Britain May Be Just the Right Size for the Long Term

Both Dalibor Rohac and Sam Bowman outline some genuine risks associated with Brexit. Indeed, if you were a particularly risk averse individual, I can see why backing the UK remaining within the EU might have appealed. Brexit, as I outlined previously, is full of risks and opportunities, and ultimately my contention is that such a long-term decision should be judged on whether you think governance at a UK or an EU level is likely to lead to better overall results.

In reaching the opposite conclusion from my own, I fear my two fellow discussants make two questionable judgements.

The first is to take Britain’s current febrile political climate as a guide to what a post-Brexit Britain will look like far into the future. Brexit is a long-term constitutional decision, and few, if any, would have predicted three decades ago that the EU itself would look as it does today.

The second is to ignore, or at least play down, the EU’s own record in its areas of competence and the likely evolution we would have seen if the UK had remained inside. It’s easy enough to cherry-pick areas of UK domestic policy failure and question the wisdom of handing more power to the UK government. But what about the counterfactual of more policy power flowing to Brussels? Has the EU really been a better self-correcting form of government in the areas it presides over, and can Britain only do worse?

On the first judgment, I think both Sam and Dalibor place far too much weight on analysis emanating from Her Majesty’s Treasury (HMT) and international organizations on the “costs” of Brexit. Contra Dalibor, serious people in these organizations really did predict that Brexit would lead to a sharp immediate slowdown in the economy, and they did so because their models assumed forward-looking agents would react to their long-term prospects being diminished. Almost every analysis of this kind only looked at long-term downsides. Few modelled the potential benefits of regulatory change, and the HMT analysis assumed the UK would sign no further third-party trade deals, a clearly fantastical assumption given the UK government’s ambitions.

Most studies used backward-looking data obtained by gravity models, controlled for other factors, and then estimated the impact of EU membership on trade and foreign investment. But the huge GDP losses they came to are likely to be far higher than the UK would actually face, as extensive analysis by researchers at Cambridge University has shown, not least because most beneficial policy change that occurred in that era would not be reversed upon leaving, and in the future trade gravity is shifting significantly towards non-EU countries.

Even the EU itself believes the hallowed “single market” has only raised EU-wide GDP by around 2.1% overall. The figure for Britain is likely to be lower: Britain tends to be more liberal on regulation than most other members, specialises far more in services where the single market is less complete, and is far less dependent on EU trade. Nevertheless, this ballpark squares well with Paul Krugman’s view that GDP losses associated with leaving the single market might be around 2% of GDP – a significant sum, but something that could easily be outweighed by liberal domestic regulatory, tariff, and trade policy reform.

Dalibor and Sam are pessimistic that Britain will move in a liberalizing direction to counteract the downside impact, citing Jeremy Corbyn’s economic agenda, and Theresa May’s stance on migration. In doing so they ignore that there were risks of remaining in the EU for Britain too and the Prime Minister’s commitment to an expansive future free trade agenda. Nevertheless, I come back to my original point that the political winds can change quickly, and confidently asserting that Britain will permanently descend towards Italian economic prospects seems to me outlandish given Britain’s previous economic revolutions and the forces and pressures that will come for pro-growth reform in order to make Brexit successful.

Sam cites Britain’s planning laws, recent changes to tax policy, and its immigration system as evidence that Britain does not have government that self-corrects toward good policy. All home-grown sores no doubt, but this seems to me peculiar cherry-picking. I’d imagine most other EU countries would trade places for the UK’s impressive employment outcomes, a consequence of labor market policies developed as reaction to the scarring effects of the 1980s recession. It is remarkable that after the financial crisis, the UK has seen the proportion of workless households fall to its lowest level for over two decades. In fact, the 1980s and 1990s saw British political leaders overturn a host of persistent economic problems, leading to rapid productivity growth right up until the 2008 crisis.

Sam and Dalibor will point out that this occurred within the EU. But the deviation of British experience from that of other EU states merely shows that overall EU membership is largely irrelevant to our prosperity. To prove that Brexiting is a huge mistake requires supporting evidence that the EU has been effective in its area of competence and would be in its future ambitions. Is the EU really a nimbler, more effective level of government able to confront and adapt to the challenges of the day?

It’s not clear to me at all that it is – conceptually, or in actuality. Most functions of government purport to deal with problems global in nature or incredibly local. Indeed, it is difficult to think of any economic issue where the answer to the question “what is the optimal governance level for this?” would be “the current contours of the European Union.”

Friedrich Hayek thought that a European economic federation could result in huge gains from trade and wealth and that this wealth and interdependency would provide a bulwark against internal squabbles and external threats. But his vision of a single market was just complete freedom of movement of goods, services, people etc. He saw diversity and competition in areas such as regulation, taxation, and spending among states as a necessary discipline on them.

I agree with Sam that the ability to “vote with your feet” can be an important constraint against bad policy. But this ceases to be significant if the EU has a harmonizing and centralizing agenda, as it does, and sees regulatory coordination as necessary to prevent a “race to the bottom.” The ECJ and its interpretation of law has seen the EU involve itself with much process regulation in recent decades, particularly in areas such as the environment and employment law in the push for a “social Europe.” And it’s clear that many within the EU Commission want this harmonisation to go further still. This is overwhelmingly a political project, and it’s clear the EU Commission’s instincts are to eliminate competition and level the playing field.

What about the EU’s record in its areas of competence?

The EU has been reasonable in upholding its anti-protectionism within the union, but is there any rhyme or reason to its tariffs externally? They look suspiciously designed, in many cases, to suit vested interests. After decades of running a unified commercial trade policy, there are no doubt some accumulated achievements. But the lack of trade deals with major global economies is notable. This is hardly surprising though, when 7 years worth of work coordinating the viewpoints of 28 countries for the Canadian FTA was almost lost due to opposition from Walloon pig farmers. It takes some stretch to believe that Britain alone would not have signed other trade deals with major powers had we maintained our independence, particularly given much smaller countries such as Chile, Switzerland, and Iceland have been able to.

Again, after decades where substantial reform could have occurred, can the current Common Agricultural Policy really be regarded as good policy, which reflects the EU’s ability to adapt to changing times? Or does it show immense inertia and the impact of competing national interests and worldviews? It is difficult, again, to believe this would have survived the 1980s–1990s UK liberal policy revolutions.

Did the predictable and predicted impact of a global crisis leading to asymmetric shocks across the Eurozone really see a responsive, effective European Union? Or did the EU effectively abolish the rule of law and make up its response as it went along? European leaders are still debating almost a decade later how to create the institutional frameworks necessary to support a single currency across vastly different national economies, and they still cannot agree.

In fact, it is not even as if the EU is particularly adept as a forum for sharing best practice in policy. Who can forget the infamous 2000 Lisbon Agenda, which declared “The Union has today set itself a new strategic goal for the next decade: to become the most competitive and dynamic knowledge-based economy in the world.” This clearly failed to materialize, and expert critics lambasted its waste of resources and top-down Soviet style attempt to push an agenda onto unwilling national politicians.

My point is not to suggest that the EU is uniquely terrible, nor that it is a bad idea for some of the other member states. But accumulated experience in major competence areas supports my initial hypothesis that Britain alone would have more flexible, responsive government that over time could achieve meaningful liberal economic reform. Clearly not everything will be perfect. But the British system is good at clearing out bad ideas when they are widely perceived to have failed. I do not see evidence of a similar effect at an EU level.

Also from this issue

Lead Essay

  • Daniel Hannan reviews what Britain stands to gain by leaving the EU, as well as what it should seek to preserve. An economic common market has always been a desirable goal, he argues, but the same cannot be said of a common goverment. Obstacles to free trade tend to be local and concentrated interests, while consumers tend to benefit most, albeit in a dispersed way. Britain’s economy is healthy despite the naysayers, and it will be better able to pursue free trade agreements outside the EU once Brexit is completed.

Response Essays

  • Dalibor Rohac challenges the claim that Brexit wasn’t about immigration. Leave voters overhwlmingly wanted to restrict immigration, and they responded to anti-immigration messages issued by various groups in the Leave campaign. As a result of the vote, Britain’s place in the Single Market may be in danger, and without it, economists generally agree that the British economy will suffer. The promised free trade agreements that were to arise before Brexit seem not to have materialized. All of these, he says, are sound reasons for concern.

  • Ryan Bourne sketches the way forward for an independent Britain. He begins by looking at what Leave voters appear to have wanted, namely, a return to parliamentary sovereignty and a rejection of political integration into a supra-state. Leave voters were not anti-trade so much as they were in favor of using local institutions and local rule as the instruments to oversee it. The current political leadership may be less than inspiring, Bourne writes, but Brexit is a long-term proposition, and it tends toward greater freer markets, he believes.

  • Sam Bowman of the Adam Smith Institute explains why he does not view Brexit with much optimism. The best available models predict that trade will probably suffer on net. This is already reflected in a drop in the value of the British pound. Not only that, but socialism remains popular at home and will now face no EU controls to slow it down. Most Britons are neither xenophobes nor free market liberals, and the political climate is unsettled enough that Britain stands to suffer genuine harms from leaving the EU.