27 June 2016

Fool me once, shame on you. Fool me twice?

I have both US and UK passports, and I use my UK passport to live in the Netherlands, so I am directly impacted by the recent Brexit vote.

Although "Leave" politicians and "Bregretful" voters appear to be backtracking at a world-record pace from their pre-vote promises and beliefs, I assume Brexit will go forward.

This post will discuss the factors that -- in my opinion -- led to the vote for Britain to leave the EU and the potential impacts of Brexit on Britain and the EU. I think that some of this discussion applies more broadly in the world, i.e., to the US in a Trump/Clinton presidential contest or to NAFTA's trade and diplomatic relations.*

What factors led to the British vote to Leave the EU?

  1. Britain, Ireland and Sweden opened their labor markets to Eastern Europeans after 10 countries joined the EU in 2004. Other EU members put delays and restrictions on free movement of labor.
  2. The arrival of "Polish plumbers" captured the popular imagination, but most communities did pretty well with migrants.
  3. The financial crisis made everything harder by reducing economic activity. Government austerity made things worse by increasing debt and cutting budgets. 
  4. Bailouts to bankers -- and continued increases in inequality -- led natives to see foreign workers their enemy. (Cynical aside: Just what elites want, two sets of working classes hating each other.)
  5. Many people voted to Leave because they thought that Leave would (a) bring jobs "back to British workers" and (b) increase economic activity in the UK.
Unfortunately, the logic on #5 is weak. If the UK wants jobs to come back, then it has to end "free movement of workers," which means the UK also departs the common market with which it carries out 45-50% of its trade. (The figure for the US with Canada and Mexico is 25-30%.) So British leaders are now stuck with explaining to the population that Santa Claus does not exist: they will have to choose between more local jobs in a smaller economy or the same number of foreigners in an economy linked to the EU (i.e., de jure Leave means de facto Stay).

Sadly, it seems that most voters did not understand this logic (let alone the basic facts on jobs, migration, spending, etc.), perhaps due to the lies of Leave politicians or the hubris of Stay elites.**

What is likely to happen to Britain and the EU after Brexit is complete?

I was not around in the 1930s, but it was an era of depressed economies, rising protectionism, and political populism emphasizing how "They" were a danger to "Us." That era ended with World War II, the deaths of 50-80 million people, and vast destruction of human and environmental capital.

That terrible calamity was caused by "leaders" who promised their people that they could just take advantage of other peoples. Although that rhetoric worked (tragically) in the colonial era, it did not in World War II (despite the experience of WWI, "the war to end all wars").

Millions died for lies.

Although I am far more worried about Putin invading other "historically Russian" territories and Trump "doing a Berlusconi" on the US than I am about World War III, I cannot rule out a series of stupid events cascading into civil and then military conflict. It's not as if we lack for haters who don't mind killing innocents or exploding "civilization."

In the best case, a post-Brexit UK will get its house in order, sign free trade agreements to replace EU relations, and reform its migration laws to address fears. Such a country will look better than today's UK because it will be more efficient and fair.

In the worst case, Northern Ireland and Scotland vote to leave the UK for the EU, leaving the English and Welsh rump to an economic and political status similar to, say, Canada. The costs of such a devolution are likely to mirror those of Britain losing its empire after WWII.

The case(s) for the EU are similar in their divergences. In the best case, the EU reforms its internal and external borders (to address the refugee and terrorist crises), puts citizens before bankers (many who have left London for New York or Frankfurt), and "gets religion" about applying subsidiarity (decentralization) in a way that makes Brussels useful rather than the butt of "banana regulation" jokes.

In the worst case, Russia invades the Baltics (the EU cannot respond nor convince NATO to help), Turkey sends a fleet of refugees to Greece, the EU closes borders, and populists take France, Poland et al. out of the EU. Life shifts back to the 1990s of passport controls, tax dodging and mafia operations at all levels.

Bottom Line: A year ago, I wrote that we need to "connect" with others if we are going to have productive conversations about topics of mutual interest, i.e., economy, society, and the environment. The Brexit vote, agrees The Economist, shows what happens when we do not.
* Americans have to realize that there's YUGE populist support for Trump that ignores facts and hates on others in the name of "making America great again." That's how Berlusconi, Putin, Chavez and a number of other disasters-in-chief were elected (sometimes, a la Hitler, without intending to ever leave office).

** I'm not saying that globalization or competition does not cause harm. I'm saying that it's worth compensating for that harm to get the gains.
Addendum: Tyler Cowen is thoguhtful (as usual) in this and this post. Oh, and the UK can't blame "Europe" for its public spending or debt.

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