Thursday, June 30, 2016

The Brexit Ponzi scheme

The shockwaves unleashed by the financial crisis of the late 2000s have finally swept away the established political and economic order of the UK. It took some time coming, but it turned out that neoliberalism isn't so resilient after all. This vote is a sweeping challenge to the model of open markets and deregulated finance that has governed us since the 1980s.

The problem is, the challenge is based on a fantasy. Brexit is a classic catch-all concept, that can mean almost anything. The basic appeal of the Brexit campaign was the notion of 'taking back control', which of course contrasts with the essential logic of the market economy, where nobody has control, and resources (including labour, ie people) are allocated in accordance with the signals we send when we buy and sell things. By 'taking back control', we supposedly allow ourselves to stop things happening that we don't like and that we feel we cannot choose to opt out of: immigration, externally imposed rules, competition for scarce resources such as housing, jobs, doctors' appointments, and so on.

These things are in large part incompatible or simply impossible, but the 'leave' campaign very successfully escaped any real scrutiny on how they were supposed to be delivered simply by leaving the European Union. Voters flocked to the stall offering free goodies.

This reminds me a lot of one the iconic events of the 2008 financial crisis: the collapse of Bernie Madoff's Ponzi scheme. As is well known, Madoff ran a massive, but strangely under the radar, hedge fund that offered remarkably consistent returns for investors, and grew to a colossal size, but which turned out to be a fraud. Madoff's returns were not profits from smart trading, but instead simply slices of the funds new investors provided, doled out to existing investors. When the credit crunch hit in autumn 2008, some investors were forced to pull out, and the flow of new entrants dried up. By December, Madoff no longer had the funds to pay off investors who wanted to cash out, and the game was up. The investors' capital, supposedly invested in various profitable assets, did not actually exist - it had been paid out in fictitious profits, and spent by Madoff himself in running the operation and making a pile of his own.

The basic structure of a Ponzi scheme is that people are persuaded of something that is too good to be true, and as more and more people pile in, the better it looks, encouraging others to suspend disbelief. Until something happens, the flow of new gullible 'marks' dries up, and the reality hits home: you've been had. The same logic drives the development of 'bubbles' in asset markets: valuations are hyped for some apparently plausible reason, more people pile into the market, thus validating the hype, and then at some point reality bites and it comes crashing down.

What happens next is that people get mad. Mad at themselves, yes, for falling for a scam. Definitely mad at the scammer, for stealing their money. But also mad at the authorities, for allowing it to happen. After the Madoff scam was revealed, officials from the SEC (Securities and Exchange Commission) were hauled before Congress and subjected to humiliating questioning as to why they did not see a gigantic multi-billion dollar fraud happening under their noses.

Who should we get mad at when Brexit fails to deliver the nirvana of low immigration, more spending on public services, and the freedom of the UK government to ignore the rules set by its main trading partners? This is what is worrying me. The authorities, of course, gave very clear warnings in this case: they were ignored, dismissed as out of touch 'experts'. Yet they may well be proved right in the end. How will Brexiters react?

My fear is they will cry 'betrayal', especially since powerful forces in the UK political economy will be trying desperately hard to stop Brexit actually happening, for the most part for good reasons. And betrayal is not a concept associated with the mainstream political centre. It is the language of violent extremism. We will not see the end of UKIP even if its dream of a UK outside Europe comes to pass. The poverty, stagnation and decline that is likely to result will stoke more fear and loathing. Will Farage, like Madoff, be the target of our wrath? Probably not. Instead the grown-ups in the room forced to deal with the consequences will be the first to be blamed.

Ponzi schemes in politics last until they have to confront reality, but given the very real constraints on political votes shaping political reality, they can survive for a long time before actually having to pay out. As with Trump in the US, the only true way to convince the punters that Brexit is a disaster is to allow it to happen. And at that point, the scheme brings down the rest of us with it.

Tuesday, June 28, 2016

Let's do it again some time: Voters' remorse and the case for a second referendum (at some point...)

So, it happened. The great British public, in its wisdom, has chosen to leave the European Union. Despite all the warnings of economic chaos and the costs of losing our rights to live, work and trade in the largest market in the world, a majority of British voters decided that it was a risk worth taking. Almost immediately, the markets set about proving that the dire warnings of the consequences of Brexit were not just scaremongering. As I write, the pound is down 10% on its already diminished value of last week, and the political chaos ensuing at Westminster is if anything worse than predicted. Planned investments are being put on hold, deals cancelled. We have a lame duck executive, and total confusion as to how and when we will leave the EU, and what kind of relationship we will have afterwards with the rest of what remains our continent.

This raises the question: did British voters really want all this? If so, the 52% who voted leave must have a remarkable taste for risk, an obsession with the abstract principle of sovereignty, or a masochistic desire to see their country become poorer. Or simply such a degree of discomfort with current levels of immigration that any price is worth paying to reduce it. This seems implausible. The same electorate, last year, rewarded a Conservative party that nailed its colours to the mast of economic stability and fiscal prudence. Now, we have opted for the opposite. Growth forecasts are revised down, the Bank of England has prepared emergency measures to help stabilize the banking system, and the ratings agencies have downgraded UK government debt. And it's only Tuesday.

It seems much more likely that many voters simply did not believe the warnings that Brexit would make us poorer. And why should they? Fully understanding the complex workings of a modern market economy embedded in a global context is beyond the abilities of even our finest academic specialists, who notoriously failed to foresee the great financial crisis of 2007-8. The economic models most voters have in their heads are at best extraordinarily crude, and in most cases almost non-existent. Given such intellectual uncertainty, voters could either take on trust the statements of a rather alien group of distant technocratic elites with a patchy track record, or go with their guts. The latter was even more likely given that leave voters disproportionately did not expect their side to win.

However, the economic downturn already emerging is likely to encourage a rapid updating of many voters' views. In much the same way as inveterate smokers can ignore the widely available medical advice on tobacco yet only give up their habit at the first real signs of damage to their health, the economic consequences will almost certainly change minds. Sure, many Brexiters will remain convinced they made the right choice, responding to cognitive dissonance by clutching at whatever consistent narrative they can to make sense of it all (a recession was coming anyway, or was caused by the failure to remove the foreigners quickly enough, or by our embittered European neighbours sabotaging our economy in revenge... the headlines write themselves). But the most exposed will surely begin to wonder if they made the right choice. Given a second chance, they may vote to remain, if a vote is held before full withdrawal takes place.

This raises a broader issue about democracy. After losing the vote, Remainers (including myself) took to social media to broadcast their anger, frustration and bitterness, often belittling the intellect of the leavers. Many insisted a second referendum should be held, because of the egregious lies told by some of the leaders of the Leave campaign. Leavers (or at least the politer ones) insisted that democracy means accepting the result, even when it goes against you. But there is a serious democratic case for a second referendum.

A vote is in part a choice under uncertainty, based on the expected utility of the policy chosen. It appears that many voters felt that the choice of leaving the European Union would reduce immigration and/or enhance British sovereignty, with relatively bearable economic costs. But it may well turn out to be the case that the costs are unbearable, perhaps especially for many lower income supporters of Brexit.  Put another way, they made a mistake. They were warned of that mistake, but made it anyway, perhaps swayed by the well-funded propaganda machine convincing them that Brexit would work in their interests. They should be given a chance to reverse that decision, if evidence emerges of a significant number of voters changing their view (perhaps through a general election, a likely scenario given current chaos).

Would this be undemocratic? Referendums are notoriously blunt instruments of democracy. They reduce complex questions to a binary choice, and unlike other votes, offer no chance to revise our choice in the light of new information. When we elect a parliament in general elections, we do so on the basis of the concept of parliamentary sovereignty, which means, amongst other things, that 'no parliament can bind its successor'. This is the very opposite of the logic of the democratic vote as one-off, irreversible decision. And, in the case of the European Union, it is worth recalling, this is already the second referendum we have held. The reasons for holding a second vote were ostensibly that the European project has changed dramatically since 1975, when we first voted on membership. In other words, we chose to change our minds in the light of new information.

So there is a case for holding another vote (probably on a new arrangement, such as the 'Norway option', rather than on EU membership itself). The problem is that it is hard to imagine doing so quickly, since that would obviously subvert the people's choice. The evidence of serious damage to the national interest must be allowed to pile up. But some of the direct consequences of voting to leave last week could well be irreversible. Choices to move production out of the UK to retain access to the single market, individual decisions to leave the UK to work elsewhere, long term investment decisions that can only be made once, not to mention the destruction of trust in relationships with other countries' governments, are unlikely to be rewound even if we do change our minds. It is perfectly possible that we have already done ourselves permanent and irreparable damage. Like the smoker, we had to suffer the heart attack before we took the medical advice seriously.


Friday, June 3, 2016

Brexit, Sovereignty and the Market

The current EU referendum campaign in the UK is probably no political theorist's ideal of how democracy should work. The debate has been suffused with at best tendentious interpretations of how the EU works and the likely consequences of leaving, at worst with outright lying. Somewhere in the middle there is a copious amount of bullshit, as politicians and voters try to make sense of things they do not understand, give up, and resort to meaningless and often contradictory verbiage. In short, Habermas must be tearing his hair out.

There are plenty of good reasons why most people misunderstand, or know next to nothing, about the EU. Most of what it does is dry, technical and frankly boring. It makes little attempt to engage with the citizens who will experience its decisions, and national level politicians have little incentive to improve citizens' understanding, given their propensity to use the EU to deflect the blame for national problems. But I submit there is a more fundamental reason why the EU is so ill understood, and that is to do with our understanding of political economy - how politics and markets interact and constitute each other - more generally.

The EU is primarily a market. The key founding principles which Brexiters are most concerned about are its 'four freedoms', and in particular the freedom of movement of people (very few seem bothered about movements of capital, goods and services). These are constitutive of the European single market, and inform a body of legislation whose purpose is to ensure that national governments cannot subvert the market by introducing protectionist measures that will undermine competition, usually to the benefit of national producer interests. EU rules are pretty much all about doing this, and establishing common minimum standards so that competition does not lead to nefarious social consequences such as risks to workers' and consumers' health, fraud, pollution and so on. Its interventions in social policy are pretty limited, except in that discrimination in social provision on the grounds of nationality is outlawed.

Because the EU is all about freeing up markets from protectionist rules, it is actually far less threatening to the UK government's autonomy than that of other governments, because our political economy is already built on rules to facilitate the operation of market forces. Worker protection is amongst the lowest in Europe, and this is one of the reasons why the UK is an attractive destination for economic migration: our labour market is very open, particularly to workers who are prepared to work for low wages. Hiring and firing rules are very loose, unions are weak and worker organization actively discouraged, there are no automatic wage indexation arrangements, and welfare provision is not very generous by European standards. So if EU rules are so consistent with the UK's own institutions, why is there such hostility towards the EU?

The Brexit movement, and in particular that element of it that is concerned primarily with migration, is - usually implicitly - in fact demanding constraints on the market. Even the use of the term 'sovereignty' reveals that the power of the government of a nation state to regulate social life in whatever way it chooses is a value to be protected from outside interference. Unfettered market forces produce uncontrollable movements of money, goods, services and people across borders. Sovereignty is the right to put brakes on those movements. It is the right to curb, control or even suppress the market.

There is a deep contradiction within the Brexit campaign, and that is the contradiction between those who - for reasons of ignorance or ideology - argue that the EU is a restraint on free trade and the market, and those who - sometimes without realizing it - demand that our government protects us from unfettered markets. Brexiters who argue that uncontrolled migration makes Britons poorer are in effect demanding labour market protections to replace those that were removed by their heroine Margaret Thatcher. Thatcher herself, of course, encountered this contradiction in the late 1980s, when realizing that the single European market she had initially championed brought with it the need to regulate economic activity at the European level, thus undermining British 'sovereignty'.

Faced with this contradiction, even Thatcher's love of free markets ceded to the greater value of national autonomy. The Brexiters in the Conservative Party are banging their heads against the same contradiction today. The resulting confusion is not edifying, and the Leave campaign's intellectual case is embarrassingly thin. In her Bruges speech, Thatcher famously said 'We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level'. Since then, the EU has been rolling back the frontiers of the state across Europe. Ironically, her successors on the Tory right now want them re-imposed at the national level, in the form of migration controls. But there appears to be no way of doing this without renouncing full access to the European single market, which would restrict Britain's ability to trade.

This confusion gives rise to the utopian, if not entirely fanciful, nature of much of the Brexit discourse, and explains why few credible intellectuals have offered their support. However, western publics are in the mood for a nostalgic form of utopia, as can be seen in the US, Austria, France and many other countries where far-right nativism is taking off. Betting markets suggest Remain will win, but Brexit is far from impossible. What is impossible is squaring the circle between free markets and the closure of borders.