Monday, October 3, 2016

Brexit Means Whatever I Want it to Mean

As Martin Sandbu pointed out last week, Brexit has to mean less free trade, despite what Liam Fox says, because less access to the single market means greater barriers to trade (whether tariffs or the more relevant 'non-tariff barriers to trade': regulations, rules of origin, and so on). Any potential gains (new free trade agreements) are in the future, and moreover not that convincing in any case (because of Britain's weak bargaining position, the loss of access to trade agreements through EU, and the time and costs involved in reaching agreements).

Moreover, the Brexit coalition (a bare majority of voters, though a tiny minority in parliament) is deeply divided on what follows Brexit.

-        On the one hand, free traders like (supposedly) Fox and more coherently Daniel Hannan see the EU as a source of restrictions on market freedom, and therefore argue that leaving will reduce regulation and improve economic performance. (This is entirely implausible, since most EU regulation is about reducing barriers to market access, and the UK already has low regulation by international standards). To the extent that labour market freedom is part of this package, it would not imply any reduction in immigration.

-        On the other, the UKIP/Tory nationalist strand of the coalition is vehemently opposed to any restrictions on UK control of borders. This implies restrictions on the ‘labour’ part of market freedom (heavier regulation to achieve fewer immigrants) and control/regulation over goods and services entering the UK (leaving EU customs union). This implies lower immigration, but also less trade, and potentially the death of the UK’s recent model of high openness to FDI and speculative capital.

The incoherence of the Brexit position has so far been resolved by a combination of wishful thinking and bullshit. The wishful thinking part revolves around the notion that the EU needs the UK so badly that it will let us keep all of the privileges of EU membership without any of the obligations. The bullshit part involves simply refusing to understand the incoherences of the Brexit position (in particular, the idea that you can have free trade whilst voluntarily exiting the world’s largest, and our nearest, free trade bloc).

What both of these positions have in common is their solipsism. The obvious inconsistencies in Brexiter thinking are resolved by assuming an Anglo-centric view of the world in which others will willingly submit to our demands, however unreasonable, or in which simply by virtue of being who we are, the contradictions of Brexit just don’t actually apply.

Examples of the former are: Germany sells us cars, so they will not want us to impose tariffs (we sell more cars to the EU than Germany sells to us; Germany has not hesitated to undermine other export markets, eg the Eurozone periphery, when it suited them; tariffs are actually required under international law unless the EU as a collective decides to offer a comprehensive free trade agreement within two years).

Examples of the latter are: Britain can now freely export all around the world, free of EU shackles (we have no obvious competitive advantage to draw on – we are a high wage, low skill country a long way from non-EU markets); France will still buy our jam, because it’s really good (so is Bonne Maman); we had free trade without immigration in the 19th century, why not now (we ran an Empire).

This solipsism is otherwise known as nationalism. In a complex world where we face huge challenges (paying off our debts when we don’t actually produce many attractive goods and services, coping with the turbulence and social disruption brought by our heavy dependence on financial inflows, the skill shortages and demographic imbalances that act as a pull factor for migration), it is comforting to retreat into a nationalist vision of the world in which bad things are caused by our enemies, and if only we could shut them out, things would be better.

The UK is not alone in this: Trump in the US and the various right-wing demogogues prospering in Europe at the moment all draw on the same ideas and sentiments. But the UK has an added toxic ingredient: our imperial past. The US, as a real existing Empire (albeit in decline) can actually elect a Trump and this would possibly represent a greater danger to others than to the US itself. The UK has a collective memory of being in this situation, of being able to doing whatever it wants, backstopped by military might. But it is no longer the case. India will buy our exports if we buy its exports, not because we tell them to do as they are told.

The option of closing our borders whilst forcing others to open theirs to us is no longer on the table for the UK. It is imperative that the younger generations who have most to lose from this harsh reality wake up to the fact, and deny the largely older Brexit voters the pleasure of torching the fields on their way out just to remember what it was like to be young.

Wednesday, August 24, 2016

The Politics of Magical Thinking

In older posts I have discussed the increasing prevalence in our political discourse of bullshit, political language that rather than being lies or simple rhetoric, has no real relation to the truth at all. The recent Brexit vote in the UK produced many excellent examples of the genre, and Donald Trump's surreal campaign is itself based on an entirely truth-orthogonal promise to Make America Great Again. But this bullshit is not the sole distinguishing feature of contemporary political discussion: we also witness a growth in what can only be termed 'magical thinking'.

Magical thinking is different from bullshit, in that it purports to make claims that are conceivably empirically falsifiable - that is, that have a relation to the truth. There is no way of testing whether Trump will indeed have 'made America great again', in the unlikely event of him actually becoming President of the United States. But we can assess the plausibility of his political proposals - both of them - in terms of real evidence and facts. It will be expensive and futile to build a wall on the Mexican border, it would be political suicide for Mexican government to agree to pay for it, and it is a logistical impossibility to ban Muslims from entering the United States. These are ideas that simply cannot work, and we can clearly show why.

The fact that Trump's supporters are enthused by these fanciful plans shows they are in the grip of magical thinking: they refuse to look at any evidence, and prefer instead to engage in dreaming about a fantasy world they would like to exist. We see much the same kind of reasoning in many other political movements around the rich democracies. Brexiters in Britain refuse to accept that leaving the EU will have a substantial economic cost, when every sensible analysis shows clearly why it is inevitable. Syriza won election in Greece by promising to extract easier loan terms from the European Union, then predictably ended up accepting an even worse deal. The Five Stars Movement in Italy claims that the country's long-standing economic malaise and endemic corruption can be solved by replacing existing elites with 'ordinary citizens', guided by online voting by party members. And so on.

The Labour Party is currently flirting dangerously with magical thinking. Despite the accumulating evidence that Jeremy Corbyn has not only lost control of his own parliamentary party, but is the most unpopular opposition leader on record, thousands of people have joined the Labour Party enthused by its new leadership. Appeals to prioritize winning power in order to actually shift British policy-making in a leftward direction are dismissed as being tantamount to unprincipled 'Blairite' managerialism. The backlash against the uninspired leadership of the party over the past decade and the huge ideological compromises imposed by Blair - who never really was a man of the left - was inevitable and understandable. But this backlash hugely overshot: not only is Corbyn an uncharismatic and uninspiring public speaker with some unpopular views and even less popular associations, but he seems incapable of running any sort of political campaign at all, 'traingate' being the latest miserable example. Yet his victory in the leadership election appears inevitable.

Why is magical thinking so popular? Partly because of the depressing nature of much pragmatic thinking. For the past two or three decades, political decision-making has been in the hands of dismal technocrats, who have presided over a drift towards ever greater inequality and the erosion of public services, whilst leading the world economy to near collapse. It's hardly surprising economists have little credibility. Moreover, politics has never been about citizens painstakingly analysing research reports before taking a position on the key issues of the day: instead, the public has vague ideas about the direction things should move, and politicians succeed when they are able to turn those vague ideas into a political strategy and a set of policies. At the moment, establishment politicians have lost trust and are entirely incapable of doing that.

So the rise in magical thinking is best seen as an expression of a very strong mood that things need to change. Previous waves of popular mobilization were similarly built around vague and naive-sounding demands, from 'flower power' to 'sous les pav├ęs la plage', which however ended up driving political change and ultimately informing policy decisions. We could be witnessing a cyclical shift from a period of 'private interest' - introspection and individualism - towards 'public action' - a more collectively-oriented form of political expression, as Albert Hirschman described in his wonderful book Shifting Involvements. If this is what is going on, it is to be welcomed. But it also carries risks: if the Labour Party is unelectable, the dominant force behind policy could well be the magical thinking of the reactionary right: an increasingly narrow, sectarian politics represented by the Brexit wing of the Conservative Party. If Labour goes for populist mobilization, it had better mobilize a lot of people, and achieve something with this enthusiasm before it wanes, as Hirschman tells us it inevitably will. The shambolic performance of Corbyn's circle so far isn't too promising.

Thursday, June 30, 2016

The Brexit Ponzi scheme

The shockwaves unleashed by the financial crisis of the late 2000s have finally swept away the established political and economic order of the UK. It took some time coming, but it turned out that neoliberalism isn't so resilient after all. This vote is a sweeping challenge to the model of open markets and deregulated finance that has governed us since the 1980s.

The problem is, the challenge is based on a fantasy. Brexit is a classic catch-all concept, that can mean almost anything. The basic appeal of the Brexit campaign was the notion of 'taking back control', which of course contrasts with the essential logic of the market economy, where nobody has control, and resources (including labour, ie people) are allocated in accordance with the signals we send when we buy and sell things. By 'taking back control', we supposedly allow ourselves to stop things happening that we don't like and that we feel we cannot choose to opt out of: immigration, externally imposed rules, competition for scarce resources such as housing, jobs, doctors' appointments, and so on.

These things are in large part incompatible or simply impossible, but the 'leave' campaign very successfully escaped any real scrutiny on how they were supposed to be delivered simply by leaving the European Union. Voters flocked to the stall offering free goodies.

This reminds me a lot of one the iconic events of the 2008 financial crisis: the collapse of Bernie Madoff's Ponzi scheme. As is well known, Madoff ran a massive, but strangely under the radar, hedge fund that offered remarkably consistent returns for investors, and grew to a colossal size, but which turned out to be a fraud. Madoff's returns were not profits from smart trading, but instead simply slices of the funds new investors provided, doled out to existing investors. When the credit crunch hit in autumn 2008, some investors were forced to pull out, and the flow of new entrants dried up. By December, Madoff no longer had the funds to pay off investors who wanted to cash out, and the game was up. The investors' capital, supposedly invested in various profitable assets, did not actually exist - it had been paid out in fictitious profits, and spent by Madoff himself in running the operation and making a pile of his own.

The basic structure of a Ponzi scheme is that people are persuaded of something that is too good to be true, and as more and more people pile in, the better it looks, encouraging others to suspend disbelief. Until something happens, the flow of new gullible 'marks' dries up, and the reality hits home: you've been had. The same logic drives the development of 'bubbles' in asset markets: valuations are hyped for some apparently plausible reason, more people pile into the market, thus validating the hype, and then at some point reality bites and it comes crashing down.

What happens next is that people get mad. Mad at themselves, yes, for falling for a scam. Definitely mad at the scammer, for stealing their money. But also mad at the authorities, for allowing it to happen. After the Madoff scam was revealed, officials from the SEC (Securities and Exchange Commission) were hauled before Congress and subjected to humiliating questioning as to why they did not see a gigantic multi-billion dollar fraud happening under their noses.

Who should we get mad at when Brexit fails to deliver the nirvana of low immigration, more spending on public services, and the freedom of the UK government to ignore the rules set by its main trading partners? This is what is worrying me. The authorities, of course, gave very clear warnings in this case: they were ignored, dismissed as out of touch 'experts'. Yet they may well be proved right in the end. How will Brexiters react?

My fear is they will cry 'betrayal', especially since powerful forces in the UK political economy will be trying desperately hard to stop Brexit actually happening, for the most part for good reasons. And betrayal is not a concept associated with the mainstream political centre. It is the language of violent extremism. We will not see the end of UKIP even if its dream of a UK outside Europe comes to pass. The poverty, stagnation and decline that is likely to result will stoke more fear and loathing. Will Farage, like Madoff, be the target of our wrath? Probably not. Instead the grown-ups in the room forced to deal with the consequences will be the first to be blamed.

Ponzi schemes in politics last until they have to confront reality, but given the very real constraints on political votes shaping political reality, they can survive for a long time before actually having to pay out. As with Trump in the US, the only true way to convince the punters that Brexit is a disaster is to allow it to happen. And at that point, the scheme brings down the rest of us with it.

Tuesday, June 28, 2016

Let's do it again some time: Voters' remorse and the case for a second referendum (at some point...)

So, it happened. The great British public, in its wisdom, has chosen to leave the European Union. Despite all the warnings of economic chaos and the costs of losing our rights to live, work and trade in the largest market in the world, a majority of British voters decided that it was a risk worth taking. Almost immediately, the markets set about proving that the dire warnings of the consequences of Brexit were not just scaremongering. As I write, the pound is down 10% on its already diminished value of last week, and the political chaos ensuing at Westminster is if anything worse than predicted. Planned investments are being put on hold, deals cancelled. We have a lame duck executive, and total confusion as to how and when we will leave the EU, and what kind of relationship we will have afterwards with the rest of what remains our continent.

This raises the question: did British voters really want all this? If so, the 52% who voted leave must have a remarkable taste for risk, an obsession with the abstract principle of sovereignty, or a masochistic desire to see their country become poorer. Or simply such a degree of discomfort with current levels of immigration that any price is worth paying to reduce it. This seems implausible. The same electorate, last year, rewarded a Conservative party that nailed its colours to the mast of economic stability and fiscal prudence. Now, we have opted for the opposite. Growth forecasts are revised down, the Bank of England has prepared emergency measures to help stabilize the banking system, and the ratings agencies have downgraded UK government debt. And it's only Tuesday.

It seems much more likely that many voters simply did not believe the warnings that Brexit would make us poorer. And why should they? Fully understanding the complex workings of a modern market economy embedded in a global context is beyond the abilities of even our finest academic specialists, who notoriously failed to foresee the great financial crisis of 2007-8. The economic models most voters have in their heads are at best extraordinarily crude, and in most cases almost non-existent. Given such intellectual uncertainty, voters could either take on trust the statements of a rather alien group of distant technocratic elites with a patchy track record, or go with their guts. The latter was even more likely given that leave voters disproportionately did not expect their side to win.

However, the economic downturn already emerging is likely to encourage a rapid updating of many voters' views. In much the same way as inveterate smokers can ignore the widely available medical advice on tobacco yet only give up their habit at the first real signs of damage to their health, the economic consequences will almost certainly change minds. Sure, many Brexiters will remain convinced they made the right choice, responding to cognitive dissonance by clutching at whatever consistent narrative they can to make sense of it all (a recession was coming anyway, or was caused by the failure to remove the foreigners quickly enough, or by our embittered European neighbours sabotaging our economy in revenge... the headlines write themselves). But the most exposed will surely begin to wonder if they made the right choice. Given a second chance, they may vote to remain, if a vote is held before full withdrawal takes place.

This raises a broader issue about democracy. After losing the vote, Remainers (including myself) took to social media to broadcast their anger, frustration and bitterness, often belittling the intellect of the leavers. Many insisted a second referendum should be held, because of the egregious lies told by some of the leaders of the Leave campaign. Leavers (or at least the politer ones) insisted that democracy means accepting the result, even when it goes against you. But there is a serious democratic case for a second referendum.

A vote is in part a choice under uncertainty, based on the expected utility of the policy chosen. It appears that many voters felt that the choice of leaving the European Union would reduce immigration and/or enhance British sovereignty, with relatively bearable economic costs. But it may well turn out to be the case that the costs are unbearable, perhaps especially for many lower income supporters of Brexit.  Put another way, they made a mistake. They were warned of that mistake, but made it anyway, perhaps swayed by the well-funded propaganda machine convincing them that Brexit would work in their interests. They should be given a chance to reverse that decision, if evidence emerges of a significant number of voters changing their view (perhaps through a general election, a likely scenario given current chaos).

Would this be undemocratic? Referendums are notoriously blunt instruments of democracy. They reduce complex questions to a binary choice, and unlike other votes, offer no chance to revise our choice in the light of new information. When we elect a parliament in general elections, we do so on the basis of the concept of parliamentary sovereignty, which means, amongst other things, that 'no parliament can bind its successor'. This is the very opposite of the logic of the democratic vote as one-off, irreversible decision. And, in the case of the European Union, it is worth recalling, this is already the second referendum we have held. The reasons for holding a second vote were ostensibly that the European project has changed dramatically since 1975, when we first voted on membership. In other words, we chose to change our minds in the light of new information.

So there is a case for holding another vote (probably on a new arrangement, such as the 'Norway option', rather than on EU membership itself). The problem is that it is hard to imagine doing so quickly, since that would obviously subvert the people's choice. The evidence of serious damage to the national interest must be allowed to pile up. But some of the direct consequences of voting to leave last week could well be irreversible. Choices to move production out of the UK to retain access to the single market, individual decisions to leave the UK to work elsewhere, long term investment decisions that can only be made once, not to mention the destruction of trust in relationships with other countries' governments, are unlikely to be rewound even if we do change our minds. It is perfectly possible that we have already done ourselves permanent and irreparable damage. Like the smoker, we had to suffer the heart attack before we took the medical advice seriously.

Friday, June 3, 2016

Brexit, Sovereignty and the Market

The current EU referendum campaign in the UK is probably no political theorist's ideal of how democracy should work. The debate has been suffused with at best tendentious interpretations of how the EU works and the likely consequences of leaving, at worst with outright lying. Somewhere in the middle there is a copious amount of bullshit, as politicians and voters try to make sense of things they do not understand, give up, and resort to meaningless and often contradictory verbiage. In short, Habermas must be tearing his hair out.

There are plenty of good reasons why most people misunderstand, or know next to nothing, about the EU. Most of what it does is dry, technical and frankly boring. It makes little attempt to engage with the citizens who will experience its decisions, and national level politicians have little incentive to improve citizens' understanding, given their propensity to use the EU to deflect the blame for national problems. But I submit there is a more fundamental reason why the EU is so ill understood, and that is to do with our understanding of political economy - how politics and markets interact and constitute each other - more generally.

The EU is primarily a market. The key founding principles which Brexiters are most concerned about are its 'four freedoms', and in particular the freedom of movement of people (very few seem bothered about movements of capital, goods and services). These are constitutive of the European single market, and inform a body of legislation whose purpose is to ensure that national governments cannot subvert the market by introducing protectionist measures that will undermine competition, usually to the benefit of national producer interests. EU rules are pretty much all about doing this, and establishing common minimum standards so that competition does not lead to nefarious social consequences such as risks to workers' and consumers' health, fraud, pollution and so on. Its interventions in social policy are pretty limited, except in that discrimination in social provision on the grounds of nationality is outlawed.

Because the EU is all about freeing up markets from protectionist rules, it is actually far less threatening to the UK government's autonomy than that of other governments, because our political economy is already built on rules to facilitate the operation of market forces. Worker protection is amongst the lowest in Europe, and this is one of the reasons why the UK is an attractive destination for economic migration: our labour market is very open, particularly to workers who are prepared to work for low wages. Hiring and firing rules are very loose, unions are weak and worker organization actively discouraged, there are no automatic wage indexation arrangements, and welfare provision is not very generous by European standards. So if EU rules are so consistent with the UK's own institutions, why is there such hostility towards the EU?

The Brexit movement, and in particular that element of it that is concerned primarily with migration, is - usually implicitly - in fact demanding constraints on the market. Even the use of the term 'sovereignty' reveals that the power of the government of a nation state to regulate social life in whatever way it chooses is a value to be protected from outside interference. Unfettered market forces produce uncontrollable movements of money, goods, services and people across borders. Sovereignty is the right to put brakes on those movements. It is the right to curb, control or even suppress the market.

There is a deep contradiction within the Brexit campaign, and that is the contradiction between those who - for reasons of ignorance or ideology - argue that the EU is a restraint on free trade and the market, and those who - sometimes without realizing it - demand that our government protects us from unfettered markets. Brexiters who argue that uncontrolled migration makes Britons poorer are in effect demanding labour market protections to replace those that were removed by their heroine Margaret Thatcher. Thatcher herself, of course, encountered this contradiction in the late 1980s, when realizing that the single European market she had initially championed brought with it the need to regulate economic activity at the European level, thus undermining British 'sovereignty'.

Faced with this contradiction, even Thatcher's love of free markets ceded to the greater value of national autonomy. The Brexiters in the Conservative Party are banging their heads against the same contradiction today. The resulting confusion is not edifying, and the Leave campaign's intellectual case is embarrassingly thin. In her Bruges speech, Thatcher famously said 'We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level'. Since then, the EU has been rolling back the frontiers of the state across Europe. Ironically, her successors on the Tory right now want them re-imposed at the national level, in the form of migration controls. But there appears to be no way of doing this without renouncing full access to the European single market, which would restrict Britain's ability to trade.

This confusion gives rise to the utopian, if not entirely fanciful, nature of much of the Brexit discourse, and explains why few credible intellectuals have offered their support. However, western publics are in the mood for a nostalgic form of utopia, as can be seen in the US, Austria, France and many other countries where far-right nativism is taking off. Betting markets suggest Remain will win, but Brexit is far from impossible. What is impossible is squaring the circle between free markets and the closure of borders.