7/5/16

Brexit and us

Brexit
This little essay offers my thoughts on two questions: why Brexit won, and what are the most likely economic consequences. I started writing this when the stock markets plunged in the days following the Brexit vote, but even though the markets have now recovered my initial views remain the same. I do hope that my view of the likely economic consequences proves wrong in the longer term, but I’m making careful bets in the other direction.

I. Why Did Brexit Win?

I read various and complicated reasons for the success of Brexit, such as bad tactics by the “stay” people, the Labor Party leader’s lukewarm support for staying, falsehoods from the pro-Brexit leaders, and so forth. But I think there are more fundamental reasons:

1. The Refugees

Most immediately obvious was the failure of the EU to deal with the massive flood of refugees during the last few years, coming atop others like the mess it made of Greece and Europe’s continuing doldrums after the Great Recession.

But the biggest, most visible, and to Brits most frightening was a threatened flood of Moslem refugees. When the refugee crisis first became apparent, the EU faced a choice: it could repel the arrivals; it could plan to accommodate and integrate them into EU countries in a measured way; or it could do nothing. Unfortunately, the EU fell into the latter choice.

It made little difference that the immigrants currently in the UK were from other EU countries or the Commonwealth.  The popular media, untruthful leaders of the Brexit movement, and a long UK history of difficulty dealing with radical Islamist immigrants all created the strong popular impression that the floodgates would open unless Britain exited from the EU.

2. Hatred for the EU

A second reason is the nearly universal loathing for the EU’s bureaucracy, which is slow, inflexible, and often incomprehensible. Although people blame the bureaucrats, or a distant and unresponsive EU government, there is another reason that makes this problem almost inevitable:

In both Britain and the US, much regulation is through the common law. In common law regulation, judges decide cases by applying general principles to specific past conduct. The accumulated body of such applications provides, in effect, the detailed regulation that society needs. Although respectful of past decisions, common law judges can modify old approaches to fit current realities, overruling old cases or finding differences between them and the one they are deciding now.

But the EU, and administrative agencies in both Britain and the US, apply general principles to prospective conduct by writing or rewriting regulations that specify the conduct that will be impermissable. The writing process is often often lengthy, expensive, and onerous, involving endless hearings and revisions with affected interests lobbying and litigating all along the way. A recent example is a 2004 Labor Dept. attempt to change an old regulation of worker wages and benefits that denied protection to home health aids and household employees. A revision to now protect those types of employment has only now been scheduled to take effect. Lobbyists opposed to the measure litigated against it for years until a final decision rejecting their completely spurious arguments recently came. So it can take years, even decades of expensive legal work to enact or modify a regulation. After all that trouble, nobody wants to repeat that process every time conditions change. So in time many regulations become outmoded and unreasonable. The system itself makes the regulatory agencies look slow, inflexible, and incomprehensible.

3. Class Resentment

The leave vote expressed the rise of serious class resentment, which exists in the US as well. Since the era of Reagan and Thatcher automation, globalization, financialization and computerization have transformed economies and employment. The beneficiaries have also sought and won enormous political favors. The combined result has been a tremendous concentration of wealth in their hands, and stagnation for virtually everyone else. The winners have paid scant attention to the losers. Even the representatives of ordinary people who gained office during this period (Tony Blair, George Brown, Bill Clinton, Barrack Obama) favored globalization, technology, and financialization, and left ordinary people largely unprotected from the gales of change. As a result, many very resentful people want to roll back many of these changes and the unequal results. Skillful communicators have learned how to mobilize these people, with Brexit the first notable result.

4. The New Media

Fourth in this list, but perhaps most importantly, there has been a sea change in the nature of public affairs media, shifting it from a predominant focus on factual and reasoned political arguments to a predominant focus on emotional and intuitive appeals. This shift became possible, and profitable, because of radically new modes of communication that technology created since about 1990. As a result, the profit-seeking firms that dominate the media can effectively address peoples’ emotions, and find it highly profitable to do so. These firms now dominate the media, and even traditionally rational and factual media have tried to follow their approach.

Formerly, people got their information about public affairs primarily from newspapers, broadcast TV, and radio. Most of these outlets, whatever their political position, dealt in known or logical facts and rational thought. Since 1990, however, the media has largely shifted to electronic forms. Newspapers have declined, and cable TV, internet web sites, and even billboards now make intensive use of graphics, fast takes, and rapid movement to attract attention. To best capture audiences (and hence advertisers) they seek presenters adept at emotional communications, and spend much more time than traditional media on emotional candy like scandal, gossip, sex, and claimed betrayals of traditional moral and religious values.

Modern technology enables profit-seeking media to capture more audiences and advertisers by arousing strong feelings than by truthful or logical utterances. As has long been true, conservative media do this much better than liberal media. Where liberals see complexity and doubt, media conservatives provide their electronic audiences with simplicity and certainty. While liberals ignore personal appearance, sound of the voice, and personal values, conservative media stresses moralistic values and retains beautiful blondes or men with authoritative voices and manners. Combined with gripping graphics, constant moral outrage, and a disregard for truth and logic, this business model has become predominant in much of the US and UK media. Accordingly, the simple and emotionally compelling idea of Brexit gained overwhelming support in British media, and many voters ignored or failed to understand the more complex arguments in favor of remaining.

II. What Does Brexit Mean for the US and world Future?

Nobody really knows the answer, of course, but for those who have to act or invest, it’s necessary to formulate some ideas. Here are a few:

1. Political

 Although the immediate consequence of Brexit is to embolden Trump supporters, Brexit is a strong warning to sensible people that complacency can indeed lead to disaster. So I suspect that Brexit will ultimately do more to scare moderate Republicans and Sanders Democrats away from Trump, if not into the Clinton camp, than to give Trump new voters. Of course, an even stronger threat could arise if Brexit or something else significantly slows the US economy before November.

A more serious danger is the strength Bexit clearly gives to nationalist, xenophobic, anti-EU parties in Europe. If they prevail politically, they could return their countries to an era of nationalism, with firm state boundaries, limited immigration, authoritarian governments, and reduced globalization. Their chances would be even better if, as seems likely, Brexit damages the already weak economies of Europe. As Poland and Hungary have already done, some states may turn to fascist-style governments; others, like Holland and France, may seek to leave the EU. Scotland and Northern Ireland may leave Great Britain. The potential for political and perhaps even military conflict will grow, and the EU’s offer of freedom and prosperity, however tarnished it may be, will fade.

• Economic

I am pessimistic about the economic future over a fairly long period. Brexit’s political implications have created massive uncertainty everywhere. It seems unlikely that Britain will negotiate a smooth departure from the EU, so that process could—like many EU political processes—take bad directions; at the least, Brexit should result in extended economic uncertainty for a long time.
 Whatever the stock market does in reaction, economic uncertainty clearly causes investors and consumers to hold back, saving and hoarding rather than spending. This would damage the already fragile EU recovery. There will be less immediate damage to the US economy, but the EU accounts for about 25% of US exports. Although not a large part of the US economy, exports support high wages. So even a small decline in exports could worsen the reduction in demand that I expect to follow economic uncertainty.


As the US and the EU are already growing very slowly, and China’s transition from export to domestic consumption is difficult, even small negative changes could put us into a snowballing recession. The paralysis of the federal government and of many GOP-controlled State governments will certainly magnify and lengthen the potential economic difficulties. Even if Clinton wins the Presidency, Republicans will probably retain control of the House, and as they did in Obama's Presidency, could stymie efforts to ease any recession. The many Republican-led State governments may well make things worse. In addition, the quantitative easing overhang and very low prevailing interest rates leave the Federal Reserve with little room to do anything useful. So the prospect is much dimmer for public policies to save the economy than after the collapse of 2008. Although there is no such massive initial impact, a decline may well occur and continue indefinitely.

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