November 2016

.030ZyesAutumn Statement shows Brexit makes us poorerBy Tom O’Leary

The ever-optimistic Office for Budget Responsibility (OBR) has come under sustained fire from the Brexiteers for its gloomy prognosis and forecasts for the Autumn Statement. This criticism is entirely misplaced. The OBR has underestimated the negative impact of Brexit.

The OBR has loyally served successive Tory or Tory-led administrations having been created by them in 2010 and has routinely forecast much stronger growth than has occurred, along with rising living standards that have failed to materialise. However, what the OBR cannot do is ignore economic reality. Its forecast weaker growth over the next two years, that is before Brexit is enacted, chimes with almost all private forecasts. The Brexiteers want to shoot the messenger, who brings news of the downturn they have created.

The OBR repeatedly emphasised that it cannot make any substantive forecasts about the Brexit period itself as the government would not provide any information on the post-Brexit economic regime, not even in the widest parameters. Instead, the OBR focused on the immediate negative impact of the Brexit vote and the deterioration of the economic outlook, and even assumed a resumption of slower but steady growth from 2019 onwards. Give the disruption that is currently scheduled for 2019 when the UK is scheduled to leave the EU, this seems implausible.

Worse outlook because of Brexit

The most important OBR forecast changes are shown in Table 1 below (taken from Table 1.1 of the OBR’s November 2016 Economic and Fiscal Outlook). GDP growth falls by a cumulative 1.1%. Household consumption is down by 1.8%. Crucially business investment falls by 12.75%. In terms of living standards average earnings fall by a cumulative 2.8%.

Source: OBR

Not all of this deterioration is due to Brexit. The OBR specifies that around 60% of it is. In the OBR’s ‘counterfactual’ scenario, as if there had been no referendum, shows that 61.25% of the deterioration by the end of this parliament is due to Brexit (Table 1.4 of the OBR document). 

The remainder is the customary downward revision to forecasts as the OBR’s rose-tinted view gives way to reality. But this can hardly provide much comfort to the Brexiteers on the right or left. The OBR has only really taken account of the turmoil of the next two years and its previous track record suggests the forecasts will be markedly lower over time.

It is clear from Table 1 above that the biggest single casualty over the next few years is business investment. This is entirely predictable and predicted. As the level of investment is in part determined by the scope of the market, the UK’s withdrawal from the world’s largest market will inevitably deter investment. Contrary to government propaganda and much easily-led commentary, there will be no attempt to replace this new slump in business investment with increased public sector investment, as shown in Chart 1 below. Contrary to Tory propaganda there is no ‘National Productivity Investment Fund of £23 billion’, it is simply the relabelling of existing government spending on road, rail, housing and so on.

Brexit may have been sold as an opportunity to ‘get our country back’, but no vote can overcome the forces of global capitalism, or abolish the laws of economics. Irrespective of the ideas those who supported Brexit, the effect of the vote is to prolong the longest period of falling real wages in recorded UK history, as shown in Chart 2. Real wages had been falling since the end of 2014, when they were 5.7% below where they were when Labour lost office in 2010. But Brexit postpones the wage recovery primarily through flat wages and higher prices, so that they are not now officially forecast to recover until Q3 2019. This lost decade in wages is prolonged by Brexit.

Overall the crisis of the British economy is demonstrated by the change in Consumption and Investment since the beginning of the crisis. The OBR has forecast the outturn for the remainder of this year. The changes in Consumption and Investment are shown in Chart 3 below. The change in aggregate Consumption since the beginning of the crisis has been just over £135 billion, led by rising private Consumption. The cumulative rise in Investment is just £0.8 billion, effectively zero.

It is this rise in Consumption without any rise in Investment to sustain it which has led to enormous overseas borrowings to cover the current account deficit. Consuming without Investment is also responsible for flat or falling living standards for the overwhelming majority.

Economic objectives

As noted above, the OBR sought but was not given any meaningful advice from the government about its aims in the Brexit negotiations, or what policy outcome it expected. Instead it was given two statements by Theresa May. Below is a key section from the statements they were given.

Theresa May said, “I want it to give British companies the maximum freedom to trade and operate in the Single Market and let European businesses do the same here. But let me be clear. We are not leaving the European Union only to give up control of immigration again.”

The OBR requested guidance on economic policy. What it got was bombast on immigration. This must be assumed to override economic policy, or supersede it.

Yet the OBR is clear, the objective of reducing immigration will itself reduce both growth and living standards for all. There are 70 references to migration in the OBR document. It states that potential growth will be 2.4% because of lower net migration by 2021. To be absolutely clear, this is not simply an effect which reduces GDP, it also reduces living standards for the entire population, measured as per capita GDP. The OBR states, “On a per capita basis, cumulative growth would have been 0.3 percentage points higher because net migration adds proportionately more to the working-age population than to the total population, thereby boosting the employment rate too” (p.45).

It should be the goal of all economic policy to maximise the greatest sustainable increase in the living standards of the population. The Brexit vote and the Brexit government have overturned that strategic aim, replacing it with immigration-reduction. Chancellor Philip Hammond told the Tory party conference that ‘no-one voted to be poorer’. Yet his own government acts as if they did. It is what they will deliver.

The reason the Cabinet Brexiteers are in uproar is that their reactionary fantasies cannot survive contact with the real world. Even the perennial optimists at the OBR must be attacked. But this is in the nature of Brexit, a reactionary project propelled by distortions and outright lies. Because Brexit erects barriers between the UK economy and the world’s biggest market, living standards will be much lower than otherwise. Curbing immigration will compound this effect.

Of course, it is quite possible for political movements and even nations to sustain themselves on reactionary fantasies for a whole period. But they tend not to survive contact with the outside world. The Autumn Statement is probably just a small foretaste of what is to come as the Brexit fantasy meets reality.

.387ZAfter Trump’s victory China is the main strategic pillar for globalisationBy John Ross

Trump’s election as US President means 2016 is ending with a stark public contrast between the positions of China and the US on global trade. The US has its first president proclaiming support for protectionism since World War II, while China states its support for increased international trade and economic globalisation.

December 2016 also marks the first anniversary of China’s major free trade agreements (FTAs) with South Korea and Australia – so far China has signed 14 free trade pacts with 22 countries and regions in Asia, Latin America, Oceania, and Europe. In contrast Trump, far from calling for extending FTAs, has called for revision even of the existing North American Free Trade Agreement – the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investors Partnership (TTIP) are different issues as analysed below.

This reality that China is now the largest economy supporting progress towards free trade, while the US moves towards protectionism, is therefore a key event in the world economy. It is consequently crucial to analyse both the fundamental issues involved, that is the most powerful forces driving the process, and the immediate practical consequences for China in pushing for FTAs and to understand the consequences of the contrasting strategic approaches of China and Trump.

The importance of trade

First, analysing the most powerful forces in economic development, international trade is one of the clearest issues where economic theory and the facts of economic development completely coincide. Economic theory states that international trade will aid economic development: numerous and repeated factual studies show a positive correlation between the trade openness of an economy and its speed of economic development. Nevertheless, to understand developments in the world economy given the now contrasting policies of China and Trump it is crucial to understand the reasons for the firmly established positive correlation of trade and the rate of economic development in the modern globalised economy.

Trade and division/socialisation of labour

Trade’s importance does not arise from some ‘magic effect’ of crossing national borders. The distance from Shanghai to Beijing and from Shanghai to Osaka is approximately the same, but the importance of trade does not mean that there is some extra benefit from Shanghai’s trade with Japan rather than another part of China.

International trade’s importance follows from the proven fact of the first sentence of the first chapter of the founding work of modern economics, Adam Smith’s The Wealth of Nations: ‘The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is directed, or applied, seem to have been the effect of the division of labour.’ Marx used the term ‘socialisation of labour’, rather than ‘division of labour’, but entirely agreed with Smith’s conclusion.

Modern econometrics fully confirmed the Smith/Marx analysis. Modern econometrics finds, in economic ‘growth accounting’ terminology, that the most powerful factor in economic growth is the increase in ‘intermediate products’ – that is the output of one industry (e.g. a steering wheel, a hard drive) used as an input into another industry (e.g. a car, a computer). But the increase in ‘intermediate products’ is merely a measure of increase in division of labour.

Modern econometrics also finds that the second most powerful factor in economic growth is fixed investment. But fixed investment is again simply another form of division/socialisation of labour – the use of the outputs of capital goods industries to produce other products.

The key role of international trade follows directly from this decisive role of division/socialisation of labour. As Smith immediately noted: ‘the division of labour is limited by the extent of the market’ – increasing division/socialisation of labour required an increasing market size. It was for this fundamental economic reason that Smith advocated free trade and Marx was a fierce critic of the founder of modern ‘protectionist’ theory Friedrich List

It is this increasing division/socialisation of labour, not of crossing national borders, that is decisive for economic development and which therefore allows the unfolding economic processes involved with Trump and China’s current policies to be understood.

‘Opening up’

These fundamental economic forces evidently explain the success of China’s ‘reform and opening up’ process since 1978 – and why China seeks new FTAs. A key reason for China’s more rapid economic than other major economies is that it makes greater use of international division of labour than the other two of the world’s three largest economies. China’s trade in goods and services in 2015 was 41.2% of China’s GDP compared to 36.8% in Japan and 28.1% in the US. Given the success of the ‘opening up’ policy it corresponds to China’s national self-interest to press forward with proposals for freer trade and FTAs.

But the fact that this advantage of division/socialisation of labour in economic development is the foundation of trade means equally means that developing this is in the interests of other countries as well as China. The statements that in economics ‘one plus one can be more than two’, and the concept ‘win-win’, are not pleasant but empty words but correspond to this decisive economic advantage of division/socialisation of labour. This is why China has been able to secure its free trade agreements with South Korea, Australia and other countries, and why it wants more.

It is also the beneficial effects of such globalisation that has helped produce rapid economic growth in China, India and other developing countries, thereby helping lift hundreds of millions of people out of poverty. Globalisation is consequently decisively important for countries, but particularly developing countries and the world’s poorest people, to achieve economic development.

US economic history

If China since 1978 dramatically illustrates the advantages of open trade US history provides one of the most dramatic examples of the negative nature of protectionism. The passing of the Smoot–Hawley act raising US tariffs in 1930, against the advice of huge numbers of US economists, was a decisive factor in the depth of the Great Depression. Trade’s share in US GDP dropped from 11.0% in 1929 to 6.6% in 1932 and was still only 7.6% in 1938 on the eve of World War II. US GDP fell by 26% between 1929 and 1933, and was only 2.0% above 1929 levels by 1938.

Following this devastating experience of the Great Depression after World War II the US turned policy through 180 degrees and actively built a globalised world trade order. The US played a decisive role in seven rounds of negotiations under the General Agreement on Tariffs and Trade (GATT) each of which further liberalised world trade. This culminated in 1995 in the creation of the World Trade Organisation (WTO). Every US President from Truman to Obama declared support for freer trade and many acted on it. It is this 71 year old at least verbal commitment to freer trade that Trump’s campaign broke with.

TPP and TTIP

To fully understand the present stark contrast between China and US positions on global trade it is important to realise that the US already began to break with the goal of an increasingly globalised world economy in reality if not in rhetoric under Obama. The TPP and TTIP differed decisively from previous trade agreements under GATT and in creating the WTOs. Their real content was regionalised protectionism for the US beneath mere words on support of freer trade.

This real content was shown extremely clearly in the TPP. The US and China are the world’s first and second largest trading nations and overwhelmingly the largest Pacific trading nations. The foundation of a genuine US orientation to freer trade in the Pacific would have been to negotiate with China. But instead the US deliberately excluded China from the TPP negotiations – confirming that, as numerous Western analysts noted, the TPP’s real aim was not to liberalise trade but to form a bloc under US dominance against China. As US Secretary of Defence Carter stated: ‘In fact, you may not expect to hear this from a Secretary of Defense, but… passing TPP is as important to me as another aircraft carrier.’

The domestic political problem with the TPP for the US administration, however, was that to enshrine the interests of US corporations it tipped the playing field even further against American workers. As well-known US economist Jeffrey Sachs noted of the TPP’s provisions: ‘Their common denominator is that they enshrine the power of corporate capital above all other parts of society, including… even governments… The system proposed in the TPP is a dangerous… blow to the judicial systems of all the signatory countries.’

As the TPP did nothing to improve the position of the US population, indeed would have worsened it, the TPP became politically toxic. All three candidates with major support during the US presidential election and primaries – Trump, Clinton and Sanders – were therefore forced to declare opposition to the TPP. Huge opposition to the TPP existed in the US because it was an attack not only on China but on the US population.

While Trump has in words turned the US from support for free trade and globalisation to protectionism, Obama had already done it in practice with the TPP and the TTIP.

China as the champion of a globalised economy

Trump famously declared during the presidential election campaign he would put a 45% tariff on Chinese imports in the US and would declare China a currency manipulator on ‘day one’ of his administration. As, however, Trump made several wholly impractical proposals during his campaign, such as that Mexico would pay for a wall along its entire border with the US, what Trump will actually do is not yet clear. As the US Peterson Institute noted: ‘If implemented, these proposals [of Trump] would provoke retaliation by US trading partners, unleashing a trade war that would send the US economy into recession and cost millions of Americans their jobs.’ In particular: ‘Industries that manufacture machinery used to create capital goods in the information technology, aerospace, and engineering sectors, which depend on exports, would be the most intensely affected. But the trade shock would also damage sectors not engaged in trade, such as wholesale and retail distribution, restaurants, and temporary employment agencies, particularly in regions where traded commodities are produced. Millions of American jobs that appear unconnected to international trade—disproportionately lower-skilled and lower-wage jobs—would be at risk.’

Putting a tariff on China’s exports to the US would also raise prices for US consumers and thereby reduce US living standards. By being inflationary such price increases would also increase pressure on the Federal Reserve to raise interest rates creating downward pressure on US economic growth. Undoubtedly the very large size of the US economy, which allows great domestic division of labour, and the fact that even Trump does not propose a return to protectionism on the scale of the 1930s, means that the negative effects of protectionism might develop more slowly in the US than in other well-known examples of the failure of protectionism in a modern globalised economy (pre-1990s India, Argentina etc). Nevertheless, turning its back on the advantages of international division of labour would necessarily lead to a slow path of growth of the US economy, and lower living standards, than if it pursued the path of an open economy.

The current problems in the US economy do not stem from its globalisation, on the contrary this has helped prevent any decisive economic decline of the Great Recession type, but of underinvestment in the US economy – a process analysed in detail in my book 一盘大棋？中国新命运解析 (The Great Chess Game?).

The TPP

There is no doubt that one of Trump’s most popular pledges in the election was to oppose the TPP. The problem for Trump is that the majority of US big capital precisely wants a deal like the TPP. Possibly Trump will conclude that anger over his reneging on a pledge to oppose the TPP would be so unpopular it cannot be done openly. But that merely means that Trump will try to secure the same anti-China results as the TPP through other means.

Nevertheless, Trump’s goal is easier to decide upon than to achieve. It took tremendous efforts to get other countries to agree to the TPP. Abe was desperate for the TPP to be adopted – Japan’s parliament ratifying it even after Trump’s election. Difficulties in the TPP therefore create the opportunity for China to promote for a genuine agreement in the Pacific which expands trade rather than the protectionism which was embodied in the TPP.

China has become the main pillar of globalisation

It is the above processes which create the strategic fact that it is China that has now become the world’s largest single economy committed to free trade and globalisation – although the EU is also at least in theory a supporter of this process and the EU’s most powerful economy, Germany, is an enormous beneficiary of globalised trade. The world rapidly growing major economy with China, India, is also sharply increasing its economic openness. The percentage of India’s economy devoted to trade is, at current exchange rates, now even slightly above China’s. The powerful positive effect of foreign trade is once more confirmed by the fact that the world’s five most rapidly growing non-oil dominated economies since the early 1990s with populations of more than five million – in descending order China, Cambodia, Vietnam, Laos and India – all have high percentages of trade in GDP. Therefore, even if the US moves towards protectionism other rapidly growing economies remain committed to globalisation and China’s decisive task is to place itself decisively among and help lead the process of the rapidly growing economies seeking the advantages of international and globalisation.

China’s policy and RCEP

China’s strategic policy of supporting freer trade and globalisation can be broken down into a series of initiatives which in present circumstances give it key advantages to play a still greater global role – particularly compared to Trump’s approach in the US.

The most important proposal of China is of course to support the Regional Comprehensive Economic Partnership (RCEP) – the proposed FTA between the ten member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, Vietnam) and the six states with which ASEAN has existing FTAs (Australia, China, India, Japan, South Korea and New Zealand). RCEP negotiations were formally launched in November 2012 at the ASEAN Summit in Cambodia. China is arguing for them to be concluded as rapidly as possible.

RCEP has numerous advantages over the TPP. In particular, key proposed participants in RCEP are rapidly growing economies (China. India, Vietnam, ASEAN as a whole etc.) whereas the TPP is based on slowly growing economies (Japan, US).

Like China’s existing FTAs RCEP builds on real trading relationships – China takes about one third of Australian exports and over 20% of South Korea’s. With full implementation of the FTA agreement with Australia, for example, 95% of Australian exports to China will be tariff free.

Unlike the TPP and TTIP, which were primarily based on giving international jurisdiction to institutions which would be controlled by a single country (the US), China’s existing FTAs, like RCEP, emphasise harmonisation of national standards with international supervision and interference reduced to an absolutely necessary minimum.

OBOR and AIIB

Finally, China has shown its ‘thought leadership’ on globalisation by initiatives which go beyond the approach of the US in GATT and the WTO. These initiatives were based primarily on tariffs, legal changes, regulation etc. They did not address the actual question of creating the material basis for trade. China’s initiatives in One Belt One Road (OBOR) and the Asian Infrastructure Investment Bank (AIIB) go beyond this by laying the basis for practical development of trade, in particular by infrastructure investment. It is for this reason that even before Trump came to office the AIIB and OBOR were attracting great international attention even from traditional allies of the US such as Britain and Germany.

Conclusion

To summarise, in very important matters, such as Trump becoming US president, it is necessary to be precise and not exaggerate. It remains to be seen how much Trump’s protectionist rhetoric is translated into protectionist practice. Nevertheless, even the change in rhetoric is important. China has now publicly become the world’s largest nation supporting and acting as a pillar of globalisation. As globalisation is the process which has brought immense benefits to the world economy, and particularly to developing countries, this creates key international strategic openings for China.

* * *

This article was previously published here on Key Trends in Globalisation and originally appeared in Chinese on Sina Finance.

.353ZyesDon’t believe Tory anti-austerity propagandaBy Michael Burke

• A lobby to provide the NHS with extra funds as it faces potentially its worst winter ever has been brushed aside
• Philip Hammond has offered £2 billion of extra funding for housing (as well as soft loans to small builders) over 4 years, when £30 billion a year is needed to meet the housing shortage
• The planned cut in the cap on social security from £26,000 to £23,000 has just been implemented, and down to £20,000 outside London
• A large number of other cuts to pensions, to social security and working tax credits have also been implemented
• The government has just announced the postponement of work to electrify the Great Western rail network in south-west England, a £2.8 billion project. 
• The Northern Powerhouse remains a slogan, not a project
• Hammond did announce £2 billion package to combat cyber-crime, specifically motivated as ‘this could lead to war’

.690ZWho are ‘the left behind’?By Tom O’Leary

Following the Brexit vote here and the victory of Trump in the US Presidential election there has been much ill-informed discussion of the ‘left behind’, sometimes spuriously described as the white working class who have not benefitted from rising living standards, or even globalisation in general.

It is not the purpose of this article to untangle the web of half-truths, distortions and falsehoods that comprise those statements. To take one example, the first great political and social exposition of the effects of ‘globalisation’ can be found in the Communist Manifesto. This sets out the enormous capacity of capitalism to dominate the globe by raising production up to a new, much higher level and so increase the exploitation of both natural resources and labour. It has nothing in common with radical ‘anti-globalisation’, that is protectionist and increasingly anti-immigrant movements in the Western countries.

Instead the focus here is narrowly on who are the ‘left behind’ in the UK. They are not the old white workers of the former industrial north, as is commonly portrayed. They are youth, dsiproportionately Asian and black youth. These are the very people who oppose Trump and who largely voted to Remain (71% of them).

Table 1 below is taken from a House of Commons Briefing paper ‘Unemployment by ethnic background’ from April 2016. A section of the briefing’s explanatory text is also included. The Table shows that the unemployment rate for people aged 16 to 24 is 14.4%, which compares to an unemployment rate of 3.3% for all those aged over 50 years. But in every age category Asian people are nearly twice as likely to be unemployed and in every age category black people are more than twice as likely to be unemployed. Put another way, if you are young and black you are more than nine times as likely to be unemployed as if you are old and white.

There is a gender element too to who is in fact left behind. Table 2 below is taken from the same briefing. In aggregate the unemployment rate for women is lower than for men. But this is somewhat misleading, as the sample size is lower, 610,000 for women versus 750,000 for men. This reflects the fact that women are more likely to be discouraged from the workforce, or are obliged to be carers within the family. So the lower unemployment rate for women shown here needs to be seen in that context.

On this basis, the unemployment rate for women is lower than for men. However, contrary to the general trend the position for Asian women is worse. For them, unemployment is even higher than it is for Asian men. Yet again, the highest rates for unemployment among both women and men is to be found among black women and men.

On pay, it is also the case that workers who are not white are paid less than their white counterparts and colleagues, and that this pay discrimination increases with qualifications. Table 3 is taken from a TUC report into black workers’ pay gap. There is a considerable pay gap for workers from all non-white ethnic groups, on average 75 pence an hour. But this rises to a pay gap £1.72 an hour for black workers on average. This pay gap also increases up the qualifications’ scale, so that black workers with a degree earn nearly a quarter less than their white counterparts, £4.30 less an hour.

.850ZyesBrexit cannot have a favourable outcomeBy Tom O’Leary

There is no realistic possibility of Brexit resulting in a favourable outcome. Following Brexit, the living standards of the population will be lower. In addition, the capacity for government spending on public services will fall along with its capacity to invest. As a result, it is likely there would the continuation of current trends, where there is a government-sponsored rise in racism, hate crime and xenophobia, in order to distract from the crisis created by government policy.

Forecasting Brexit effects

Economic forecasting is an inexact science. But its findings are also often presented and understood inexactly too. Forecasts can be presented as a range of probabilities but should nearly always be conditional, as outcomes depend on a series of factors outside the main elements of the analysis. So, for example, it is certain that prices will rise much higher than they otherwise would because of the Brexit-induced slump in the value of the pound. But the precise level of consumer price inflation in 2 years’ time must be an unknown without foreknowledge of the level of global commodities’ prices, knowledge of the ability of firms to reduce profit margins, the response of consumers and so on. Yet there is still the certainty that prices will be higher, and that any tariffs will make prices much higher still. Real incomes and living standards will fall.

So it is with GDP forecasts. There are two main documents setting out the central projections for the economy if Brexit goes ahead. The first is the analysis from the UK Treasury, the second is from the grouping Economists for Brexit. Both have been subjected to critique and readers interested in those can find them here and here.

There are some surprising similarities in the analyses and some huge differences. There are also some important omissions.

Taking first a point of agreement, in discussing versions of ‘Hard Brexit’ which would involve the unilateral removal of all trade barriers by the UK, all sides are generally agreed that incomes fall significantly, although the Treasury is the least concerned with this important matter. However, in the model formulated by the principal author for Economists for Brexit Patrick Minford prices will fall much further than incomes, as the UK economy enjoys the fruits of an unfettered and largely unregulated free trade. As a result, in this scenario real incomes rise significantly. This is flatly contradicted by the UK Treasury analysis and the Brexit economists’ critics. Finally, there is widespread confusion about the role of investment in the economy, which means even the most apparently pessimistic scenarios may underestimate the negative effects.

Falling prices?

Patrick Minford did not receive as much publicity as Alan Walters in terms of his influence on the Thatcher governments. This was almost certainly a mistake as his work was crucial in formulating the ‘supply side miracle’ of Thatcher’s efforts to create unfettered markets in goods, capital and labour. Everything from banking deregulation and Big Bang through to privatisations of state -owned industries, the end of the ‘closed shop’ and now zero-hours contracts all owe something to Minford. He is an important figure in recent British economic history. 

He also bears some responsibility for the entire economic debacle of this period and now the crisis caused by the Brexit vote. This is not an ad hominem attack, but is used to show that Minford’s ideas have already been tested in the real world and they have been disastrous. He begins with the reasonable proposition that barriers to trade impose a cost to the idea that the removal of all barriers must be a benefit. This is clearly logically false. There is a cost to imposing fire safety standards on all new homes and public buildings. But there is a far greater cost if buildings frequently burn down and lives are lost.

The Minford claim that prices will be lower after Brexit rests on two spurious propositions. The first is that prices are on average 10% higher in some EU countries (or were 14 years ago when the data Minford relies on was collated!) so that these must arise from non-tariff or regulatory barriers inside the EU, which will no longer apply if his ‘Britain Alone’ model is adopted. Secondly, he argues, ignoring both geography and history, that other countries will supply those same goods or services to the UK at prices equivalent to the non-tariff EU prices. Notably in his view, all of this benefit will lead to the elimination of British manufacturing and the huge growth in inequality, even while the economy as a whole is boosted by 4% over the long run. 

This is nonsense. Minford’s analysis takes no account of the quality of products. Take housing, the single largest component of household expenditure. The UK housing stock is much more dilapidated than the EU average. Approximately half the proportion of homes in the EU are more than 70 years old compared to Britain. Price should be adjusted for quality, and Minford makes no effort to do that. Higher prices can just as easily denote higher quality goods.

But the assertion that other countries will meet the removed EU goods and services is outlandish on two grounds. The British economy is tied through a network of increasingly complex supply chains to the European economy. If those supply chains are severed, it will not be by US or Chinese firms inserting themselves. They cannot under EU rules pass themselves off as EU producers once the UK has left. Nor would they be interested in removing all the non-tariff barriers that protect their firms just to sell into the British economy, which is simply not that important on a world scale.

On this issue, the Economists for Brexit are wrong and their critics are right. Prices will rise post-Brexit. They are rising already. As all analyses accept that incomes will fall, this can only mean that living standards as whole will fall significantly.

Misunderstanding investment

The Economists for Brexit pay almost no attention to investment, despite frequent references and a chapter nominally devoted to it. Instead, it is simply asserted that investment will rise following the (spurious) forecast of vastly improved trade at lower prices. 

But the Treasury analysis, while much more serious in its examination of the effect on investment, is sorely lacking. In effect, the focus is almost exclusively on the negative impact on Foreign Direct Investment of leaving the EU. As FDI is defined as the ownership of 10% of equity or more, FDI conflates two different things, a change of ownership via overseas acquisition of equity and actual fixed capital investment.

The UK economy is in precarious position, with a record current account deficit. FDI inflows offset that, and without it living standards would immediately fall even further. This would be expressed as a further slump in the currency and rising long-term interest rates. 

This is a run-down of UK assets to finance UK consumption that exceeds UK production. It is only possible to begin to reverse that with actual fixed capital investment to raise production. 

However, Brexit itself makes this both less likely and less effective. Private sector investment becomes less likely with Brexit because investment is driven by returns, the key factors being the size and growth of the target market. Outside the EU, the UK economy is a far smaller market than a component of the Single Market. It will also experience slower growth. 

All UK investment also becomes less effective outside the EU. As Adam Smith demonstrated long ago the effectiveness of investment is determined by the size and scope of the market, including, but not confined to well-known factors such as ‘economies of scale’. As the size of the market in which the UK can operate is restricted, the efficiency of investment declines.

As a result, of the two main scenarios outlined by the Economists for Brexit makes little sense, while the UK Treasury analysis underestimates the long-term effects of leaving the EU. Things are likely to be worse than they suggest.

No ‘People’s Brexit’

It would be possible to overcome all of these negative factors if investment were to rise by a large factor. But as we have seen private sector investment will fall.

In effect, in order to offset these negative effects public sector net investment would need to both replace reduced private sector investment and increase the aggregate total to compensate for the lower efficiency of investment outside the EU. From about 1.5% of GDP, public sector net investment would have to rise to something like 20% of GDP. This is not a realistic possibility in the current economic and political circumstances in Britain.

All likely and realistic Brexit scenarios entail a significant diminution in the living standards of the population. This will include rising prices and lower real incomes, job losses especially in manufacturing and high value-added sectors as well as cuts to public services as government finances deteriorate. The Tory government over 6 years has not been able to generate popular enthusiasm for policies that have led to falling living standards. It has deliberately fostered racism, Islamophobia and xenophobia as a distraction, with some effect.

Labour cannot possibly stand on this ground. Aside from the moral bankruptcy and the economic illiteracy this would entail, it could prove fatal. The Tory party can and does subsist on promoting reaction. Labour would risk annihilation as its natural supporters, who overwhelmingly voted Remain, deserted it in droves.

The arguments used to support a ‘Lexit’ are spurious and misleading. Overseas workers cannot possibly drive down wages as on average they are more highly paid then UK workers. They are net contributors to public services, not a drain on them. They are not taking anyone’s jobs; record levels of immigrant numbers coincide with record low unemployment. 

There is no prospect of better protections for workers, greater environmental protections, better health and safety rules under any likely Brexit government. Unwilling to increase public investment to the required level, they will tolerate or even foster a race to the bottom. It is impossible to fight neoliberalism via Brexit. The UK will become an archetype of neoliberalism.

More technical arguments that, for example, EU state aid rules prevent a radical programme of nationalisation are equally spurious. Jeremy Corbyn and John McDonnell do not propose a large-scale programme of nationalisation, for very good reason. There are not the spare funds to purchase the equity of the energy, transport, building and other firms and the banks. And the political situation simply does not allow any nationalisation without compensation. It would just be posturing to suggest that court orders ruling in favour of private property rights would be overturned or physical seizures of property take place.

The limited retrieval of the rail franchises as they fall back into public hands that is planned is realistic and would not at all contravene EU state aid rules. On the contrary, after the Brexit vote the UK is now set to hand out state aid to major manufacturers simply to keep them here.

Conclusion

In the concrete circumstances of the UK economy Brexit can only lead to a fall in living standards. Prices will be higher, real incomes lower, and living standards will fall. All political forces who wish to raise living standards will have to fight against it, or overturn it if necessary. There can be no idea of embracing Brexit as a road to prosperity. That is an impossibility in the actual circumstances of British politics and the British economy.