About this Issue

More than a year after a historic referendum, Britain continues on its path toward leaving the EU. Yet the exact shape of that depature remains to a considerable degree uncertain. What policies will emerge in the areas of trade, immigration, and inter-governmental cooperation?

The lead essay this month is by former Member of the European Parliament Daniel Hannan, a longtime supporter of Brexit who views it as an opportunity to set much freer trade policies for Britain than would otherwise be possible. Replying to him will be Dalibor Rohac of the American Enterprise Institute, Ryan Bourne of the Cato Institute, and Sam Bowman of the Adam Smith Institute. Each has a somewhat different perspective on Brexit and the path forward thereafter; each will write a formal response, then all will discuss the various issues raised through the end of the month.

Comments are also open, and we likewise invite readers’ feedback on these matters through the end of the month.

Lead Essay

Brexit Explained

The British problem – or, from a UK perspective, the European problem – is easily stated. The British people always wanted a common market in Europe, not a common government.

That’s why we didn’t join when what became the EU got going in the 1950s. The UK had argued for a broad free-trade area, based on what is now the OECD, closely tied to the United States and open to world trade, but that argument only spurred the original six members to push ahead more quickly with their plan for political union.

The same issue derailed our two membership bids in the 1960s. As General de Gaulle put it when he vetoed one of them: “England in effect is insular, she is maritime, she is linked by her interactions, her markets and her supply-lines to the most diverse and often the most distant countries.”

In 1972, when we took the decision to join, the leaders of all the main parties were careful to refer to the European political entity on their doorstep as “the Common Market.” In 1975, when we held our first referendum on whether to leave, the Government explicitly assured people that there were no plans for political or monetary union.

By the time the Maastricht Treaty was signed at the beginning of the 1990s, it was clear that these assurances had been false. The EU could no longer be portrayed as an association of states co-operating for commercial purposes. Maastricht extended the jurisdiction of Brussels into many non-economic fields, including criminal justice, immigration, foreign and defense policy, citizenship rights, and culture.

From then on, it was only a matter of time before Britain sought a different relationship with its European allies. Although we wanted the strongest links with neighboring countries, there was no support for political union.

In 2015, David Cameron announced that he was looking for a new deal with the EU, and that there would be a renegotiation followed by a membership referendum. Had the renegotiation resulted in any significant repatriation of power, he would have won the referendum. All he needed was to come back with some competence returned, and to say, “Look, I have set the precedent. Powers can pass downwards as well as upwards. We won’t be drawn into a United States of Europe.”

In the event, though, he came away with empty hands. Perhaps he asked for the wrong things, or perhaps the other leaders never took the threat of a “Leave” vote seriously. Whatever the explanation, the effect on British public opinion was immediate. “If that is how Brussels treats its second largest financial contributor before we vote,” people said, “how will it treat us if we vote to stay?”

Having failed to get a looser deal from the inside, we are now seeking one from the outside. Theresa May keeps stressing that she wants the closest possible friendship with the EU: one that preserves our military alliance and our security links as much as our trading relationship. Almost no one in the UK seriously disagrees.

Think of the relationship between Canada and the United States. Canada has a political union on its doorstep. It has the closest partnership with that political union possible short of joining it. Both sides are happy with the deal.

Could Britain do something similar? Yes. Having taken back legal sovereignty – in other words, having left the jurisdiction of the European Commission and the European Court of Justice – Britain can replicate some of its current arrangements through bilateral treaties.

For example, the real basis of the Single Market is the ban on discriminating against goods or services from another member state. Almost everyone in Britain supports this idea, which benefits consumers.

Likewise, we may want to participate in European programs where there are benefits to all sides, on such issues as police co-operation, educational exchange, and scientific research. Several non-EU states participate in these programs: not only countries like Norway and Switzerland, but also those as distant as Israel and Canada.

As for freedom of movement, the objection is not to EU nationals coming to Britain for the purposes of work or study. It is to the lack of control. During the referendum campaign, for example, the ECJ issued a preliminary judgment overruling the deportation of a convicted criminal, the daughter-in-law of a notorious Islamist hate preacher. She was not a UK or EU national, but her son had been born in the UK, and the EU court ruled that repatriating her would violate his rights as an EU citizen.

When we cease to be EU citizens, such rulings will become impossible. But that doesn’t mean that we want to close our borders. We have offered to guarantee the rights of all EU nationals already in the UK, and I expect the eventual deal to allow people to work and study in each other’s countries, albeit through reciprocal treaty entitlements rather than by right as EU citizens.

I realize that all this may sound jarring. Overseas media tend to portray Brexit as nativist and protectionist. The UK papers that have significant overseas circulation, above all the Economist and the Financial Times, have taken a similar line, as has the BBC. If the New York Times were your sole source of information, you could be forgiven for thinking that the UK had become a racist hell-hole, from which decent citizens were fleeing in search of EU passports.

In fact, had Leave fought the kind of nostalgic campaign that Remainers imagine, we’d never have come close to winning. We fought and won chiefly on the issue of democracy: Our internal polls, like the published polls, showed that by far the biggest motivating factor for Leave voters was wanting decisions to be taken more closely to the people they affected.

For example, an exit poll of 12,369 people found that 49 percent of Leavers had been motivated by the desire to bring decisionmaking back to Britain, and only 33 percent by wanting more control of immigration.

I’ve learned in politics, though, that almost no one listens to the other side. Rather than going to source, people read their allies’ reports of what the other side is supposed to have said. If a British person tells you that the vote was “all about immigration,” I can almost guarantee that you are talking to a Remainer. Those among my friends who voted to stay in the union didn’t weigh and then dismiss the economic and democratic cases against European Union membership; they never heard them.

The same confirmation bias can be seen in their determination to find bad economic news. Yet here is a selection of recent news headlines from the UK:

  • Unemployment fell by a further 57,000 to 1.48 million in the 3 months to June. It has dropped every month, without a break, since the referendum last year, when it stood at 1.67 million. There have never been so many British people in work.
  • Manufacturing demand is, according to the Confederation of British Industry, at its highest level since August 1988.
  • Retail sales, official figures show, are up 2.9 percent on this time last year.
  • Exports are up 16 percent, helped by the long-overdue correction of the exchange rate. Remainers like to point to the fall in sterling, but rarely mention that, before the vote, the International Monetary Fund and the Bank of England agreed that Britain’s currency, seen as a haven from the travails of the euro, was artificially expensive.
  • Continental Europeans evidently still regard the British economy as attractive; more of them are working in Britain than ever before.
  • As for the supposed decline of the City of London, a number of European banks, including Deutsche Bank and ING, have moved there since the referendum. Last year, Wells Fargo spent £300 million ($392 million) on its new European headquarters — in London. According to the latest survey by Morgan McKinley, hiring in financial services is up 16 percent since the vote.
  • In July, the UK budget was in surplus for the first time since 2002.

Now you may think I’m simply indulging a confirmation bias of my own and cherry-picking good news stories. But it’s only fair to contrast what has happened since the Brexit vote with what was predicted during the campaign. Remain campaigners told us to expect a recession in 2016; in fact, Britain grew faster in the six months after the referendum than in the six months before. They told us that the FTSE-100 index of leading companies’ share prices would collapse; in fact, British stocks are the best-performing in Europe. They told us that Scotland would leave the United Kingdom; in fact, support for separatism has collapsed, and the Scottish first minister, Nicola Sturgeon, has shelved her planned independence referendum.

Things may yet go sour, of course. We haven’t abolished the economic cycle. Indeed, all Brexit does, in a sense, is throw the responsibility back to us. If we have lower, flatter, and simpler taxes, we’ll flourish; if we don’t we won’t. Either way, it’ll be up to us, not the EU. If we have lighter regulation, we’ll succeed; if we don’t, we won’t. There’ll be no point in thanking or blaming Brussels. If we have free trade, we’ll… oh, you get the picture.

Actually, it’s this last item, free trade, that offers the most immediate gains. For more than 20 years, there were desultory talks between Washington and Brussels about market liberalization, but they always ran up against the protectionist interests of France and various southern European states.

There is now the prospect of a tie-up between the world’s largest and fifth-largest economies. Unofficial talks began in July between U.S. Trade Representative Robert Lighthizer and the British Trade Secretary, Liam Fox. The potential gain is vast. Here are two countries linked by language and law, habit and history. Each is the other’s main investor. Every day, a million Americans turn up to work for British-owned companies; and every day, a million Brits clock in to work for American-owned companies. But, until now, London has not been free to negotiate its own trade deals.

The challenge is to make sure that the eventual US-UK deal is open, competitive, and consumer-led. This wasn’t always the case with the US-EU talks that were being conducted under the Obama administration, known as the Transatlantic Trade and Investment Partnership (TTIP). In fact, there’s a clue in the name: these deals don’t even call themselves free trade agreements anymore, because they are at least as much about regulatory control as they are about mutual product recognition.

Sure, there were liberalizing elements in TTIP. But there was also evidence that American and European corporates were colluding to harmonize and extend regulations, and so raise barriers to entry.

We now have the opportunity to do something bolder and better. We can negotiate a trade deal based on the principle that what is legal in one country is legal in the other. If a drug is approved by the FDA, that should be good enough for Britain. If a trader is qualified to operate in the City of London, that should be good enough for Wall Street. And so on.

Easier said than done, of course. Everyone is in favor of free trade until some local lobby interferes. Because competition brings dispersed gains but concentrated losses, politicians often act against the national interest to prop up a particular sector, especially if it happens to be located in an electorally significant region. For example, sugar in the United States is roughly twice as expensive as on world markets because a handful of sugarcane planters happen to be politically active in the swing state of Florida.

Still, if we absolutely must privilege certain industries over others (six jobs are lost in food processing for every job held in sugar production), then let’s not do it through tariffs or quotas. A straightforward subsidy, though still wrong in principle, is far, far cheaper.

We can expect Floridian politicians to back their sugar growers, just as politicians in Dearborn Michigan or in Port Talbot, Wales, back their steel mills. But the rest of us need to raise our voices on behalf of consumers. Imagine, for example, how much the mutual recognition of pharmaceuticals would lower the price of drugs in the United States. Imagine how much money Americans would then be able to spend on everything else, and how much that spending would boost other industries.

We won’t get another opportunity like this. It’s not every day that a G7 country gets to draw up a new trade policy from scratch. Let’s seize the moment.

Response Essays

Reasons for Concern about Brexit

Apart from a stylized history of the United Kingdom’s evolving relationship with the EU and its precursors, Daniel Hannan’s essay makes three main claims. First, contrary to its image in center-left press, the Brexit vote was not “all about immigration.” Second, good economic news after the referendum has unmasked the economic case against leaving the EU as mere scaremongering. Third, Brexit offers the United Kingdom new opportunities to liberalize its economy and to engage in free trade with the rest of the world.

Each of those claims merits a closer look.

First of all, it is more than a little disingenuous of Hannan and other free-market Leavers to complain that readers of The Economist tend to see Brexit as an expression of nativism. It was free-market Leavers, after all, who deliberately formed a political coalition with the likes of Nigel Farage, and who decided to look away in the face of bigotry and scaremongering over immigration coming not just from Leave.EU but also from Vote Leave headquarters.

More broadly, the preoccupation of the British public with immigration has long made the UK an outlier in Europe. British Social Attitudes surveys have shown consistently overwhelming majorities supporting reduced immigration (56 percent “by a lot,” 21 percent “by a little” in 2013). An index that combines both preference for reduced immigration and the salience of the issue placed the UK ahead of any other EU country, at three times the European average.

A vast majority of those concerned about immigration (73 percent according to a BSA poll) voted to leave the EU. Hannan cites a poll in which immigration comes second on the list of motivating factors for Leave voters. On a different poll, immigration came first with 33 percent, followed by economic considerations (28 percent), and only then by control over British laws (12 percent).

The resonance of immigration in the British debate is not so much a result of an EU-imposed lack of control as of choices of British policymakers: the lack of transitional restrictions after 2004 EU enlargement, tight urban planning restrictions, lax registration requirements, and the character of the National Health Service as a free-for-all.

It is also misleading to cite, as Hannan does, the case of deportation of Abu Hamza’s daughter-in-law as an example of “the lack of control.” In its decision, the ECJ ruled that EU member states “may adopt an expulsion measure provided that it is founded on the personal conduct of that third-country national, which must constitute a genuine, present and sufficiently serious threat.” Furthermore, deciding whether that was the case in this particular matter was “for the national court to determine.”

Second, Hannan is correct in observing that the UK’s economy has not plunged into a recession, as some Remain campaigners predicted. A discussion of the accuracy of claims made by the two campaigns before the referendum would be an interesting one, though likely unflattering to Leavers, too. More importantly, however, no serious economist predicted that the vote itself would send the British economy on a downward spiral. What almost every serious economist agrees on, in contrast, is that severing ties with the EU’s Single Market would have adverse and potentially serious consequences for the British economy.

For that reason, it was reassuring to hear Hannan’s earlier assurances that “absolutely no one [was] talking about threatening our place in the Single Market.” Alas, because of the political salience of immigration, the Prime Minister ruled out the UK’s continued membership in the Single Market. Worse yet, respectable voices are now peddling the manifest falsehood that “no deal is better than a bad deal” – a possibility that looms more and more realistic as the centrality of immigration in the UK’s negotiating position becomes evident. Crashing out of the EU with no agreement, or with a trade agreement that provides significantly less market access than Single Market membership, would adversely affect the economy.

Finally, Hannan has a point in saying that “[i]f the [UK has] lower, flatter and simpler taxes, we’ll flourish; if we don’t we won’t. Either way, it’ll be up to us, not the EU. If we have lighter regulation, we’ll succeed; if we don’t, we won’t.” Depending on the outcome of the Brexit negotiations, the UK might very well be able to liberate itself from irksome EU regulations. But it is simply fanciful to imagine that those – and not planning rules or a patchy system of secondary education – constitute a real bottleneck to the UK’s economic growth.

In reality, policies that matter most for economic growth have been always in the hands of the UK government, not the EU. The bloc is home to some of the advanced world’s most lightly regulated product markets (UK and the Netherlands) as well as some of the most protectionist ones (Croatia). Ireland, with a corporation tax rate of 12.5 percent, is an EU member – as is France, with a rate of 33.3 percent. Estonia, a Eurozone member, is the sixth-freest economy in the world on the Heritage Foundation’s Index of Economic Freedom. Greece, also in the Eurozone, ranks 127th, below Russia, Tajikistan, and the Democratic Republic of Congo.

The Leave campaign also promised a flurry of free-trade agreements, to be negotiated before the UK leaves the EU. One wonders how successful the UK has been in exploiting these “most immediate gains,” as Hannan put it, and how conducive the current international environment is to “bolder and better” trade agreements, particularly in light of a U.S. President fixated on bilateral trade deficits.

A more fundamental problem for Leavers is that such a trade agenda involves the same vexing trade-offs between economic integration and domestic control of the rules of the game that led British defenders of national sovereignty to reject the UK’s EU membership. For example, Hannan expresses his desire to tackle non-tariff barriers by applying the principle of mutual recognition.

While mutual recognition remains the canonical libertarian response to the problem of non-tariff barriers, it is fraught with difficulties. Mutual recognition means that foreign producers who follow different rules – such as those U.S. farms that treat poultry with chlorine – are able to compete alongside British ones, held to stricter standards. Libertarians will not find the idea upsetting – and neither do I. Yet the public, including many of those who voted to leave, will find it controversial to say the least – in part because mutual recognition renders domestic regulation ineffective, eroding the ability of government to set rules of the economic game. Even more worryingly for those who profess to care about sovereignty, mutual recognition gives foreign legislative bodies the power the change the regulations guiding the sale of products and services available to the British public.

These are not only abstract questions. In 1998, the EU and the United States concluded a mutual recognition agreement covering telecoms equipment, electrical appliances, medical devices, pharmaceuticals, and several other product sectors. But upholding it the agreement quickly became untenable precisely because of differences in regulatory culture, and views on risks and proper balancing of costs and benefits.

One wishes that Brexiters were right in their cheerful assessments of the opportunities that await their country outside of the EU. However, there are good reasons to continue to worry about the damage that Brexit might do to the British and European economy, free trade, and most importantly to the free-market cause, which has been tarnished by association with the worst kind of bigotry that the UK has seen in its postwar history.

Brexit Is the Start, Not the End, of the Process

The Guardian labeled Daniel Hannan  “The Man Who Brought You Brexit.” Perhaps more than anyone else, he shaped and propagated a center-right case for Britain leaving the EU, founded around the principles of economic liberalism and direct democracy, which resonated with common ground thinking among the Conservative Party grassroots.

Though ultimately the winning “Leave coalition” was broader in scope and message, Hannan’s well-built up case, his championing of a referendum and his role in building the architecture of the winning Vote Leave campaign, brought a respectability, intellectual coherence, and narrative crucial to victory. He and his message were the reasons why, overwhelmingly, British self-identified classical liberals and libertarians felt championing Leave came naturally.

So when Daniel Hannan writes about Brexit, he deserves to be listened to. His essay here does a good job in knocking back misconceptions about the campaign itself and its consequences.

Though the media portrayed the vote result as a huge surprise, the fundamentals always pointed towards Leave, and the nature of the debate made Leave’s simple arguments far more powerful. Not just because, as Hannan says, the public resented the EU’s journey towards political union, or David Cameron’s failure to negotiate meaningful reforms, or even the EU’s euro and migration crises.

The key point is that Britain was an anomaly in the EU anyway – making the relationship increasingly uneasy and unsustainable. The public knew it. Already outside of the euro and Schengen (the borderless movement area), Britain was less dependent on EU trade than other member states, had the lowest proportion of its emigrants in other EU countries, the lowest level of trust in EU institutions outside of Greece and Cyprus, and the lowest proportion of citizens identifying as “European.” Brexit, in other words, was not some freak act, but an earthquake which arose on a massive fault line.

The referendum simply gave the public the opportunity to make the leap for political freedom. As Hannan writes, polling suggests a desire for more Parliamentary sovereignty was the most important reason to do so. We can only second-guess why so many voters desired that repatriation of power.

The media like to portray it in economic terms, as a cry for help from the dispossessed, those who suffered under the path of globalization or others who longed for the end of so-called “austerity.” But neither of these explanations makes sense as a comprehensive answer. The old were most likely to vote Leave, and they had been insulated from government spending cuts. Homeowners and rich southeastern areas voted to Leave. Scotland, one of the areas which saw the biggest deindustrialization, voted to Remain. And both sides scrambled over each other to claim they were more “pro free-trade”– the Remainers arguing that a highly integrated single market was the world’s most comprehensive free trade area; the Leavers that the EU was an outwardly protectionist customs union.

Far from being “the economy, stupid,” Brexit was ultimately swung by a simple judgment: that British Parliamentary democracy was a better forum for decisionmaking than the backrooms of Brussels.

The UK government has by and large shown that it understands this and is committed to respect the result. It recognizes that leaving the legal jurisdiction of the ECJ and exiting too the EU single market and customs union is the only way to “take back control” of trade policy, public funds, immigration, and regulatory policy in any meaningful sense. Had Britain remained within the single market for anything other than a transitional period, the UK would have had to accept paying membership fees without being able to vote on the market’s regulatory provisions, and would have found it near impossible to agree to comprehensive free-trade agreements with third parties in services given its lack of regulatory control. Clearly, that was unacceptable.

Though economics was not the deciding factor in the referendum, it is clearly the area where bad negotiations could mess things up now.  Theresa May’s government desires a comprehensive free-trade agreement with the EU to replace its current trading relationship, but this may take longer to agree than the 2-year formal negotiations allow. For that reason, most sensible Brexiteers accept the need for a period of transition – a glide path from one set of trading arrangements to another. The frequent question we “Economists for Brexit” get asked though is whether the UK can be an economic success outside of the European Union in the longer-term.

That this is even asked seriously is bizarre. Brexit is a constitutional decision to repatriate powers. Self-evidently, a range of economies outside of the EU are successful whilst running their own affairs. It takes some lack of imagination to believe the UK is currently the pinnacle of economic dynamism, and that no policy framework could, in the long-term, increase the economy’s size or growth rate relative to continued membership.

In fact, the opportunities from an EU exit are legion. Brexit enables the UK more flexibility to sign trade deals with countries towards which economic gravity is shifting; to scrap the 12,651 tariffs and many non-tariff barriers the EU currently imposes on our behalf; to revise highly damaging EU climate change, labour, financial, and clinical trials regulations; to scrap the EU’s Common Agricultural Policy and agricultural subsidies; and to translate Britain’s £11 billion annual net contribution into pro-growth tax cuts.

The economic consensus, of course, including Her Majesty’s Treasury, ignored all of these positive policy choices. Their modelling only included assumptions and scenarios which, to varying degrees, meant Brexit resulted in less free trade and open markets. When plugged into gravity models of trade based on backward-looking data, this led to large predicted long-term losses to GDP almost by construction. The daft short-term predictions of recession and rising unemployment stemmed directly from this. Consumers and investors, recognizing Britain would be poorer in the longer term, would supposedly rein in activity straight away.

Clearly, that hasn’t happened to anywhere near the extent forecast. The economy has slowed slightly since the vote, as predicted by many Leave economists, as a natural consequence of policy uncertainty. But the economy has proven remarkably resilient. People and businesses have seemed to shake off the implications of the referendum, suggesting they see the future risks as largely balanced. Perhaps they understand something that many economists seemingly do not: Britain’s future prospects will largely be determined by its own actions.

Whether British governments will use Brexit as an opportunity to pursue a free-market agenda is another question. Removing yourself from a club that binds and constrains members presents risks as well as opportunities. Vested interest groups will use Brexit as an opportunity to lobby for more protection, and Britain’s exit will significantly loosen restrictions on state aid and the ability of government to pick winners and losers.

The current political climate exemplifies these risks. The Labour party is led by an overt socialist, who is well-known to desire British single-market exit to pursue nationalization and a state-directed economy. Theresa May, the Conservative Prime Minister, though committed to free trade, talks often about the need for an industrial strategy and has of late excoriated big business and threatened to cap energy prices, harnessing the supposed Brexit dissatisfaction to push the most interventionist Conservative agenda since the 1970s.

A full Brexit dividend will not be achieved with either of these platforms, and it will be extremely disappointing if the government now decides to focus on additional migration control without other liberalizing policies.

Yet it’s important to remember that Brexit is a long-term decision, not an election. Libertarians in particular should have been concerned with the ever-growing concentrating power at a higher EU level, and its commitment to high levels of harmonized regulation under unresponsive government. This is the big picture reason why many of us campaigned as we did -  one does not need a starry-eyed attachment to majoritarian rule to conclude that a British democratic system, taking more decisions closer to the people, would be preferable and more likely to self-correct in a way conducive to prosperity and freedom than an EU bureaucracy in Brussels.

Of course, there will be bumps and scrapes along the way. The EU negotiators are already showing they prize protecting the political project of the EU over economic mutual benefit, making a more disruptive Brexit likely. And outside, Britain will make mistakes, sometimes curbing freedom unjustifiably, as every government does.

If Brexit is to be a boon for the cause of liberty then the exit itself must be the start, not the end, of a process. For better or worse, Brexit broadens the scope of opportunity. Economic reality is a helpful constraint against the downsides. But it now requires a robust free-market domestic and trade agenda to make the most of it.

Brexit’s Dangers

Dan Hannan’s vision for Brexit is optimistic and rooted in the tradition of classical liberalism. But his sunny optimism is a minority view in the United Kingdom, and it is unlikely things will work out the way he wants.

Here is one minor illustration of what I mean. Recently my think tank published a paper on the safety of American-produced chicken, which is often washed in a chlorine bath to kill microbes. We argued that Britons would be better off if they could choose to buy these products themselves.

Though it was based on evidence from the most respected public health authorities in Europe and the United States, the paper’s proposals were immediately ruled out by a cabinet minister who had been a leading Brexiteer, who said Britain would never allow American chicken to be sold here. Many people asked if any trade deal with the United States was possible if we’d have to open our markets to American chicken.

I mention this to put Dan’s optimism in context. Britain is a country whose Conservative Prime Minister is preoccupied with forcing private businesses to put trade union representatives on their boards and cut their executives’ salaries in the name of “fairness.” The less said about Jeremy Corbyn the better.

Most people did not vote to Leave for classical liberal reasons. The “control” of Brexit is more likely to lead to more extensive government and less freedom for Britons. And the economic losses of Brexit are real and likely to get worse.

The costs and risks of Brexit are much greater than Dan suggests, and the future bleaker. We cannot plan for a freer future without acknowledging the difficult path ahead of us.

The idea that most Leave voters were classical liberals stretches credibility. Many, if not most, wanted control over immigration to cut it. Many others simply wanted to spend more taxpayer money on our health system. At the top of the Vote Leave website is its slogan, “Let’s give our NHS the £350 million the EU takes every week,” which was a centrepiece of the campaign.

This leaflet was posted nationwide by the Leave campaign. It highlights the numbers that move to Britain every year from Europe because “EU law means all members must accept ‘the free movement of people.’” Sovereignty was important, it said, because the EU was overruling Britain on counter-terrorism and immigration matters. A notorious anti-immigration poster launched by Nigel Farage (which the official campaign rejected, to be fair) echoed this anti-immigration message.

The British Election Study found that “many respondents mention both sovereignty and immigration together, showing that these two issues were closely linked in the minds of British voters.” Immigration was just behind sovereignty as a reason for voting Leave. Vote Leave’s Campaign Director has written that Leave could not have won without focusing on immigration and spending more money on the NHS.

Not that there is any real reason for this. EU immigrants pay more in taxes than they cost the state, are not associated with lower wages or fewer jobs, and don’t drive up crime rates. The only rationale for limiting their numbers is political. And, sure enough, the only thing that both the Conservatives and Labour have agreed on is that freedom of movement must end after Brexit – and a bureaucratic, centrally-planned immigration system set up in its place.

Maybe Brexit gives us the chance to reform areas the EU wouldn’t let us. Fishing and farming have long been some of Brexiteers’ biggest complaints about the EU, but so far there is little appetite for reforms like creating property rights over fisheries stocks or cutting farm subsidies. Pro-Brexit politicians have been given control over these areas but have been at pains to stress just how little will change. We already have full control over things like healthcare policy – and, with the National Health Service, have chosen one of the most centrally planned systems in the world.

So what does “taking back control” really mean in a country with no checks and balances and no codified constitution? Parliament is supreme in Britain. No domestic body can overrule it, and a Parliamentary majority is equivalent to an unlimited dictatorship.

This has served us well enough, though it is what allowed the post-war Labour government to set up a nationalized healthcare system and nationalise the entire energy sector, the railways, road haulage, the steel industry, and more, all virtually unopposed in only six years.

For decades the EU has acted as a check on that kind of state overreach: stopping the Scottish government from establishing a prohibitionist price floor on alcohol, forcing member states to open up state-dominated markets to private competition, and barring European states from subsidizing or otherwise protecting their native industries from foreign rivals. These policies were part of what helped the British economy to return to health in the 1980s, complementing and supporting Margaret Thatcher’s reform programme. The system is flawed – I have been a vocal critic of bad EU rulings over Google and antitrust – but it has proved better than the alternative.

Once the EU checks are gone, what comes next? Jeremy Corbyn is more popular than Theresa May, and Labour regularly polls ahead of the Conservatives. Corbyn is a long-time ally of Trotskyites, and his Labour party has been captured by the extreme left. The prospect of a Prime Minister Corbyn, who was a long-time supporter of Brexit, totally unconstrained by rules against subsidies, tariffs, and nationalizations, must make pro-Brexit classical liberals think twice.

Even if this does not happen, the barriers to trade that Brexit will create will make Britons poorer. As Dan notes, the Single Market is about eliminating regulatory barriers to trade, not tariffs, which are already very low between most developed countries. Single Market membership is a form of commitment mechanism that allows governments to mutually agree not to use things like subsidies, spurious safety checks, or labelling rules to keep each other’s goods or people out. Iceland and Norway are members without being in the EU.

Were we to follow their model we could avoid much of the economic damage of Brexit. But, because it requires free movement of people as well as goods, services, and capital, the British government is determined to leave so that it can cut immigration. Whatever deal we manage to get with the EU instead will either be as complex and bureaucratic as the sort of trade deal Dan attacks, or it will mean significant trade barriers for anybody who wants to do business between Britain and the EU. Either way, it will fall far short of the sort of freedom to trade that we have right now.

Just how much this will cost is an open question. The LSE’s Centre for Economic Performance uses a dynamic model to predict a long-term economic loss of between 6.3% and 9.5% of GDP; the UK Treasury predicts losses of between 4.6% and 9.5%; the National Institute for Economic and Social Research predicts losses of between 1.9% and 3.7%, or between 6.3% and 9.5% if productivity growth is affected, as seems likely.

These estimates are based on the “gravity” model, which weighs trade by the size and distance between economies, and has been described as “the most reliable empirical relationship in international economics.” This model explains why the United States exports more to Mexico and Canada than it does to the much larger European Union.

The benefits of freer trade with the rest of the world are not symmetrical to these losses. The United States is the only economy that is both large enough and close enough to matter much, but a comprehensive trade deal is only likely to make us 0.35% richer in the long run. At best, the GDP gains from free trade deals with Japan, the United States, the Anglosphere, India, and the ASEAN bloc would raise UK GDP by a maximum of about two percentage points. I have proposed that Britain open its borders unilaterally to the world’s poorest countries, which would help them, but would be unlikely to boost our own economy by more than a small fraction of one percent.

The astonishing collapse in the value of the pound reflects all this, and as it happened on the day after the Brexit vote cannot be explained away as a market “correction” (especially since the pound rose when markets were expecting Brexit not to happen). It was a recognition that we were going to be fundamentally poorer in the long run, and it explains much of Dan’s other economic data. Higher exports and stock market asset prices do not make us better off if they are driven by a depreciated currency – they mean we’re getting less in imports for what we make and sell in exports and assets.

There is no point in being hysterical. Brexit is not the end of the world and it may open some doors for better policy, out of necessity if nothing else. I will explore these in the subsequent discussion, as well as how we might minimise the harms of Brexit, aware of the costs and risks involved.

Right now we are about as rich, per person, as France. With the right economic reforms we could be perhaps as rich as Germany. After Brexit, our long-term living standards are likely to trend towards Italy’s. Italy is a fine country, but it’s not what I want Britain to be – especially without the weather.

Most Britons are not xenophobes, but they are not free market liberals either. The Brexit they voted for will make us less open to the world around us. We will be poorer as a result. Without the checks and balances that the EU, for all its faults, provided, politicians will be free to nationalise more industries and keep out more talented migrants from abroad. Attractive as Dan’s vision may sound, it is probably not what the future holds.

The Conversation

Can Post-Brexit Britain Learn?

How good government is at correcting its mistakes is one of the key questions in this debate. If Ryan is correct that “a British democratic system, taking more decisions closer to the people, would be preferable and more likely to self-correct in a way conducive to prosperity and freedom than an EU bureaucracy in Brussels,” we should be quite optimistic about long-run governance in post-Brexit Britain.

But is he right? In areas where we have control already, has Britain’s state shown that it learns from its mistakes and the successes of its neighbours?

Learning and adaptation by institutions is best understood as response to feedback mechanisms. Hayek may have overstated the amount of knowledge available in an economy when he argued that an entrepreneur’s “local knowledge” was superior to that of a government official. A simple ignorance-based model could work like this: we assume that everyone is equally ignorant and is making their business and policy decisions based on guesswork. Whatever system was best at eliminating the “wrong” guesses was the one that would end up producing the best results. The market tends to beat government as a discovery process simply because it has more guesses going on at once, and a more aggressive selective death rate.

In this kind of model, the case for political decisions happening locally rests more on pluralism than on local political knowledge. It is better to have Manchester and London making different political “guesses” because the chance of at least one of them guessing right is higher, the costs of error are lower, and people can leave one for the other if one manages to succeed – not because Manchester’s local government understands Manchester better than central government in Westminster. Neither entrepreneurs nor government officials are privy to any special knowledge at any point – it is the selective death rate that eliminates failure, and the winners are simply the people who got lucky with their guesses.

Ryan’s argument makes sense, but if instead of well-informed local politicians we imagine policymaking to be a series of random guesses with much less of a built-in corrective mechanism than exists in markets, the case for “taking back control” in order to improve self-correction may be weak.

It is probably true that Britain making its own decisions on, say, competition law will mean more experiments in policymaking. But are the corrective feedback loops much shorter in London than in Brussels? As we have seen, domestic UK politics does not suggest that in areas where the EU is not involved, such as health policy, we are especially good at learning from our mistakes or the relative success of our neighbours. Jeremy Corbyn, whose Labour party probably has a 50/50 chance of winning the next election, has just today announced plans to introduce rent controls across the country, a policy that will likely prove popular despite its almost unanimous opposition by economists and its repeated failures around the world.

Indeed most of the problems the country has are the result of extremely poor decisionmaking by the government in the face of evidence from close neighbours. Our housing situation resembles that of New York City or San Francisco, except across an entire country. Tight regulatory constraints on supply, like zoning and unreasonable building codes, have led to extremely expensive housing and a large knock-on hit to growth, as workers cannot move to where they would be most productive. Despite our proximity to the simple, permissive rules-based systems of many continental European countries, where housing is much more affordable and construction is much easier, we do not seem to have learned anything at all.

On taxes, we have gone backwards in many respects. The former Chancellor, George Osborne, was widely hailed by free marketeers for his cuts to the headline corporation tax rate, but to avoid having to cut spending he cut allowances for firms to write off their property and machinery investments from their tax bill. The effect was that for firms that invest in things like machinery and property, the effective marginal corporation tax rate has barely fallen at all, and for some it has risen. The success of countries like Estonia that have designed their corporate tax systems so that they do not fall disproportionately on firms that invest their incomes has not yet made its way to Britain’s policymakers.

As most discussants have agreed, the country’s immigration system is self-destructive, and is making it harder and harder for highly skilled workers from places like India, China, and the United States to move to Britain even when they have a job offer in hand. We have not learned from our neighbours – let alone our English-speaking cousins in the United States, Canada and Australia – that highly skilled immigrants are a substantial boon to natives, and less skilled immigrants no burden.

Policy pluralism within countries, through federalism and political devolution, is attractive for another reason apart from self-correction. As Ilya Somin has argued, people move from states with bad policy to ones with better policy, voting with their feet. This is more applicable when cultural and language barriers are low, as they are between U.S. states. But over one million Britons live in other EU countries, and once Britain leaves the freedom of movement rules of the EU single market, this foot voting exit mechanism will be diminished.

If self-correction has not worked in many of the areas we already control at home, it does not seem to be an effective mechanism to rely on in the areas that the UK will control after Brexit. Adam Smith once remarked that “there is a great deal of ruin in a nation” – something all of us should remind ourselves when political developments feel truly bleak. But it has another meaning too: there is already so much ruin in British governance, it is optimistic to imagine that adding some more will really improve things.

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.

On Brexit, Leavers Bear the Burden of Proof

I am encouraged by the fact that our conversation has avoided extreme views. All contributors appear to agree that EU membership is a mixed bag and that Brexit is neither bound to be a disaster, nor is it guaranteed to boost Britain’s – or the EU’s – prosperity. We seem to agree that the UK’s departure increases the variance of possible outcomes. Or, to quote Ryan’s original contribution, “for better or worse, Brexit broadens the scope of opportunity.”

Common prudence normally cautions against policy changes with uncertain outcomes – unless there are compelling reasons to believe that the potential upsides of proposed change strongly outweigh the downsides. My contention is that Leavers have not provided such reasons.

It is not enough to suggest that Brexit will lead to good economic outcomes, if accompanied by “liberal domestic regulatory, tariff, and trade policy reform.” Neither is it enough to express the hope that British parliamentary democracy provides a reliable self-correcting mechanism to public policy – at least not without accounting for the political drivers of Britain’s relative economic decline between the 1930s and the 1970s.

In order to make the case for Leave convincing, one would need to identify the specific policy areas in which burdensome European rules stifle economic activity and also to show what political dynamics would lead to desirable change after Brexit. While it is possible to find many intrusive, costly, or obsolete EU rules, the bottlenecks to the UK’s growth are overwhelmingly domestic. Furthermore, for a bonfire of EU regulations – or of British ones – to occur after Brexit, the British public would have to become dramatically more pro-market than is currently the case.

True, leaving the EU offers the possibility of scrapping British tariffs, currently dictated by the EU’s Common External Tariff, and striking new trade agreements with countries around the world. But in a world of non-tariff barriers, effective trade liberalization is difficult, politically and technically. The international environment does not appear particularly auspicious to it at the present time, either. The administration in Washington harbors suspicions of the rules-based WTO system. Although President Donald Trump announced a “very big and exciting” trade deal with UK was in the making, his understanding of international trade is limited and seems driven by an obsession over bilateral trade deficits, suggesting a very shaky foundation to future trade negotiations.

Elsewhere, we do not see a rush to strike trade deals with the UK. Canada’s Prime Minister Justin Trudeau, in turn, promises that the UK will be able to replicate the terms of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU. Trade negotiations require willingness to do contentious political bargains and need technical expertise, oftentimes in scarce supply. For most countries, tailor-made deals with the UK are simply not worth the trouble. The UK might end up with versions of agreements negotiated by the EU – without any influence over their content. In other situations, the UK might lack the bargaining power needed to persuade governments of large economies to open up their protected industries or coordinate their regulatory regimes with the UK’s.

To the extent to which Brexit “broadens the scope of opportunity,” it does so symmetrically, for better and for worse. One cannot dismiss Jeremy Corbyn, a genuine political extremist, as a one-off fluke. As Prime Minister, he is bound to do more when not bound by EU rules. As Alex Massie writes in an eloquent piece in The Spectator, “[Corbyn’s] government would know no boundaries, recognize no sensible or proportionate limits, accept no compromise. Like the Tory Brexiteers, Corbyn recognizes that the EU makes achieving this more, not less, difficult. Those pesky rules!”

For Ryan, “economic reality is a helpful constraint against the downsides,” including Corbyn’s socialism. But that is inadequate in light of the UK’s own economic experience during the 20th century, and of the many policy-driven growth disasters that regularly afflict liberal democracies. The EU has provided European governments (including Margaret Thatcher’s) with an anchor that commits them to a broadly market-friendly outlook. Yes, unmoored, the UK could become the next Hong Kong – in principle at least. But observing the current political winds and drawing lessons from public choice theory, it seems a safer bet that new discretionary powers acquired by British politicians will result in a drift towards less, not more, economic freedom.

I close with two observations.

First, contrary to arguments advanced by some Euroskeptics – not necessarily by Ryan — we do not find ourselves in a world of binary choices. Even after Brexit, the UK will be bound by some EU rules. Simultaneously, it will forego any influence over the content of those rules.

For all the British grumbling about Brussels, the UK has been among the most influential member states in actively shaping European legislation. As a European of a classical liberal disposition, I believe that it was a force for good: for more flexibility, for more market-friendly approaches, and for less continental dirigisme. For the EU as a whole, the UK’s departure is thus highly regrettable.

But more importantly for the British, if the EU takes an anti-market turn as a result of Brexit, the UK will be affected too. Britain can withdraw from common European institutions but it cannot unshackle itself from the constraints of economic geography. Abandoning the influence the British once exercised in Brussels can easily become an act of irreparable self-harm.

Second, and finally, I take issue with Ryan’s rhetorical question, “Is the EU really a nimbler, more effective level of government able to confront and adapt to the challenges of the day?” as well as his contention that “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.’”

Until the postwar era, the European continent has been characterized by a recurrence of protectionism, tyranny, and war. The multitude of tribes, ethnic groups, and nations on a single continent has always been a source of frictions that Europeans tried to remedy by devising more or less successful systems of governance that bound such groups together in order to provide for common defense and sustain integrated common markets. The EU is nothing but an extension of those past efforts – and an incredibly successful one at that.

The past 70 years of Europe’s history, characterized by the continual deepening of economic ties between European countries, liberal democracy, peace, and passportless travel are unparalleled in European history. A skeptic could say that perhaps those beneficial outcomes would have arisen in the EU’s absence as well. We are not able to test that claim. But if we believe, in a true Hayekian spirit, that caution is justified in face of complex social orders, we might not want to test it, either.