I have been doing some research on Brexit. I vowed to stay clear of the topic because of all the stupidity surrounding it from both sides, but most galling are the Labour Remainers who think the European Union is some sort of nirvana (with a few problems) and is on the road to redemption through some amorphous ‘reform’ process. Pigs might fly! I mentioned the recent publication by Open Britain (January 30, 2018) – Busting the Lexit Myths – in yesterday’s blog. This document seeks to state the case for British Labour’s “Campaign for the Single Market”. The ‘single market’ is held out as some sort of security blanket for all and sundry. Without it, Britain will apparently lapse into a state where the government will be unable to maintain services, where “genetically modified foods, chlorinated chicken, and access to procurement of protected sectors like healthcare” overwhelm the local economy, where environmental and working standards disappear and that hapless island floats off into a shocking dystopia. It is really the stuff of fantasy. But the image it evokes of the confidence in British democratic systems and its own capacity for volition is quite stunning. Without the EU, Britain becomes hapless. You laugh then cry. Pathetic.
Single European Act 1986
In 1986, Jacques Delors as the President of the European Commission, pushed through the – Single European Act – which was the “first major revision of the 1957 Treaty of Rome” and proposed to establish a single market within the European Union by December 31, 1992.
You can think of the SEA as being the neoliberalisation of the existing Treaty governing Europe, which had been developed in a prior ideological climate based on Keynesian economics.
The aim of the SEA was to reform the ‘Common Market’ to ensure that free trade in theory meant free trade in practice.
It also aimed at improving the speed of decision-making in the EEC (by implementing qualified majorities for certain Council decisions) and empowering the European Parliament.
Notably, the unanimity rules and the veto powers were maintained for many matters relating to economic and monetary policy, although what issues were demarcated in this way was unclear and legally contestable.
As expected, the process was controversial with strident disagreement about how much power to give the European Parliament. The Commission certainly did not want an outbreak of democracy to interrupt their neoliberal putsch.
An important component of the SEA was the elimination of capital controls, which were seen as being anti-market. It escaped attention that these controls were the major reason that the European Monetary System had achieved any sense of stability in the 1980s after a succession of currency crises.
It didn’t take long after the SEA was made operations for the crises to reemerge – but by then Maastricht was the flavour and there was no stopping the European Commission in its headlong neoliberal push to introduce a common currency and stifle the capacity of the Member States to seek prosperity in their own terms.
The neo-liberal narrative at the time claimed that as the economic interdependence between nations increased this required a ‘hollowing out’ of the state, which was code for transferring resources into the hands of financial and other elites via privatisation, and labour market and financial deregulation.
These changes are combined with a reduction in democratic oversight that arises from reducing the flexibility of fiscal policy and increasing the ‘independence’ of the monetary authority.
Enter the – European Single Market – which is a logical extension of the dominance of neoliberals in the European Commission.
It is meant to “drive further integration” via “a seamless, single market”.
The European Commission claim that (Source)
… the Single Market has brought tremendous benefits for European citizens and businesses
In 1996, the European Commission put out a press release (October 30, 1996) – The Single Market is Proving Effective, But Additional Efforts are needed – Commission Agrees Action Plan.
In a related document – the European Commission claimed that:
1. “Numerous examples of the benefits of the Single Market have been identified by the studies and surveys undertaken for the Commission”.
The Commission is highly selective in who they hire to do these sorts of studies.
2. “Community GDP in 1994 was 1.1% to 1.5% higher than it would have been without the Single Market …”
3. “Convergence – the levels of national income of a majority of Member States on the Community’s periphery have converged towards the Community average … Analysis shows that the Single Market has had a specific positive impact on convergence.
Please read my blog (January 29, 2018) – IMF finds the Eurozone has failed at the most elemental level – for more discussion on this point and for evidence of increased divergence rather than convergence.
4. “Labour productivity improvements have been greatest in manufacturing sectors most sensitive to the Single Market, where productivity increased by 14% over the period 1986-91 compared to 7.5% for other sectors.”
We could go on.
The recent publication by Open Britain (January 30, 2018) – Busting the Lexit Myths … collaboration with Europe as the best means of raising prosperity, promoting equality and protecting people and the planet against the worst impacts of globalisation …
They seem to think that the ‘single market’ has delivered better outcomes for the Member States than otherwise.
They quote dubious research (NIESR) which concluded that “the further Britain travels from the Single Market, the greater the economic loss.”
Apparently, leaving the ‘single market’ will mean:
… lower productivity and lower living standards.
Well we can look at that point directly.
In March 2015, a Bruegel Working Paper (2015/01) – The Long Road Towards the European Single Market – presented an interesting graph (see Figure 2).
The authors say that:
… when evaluating whether the single market has been hitherto a successful policy, one has to bear in mind the ultimate channel through which it was supposed to boost growth and welfare in the EU: productivity.
Figure 2 … provides a long-term comparison between the EU15 and the US in terms of GDP per hour worked (one of the many possible measures of labour productivity) and GDP per capita.
GDP per capita is a measure of material living standards and we would expect it to rise over time.
The authors conclude that “Europe did not effectively embrace the ICT revolution” and:
More generally, the SMP did not manage to roll back this trend and, since productivity started eroding vis-à-vis the US in the late 1990s, per-capita GDP has stabilised at around 70 percent of the American level.
With this in mind, it seems the impact of the single market on productivity and hence growth can be considered somewhat more muted than originally expected.
They also note that the plethora of European Commission (and other pro-EU) studies of the impact of the single market on growth have produced a “significant mismatch” relative to what the evidence subsequently told us had occurred.
In other words, the optimistic estimates in the early days leading into the single market were over the top.
To update their analysis, I examined the – Total Economy Database – compiled by the US Conference Board – which provides a consistent dataset back to the 1950 on a range of indicators, some of which have been touted in the Brexit debate.
Specifically, the – Output, Labor, and Labor Productivity, 1950-2017 – contains “time series data on Gross Domestic Product (GDP), Population, Employment, Total Hours Worked, Per Capita Income and Labor Productivity (measured as GDP per Person Employed and GDP per Hour Worked).”
What this allows us to do is assemble some interesting indicators which shed light on EU trends under a single market.
The following graph replicates the Bruegel Figure 2 mentioned above but updates it to 2017. The comparison with the US was based on the claim that the US represents the sort of free (single) market that the European Union aspired to replicate. The US states being currency-users and separate legislatures similar to the European Member States.
The EU15 comprised the following 15 countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom.
The vertical green line denotes the introduction of the ‘single market’.
So if the ‘single market’ has been a great success in lieu of the alternative, then the alternative must have been pretty dire indeed.
There is very little proof that the ‘single market’ has improved the relative performance of the EU15 economies against the US, the exemplar of a ‘single market’.
Now that does not mean that there have not been absolute gains. The point is that the dramatic shift that marked the introduction of the ‘single market’ has worsened the relative position of the EU15 against the US (and Japan, by the way) by not maintaining the closure that was occurring pre-single market.
In fact the neoliberal period brought a stop to that progress.
And despite all the studies that the European Commission and the Europhiles beyond like to wheel out which purport to show that the ‘single market’ has delivered on all its expectations, the fact is that the evidence base for that confidence is very thin indeed and mostly ambiguous.
A Working Paper by the European Centre for International Political Economy (01/2016) – What is Wrong with the Single Market? – is sympathetic to the idea of the ‘single market’ but even then concluded that:
Today’s European Union is a good distance from its founding freedoms – the freedom of goods, services, capital and people to cross borders …
The European economy is embedded in a global economy, and periods of rapid structural change a ect Europe, but the shape and profile of those changes are often determined by Member State policies at home and what instructions they give for economic behavior …
Single Market reforms have become victims of the piecemeal approach to reform … What they have created, however, is such a complex web of regulations, administrative rules, national discretion, and partial freedoms to cross-border exchange that the Single Market itself is not possible to grasp and that it is riddled with uncertainty …
Europe’s Single Market history of partial liberalisation has reduced the potential gains from its own reforms …
The EU is an amalgam of different cultures. The market is, therefore, quite diverse culturally, linguistically, and follow general divisions between policy and government in Europe. Consumer and voter attitudes and expectations among the Member States are reflected in the policy approaches taken by the national governments, and they are sometimes difficult to succumb … Some Member States’ policies are protective of their businesses and do not necessarily support the Single Market. Their policies may occasionally, if not often, hamper the outcome of the SMP in situations where barriers have been removed.
The nation state remains intact despite the desire by the IMF, the European Commission and other bodies to neuter it.
The paper which is a good summary of the extant literature on this topic goes through a number of aspects where the ‘single market’ has impacted.
The conclusion is that all the enthusiasm in the Brexit debate by the Remainers for the ‘single market’ is not based on evidence. They cannot say that Britain is better off in the ‘single market’ because the ‘single market’ doesn’t exist.
It is another example of creating an ideal and then using it as if it exists to analyse decisions and options.
It is like economists holding out the perfectly competitive market as a baseline when it cannot exist and trying to move towards the idealisation will likely cause more damage than to ignore it.
Please read my blog – Defunct but still dominant and dangerous (July 23, 2010) – where I introduced the Theory of Second Best, which is a refutation of mainstream economic theory.
It was introduced to the literature in 1956 and says that if all the assumptions of the mainstream theory do not hold then trying to apply the results of the theory is likely to make things worse not better. So “if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the ones that are usually assumed to be optimal” (Source).
So by trying to chase a ‘single market’ (the neoliberal optimal) when it, in fact, does not exist is not likely to deliver the best outcomes.
I will write more about that in due course.
The myths that British Labour has to move beyond
Apart from the almost deification of the neoliberal single market, the Open Britain document is so full of macroeconomic falsehoods that it makes a mockery of its title – “Busting the Lexit Myths”.
It is clear who needs “busting”.
1. “in normal times, governments finance their spending by borrowing instead of taxation” – the correct statement would be – under current (neoliberal) institutional arrangements, governments match their spending in excess of taxation with borrowing.
Further, the document claims that the Stability and Growth Pact rules:
… allow governments the flexibilty to deliberately spend in a Keynesian manner during a recession and to invest.
Tell that to Greece.
And haven’t they seen the dramatic drop in public investment ratios since the austerity bite was imposed.
The rules are biased against flexibility. They are anti-Keynesian.
Had the rules allowed such flexibility then the Eurozone Member States would have kept growth after 2009 in line with the US and other nations that allowed their deficits to support the non-government sector desire to save more.
The only reason that the UK double-dipped was that Cameron and Osborne followed the Eurozone into austerity oblivion.
2. “an ageing population means that we need more tax revenue just to maintain existing public services” – Neoliberal 101.
The UK government does not need more tax revenue to spend more on anything unless it is at full capacity and needs to squeeze non-government purchasing power to free up the real resources that the non-government sector would otherwise command through its spending.
3. “Leaving the Single Market would mean our public finances and, therefore our public services, going in the wrong direction”.
What direction is that?
This followed the previous claim that the tax revenue would dry up.
A rising fiscal deficit is neither good nor bad. It all depends on the saving and spending desires of the non-government sector and the state of capacity utilisation.
A rising deficit associated with a growing economy and full employment with stable prices is to be desired.
4. “Couldn’t we just borrow more money? With an independent central bank and low interest rates it would technically be possible to borrow more money to pay for increased spending on public services and social security.”
The UK government ‘technically’ does not even have to borrow. That is a neoliberal presumption and it is time these Labour MPs realised that.
The capacity of the UK government to spend has nothing to do with the level of interest rates that the central bank can set.
5. “However, it would be politically difficult to do this under the Labour Party’s new fiscal rule”.
Scrap the rule.
This is about as lame as it gets.
It is equivalent to the following logic:
I can spend when I like and I should when non-government spending is low but I won’t because I have voluntarily imposed a rule that I cannot spend when I like.
The author seems to eulogise the ‘fiscal rule’ – and it doesn’t get much lamer than that.
Even the politics doesn’t seem to add up any more.
There was some very interesting research released this week by the US Pew Research Center (January 25, 2018) – Economic Issues Decline Among Public’s Policy Priorities – which showed that Americans want the government to keep “strengthening the economy continues to rank among the public’s leading priorities (71% top priority), along with defending against terrorism (73%) and improving the educational system (72%).”
They also found that:
Reducing the budget deficit also has declined among the public’s policy priorities. Currently, just 48% say cutting the deficit should be a top policy priority for the president and Congress, down from 63% in 2014. A year earlier, in 2013, the share citing the deficit as a top priority was high as at any point in the past two decades (72%).
“Then you better start swimmin’
Or you’ll sink like a stone
For the times they are a-changin’.”
The British Labour Remainers should realise that the ‘fiscal deficit’ hysteria is passing. Both sides of politics should stop trying to fan the fears.
More people are getting wiser about these matters.
So if a voluntarily imposed fiscal rule gets in the road of responsible policy then the solution is not blind obedience and to wheel it out as some sort of self-flaggelation device.
The solution is obvious – Scrap the stupid, meaningless rule.
The Author (Catherine West) goes on to say: “Austerity is a political choice”:
It is possible to both leave the Single Market and not cut public services. But it is not possible to do this without increased borrowing or higher taxes than originally planned in the 2017 manifesto.
Political choices are not “Écrit dans le marbre” (to quote Mario Draghi at his Press Conference (January 25, 2018)).
Another author claims that Brexit will kill the NHS in Britain because there will be “less money, an exacerbated staff crisis, poorer working conditions and broken healthcare bonds with the continent”.
The evidence for that claim is very weak.
The British government has all the cash it needs to provision the NHS to provide best practice health care. To think otherwise is to fall into the neoliberal ‘the government has run out of money’ myth.
Another ‘Buster’ falling into ‘myth’ himself.
The NHS problem is political and internal to Britain. Neoliberal fiscal myths and a desire by private health providers to get their hands on an ever-increasing share of the health cake.
That has nothing to do with the EU membership and leaving the EU will not change that.
Also, apparently, Britain is incapable of building cross-border research relationships if it is outside the EU. Come down to Australia and I will show you how to nurture cross-border, international research relationships.
You need, ah … let me think … an E-mail account, perhaps a FaceTime account if you use Apple, … oh, yes, sometimes a telephone helps, especially a mobile so you can keep in touch when travelling … what else … not much.
Another Open Britain author claimed that:
We would not have seen the progress that we have in the fight against exploitation and discrimination in the workplace were it not for Britain’s membership of the European Union.
How do we know that?
Haven’t the British people any volition.
Australia is not a member of the EU and we have seen similar developments.
The author admits that “it is true to say that in some areas the UK already had laws in place, such as on equal pay and maternity rights” – see volition.
The author holds out French President Macron as an example of how the EU is intent on protecting workers’ rights. Excuse me? Is this the same President Macron that is systematically attempting to ‘race-to-the-bottom’ by signing the new labour code, which gives employers more power to cut wages and makes it easier to sack workers.
The trade unions are aghast at these shifts in French policy.
The policy changes increase job insecurity, will see pay cut and more capricious redundancies.
Workers will also not be able to claim as much for unfair dismissals.
The most recent changes build on the pernicious – El Khomri Law – or the Loi Travail, which became operational on August 9, 2016.
Macron was a principle supporter of the Law, which cut pay, streamlined redundancies in favour of the bosses, reduced unfair dismissal payouts and more.
The Open Britain author (Sarah Veale) seems to be acting like an ostrich on a beach (head in sand):
There is now significant support behind President Macron’s proposals, which if enacted will protect against ‘social dumping’ and mean fairer conditions and wages for all workers within the Single Market.
This is totally false.
El Khomri and Macron’s latest changes undermine workers’ conditions and rights. The French trade unions are totally opposed to the legal changes.
The lack of confidence in the British democracy is quite stunning:
If the UK leaves the Single Market, that safety net is removed and there is therefore very little protection from future governments who might decide to water-down, salami-slice or otherwise ‘amend’ workers’ rights and protections in this country.
The protection is democracy and the voting box!
I could go on.
Another author, Lord (John) Monks, is a former trade union boss now a pompous House of Lords member. What is it with these British labour types who were born in humble circumstances but accept these baronets and stuff?
He claims that British trade is ruled by the ‘gravity rule’, which says that “bilateral trade between two countries is proportional to size, measured by GDP, and inversely proportional to the geographic distance between them”. He cites the fact that “Australia accounts for just 1.7% of UK exports” as evidence of this.
I wrote about the impacts on Commonwealth trade when Britain entered the Common Market in 1973 in this blog – Britain doesn’t appear to be collapsing as a result of Brexit (December 13, 2017).
There was a dramatic shift in Australian major export markets as Britain entered the Common Market. It was nothing at all to do with ‘gravity’ (distance) but a political realignment and a decision by Britain to enter a customs union with tariff walls.
Further, there has been a large shift in British export markets since 1999 away from the EU.
As I demonstrated, the share of UK exports that go to other EU countries was 54.6 per cent in 1999. By 2016, the proportion was just 43.1 per cent.
Further, while 43.1 per cent is still a significant proportion, the result is overstated because it includes goods shipped through the port of Rotterdam, which are bound for non-EU nations, but are recorded as going to the EU.
Monks posits a sort of dystopian post-Brexit world, where Britain is flooded with “genetically modified foods, chlorinated chicken, and access to procurement of protected sectors like healthcare” because President Trump will force “‘America First’ protectionism” onto the hapless British public.
Laugh before you cry.
The picture these authors paint of the British government capacity is amazingly depressing.
Hapless, without volition, open to the vicissitudes of flagrant politicians abroad, not being able to resist those who want to do it economic harm, without a penny to spend of its own, without a choice.
Only protected by the wisdom and rules from Brussels.
These Labour MPs should have their nominations withdrawn by their party members before the next election and new more progressive (economically) candidates put forward.
Except Lord Monks – he has a life peerage courtesy of all people, David Cameron. The British are stuck with him for the duration.
MMT University Logo competition
I am launching a competition among budding graphical designers out there to design a logo and branding for the MMT University, which we hope will start offering courses in October 2018.
The prize for the best logo will be personal status only and the knowledge that you are helping a worthwhile (not-for-profit) endeavour.
The conditions are simple.
Submit your design to me via E-mail.
A small group of unnamed panelists will select the preferred logo. We might not select any of those submitted.
It should be predominantly blue in colour scheme. It should include a stand-alone logo and a banner to head the WWW presence.
By submitting it you forgo any commercial rights to the logo and branding. In turn, we will only use the work for the MMT University initiative. It will be a truly open source contribution.
The contest closes at the end of March 2018.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.