#71 – A flat-earth debate

BREXIT, FEAR AND THE ECONOMY

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”

27 thoughts on “#71 – A flat-earth debate

  1. I think people need to see the wolf coming before they act. The question is, given a downward adjustment is coming, will people actively take it on and show some pragmatism and toughness, or will they just let it wash over them hoping someone else takes the hits first. An indicator for me would be more marriages at younger ages, and more children. That isn’t happening, at least among our indigenous. It’s the youth vote that will swing the referendum. We’ll get what they want.

    So I wonder, if Brexit is followed by stagnation, if the government response would be to dig a deeper hole, if it can, & more reliance on the City, and more dirty money?

    Also, why not bring up immigration? Demographic change, along with technological, is a top force. People will make sacrifices for their own people. If you don’t have a nation, you perhaps won’t get the national spirit of innovation for which you’re looking, you won’t get everyone pulling in the same direction. [sorry, but this blog always brings out the pessimism in me]

    • First of all, “leave” are perfectly entitled to bring up immigration, which I agree is a very relevant issue – indeed, it could be a decisive issue for many voters. But I hope they won’t do it in a “scare-the-voters” way.

      On demographics, one problem is that the young are less likely to vote than the old – that is why parties fawn to pensioners, but do nothing about the “generation transfer” of wealth up the age scale.

      About stagnation, I’d say that’s what we already have – put that together with a huge current account deficit and you can see why the government wants foreigners to fund the next generation of nuclear stations, and grovels to China at the risk (certainty?) of annoying the US.

    • I would say that the real ‘scare’ is unsustainable levels of migration into the Uk.
      What part of the word unsustainable do politicians not understand ?.
      I’m sure Dr Morgan needs no lectures from me on the devastating consequences of unchecked exponential growth….
      A small country that needs to accommodate the equivalent of a city the size of Coventry every year is heading for a bad place.
      The government made their view clear in parliament this week that there was nothing they could do but hoped jobs and presumably investment went to competitor economies therefore reducing the pull factor for the Uk.
      This is the reality of Eu membership – lies, scare tactics and a government hollowing out and destroying our country from within.
      As Nicholas Ridley said ‘I’d rather face bombs and bullets than be taken over by economics’.

      The official policy on migration of ‘not infront of the children’ has worked so far but sooner or later the cat will be out of the bag….

    • Ken

      Migration policy is critical, and has been bungled for far too long. It can be a very emotional subject – there is a legitimate debate to be had, but we do not need rhetoric like “swamped”, and even the PM referred to migrants as a “swarm”. So here’s my check-list.

      First, population total. My hunch – hard to quantify – is that Britain is becoming over-populated. I think 60 million was the sustainable maximum, and forecasts of 80 million are worrying.

      Second, benefits. A country certainly benefits from migrants bringing skills, but to benefit it is necessary to be selective, as Australia is. We’ve never grasped this point, I feel. We base decisions on where migrants come from, or their own needs, not the needs of the economy and society, which should be paramount.

      Third, consent. A big problem in the UK has been a failure to consult the public, and politicians are too quick to make accusations of racism against anyone trying to put migration on the political agenda. The issue should be debated, not feared and avoided.

      Fourth, integration. Immigrants should be expected and helped to full citizenship. This means they need to acquire the language (so provide English lessons, not translations), and should not promote intolerance. If I moved to Saudi Arabia, I would expect to be allowed to practice Christianity, but I would have to learn Arabic, and accept that Saudi is an Islamic country, so I would have to conform to, for instance, the ban on alcohol – not lobby to change their culture.

      Finally, control. A country (meaning the public as well as the state) needs to decide how many immigrants to admit, consider what skills are needed, and prioritise integration – and all of this does require controlling your own borders. The opposition to free movement isn’t confined to Britain, but is growing in importance in much of Europe. Other EU countries are going to be pressured by their voters to introduce border controls, so there’s nothing to be gained by trying to resist this.

  2. Tim, I think we don’t understand that western economies are “mature” and growth is tapering off, for many reasons, well described by Gail Tverberg in “Our Finite World” blogs. Secular cycles last between 250 – 300 years, and we passed our peak in about 1970. We are now deflating but using credit to mask the structural problem. We are also compounding deflation through demographic changes. The biggest,wealthiest cohort, baby boomers, are retiring en masse and with it comes reduced spending. Neo-liberal economic policies have made it impossible for the later generations to take over as they are burdened by debts and low wages. Harry Dent calls it a “Demographic Cliff”. These events are the same for Europe as well as Britain [and elsewhere] It cannot be solved as things stand as our finite world is limiting choices already.

    As an outsider, in Oz, I see the issue as one of choice between economic values, except that both sides are following neo-liberal agendas. If one side broke ranks, that would make a choice an easy one. The Lisbon treaty takes away some of Britain’s monetary sovereignty by mandating the government be limited in spending to its tax revenue as saved in the Consolidated Fund. The BoE has to issue gilts to match any excess spending. We here have a Consolidated Fund in Treasury as well, but it is only a ledger not a bank account.It has no bearing on the ability to buy government debt. A Brexit would eliminate that constraint. Not that it’s such a big deal by itself as the UK was fortunate to keep most of its monetary sovereignty, unlike Greece – and see what happening there with the Troika trashing the place. Not a recommendation for remaining in the EU at least not in any EU monetary union.

    If Britain had a plan, then a choice might become a real choice. As it stands it’s a non event, except for the windy blowhards sounding off.

    • Agree 100%. One of the main themes of my book is how we’ve been faking growth by trashing the balance sheet. By 2008, that had reached the point where we couldn’t keep up the interest payments, let alone repay capital, which was why ZIRP was introduced. That having failed, we are flirting with NIRP…… it is madness compounded by madness.

      The lack of a plan is indeed striking, and the lack of forward thinking is a characteristic of the neo-liberal mind-set. It is also, I think, characteristic of an economy dominated by corporatism. Big organisations (whether private or state) are inherently resistant to change, whereas smaller firms tend to think a lot more about the future.

      Within a stagnant, post-growth economy, the need is for innovation, meaning an environment geared to support small businesses and start-ups. If we cannot grow the economy in total, we need to re-envision what we have in more productive ways.

      Microsoft and Apple began as small firms, because no existing giant corporation would have backed their innovative ideas. This is also why think-tanks and academics, not the big public services, pioneer new ideas in the state sector.

      Finally, stagnation – meaning deterioration per capita, if population increases – puts a much greater focus on inequalities of wealth, income and opportunities. These inequalities have been widening since the 80s, but I don’t see the public tolerating this in a post-growth economy.

  3. Thanks Dr Morgan for another engaging read I have been eagerly awaiting your next article.

    I find myself agreeing with the view that the Eu favours large corporations with the resources to lobby to ‘set the playing field’ and employ the large numbers needed to comply with complex regulation. Would leaving the Eu give a ‘hand up’ to more innovative small and medium sized businesses and thus help re-balance the economy?

    • For me, the issue of “left” versus “right” is out-dated – the real issue is corporatism versus individuality. I wrote a series on this not long ago.

      “Corporatism” means putting the good of the organisation before those of the individual and the broader society. This don’t just mean big business – we see corporatism in action when public sector organisations engage in cover-ups, gag whistle-blowers and put the organisation before the broader good.

      The economic equivalent is “concentration” versus “competition”. Competition is a good thing, and benefits customers, employees, investors, the economy and society. Corporatists try to minimise competition, to boost profit margins (and the power and wealth of those at the top) to the detriment of everyone else.

      The state, big business, political parties and big public sector fiefdoms are corporatist. Eisenhower famously warned Americans about “the military-industrial complex”, and today’s equivalent might be “the political-financial complex” – but the broader risk lies in any “complex” or grouping which becomes excessively powerful, politically or economically.

  4. Hello Dr Tim. For your Brexit economic argument it sounds like you are asking for a cost-benefit analysis of Britain’s membership of the EU and the single market. It should be noted that for over 40 years no British government has commissioned an authoritative cost-benefit analysis of EU membership, despite one being called for by Lord Pearson in 2006, 2009 and 2010. Surely this is a clear indication that past governments did not wish to collect and present evidence, some of which might show the EU in a less than favourable light.

    Fortunately Michael Burrage has recently provided one:
    http://bit.ly/1RuRnbe

    Also Professor Congdon examines the costs of EU membership:
    http://bit.ly/1ei7ABw

    And tells us that in 2011 the UK paid the EU a net figure of £9.3 billion to the EU and in 2012 £10.0 billion. But in 2013 the figure jumped to about £13 billion, not far off a full 1% of GDP. In December 2013 the five-year Budget was changed again, adding an extra £10 billion to the UK’s commitment until 2018. In March 2014 the EU Budget commissioner said that EU institutions had overspent their budget allocations by £20 billion in 2013!

    Whilst most politicians stick to talking about the net fiscal cost of EU membership the elephant in the room is surely the indirect costs of regulation. Now if you cannot trust the EU and its officials, like Lord Peter Mandelson, to tell the truth then whom can you trust. And the EU and its officials tell us that the costs of the single market are twice the economic benefits of the single market, and in cash terms are £120bn per year to the UK (6% of GDP). Surely they of all people are most unlikely to overstate such costs?

    Burrage considers whether such costs are outweighed by the value of the extra exports to the EU and what proportion of these extra exports of goods might reasonably be attributed to EU membership. He compares the value of UK exports in 1973 to the 12 founder countries that were then, or have since become members of the EU, as a proportion of UK GDP, with the value of UK exports to the same 12 countries as a proportion of UK GDP in 2013, and finds that the proportion has declined from 18.7 per cent in 1973 to 16.5 per cent in 2013.

    Thus EU membership has thus been accompanied by a decline in the proportion of UK exports going to fellow EU members, which, as Burrage observes, rather makes it difficult to calculate the extra proportion that might be attributed to EU membership.

    atb

    • Well put. I agree entirely about the real cost of membership being the cost of regulation.

      My point is that the UK needs to change its economy by strengthening the competitive position of small and medium enterprises (SMEs). These are disadvanted by an EU that tends to serve the interests of big corporations.

      SMEs are the main source of innovation, growth and jobs, and the UK is far better at innovation than it is at “management” – so creating an SME-friendly system would play to UK strengths.

    • So, if the economic arguments are inconclusive our decisions which way to vote must depend on our beliefs. For example: Which is to be preferred? The State bureaucracy of Europe if we stay in, or that of the UK if we come out?

    • Barry, yes, that’s about the size of it.

      Economic forecasts for Leave vs Remain are uncertain, because they fail to (or cannot) factor-in structural change.

      It is also arguable that many projections are biased, even if not always intentionally.

      So you’re right to attach very little weight to economic cases from either side.

      Which, yes, means deciding on non-economic issues.

      That idea scares the Remain camp. Because, if you take out the economy, and international comments on the economy, the issues come down to sovereignty, borders and immigration. That could win it for Leave.

    • This is off-topic, but certainly not off-subject – I usually look at global economic issues, and this piece on Brexit is outside my usual focus.

      On the McKinsey report, I have it and have made much use of it. I’ve also found the basic data on debt & GDP covering most of what the report looks at, enabling me to update it from McKinsey’s data cut-off (mid-2014).

      The main points from it, for me, are:

      – Borrowing (nominal $ per year) exceeded annual growth in the ratio 2.9:1 during 2007-14 (excluding inter-bank debt)

      – This was a worse ratio than 2000-07 (2.2:1)

      – Much of reported global GDP “growrth” is fake, i.e. it is nothing more than the spending of borrowed money

      – China and other EMEs are now making the same mistakes which the West made pre-07!

  5. I find this issue difficult for reasons that are uneconomic, partly because I don’t have any faith in the economic projections so I don’t see these as valid criterion, but also because in this case I have a conflict between more democracy under a malign invasive government or less democracy under beurocrats who are unaccountable but less interested in tracking my every move.

    I tend to look for the libertarian choice and while I prefer an economically liberal system, social liberalism is more important. It’s not just this government that is the problem, although they have zero respect for the historical safeguards that have been preserved for centuries within the law for protection of basic individual freedoms and privacy, but they only seem to be continuing the political thuggery of Labour’s legacy. I don’t see much resistance generally from any quarter so it will only get worse whichever party is in power, barring freakish events like the Green party winning overall majority.

    On the other hand, while in Europe, my vote seems less significant within the corporate state machine, yet at least the lack of interest in my existence as an individual seems to go along with a feeling that there is also less interest in tracking my movements and ensuring my conformation to the state ideal of a hard working citizen with the acceptable prejudices.

    • First of all, I think you’re right not to put much faith in economic projections, whoever they come from.

      Second, I share your view on the libertarian issue. The arguments do cut both ways here. For instance, the EU is favoured by large corporates – because its regulation disadvantages smaller competitors, whilst free movement puts downwards pressure on labour costs – yet the EU is doing quite a lot to restrict the behaviour of American multinationals (like imposing restrictions on shipping EU citizens’ data to the US). So for us libertarians, it isn’t a straightforward call.

      In my view, successive UK governments have been even less libertarian than the EU, in that there has been serious erosion of the right to free expression. One young woman was arrested for refusing to remove a t-shirt saying “b******s to Blair”, as was another for reading out in London a list of British Iraq war dead. Even children have been arrested for saying (or posting) things deemed to be racist etc., and we have invented a right not to be offended, and then elevated that above the right to free expression. I believe in free speech and tolerance of different opinions, and think that debate and counter-argument is always better than censorship and prohibition.

      This said, the incumbent “liberal elites” are now in retreat, not just in Britain but in the the US, Holland, France, Spain, Greece and even Germany. Right wing populists have won power in Poland or Hungary, and the BBC – bastion of liberal elitism – is spitting feathers over Hofer in Austria and Trump in the US. Obviously migration is becoming a litmus test in the EU, with an upswell of public anger over “open doors” policies.

      The EU has two big challenges to tackle (which is why the distraction of Cameron’s demands for reform was so resented earlier this year). First, the Eurozone is dysfunctional. Second, the elite and the public seem miles apart over migration.

      I don’t see the EU or national elites giving ground over these, and I don’t see the tide of public discontent reversing. Therefore, the EU could well implode whether the UK is in it or not.

      Finally, the UK elite seems to think that a narrow vote for “remain” will end the debate. Well, a narrowish win for “no” didn’t end the debate in Scotland….

  6. I see the state you describe, where the right to be offended trumps free expression and even truthfulness, as inseparable from this government’s “evidence-free” approach to policymaking, and ultimately the coming of age of New Labour’s self righteous assumption of responsibility for what used to be common decency which we as a society lost only to find it had been replaced by political correctness.

    • Well, we’re getting quite a long way from the referendum – just as well, perhaps, after the nonsense scare-mongering emanating from government today! – but I agree. It is ironic that a government committed to privatisation should be so complicit in the nationalisation of morality.

      The whole situation is a mess. Whilst economics is dominated by the right, where the only business ethic seems to be “never own up”, what used to be called “the left” now controls the social agenda. Morality, as I see it, is a matter for the individual and his conscience, but government has taken on the responsibility for dictating what is moral and what is not. If the government dictates morality, why bother to decide for yourself between right and wrong? Like any limb or muscle, moral sense will atrophy if you don’t use it.

      Conversely, what if your own conscience leads you to disagree with the state-imposed morality? Should you be forced to choose between morality and the state?

      An example is fox-hunting. I don’t like it – but others do, I respect their right to take a different view, and I don’t see my dislike as empowering me to tell others what they should or should not do. That’s why I don’t like bans unless they are absolutely necessary. Persuasion is almost always better than coercion.

      But government these days prefers coercion.

    • Infantilization is what it amounts to, and I find it oppressive and exceedingly offensive. For some reason however these issues seem to be almost entirely absent from political debate these days. It’s as if people have simply given up and conceded the argument as having been won.

      Perhaps it’s a weariness caused by the last 15 years living under a perpetually elevated terrorist threat alert. Most have probably accepted what they see as a small price to pay buying that it’s “for their own good” without realizing quite what has been lost.

  7. I understand that the EU’s accounts have not been signed off the last twenty years. If this is so the EU’s finances are out of control. If this were a company they would be heavily sanctioned.

    • As I understand it, accounts have been signed off (by the European Court of Auditors) in each year since 2007.

      This has not been a completely clean bill of health, as each of these audits has been “qualified”, meaning “accounts approved but…..”. This said, errors seem to lie in member government submissions, such as proving that subsidies (such as farming) have been spent entirely properly, rather than centrally.

      As my book explains, government accounts generally are pretty dodgy. Greece has packaged up and sold forward its future EU subsidies – a bit like a football club forward-selling future ticket revenues – whilst Germany and Portugal have done similar things.

      In order to privatise Royal Snail (for circa £4bn), the UK government took over postal pension liabilities (net £10bn) and didn’t add them to debt, classifying them as “contingent liabilities” instead. Debts of wholly-state-owned entities (such as National Rail) aren’t included in public debt. Neither are nuclear decommissioning costs, or – the big one – about £1000bn of public sector pension liabilities. The US doesn’t include future Social Security costs in its debt even though the Federal and Social Security budgets were merged when SS was in surplus (to mask the deficit) and remain combined.

      Many governments account in ways that would get a small business owner into big trouble!

  8. But, with respect Tim, you’ve slipped in a conceptual slight-of-hand here, because the UK government is not a small business — it has sovereign currency-issuing powers — and therefore does not need to manage its ‘budget’ in the same manner as a business of any size.

    It does, however, have to consider whether the spending actions it takes are first, in the general social interest, second, do not advantage (profit) private interests only and third, do not allow an environment of rampant moral hazard to flourish.

    I suggest this plays into your series on corporatism and the favouritism shown to large corporates.

    Regards,
    Dan.

    • Dan

      I think we’re talking about two different things. I was not suggesting that actions open to government and small business were comparable. What I was talking about was accounting probity. How much a government borrows is one thing – hiding some of that debt is quite another!

      Your broader point is exactly what I’m looking at at the moment, and also relates to what Steve Hilton has been saying about economic and political systems needing to be restored to “a human scale”.

      The current system can be characterised as a corporatist economy and the corporatist rule of what others have a called a “liberal elite” (whilst I understand what they mean, “liberal” isn’t how I would describe them). This duality is coming under increasing public scrutiny and may not survive unless it can adapt.

    • The UK is not as monetary sovereign as it used to be, before it signed up to the Lisbon Treaty.
      It’s supposed to recycle its tax revenue from the Consolidated Fund and only create new money when that is exceeded. And then buy gilts to make up the difference.
      It’s all a sign the EU and the UK government have a very distorted picture of how modern money actually functions! Using taxation to base expenditure on is not understanding that Government budgets are just an accounting device. A reckoning of the tax take and the government spend, a budget surplus when the tax take is greater than its spend, and the opposite for a budget deficit.
      ETC, ETC, etc. Ignorance is Not bliss. These nincompoops damage society by their wrong headed and wilful behaviour.

  9. I think one of the fundamental failures we have in the UK, not only in relation to Brexit but about the whole conduct of monetary and economic policy is the failure to realize that the issues we face are not cyclical but structural. Policy consists of tinkering for the short term whereas what is required is a fundamental look at secular trends.

    I’m just finishing reading Robert Gordon’s book: “The Rise and Fall of American Growth” in which he analyses the secular fall in growth over the last forty or so years – the conclusions also apply to the UK. Growth is driven by two main factors: population and productivity.

    Population in the developed world is static or even declining in some cases and the working populations are in even steeper decline. As regards productivity it is not only investment that is in decline in recent years but that much more elusive concept of innovation, in the long run much more important.

    What this points to, in my view, is the probability of a lower potential growth rate going forward, exacerbated by the continuance of international labour arbitrage. There is also the challenge posed by robotisation/AI but that may mean more of a change to the structure of the labour markets rather than size, and ultimately on inequality.

    Put all this together and it means that current policy is targeting a state of “normalcy” which no longer exists and which willfully ignores the major structural issues we face. This is not a good prospect.

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