkel isn’t going to invade the Sudetenland, and France isn’t going to march into the Rhineland, if British voters give the EU the bird. The responsibility for maintaining peace in Europe rests with NATO – not the EU – and with international relationships, most importantly that which links Britain to the United States.

Here, a strategic mistake far bigger than “Brexit” has already been made, when Britain broke ranks and signed up to the AIIB, China’s rival to the World Bank, in direct defiance of US policy. This can only undermine the UK’s credibility in Washington, which is particularly regrettable at a time when American voters seem to be veering towards isolationism.

The claim that leaving the EU would weaken national security is a bit rich from a Prime Minister who has presided over a dangerous deterioration in conventional defences. Mr Cameron’s governments have slashed the size of the Army, failed to replace the RAF’s antediluvian Tornados, bulldozed Britain’s vital maritime surveillance capacity into scrap metal, failed to reinstate the Navy’s interceptor aircraft, decommissioned the aircraft carriers, slashed Britain’s submarine force and done nothing to bring the numbers of destroyers and frigates back up to necessary levels.

Fear, risk and credibility – eaten by the dog?

The sheer scale of the scare campaign, and its increasingly outlandish assertions, pose a clear risk of provoking derision in voters. Some people have already started to wonder whether “Brexit” is to blame for the failure of their geraniums. Others have quipped that “Brexit” might cause Earth to veer out of the solar system. It wouldn’t surprise me if school children start to claim that “Brexiteers” have stolen their homework, as a fresh variation on the old “eaten by the dog” excuse.

The margins of ancient maps were labelled “here be monsters”. Those navigating “project fear” surely know that its wilder fringes are labelled “here lies ridicule”. Assuming that they know this, why have the “remain” camp strayed so far into fear-mongering?

My supposition is that the pro-membership side is running scared. This would be consistent with an approach that has been bungled from the outset.

Mr Cameron went in to reform negotiations with the statement that he was quite prepared to campaign for a “leave” vote if he didn’t secure concessions. This makes it very hard for him now to explain why, if “Brexit” would be such a total disaster, he was so recently prepared to support it. Was he, until a few months ago, happy about the prospect of economic catastrophe, defence enfeeblement and European war? Or has he only lately discovered these risks? And, if “Brexit” would be such a catastrophe, why call a referendum at all?

The economic issue – a case not made

Thankfully, contributions to the debate from outside Britain have largely been confined to economic issues, where both foreign leaders and international organisations have reiterated warnings made at home by the commentariat and the representatives of big business as well as, most recently, by the Bank of England.

The problem with economic evaluations – as supplied by both sides of the debate – is that they are “flat earth” in nature. They have delivered projections based on an implicit assumption that there will be no structural change in the British economy.

The reality is that structural change has to happen – or, to put it another way, the British economy will be in very real trouble if it doesn’t. The government has itself, in the not-too-distant past, argued the case for “rebalancing”, though it has been noticably mute on the subject since it became apparent that rebalancing isn’t happening.

The best way to appreciate the need for structural change is to recognise that goods and services produced by the economy divide into two broad categories.

The first category is output that competes on global markets – even products actually sold at home fall into this category, if they have to compete with imports.

The other category comprises services which can only be consumed at home, and are not subject to international competition. Cars, refrigerators, steel and food are globally-priced, because the customer can always choose an imported alternative if it offers better value. There is international competition in some service areas, too, such as tourism, banking and insurance.

A customer cannot, however, employ an estate agent, book a taxi or order a takeaway meal from abroad, so competition and pricing in such categories is purely domestic. This has profound implications, not just for the performance of the economy but for how output is measured as well.

The real imperative – rebalancing

A long-standing problem, which Britain shares with many other developed economies, is that too much of its output is capable only of internal consumption, and cannot be marketed in competition with overseas suppliers. This is reflected in a bias towards sectors such as property and domestic financial intermediation, and inadequate exposure to globally-marketable sectors. This is becoming ever more of a problem because, as the real estate and similar sectors have boomed, production (including energy as well as manufacturing) has continued to shrink.

Current trends, notably both in oil and gas production and in manufacturing, suggest that things are getting worse – which in turn has adverse implications both for borrowing (which remains excessive) and for Britain’s current account relationship with the rest of the world (which has become dangerously negative).

Changing this imbalance is vital, and requires much more than pious hopes and vocal encouragement. What is needed most is innovation, and this tends to come from small- and medium-sized enterprises, not from the corporate giants which dominate so many UK sectors.

Would leaving the EU promote the cause of rebalancing, towards globally-marketable output and towards smaller, innovation-driven businesses? Or would continued membership be more effective in delivering these structural changes?

The only honest answer has to be “don’t know” – but even that is better than the position of both camps (“remain” especially), which seems to be “haven’t thought about it”