Brexit or Fixet
“In a nutshell, the referendum is a watershed in two related trends: the rising clout of anti-establishment politics and the retreat from globalization.” (Wall Street Journal 27 June 2016)
The Journal, if it were not the Journal, might have added that it reflects a growing disenchantment with neo-liberalism, as the trickle-down effects appear to have trickled up. Too often, for example, there seems to be an inverse relationship between executive remuneration and market performance, nowhere more so than in the banking and financial services sector. The growing resentment has been for too long ignored by the business media who blandly explained it away as a necessary means of attracting the best managerial talent. The hole in that argument was recently exposed by the research of Thomas Philippon, professor of finance at New York University. He measured productivity performance in the finance sector going back to the nineteenth century. He found over that time the sector has persistently charged around 2% for each dollar used to pool funds, and as the FT summed it up, “Opacity allows those with expertise to use their knowledge to serve themselves without passing on the commensurate benefits to the consumer, Productivity gains are simply distributed within the industry.”[1] In Britain, another name for national planning is the ‘Old Boys Club’.
This productivity story is the inverse of the IT sector. During the 1980s and early 1990s, as economist Robert Solow observed, “you could see the computer age everywhere but in the productivity statistics.” That was because the lower costs instead of boosting profits were being passed on to the consumer through very transparent competitive pressure. Only when computers started serious business networking in the later 1990s did the productivity data start to show itself. But once a new productivity plateau had been reached, further measurable increases become difficult to sustain. Google searches, for example, raise the productivity of researchers and consumers enormously, but where are the prices that measure that?
At the end of the day ordinary working folk need to buy bread and pay their rent. They need real incomes, and time-saving devices do not generate real incomes unless they are working devices that free up time to earn elsewhere. While Thomas Piketty (Capital in the Twenty-First Century) recently placed long-term wealth and income inequalities into historical perspective, it is when real incomes stagnate without hope of recovery that the resentment comes to the fore. The implications are serious. “Elections are usually fought on the familiar terrain of liberal versus conservative, and big government versus small. That is shifting to nationalist versus internationalist and ordinary workers versus elites.” (Wall Street Journal, op. cit.)
So is Brexit a valiant Cri de Coeur to reclaim a country, or a ‘ship of fools’[2] heading for a wreck? Certainly the ship has hit dangerously turbulent water and may well lose a mast or two, but can it stay afloat to reach calmer tides without being reduced to a paddle-steamer? The answer will largely depend upon one of two factors. Either, the UK will negotiate some form of EU-relationship such as EEA (European Economic Area) which will offer the means to continue free trade, including banking rights to “passport” in euros, but at the cost of (i) accepting the free movement of people, contrary to the essence of the Leave vote,[3] and (ii) having no say in the EU rule-making process that governs these trades. Or, the UK will be confronted with tariff and non-tariff barriers to trade with the EU and will have to seek alternative markets with exports to the rest-of-the-world. But the rest-of-the-world has moved on a bit since the glory days of British imperial exports and going could be tough, not least since de-industrialization created a vacuum that trade in services, mainly financial, have been trying to fill.
Computer services are a good example of the pending challenge. Nearly 50% of exports go to the EU. Losing privileged access to the EU market will create serve difficulties for the sector. Data regulations are another area in which the UK government will lose any influence. The EU-US agreement on the new Privacy Shield, agreed on 27 June, is intended to replace the Safe Harbour Agreement which was struck down by the European Court. Either the UK will have to follow the EU rules with its own legislation, or face obstacles in commercially-important data transfers. Again, an Independent UK cannot be so independent after all. This really could be a ship of leavers sailing off to Sebastian Brant’s Paradise of Fools.[4]
[1] John Plender ‘Perverse incentives foster the perfect financial crime’ Financial Times 27 June 2016
[2] https://en.wikipedia.org/wiki/Ship_of_fools
[3] Especially after the EU has insisted that “access to the single market requires acceptance of all four freedoms” (‘Brussels hardens UK exit stance’ Financial Times 30 June 2016)
