Tuesday, 25 August 2015

How Keynesians became part of the problem!

Back in 2000 a new footbridge over the Thames was opened, however, it had a major fault, it wobbled badly. However the reason why it wobbled was moderately interesting. Like all bridges it had a swaying motion with  a resonance frequency. However this frequency was approximately the same as most people's walking pace. Without thinking people found themselves walking in time to the sway and the result the bridge swayed more, essentially a feedback mechanism caused by an instinctive desire to walk in time with the sway.

Arguably similar psychological basis causing feedback loops can be seen through human culture. Conspiracy theories as documented in David Aaranovitch often fulfil a base need for a simpler and more rational world. However become difficult to displace once they gain a critical mass of support. Indeed often their level of support as proof of their "truth". Evidence which should make such theories fall apart are "debunked" via pseudo-experts. Similarly economic bubbles are typically caused by a similar narrative where some asset is perceived as a good investment  (e.g. Dot Com stocks). This leads to over investment which in turn drives up the price of the asset reinforcing the narrative. When the crash however comes the results for those who invested last can be devastating.

Undoing the damage of these economic bubbles was a primary motivator of Keynes. Keynes believed that simply waiting for economic growth after a bump was simply not a good enough response from economists. He famously stated "in the long term we are all dead". The role of good economics was try to prevent depressions and he felt this could be done via stimulus spending. There are good arguments for Keynesian economics. Without a feel good factor recessions can spiral into depressions (essentially a negative bubble) leading the suppressed demand which ultimately undermines economic activity. By contrast kickstarting an economy by creating demand (using tools such as low interest rates, higher inflation, devaluing a currency) can get an economy back on its feet. However whilst the economics might be sound, their politics is increasingly dreadful.

Firstly there has been their clumsy attempts to get the population on their side. Having failed (rightly or wrongly) to convince policy makers of their arguments, many top Keynesians have attempted to put their arguments directly to the public. There is nothing wrong with this in principle, however, in practice the results have been relatively mixed. Part of engaging successful is to ensure that the idea is catchy. Explaining the benefits of higher inflation verus spending cuts can get very dry, however, writing a popular economics book called "End this Depression now" (as Economics Nobel Laureate Paul Krugman did) helps overcome this problem.

However there is a fine line between simplification for understanding and deception. Sadly the title is probably all most people will read of this book. This can be seen on left wing social media circle which is full of memes along the lines of "Austerity is purely ideological say Nobel Laureate" spread by people in search of easy solutions.  Sure Paul Krugman isn't the first academic to suffer from a catchy title being misinterpreted. There are many other examples: -
- Richard Dawkins "The Selfish Gene" was commonly misinterpreted as an ode to individualism when in actual fact it was largely about the evolution of altruism.
- Similarly James Surowiecki's "Wisdom of Crowds" in reality dealt with the situations where groups of people can collectively have better judgement than individuals and was not arguing for crass populism.

.... However what marks Krugman is that having got his anti-Austerity crowd fired up he seems to have done little to disabuse their belief that complex problems have simple solutions.

Sadly Krugman is not alone. Another recent example was Stiglitz cack-handed engagement with the Greek crisis. Few, with the wisdom of hindsight, see the Greek decision to join the euro as a good one. It enabled their government to borrow unfettered at low interest rates and subsequently has tied their economy to the German one. The result has been that Greek now faces a terrible choice of more austerity via spending cuts or unpegging their currency austerity through inflation and devaluation.

There was never really any serious "other" alternative, as there was little political will in Germany to subsides the Greeks and even less in many many Eastern Europeans (with lower GDP per capita than Greece). So when the Greek government decided to have a referendum and threaten to leave to get better terms there was no much realistic chance of success. Still presumably despite having some awareness of the political backstory and the goals of the Greek government, Stiglitz managed to write a piece recommending the Greeks vote "no". Rather unsurprisingly the results were disastrous with the Greek government tanking their economy and getting worse terms from the EU.

However perhaps the greatest example of the ability of Keynesian economists to shot themselves in the foot politically is still unfolding right now. After the UK Labour party lost the general election in they commissioned some polling. This indicated that UK electorate saw them as too left wing. Rather than engaging with this realty, many labour supporters rather are indulging themselves in political fantasy on any conspiracy theorist would be proud of. As a result they have concluded that they weren't left wing enough and thrown their weight behind veteran hard left wing campaigning MP, Jeremy Corbyn.

Most political pundits, even those traditionally of the left, are questioning his wider electoral appeal on a range of issues from his "friendship" with terrorists to his hard left economics (including Polly Toynbee, Janan Ganesh, Dan Hodges). Yet this hasn't stopped some Keynesian economists writing a letter in support for him praising his Keynesian credentials. This has almost certainly helped this hard left fantasy afloat in supporters but its difficult to see how this helps the political left in the UK. Indeed given most Keynesian economists presumably want something somewhat to the left, its difficult to see this engagement as anything other than deeply counterproductive.

Keynes originally focused his efforts on fixing bubbles. He understood animal spirit and how things can get carried away with the momentum. Sadly his disciples seem to have forgotten this and instead seem to be busy creating political bubbles by adding their "expert" voices to mob on social media baying for change. Unfortunately like all bubbles they are likely to end badly.... and more often than not for the causes they claim to be supporting. 

Tuesday, 9 June 2015

Labour Election

There are two issues that get conflated in the post election debate: –
1. Was the party positioned correctly
2. Was the party effective at getting its message across
The answer on the second point is a resounding “no”. I’m afraid Ed team were a PR disaster and the message was all over the place (anti-austerity but keeping Tory spending pledges, nasty Tories but we’ll keep out the immigrants as well etc etc). It all came across as political posturing rather than having a position backed up by substantive arguments.
Unfortunately this also makes answering the first question about party position rather difficult. I don’t think its as simple however simply right or left. They did however fail to win over some key groups. In particular they seemed to do badly in poor market town (e.g. Gainsborough). I can only assume that the Tory lazer focus on “hard working families” (combined with the benefits cap) was very effective here. Most people self identify as hardworking. I can imagine that man people objected in less affluent areas objected to the high high benefits being paid to people living in London.
This was then combined with some failures with the economic message. Some of this was positioning again. However some of the criticism was more substantive. In particular Labour managed to alienate many of business leaders with its regulatory rhetoric. This was no doubt initially popular with the electorate, however, I suspect the disappointment expressed by many business people with these polices reinforced the perception that Labour couldn’t be trusted with the economy. Therefore any electoral benefit was more than offset by the substantial costs. .
Sadly this isn’t the lesson that many Labour supporters seem to be learning. In particularly there seems to be a common fallacy that a more left wing labour party would have won working class UKIP voters and SNP voters. However these arguments seem to assume that you can buy off demagoguery. If somebody has decided that “immigrants”, “the EU” or “the English” are the primary problem then sadly I don’t think any public spending promises will persuade them to vote different.
Unfortunately people who have stepped outside mainstream argument can probably only be persuaded back by slow rational argument (i.e. something a bit deeper that posturing of the last Labour leadership). Meanwhile in the short term I suspect some traction can be made by persuading Labour doubters that it isn’t anti business, can manage an economy and does support working people. Such a strategy would win back across the spectrum including many reluctant Tories (which obvious not only wins Labour votes but loses them for the Tories).

Tuesday, 19 May 2015

Homo politicius

The post election debate has been dominated in equal measure by the success of the Conservatives and the failure of Labour. Political pundits hare happily drawing conclusions about politics drifting to the left or right and the reasons why this might have happened. However all to often these assumptions are based on a rational actor model or homo politicus.

The assumption is that Homo politicus has deeply held views evidence based view. He has a deep understanding of politics and the direction of travel of the political parties. He makes his decisions on how to vote based on marrying up the parties whose manifestos are a closest match to his political views. Homo politicus is closely related to homo economicus (the being invented by economist who makes only rational decisions and prevents economic crises). The problem is that neither like homo economicus, homo politicus doesn't exist.

Indeed you just as look at the results of the last election to realise the problem with the homo politicus model. The conventional view expressed by many was that the recession and the austerity afterwards had been very hard on most people. Logically most people assumed that this would favour left of center parties with their focus on redistributing the wealth. Therefore based on a rational model you would expected outcome would be a drift to the left. In fact the opposite happened with voters punishing the left and drifting to ring wing and populist nationalist parties.

Part of the reason for the failure of the simple rational models is actually its very hard to determine what voters should be rational voting for anyway.  Presumably few voters would find an exact match between their desired policies and the policies of any party. Strictly speaking a rational voter who makes his decisions on the policies in the party manifesto alone would need to determine the important of the policies and the closeness of match.

However this overlooks the importance of trust and credibility. Even if you do find a party that offers the perfect policy platform there will no doubt be questions about ability of the party to deliver the policy. You might conclude that either the local representative or the party leader simply do not have the stature of personality to drive through their desired policy.

Even if we assume that politicians can be taken at their word there is a further problem with the rational agent model which is how should a policies be evaluated anyway. Is a policy good if it benefits the voter directly or should policies be judged on their wider benefits and risks. Should policies be looked at in terms of immediate payback or longer term benefits.

When weighing up multiple policies how do you determine relative importance of one policy area versus another (defense versus education versus health). Most people normally tend to weigh up benefits and risks based how they are perceived, which in turn depends on how they are reported. Hence people play lotteries and

When looked at in its entirety voting is a very complex decision. Weighing up all these differing aspects would be an almost impossible and would required voters to be very widely read on a vast range of subject areas. Needless to say most voters are not well read on a range of subject (most barely follow the news). Most voter base their voting decisions on much simpler criteria. These are typically: -
- Normally vote for this party? (Inertia)
- Can I trust the party and its leader?
- If I vote for them will they look after me and people I care about?
- Are they focused on issues that I think are important?

Actually what happened in this election was simply the perfect storm for the Labour and Liberal Democratic parties.The Lib Dems were punished on a trust issue (specifically tuition fees which was seen as an unforgivable act of betrayal by many voters). A centre left homo politicus would probably have forgiven the Lib Dems for this. However real voters felt wanted to "punish" Clegg for the betrayal (even if that meant switching to the party that had actually proposed the tuition fee policy).

Labour meanwhile had a perfect storm of its own. Indeed their perfect storm was arguably caused by the homo politicus model. Their leader had assumed that a moving left would shore up the core vote and combined with the collapse of the Lib Dems and a perceived leftward drift post recession would ensure victory.

However this worldview ignored all the complexity of real voters. For starters the leadership was seen as weak and out of touch and whilst more high minded people will say in shouldn't matter.... It did matter and people voted accordingly. The left wing message contained many individually popular polices. However Labour failed to realise that homo sapiens (unlike homo politicus) don't read manifestos nor pay much attention to specific polices. They do listen to the general noise and each of the policies reinforced a message of a party that would be interventionist and damage the economy.

Meanwhile despite moving left, Labour's "core vote" strategy fail dramatically in its own right. The rise of the SNP, driven by the referendum driving the Scottish nationalism being driven up the agenda, resulted in a shocking loss of seats in Scotland. This fits with This hardly fits with rational decision given the eye watering high levels of austerity that would be required by an independent Scotland and the largess that Labour were offering.

Perhaps even more shocking rebuke for this homo politicus model came from Northern England. Although UKIP didn't win any seats from Labour they did take a lot of votes and aside from a protectionist immigration policy they are hardly left wing. Yet their strong (and more than a slight fascist) vision had significant appeal in a group that were unlikely to see much benefit.

Right now the Tories and the nationalist are more popular than ever (although the anomalies of our voting system have been very harsh on UKIP). Meanwhile the Lib Dems and Labour are currently in the process of rebuilding themselves. Furthermore the next five years will enable the Tories and the nationalists to shape the agenda (almost certainly to the detriment of Labour the the Liberal Democrats). Rebuilding in this environment will be tough for both parties.

Both parties would do well to remember that they are dealing with homo sapiens. Core votes strategies leave little scope for unexpecting changes in people priorities. Cleverly positiong and neat policies may work in theory in practice however winning elections relies on much simpler such as A leadership with credibility and strong principled message which offers voters tangible benefits based on the issues that the voters see as important. 

Monday, 24 November 2014

How UKIP could destroy the UK

The UK is staring emerging from a recession and in many ways the future for the UK hasn't looked brighter for many years. Not only have we returned to growth, we are now growing faster than most of our European neighbours.

However post recession UK could almost be thought of as two separate countries; urban UK and rural UK.  Urban UK is the urban high growth areas with world class technology and cultural industries. This part of the UK can almost be through of as a European Singapore or Hong Kong. This UK is primarily made up on London and surrounding areas but increasing other parts of the country are learning from the success of London. There is increasing a feeling of increased opportunity in places like Leeds and Manchester serious talk about building HS3 to create a power house of the north. Meanwhile the great cities of the midlands such as Birmingham and Coventry are returning to growth. Coventry in the 80's was seen as the architypical "ghost town" (indeed the Specials wrote the song about their home town) however a city centre being redeveloped and Jaguar building cars to rival Mercedes and BMW it has the feel of a town on the up.

However the story is very different in rural UK. In rural UK does not have any great industries or any great universities. The small market towns are often that fill rural UK are often disconnected from the cities that have such infrastructure. As a result these rural areas are not able to build the necessary clusters of advanced companies to enable them to compete in a globalised world. There are few jobs in these areas and even fewer well paid jobs (although this is to some extent offset by the lower cost of living). In this sense rural UK can therefore reasonably be compared with an Eastern European nation.  

The interest of Urban UK and rural UK also also somewhat divergent. Urban UK benefit from a close relationship with the EU enabling its products to be sold to the worlds largest market. Relaxed immigration rules enable the movement of labour and mean few barriers for new skill migrants. This makes in turn makes urban UK a great place for large companies which further driving up wages and draws in more talent in a virtuous circle. The amazing wealth generating capabilities of urban UK means a large number of lower skilled jobs providing employement for others in industries such as hospitality and retail. 

Meanwhile rural UK has a slightly more awkward relationship with the EU. The low tech industries of rural UK don't have much of a global market and hence international trade is not a priority. Meanwhile the weak local economies mean that migration is typically seen in a very negative light. Perhaps the slightly ironic thing is that the EU would probably look a lot less negative for rural UK were in a separate nation. As a separate nation it would be significantly poorer and wages lower and would attract few migrants (and it would be in economic equilibrium with many of the poor parts of the EU). However, the success of urban UK means pushes up wages and increases government spending (on rural infrastructure) making it more of an attractive destination for immigrants than it would otherwise be. 

Given these two nations the logical thing for any government to do would be to focus its energies ensuring that the urban areas continue to proposer through good trade links and investment in the vital infrastructure these areas need and ensuring that they can continue to attract talented people. They would in parallel invest in the rural areas with an awareness that these areas are not going to be the areas of growth for the future. This is more or less the strategy that successive governments have (correctly) adopted. However, increasingly there is a political challenge. A side effect of the higher wages in rural UK is that it encourages low skilled immigrant. Such immigrants have the discipline of poverty and as a result are prepared to work harder. The results is the predictable backlash and in the poorer disconnected market towns this comes in the form of UKIP.

Reactionary parties are nothing new but UKIP however causing a particular headache in the UK due to the way the political system works and the recent history of the UK. Both the main parties (the conservatives and labour) cross the rural/urban divide and both parties have seats that are likely to be targets for UKIP as a result. This means neither party is able to entirely make the rational choice and focus policy on growth in Urban UK and managed decline in rural UK. 

Labour
Whilst Labour can claim some success are reviving the inner city areas. Many of these neighbours (particularly in places like London) have gone from being no go areas to desireable neighbourhoods offering city centre living for affluent young professionals. This has in turn created jobs and opportunities for the original residents.

However the many of the smaller mining/mill towns have not experienced the same success. These towns don't really have the scale to or skills in their local populations to be hubs. Although new Labour tried policies to help these areas (e.g. opening art galeries in Burnley) they were always in retrospect destined to fail. The fact that the policies were unable to help the Labour significant parts of their heartlands has increasingly lead to a sense that the party has forgotten its working class roots "sold out to metropolitan elite". Increasingly Labour are finding themselves in a bidding war with UKIP to make populist sounding noises to win the votes in these "left behind" constituencies.

Conservatives
Meanwhile the Tories have a similar and arguably worse problem. Back in the 80's many rural conservative areas seemed to exemplify Thatchers values - places fully of small business and entrepreneurs (indeed Thatcher's own father ran a small grocers in such a market town). 30 years on the fortunes of these constituencies are looking decidedly mixed. Many suburban Tory areas in commuting distance of big urban centres as they have remained desireable neighbours for couples to bring up children (whilst living in easy commuting distance of centres with good job opportunities).

However many other market towns haven't been as successful. Unlike the urban areas which form natural "hubs" which attract skilled people, rural areas are often beset by low skills meaning world class industries are unlikely to be based there. Traditional industries in such areas like as agriculture and tourism are either growing slowly or (in the case of tourism) in decline from international competition. This in turn means there are few entrepreneurial opportunities and the types of beautique retail outlets (which can thrive in rich urban areas) are unlikely to have such traction in towns. Meanwhile more traditional retail outlets (like grocers stores) are unlike to fare well against the competition of large scale discount stores.

The situation for the conservative areas is very ironic on many different levels. Opposition to the EU is often positioned in Thatcherite terms by tabloids (more free trade and removing the "heavy hand of Brussels"). However, increasingly the opposition to the EU is based on dislike of immigrants "undercutting local labour" and a desire to turn back to the clock (to the 80s - which 70% of UKIP votes think of as a better period according to a recent poll). Its difficult to see these drivers as anything other than protectionist desires from residents of dying town. Indeed probably the best argument for leaving the EU would be our ability to remove agricultural tariffs, however, its hard to imagine such a policy having much appeal in rural communities.

The Future
The UK future remains should be as a trading nation with great cities and great centres of learning that are the admiration of the world. These is the future that all major parties should be striving for. However the threat of UKIP prevents either party from fully grasping this. It would be a huge tragedy is politically expedient calculations to counter a reactionary "insurgency" from a dying parts of the UK prevented our countries from achieving its full potential. 

Thursday, 8 August 2013

The Case for a BrExit

On most matters UK political leaders tend to agree on rather more than they disagree on. The conservative party (aside from an obscure fringe), largely supports the welfare state, free healthcare provision (albeit with an emphasis on internal markets) and some Keynesian support for the economy during a downturn. Meanwhile the labour party is unlikely to support the levels of tax previously seen in the 70s nor repealing the union legislation laid down by Thatcher. This reflects the will of the majority of the population.

However in UK politics there is one areas where we have the slightly paradoxical situation where all three major parties in the UK are at odd with a large section of the UK public, namely the UK position inside the EU. A substantial proportion of the British public are skeptical about the EU to the point of hostile. Superficially this would seem to be a failure of UK democracy or a sign that our "liberal elite" are out of touch with the voters. However a closer look at the opposition to the EU shows that they have diverse and mutual inconsistent positions.

The Socialists/Protectionists

The first group are the socialists/protectionists. Initially much of the opposition to EU membership came from the left of the political spectrum with the Labour party being largely anti-EU. The common market was not seen as inherently favouring free markets and therefore not vehicle for driving their socialist agenda. Equally many labour supporters were instinctively nationalistic with a strong belief in the commonwealth and hence not particularly predisposed towards Europe. Still to this day there are those (such as Owen Jones) on the hard left of the labour movement who are hostile to Europe on the basis of its "neo-liberal agenda" . This is however now a minority position in the labour parliamentary party now, as it has dropped hard left positions and adopted a less hostile view of the EU. 

However arguably much of the recent anger at the EU has been based on the arrival of new immigrants from Eastern Europe (and the perception that they are driving down UK wages). Such objections are against the free movement of labour can be seen as inherently protectionist. Equally the common refrain amongst anti Europeans is that we have a trade deficit in goods with the EU and hence we would be better off out. This argument implies that trade barriers would work in the UK favour as it would deprive the EU of the lucrative UK market and that we would not miss European imports. Ironically the party that has best channeled this anger, UKIP, describes themselves as libertarian (which should in theory make them both pro market and pro free movement of people).

The "Libertarians"

The libertarian case against the EU almost the exact opposite of the socialist case against the EU. Libertarians in theory believe in the free movement of goods and people as little intervention from government as possible. In theory therefore the EU should be seen as a good thing by such people. However the libertarian opposition to the EU is based on three tenets: - 
  • The EU is protectionists (blocking trade with growing markets outside the EU)
  • The EU over-regulates preventing UK businesses from being as competitive as they would be outside the EU
  • The UK could get bilateral deals and use the WTO to negotiate better deals with both the EU and other countries around the world
These anti-EU arguments are given the most credibility by the UK media and are used extensively by UKIP and the anti-EU elements of the Tory party.

The Populists

There are several strands to the populist arguments against the EU. The classic argument broadly that
  • the EU is creating rules that hold the UK back and prevent the UK from building a "new Jerusalem".
  • British (liberal) elites have been "seduced" by the EU and failed to "do what's right" (ie leave). 
  • They also like to point to a majority the British public opposing EU membership. 
  • They also claim the EU membership is expensive (which compared to household budgets it definitely is but as a proportion of the UK budget it isn't)
  • A standard populist argument is that we have a trade deficit (which given many populists have libertarian leanings seems a deeply ironic)
Effectively the case combines a strong patriotic call to arms (against the nefarious others blocking the UK),  ad populem argument and a belief in a corrupt elite. Often the details beyond this are sketchy (and depending who is making the case will vary). They are based on the assumption that on leaving we will have the ability to dictate our terms to the EU. The typically combine "libertarian" positions (e.g. deregulation of the UK to aid growth) with seemly contradictory positions on immigration.

The Sovereign-ists

This group believe that UK sovereignty is paramount and that all UK legislation should be written in the UK parliament. They take great offence at any legislation that "imposed" from the EU. They do not necessarily have a vision for how the UK should use its specific power. The Soverign-ist is necessarily tied to any specific camp (although often they can be linked to the populist camp based on the perception that meddling bureaucrats are holding us back). However for some the principle of sovereignty is paramount (even if that means loss of trade and influence).  

The Challenge for those support BrExit

Given the agendas of the BrExit supporters are so diverse perhaps the more interesting question what would actually happen if the UK did actually leave the UK. Its difficult to see how such diverse groups of people (who all believe they will gain from leaving the EU will be satisfied by the any outcome).

Its likely that the populists will quickly become disillusioned with the new status quo as leaving the EU is unlikely to usher in a new era of prosperity, as many seem to believe. Leaving would potentially put a lot of investment at risk (due to the uncertainty around our future) and even if it does not actively deter investment its unlikely to lead to any quick dividends.

Negotiations with the EU are likely to be difficult for the UK, as the UK is more reliant on trade with the EU than EU nations are on aggregate with the UK (approximately 50% of UK trade is with the EU whereas France and Germany have less than 10% of their trade with the UK). This imbalance (caused by a large bloc and a much smaller nation) is likely to mean that the UK will not be negotiating from a position of strength (the balance of trade in goods argument is really not that significant).  Consequently its likely the UK would face a difficult choice of implementing much of the current body of EU legislation - as do Norway and Switzerland through bilateral agreements - or putting such trade at risk. Any compromises which involve implementing EU rules are unlikely to please sovereignists.

The socialists and protectionists are unlikely to get exactly what they desire either. The UK (unlike countries such as Australia, Norway and Canada) has a large population and relative few valuable natural resources. Trade is therefore essential for the UK if it is to maintain current standard of living. However, such policies are unlikely to be popular with the electorate. Last time the labour party adopted hard left policies (under the leadership of Michael Foot) it convincing lost the election. The labour party only started to increase its share of the vote after Neil Kinnock, John Smith and Tony Blair moved the party significantly towards the centre ground. Socialists who leave the EU may find that there are policies (such as attempts to regulate the flow of foreign labour) may have some resonance. However trade barrier to deter people from buying foreign goods (e.g. foreign cars) are likely to be unpopular. In any case implementing protectionist legislation is likely to result in a similar response from our former EU partners (given the high volume of trade with the EU this could be crippling for the UK economy).

The Libertarian Issues

The anti-EU argument that is given the most "credibility" is what can loosely be described as "libertarian". There are many pundits of offering varying degree of credible analysis claiming that the EU is a bureaucratic monstrosity holding the UK back. The key core elements to this "libertarian" view of the EU are: - 
  • The EU is excessively protectionist (compared with the rest of the world)
  • There is scope to negotiate good trade deals with the rest of the world outside the EU using the WTO
  • The EU protectionist regulation wouldn't be used against Britain if it left
The validity of these arguments cannot really be assessed without looking at the role the WTO plays. Broadly speaking the WTO deals with the rules of trade and settling disputes. It remit is broadly pro-free trade although with some important caveats about where free trade may be detrimental to development, the environment and health. WTO member are therefore able to set their tariffs at the level they want, however, they are unable to arbitrarily raise them above the agreed maximum tariffs. This is all very good, however, its not anything like customs union.

Looking at the statistics generated by the WTO (see link) you can see the differing tariff profiles for different countries. Below is the WTO analysis of the tarrifs for the EU,Australia, Canada, India, China Norway, Switzerland and USA. The analysis looks at a range of different product (e.g. food, chemicals) and looks the tariffs that are applied: -
  • The Bound Duties - % of duties that have fixed upper tarrifs (confirming to WTO)
  • The Simple average Duties - the average duty free (as a percentage of the product cost)
  • % Duty Free - the number of categories that are duty free
  • Non ad valorem duties - the number of lines with duties that are not based on value (e.g. based on weight or quantity instead)
  • Duties > 15% - the number of categories that have duties higher than 15%

Country/Territory Bound Duties Simple average Duties % Duty Free Non ad valorem duties Duties > 15%
European Union 100 5.3 27.2 4.7 4.3
Australia 97.1 2.8 48.8 0.2 0.1
China 100 9.6 7.5 0.5 14.6
Canada 99.7 4.5 71.4 1.6 7.1
India 73.8 12.6 3.5 5.0 16.5
Norway 100 7.8 88.6 6.8 5.5
Switzerland 99.7 7.8 20.2 79.7 5.8
United States 100.0 3.5 45.4 8.2 2.8

The figures above could (depending on which statistics you prioritise) be used to make an argument for a the EU being more protectionist that it should be. The analysis will come out different depending on any weighting (e.g. relatively to level of trade etc). Also there ignore many of the other complexities of trade (e.g. use of technical regulations as trade barriers). However the statistic do not obviously support an overly protectionist Europe.

After leaving the EU, the EU could potentially apply the maximum trade tariffs on UK imports. Whilst the tariffs typically are not that high they could hurt export industries which may conclude it is easier to pull investment from the UK and enjoy friction free within the EU by relocating. A libertarian government keen to avoid EU regulation would face the dilemma putting significant export industries at risk or adhering to EU regulations that they disagree with.

They would also face a similar challenge when negotiating with the rest of the world - should they lower UK tariffs to get the benefit of cheaper imports or should they try to negotiate bilaterial agreements that give UK producers access to foreign markets. The libertarian position should always be to lower tariffs however cutting UK tariffs without getting commitments from other countries would not impress potential exporters. They could cut tariffs and hope that other nations respond in kind, but this assumes that other nations would (arguably the trade policy equivalent of unilateral disarmament from CND). If a libertarian government were to hold off reducing our tariff barrier until we have managed to get a series of bilateral agreements in place, then it might take time to make significant progress (given the speed of international diplomacy). One challenge would be to get other countries interested in starting negotiations with the UK. They could easily conclude that there are other larger, faster growing markets which they have less access to that they would rather focus their diplomatic efforts on. (So far David Cameron trade missions haven't massively increased our trade outside the EU).

Where the "libertarians" might be slightly stronger ground is deregulation. Potentially companies can get better returns if internal regulations are removed and this has the upside of giving better returns for investor (and therefore arguably encouraging more investment and growth). The downside, however, is that such deregulation is likely to lead to worse employment conditions/wages and potentially damage to heath and the environment (which may offset any potential growth). Even if deregulation could enable growth there would be practical limits to far any deregulation could go. Potentially the level of deregulation required to offset trade friction could be significant. Its unlikely that radical deregulation would ever be supported by the UK electorate (in much the same way as there is limited appetite for radical socialism). In any case there would be a practical limits on how far an "independent" UK could deregulate as anything that adversely effected the environment or health (e.g. excessive pollution or the air or seas) could result trade sanctions under WTO rules.

Conclusions

In summary outside the the EU our policy options would be very limited. Implementing radical policies (either socialist or libertarian) are likely to be met by internal resistance from the UK electorate. Anything which distorts trade with the EU could lead to a strong counter-response to the detriment of UK exporters.

What would almost certainly emerge for a post EU settlement would be a fudge that would ultimately leave nobody very happy. Its easy to talk about what is wrong with the EU and even the UK's position in the EU. However, its difficult to see how that improvement would be attained for the UK by leaving the EU.

Monday, 3 June 2013

How bad ideas can get momentium (and how social media helps this)

Reading twitter, comments on newspapers and phones in shows in TV or the radio perhaps the most striking thing is the sheer level ignorance of many people. This perhaps isn't as that surprising. Most people have busy lives with families, work, education (often on top of work or work on top of education) and hobbies. Spending your spare team reading up on esoteric aspects of government policy is not exactly many people cup of tea. 
Building up an informed opinion is also very hard work. Generally you need to start with a philosophical view (e.g. what type of society you want to make). Although people will have different views, the majority will probably have somewhat similar objectives  (e.g. a growing economic with the proceeds of wealth fairly distributed amongst the population). However the difficulty is determining how such an object can be met. This involces understanding the nature of the problem, the dynamics around it and understanding both constraints and how this issue needs to fit with other priorities.

Gathering facts and statistics even now a time consuming activity. Often the data available (and even more so the publicly available data) is a subset of that required to understand the problem. Equally facts can be misleading when looked at in isolation. A good example is the (often stated) fact that the UK runs a trade deficit with the EU. Superficially this implies the bargaining power sits with the UK. However a moderately deeper understanding of the relative volumes of trade shows that 50% of UK exports go to the EU and less than 10% of the average EU countries exports go the the UK.

Facts by themselves are often useless without and understanding of how things are likely to change in the future. For example death from infectious diseases in the UK tend to be quite low, however, if the uptake of vaccines were to drop then potentially there could be significant outbreak of dangerous infectious diseases (indeed we are seeing this now post the Wakefield case). Judging the dynamics of a situation is difficult and requires a understanding of how different factors are likely to play out. In complex systems its often difficult to make long term predictions and determine which effects will "win out" even with accurate measurements (this is why long range weather forecasts are notoriously inaccurate).

Measuring dynamic effects is almost impossible (its often hard to see trends for the noise). Typically such effects can only be inferred bias on an understanding of the problem. Here however many experts struggle to avoid personal biases. For example right wing pundits will often claim state benefits encourage idleness which damages productively - Effectively they are claiming a dynamic effect (that overtime people's willingness to live off the state increases). Likewise left-wing pundits are likely to make similar claims about bankers and regulation.

Then there are the human and social factors, which are an extension of the dynamic factors (these introduce additional levels of complexity). A change in the law or spending priorities aimed at solving a problem in one area is likely to have knock on effects elsewhere. Crude laws aimed at curtailing offensive speech could easily have unintended consequences blocking legitimate criticisms of people in power. Equally over invest in solving social problems could result in perverse incentives.

To make matters worse our brains are not evolved for making complex policy judgments. Instead we have well developed monkey brains that are often quick to draw instinctive judgments. Such judgments (such as being distrustful of outsiders) might have been useful in the past (when a chance meeting with a neighbouring tribe could easily have fatal consequences), however, often they are not as useful in the modern context.

Its therefore hardly surprising that many people hold uninformed opinions don't stand up to much scrutiny. Most people simply don't have the time to gather the data, analyse it and produce meaningful opinions which are intellectually coherent. However the real problem with uninformed opinions is when they start to go viral. Often you start with a meme based on a half truth and which plays to people innate fears/hope. Once this meme has gained enough momentum - populists, demagogues and  polemicists using it as a mechanism to gain power and influence against "the establishment". This leads to the formation of a ground swell of opinions which in turn leads to pundits and intellectuals who try to justify this intellectual fraud.

Into this mix comes social media. Many claim that it makes participation easier. This is certainly true for people who perhaps wouldn't have had access to politicians in the past. However it also creates lots of noise as people let of steam with their poorly formed opinions. This in itself isn't anything new but social media can enable like minded to congregate quickly (and not always for the betterment of society as the recent riots have demonstrated). Many embrace social media (and to some extent this is necessary as it is here to stay), however the fear has to be that social media will end up being little than a platform for  bigots and "swivel eyed loons" to demand they be listened to and their opinions be taken seriously.

Unfortunately not all opinions are equal nor valid. If ultimately social media is to be a force for good then it needs to become more than a platform people people to shout 140 character slogans at one another and more a tool for collaboration (so people can build up ideas and learn from one another). In the business world such tools are slowly starting to emerge so that teams can easily share information.  Equally in the public web wikipedia has shown what is possible through open source development and collaboration. Therefore I suspect  the biggest challenge with social media isn’t getting people engaged but actually rather the opposite… getting people to engage where they can focus their efforts and really add value.

Sunday, 30 December 2012

EU-phobia - the Allowable Bigotry

One of the features of David Cameron's leadership is that he has tried to fight the conservatives reputation as the nasty party. He has tried to position himself (and the party) as a fiscally conservative but socially liberal. His position is in stark contrast with the US Republicans. However on one issue the conservative party has actually become more extreme, its EU-phobia. Most conservatives were somewhat skeptical of the benefits of the euro. This position had been vindicated by events. However the lesson many conservatives seem to have learnt isn't one about the need for your own currency so that you can issue run a deficit during an economic downturn (in fact arguably the austerity policies indicate they have ignored this lesson), instead many conservatives seem to have concluded that the source of the UK problems is the EU. 

This position is superficially appealing. On the one side you have meddling foreign bureaucrats telling us how to run our country (and regulation our industry) and on the other side you have plucky politicians standing up for Britain against the meddling Europeans. However look a bit deeper and the issue quickly gets a bit more complicated and the risk of leaving become more apparent. At the moment Europe is our biggest trading partner taking 54% (based on WTO figures) - although the EU phobes try to deny these figures. Our membership of the EU gives as access to these markets at the "cost" of EU regulation. 

According to the EU phobes this EU regulation is prohibitively expensive and by leaving/renegotiating we could avoid this regulation. However they acknowledge that having left we would need to set up bilateral trade relationships between the UK and the EU. However they claim arrangements will result in more favourable trading conditions for the UK. The slight irony of this position is that on the one hand the EU phobes claim we don't have enough influence over EU policy from within the EU to stop regulation being forced on us. Yet somehow on leaving we will have a position of strength to avoid any regulations we don't like without any likely sanctions on us. It would seem the EU phobes are underplaying our currently influence and overplaying our "future" influence on leaving - or have a very strange idea of how to win friends. 

The classical examples used by the EU phobes for what the UK could become outside the EU are Switzerland and Norway. However Norway and Switzerland also do apply a lot of EU law (albeit without any influence on the development of the legislation as they have no representation in the EU parliament nor minister present for the council of minister meetings). The Norwegian foreign minister recently highlighted their one-sided relationship with the EU and questioned whether this would be appropriate for the UK

Equally there is little evidence that Norway has gain from being outside the EU. Norway's wealth can be largely attributed to a small population and significant oil reserves - this fortune of geography is entirely incidental to their status outside the EU! Meanwhile Switzerland as prospered thanks to a combination of strong international companies (such as Nestle, Novartis and ABB etc), good bilateral treaties with the EU and its famous secretive banks. Even so Switzerland has been coming under intense pressure from both the EU due to its banking secrecy and internal EU documents indicate pressure on that the EU has put a lot of pressure on Switzerland to comply with EU legislation. This shows that despite both countries  "independence" they are still subject to pressure from the large trading bloc on their doorstep. 

Anyway the UK is unlikely to be in the same position as either Norway or Switzerland. Both these countries have to some extent attained their current relationship with the EU on the basis of being potentially joining the EU at a later date (however unrealistic this arguably is/was). Also both countries have significantly smaller populations than the UK (Norway is 5 million and Switzerland 8m). This means that any punitive trade-barriers would achieve very little (in terms of protecting EU markets) whilst alienating a potential future EU member. Meanwhile the UK having left (and presumably freed from EU regulation) would without any trade barrier represent a significant threat to investment in the EU. Its difficult to see why the EU would have any incentive to tolerate such an arrangement. 

One argument is that the UK would despite this be in a strong position to negotiate with the EU because of the UK has a trade deficit with EU. This implies that the rest of the EU has more to lose that the UK in terms of loss of trade. However this is a very flawed argument. Firstly it is a strange argument from a free trade "liberal", given trade is supposed to benefit both parties. Many countries for example run trade deficits with China but still benefit from cheaper consumer electronics than they would have if they tried to manufacture it themselves. 

More importantly it ignores the relative worth of the trade in aggregate. Currently 54% of UK exports go to the EU. Statistics for the EU trade with the UK are harder to come by but if we use France and Germany as an example (they are both major EU economy), proportion of their exports to the UK are 7.8% and 6.6% respectively. Losing all these exports would hurt them significantly but losing 54% of our exports would hurt the UK MUCH more! Its difficult to see how this is negotiation from a position of strength!

However the argument that we can somehow attain better terms with the EU is only half the EU phobes argument. The second argument is that outside the EU we would be free to negotiate trading relations with faster growing nations. However this argument has a series of major flaws. Canada and Australia (in what EU phobes call the "anglosphere"), have enjoyed relatively high growth rates thanks to commodity prices. However, the economies of Canada and Australia are $1.78 trillion and $1.34 trillion. This sounds a lot but UK, France and Germany are respectively is $2.45 trillion, $2.77 trillion and $3.60 trillion. Canada and Australia are significantly further away than France and Germany making it significantly harder to export many goods and services.   

Many of the really high growth rates have come from countries are in sub-Saharan Africa and Asia. However according to world bank figures the GDP of sub Saharan Africa is $1.26 trillion (which presumably includes the relative wealth of South Africa). In other words many of the countries even with stellar growth rates have and will have small markets for the foreseeable future (and certainly not markets worth risking our position in the EU for)! In any case many of the markets in Africa and Asia (including the giants of China and India) have high levels of inequality which may mean that the market for European high-end brands is somehow more limited that the statistics would superficially imply. This is not to say that there are not trading opportunities in these growing economies. Germany has been able to export its high end technologies to China. Which ultimately shows that the EU is not an impediment to trading with such countries if you have a high value product that they need! 

So in summary leaving the EU is unlikely to strengthen our ability to trade with EU countries and is unlikely to open up new significant new markets assuming that we can sell them a high value protect that meets their requirements. This raises the question why the EU phobia has taken such a hold of the right wing of UK politics. Scrape away at the surface and emerges is an ugly combination of a very negative right wing libertarian worldview mixed with some populist politics. 

The negative liberatian view is based on the assessment that the UK needs to reduce its costs to trade with the developing world - rather than copying the German model developing high quality industries. No doubt removing regulations will help a few industrialists (whose industries would not be effected by worsening trading relations with the EU) squeeze some more productivity out of their labour forces and their increase margins. However this will potentially come at significant costs to some industries that are reliant on EU trade, weaker employment and environment protection and (probably) a net cost to our economy. These regressive views have managed to gain traction due to populist anti-EU (foreign meddling) sentiment.   

In many respect this closely parallel the approach adopted by the more extreme elements of the US republicans (regressive policies that advantage the richest mixed with some populist position on gun rights, women's right, gay rights and religion in the classroom). However unlike the US nobody seems to be willing to confront issue of EU phobia. Much of the popular press is happy to pander to the negative stereotypes of the EU meanwhile few of our political leaders have dared confront population with the difficult truth that there are no easy or risk free options for the outside of the EU. So instead of a debate on the risks of withdrawal and how we might (or might not) develop our economy country inside or outside the EU. We end up with a phony debate where on the one-side you have myths about eurocrats regulating bendy bananas and on the other side a land of milk and honey where we can be as rich as Norway (without having the oil). Perhaps before with laugh at the dysfunctional elements in US politics, we should look reflect on the more dysfunctional elements of our own politics and the (apparent) inability of much of the population to face the reality of our relationship with the EU.