Monday, 28 November 2016

Brexit, trade and echoes of the past


Brexit supporters have been severely critical of the OBR for its grim outlook for the UK post Brexit. The OBR is by no means the most negative of the professional forecasting bodies, and historically its forecasts have tended to err on the side of optimism, as Duncan Weldon observes. But it struggles to find anything good to say about post-Brexit Britain. In particular, it is distinctly negative about the future for Britain's external trade.

Brexit is above all a shock to trade, since its primary impact will be on Britain's trading relationships, not only with the EU but with other countries too. At present, we have no real idea what these will look like once the UK has left the EU. The OBR is therefore forecasting under extreme uncertainty. If there is one thing we can be sure of when forecasting under extreme uncertainty, it is that the forecasts are even more likely than usual to be wrong. This does not indicate that the forecasters are biased. It just means they have little reliable information.

Because of the lack of clarity about the future, the OBR has applied three conditioning assumptions to its forecasts:

• the UK leaves the EU in April 2019 – two years after the date by which the Prime Minister has stated that Article 50 will be invoked
• the negotiation of new trading arrangements with the EU and others slows the pace of import and export growth for the next 10 years
• the UK adopts a tighter migration regime than that currently in place, but not sufficiently tight to reduce net inward migration to the desired ‘tens of thousands’.

For the purposes of this post, the second of these is the most significant. It is also the most controversial. The pro-Brexit group "Economists for Brexit" disagree with it. They think that when the UK leaves the EU - assuming that the government adopts their preferred unilateral free trade model - there will be a substantial boost to trade which will flow through to higher incomes and sustained GDP growth:

The OBR's forecast is substantially more gloomy:


The difference primarily arises from the fact that the OBR doesn't assume a consumer demand boost from unilateral abandonment of trade tariffs. In fact its underlying assumption is that trade tariffs rise, as leaving the EU exposes the UK to higher trade barriers in Europe, free trade deals take time to establish, and the UK is likely to apply (at least) WTO MFN tariffs to trade that was previously free. This is the primary cause of the contraction in gross trade evident in the greyed area of this chart:

However, it is not the only cause. Brexit will be implemented against the background of contracting global trade and rising protectionism. This is likely to hamper the UK's quest for new export markets considerably. The OBR forecasts that by 2020, gross trade will be lower than it was in the 2007-8 financial crisis.

The worsening global trade outlook also seriously calls into question the assumptions made by Economists for Brexit regarding the economic effect of unilaterally abandoning trade tariffs. Positioning the UK as a beacon of free trade for the rest of the world is hardly likely to be an effective strategy for growth if the rest of the world is sticking two fingers up to free trade. When everyone wants to export and no-one wants to import, the country that unilaterally opens its doors to imports is inevitably flooded and its own supply side is crowded out. So UK businesses would face stiff competition from imports in addition to tariffs and other trade barriers for their exports. Economists for Brexit heroically assume that this would be entirely offset by improved export competitiveness from sustained sterling depreciation. But when a consumer boom from cheap imports is combined with challenging supply-side conditions which are resistant to the stimulus of a lower exchange rate (as I shall explain shortly), sustained currency depreciation can have only one outcome. Inflation, here we come.

To be fair, that is what Economists for Brexit forecast. Their medium-term estimates for CPI inflation are significantly above those of the OBR. Even so, I think they are not high enough, given the difficulties UK businesses face due to the worsening trade outlook. Economists for Brexit also appear to predict a wage-price spiral, since their forecast shows much higher wage growth than the OBR's. Unsurprisingly, they forecast higher interest rates. We haven't seen this combination of inflation, wage growth, falling sterling and rising interest rates since.....well, since the Volcker Shock. In fact Economists for Brexit's forecasts could be entitled "Back to the 1970s", apart from their amazing optimism about unemployment. Maybe I am scarred by my memories of the 1970s, but I don't regard their forecast as rosy.

Sterling depreciation is a double-edged sword. It would boost exports to some extent: the OBR's chart shows a small boost to exports from this year's fall in sterling. But it would also squeeze household incomes and business profits because of inflation in essential goods, notably energy and fuel. In the oil price shock of 2011-12, households cut back discretionary spending sharply, derailing a promising recovery. They would be likely to respond in the same way to energy and fuel price rises due to sterling depreciation: they might also defer or cancel spending on other imported goods. Consequently, OBR forecasts that imports will fall.

The OBR says that the combination of falling imports and increased exports will mean net trade turns positive in 2017-18 (I have circled this on the chart). However, the implied fall in domestic demand means lower, not higher, GDP growth than would have been the case without the Brexit shock. Fortunately, the shock is short-term and the OBR says the UK will return to growth of around 2% per annum thereafter, which is consistent with the views of other professional forecasters (though not, of course, Economists for Brexit).

The UK's share of world trade has been declining for the last two decades, and this trend is unlikely to reverse. This is due to the changing structure of the world economy, and in particular the rise of China. The OBR's longer view of the UK's export market share shows that the depreciation of sterling after the Brexit vote makes little difference:


In short, there isn't going to be an "explosion of international trade", as some Brexit supporters have suggested - at least, not enough to reverse the UK's secular decline as a major trading power. The boost to net trade from sterling depreciation will be short-lived if the OBR's assumptions hold. If the UK government adopted Economists for Brexit's unilateral free trade policy, there would be a boost to imports as trade barriers were lifted, but this would also be short-lived. After that, worsening inflation, tighter monetary conditions and a difficult external trading environment would cause both imports and exports to fall, just as they do in the OBR's model. Whichever forecast you look at, the outlook for trade is indeed grim. I don't know what planet Jacob Rees-Mogg inhabits, but it isn't one I recognise.

However, the outlook for the UK's external balance is not quite so grim.  The current account deficit has been in the headlines recently because of its (considerable) size. This worries some economists because of the risk of a "sudden stop", and annoys the economic illiterates who think the UK should "pay its way" in the world. But as I have explained before, the current account deficit doesn't necessarily say anything about UK competitiveness. You have to look at the component parts to understand what is going on.

The headline current account deficit is set to shrink, as investment income switches from deficit to surplus. The current investment income deficit arises mainly from sterling's appreciation versus the Euro due to the ongoing Eurozone depression and the ECB's negative interest rate policy and QE. This chart clearly shows the switch of investment income from surplus to deficit in 2012, when the Eurocrisis hit:

Now that sterling is falling, the investment income deficit is closing even though UK interest rates are still above EU rates, since the difference is lost in the exchange rate. The OBR predicts that investment income will return to surplus by 2019, entirely due to currency effects. This is the only significant effect of sterling depreciation on the UK's external position, since the OBR forecasts that the trade deficit will remain at around 4% of GDP. Those obsessed with manufacturing and trade in goods will no doubt sniff at this, since investment income arises principally from the financial sector. But income is income, however it is obtained.

This improvement in the UK's current account balance is reflected in my favourite chart - the sectoral lending chart:



Despite the improvement in the external position, this looks awful. The OBR forecasts a sustained 2% deficit for the household sector. That means rising debt. As the household deficit is partnered by a surplus for the corporate sector and closure of the fiscal deficit, the increased debt is likely to take the form of borrowing to fund consumption. This is anything but desirable.

The OBR says that a sustained household deficit of that size is unprecedented and probably unsustainable:
The persistence of a household deficit of this size would be unprecedented in the latest available historical data, which extend back to 1987. Other datasets extending back to 1963 also suggest little evidence of a large, persistent household deficit, with the household surplus moving into negative territory in only one year between 1963 and 1987. A household deficit of the size and persistence we expect over the forecast period might be considered consistent with the unprecedented scale of the fiscal consolidation and the extremely accommodative monetary policy upon which our forecast is conditioned. It nevertheless demonstrates that the adjustment to the fiscal consolidation is subject to very significant uncertainty, and alternative adjustment paths are quite possible. 
The OBR does not specify what the "alternative adjustment paths" might be, but these are all possibilities:
  • households choose to cut spending rather than taking on more debt, causing imports to fall more than forecast and sharply reducing the external deficit. This would be likely to be associated with a sudden slowdown in GDP growth, possibly amounting to a recession (the OBR's fan chart shows recession as an outside possibility)
  • sterling continues to fall, maintaining the improvement to exports beyond 2018 and increasing the net investment income surplus, thus reducing the external deficit
  • business investment increases, pushing the corporate sector into deficit (this could be "pump-primed" by government investment)
  • the government fails to close the fiscal deficit (or decides not to)
These are not mutually exclusive, and the eventual outturn could well be some combination of all of these. What is unlikely to happen is an export miracle. We are not Germany, and this is not the 1950s. It looks uncomfortably like the early 1930s, when countries put up trade barriers and devalued their currencies to steal export share from each other. That ended really well, didn't it?

Though of course, a miracle could still happen. For if there is one thing we can be certain of, it is that forecasts made under extreme uncertainty are unusually likely to be wrong.


Related reading:

Some unpleasant trade realities
The currency effects of Brexit
The dominance of Brexit

Image is a Stewart McCrae cartoon from the 1970s satirising the Australian government's struggle to manage the economy. Gough Whitlam, Jim Cairns and Frank Crean are pictured on a raft called 'Economy'. Source: ABC News


Thursday, 24 November 2016

True patriotism



Treason is popular. As the tide of protectionism rises around the world, the concept has come back into vogue. If you believe in the right of all people, whatever their colour or creed, to seek life, liberty and happiness for themselves and their children, you are unpatriotic. I am one of many who have been labelled a "traitor" for voting Remain in the EU referendum. But I have got off lightly. The same label cost Jo Cox MP her life.

Jo was a fervent Remain supporter. She believed strongly that Britain would be better off as a member of the EU. As Thomas Mair shot and stabbed her in June 2016, shortly before the EU referendum, he shouted "This is for Britain”, “Keep Britain independent”, and “Britain First”. Political assassination? No. Execution. Treason used to be a capital offence, and Mair regarded Jo as a traitor because of her support for Remain. To him, killing Jo was an act of patriotism.

Patriotism is taking an ugly turn. We wear poppies on Armistice Day, honour those who have died in war and vow never to forget their sacrifice. But we are forgetting what their sacrifice was for.  As the two dreadful wars of the 20th century fade from living memory, the laying of wreaths and the Last Post are becoming merely empty rituals, while "patriotism" is hijacked by those who promote a creed of selfishness and brutality. The Union Jack, our symbol of unity, is adopted as their logo by groups intent on setting people of different faiths and colours against each other. Sometimes it is even displayed alongside the swastika as if we had never fought a war to end the evil of Nazism.

Christianity, too, has been forced into the service of this new patriotism. These words of Jesus feature on the website of the far-right political party Britain First (no, I'm not going to provide a link):
If the world hates you, keep in mind that it hated me first. If you belonged to the world, it would love you as its own. As it is, you do not belong to the world, but I have chosen you out of the world. That is why the world hates you.
Britain First describes itself as a "patriotic political party and street defence movement.". It is ferociously anti-immigration and has an official policy of banning Islam in the UK. Its leader famously refused to accept the election of a Muslim as London Mayor, turning his back on Sadiq Khan as he gave his acceptance speech. Shortly afterwards, it announced a campaign of "direct action" against Khan and other Muslims in elected office, saying that they would be treated as "occupiers".

For me, as a Christian, to see the words of Jesus used to justify such hatred is painful beyond belief. The Jesus I know from the Gospels famously engaged with people of despised races and faiths, to the horror of the religious establishment of his time. "We will restore Christianity as the bedrock and foundation of our national life as it has been for the last one thousand years," says the party's mission statement. No thanks. I would rather Christianity died out than such a hideous distortion become the bedrock and foundation of my country's national life.

Of course, Britain First is hardly a mainstream political party. But the hatred it spews has echoes in the UK Independence Party and even among some members of the Conservative Party. They may not express their hatred in such extreme terms, but the underlying beliefs are the same: Britain for the British, keep the foreigners out - or if we must let them in, make sure they understand they are only here under sufferance. This is a narrow-minded, borderline racist definition of "British" that denies the diversity and tolerance that is the hallmark of our open, liberal society. And it is deliberately spread by the right-wing press.

Thomas Mair's action was extreme. But the words he used came from the Daily Express, the Daily Mail, the Sun. They are the words of those who self-identify as "patriots", wave the Union Jack and call for the borders to be closed, immigrants sent "home" (even if they have lived in this country for many years), and refugees rejected.

True, the vast majority of those who describe those who disagree with their "patriotism" as "traitors" would never dream of murdering anyone. But their words incite others who have no such inhibitions. History tells us that the support of the many makes possible the violence of the few: even genocide is popular. The violent murder of Jo Cox was the misbegotten child of the verbal violence of the mass media and the right-wing "patriotic" political parties. The poison spreads, and where it takes root, it brings death.

Thomas Mair was sentenced to life imprisonment without parole for murdering Jo Cox. The judge's remarks should give us all pause for thought:
You affect to be a patriot. The words you uttered repeatedly when you killed her give lip service to that concept. Those sentiments can be legitimate and can have resonance but in your mouth, allied to your actions, they are tainted and made toxic.
It is clear from your internet and other researches that your inspiration is not love of country or your fellow citizens, it is an admiration for Nazism, and similar anti democratic white supremacist creeds where democracy and political persuasion are supplanted by violence towards and intimidation of opponents and those who, in whatever ways, are thought to be different and, for that reason, open to persecution. 
Our parents’ generation made huge sacrifices to defeat those ideas and values in the Second World War. What you did, and your admiration for those views which informed your crime, betrays the sacrifices of that generation. 
You are no patriot. By your actions you have betrayed the quintessence of our country, its adherence to parliamentary democracy.
Murdering someone in the name of Britain is not patriotic. Taking the law into your own hands is not patriotic. Branding someone a "traitor" simply for disagreeing with you is not patriotic.

Our liberal democracy is founded on the right to hold and express minority views without fear and to seek to change the opinion of the majority. And our Christian heritage, at its best, teaches concern for the poor, help for the downtrodden and a warm welcome to the stranger in our midst.

True patriots, like Jo Cox, defend the rights of minorities and promote the social values derived from our Christian heritage. The real traitors are those self-proclaimed "patriots" who seek to stifle opposition, create division and sow the seeds of violence.

Image courtesy of Brendan Cox. 

Related reading:

Austerity and the rise of populism
Grieving for a lost empire
When the world turns dark
Europe's Shame
In the bleak midwinter
When darkness falls - Pieria




Friday, 18 November 2016

Reinventing work for the future



We have a crisis of work. The secure, well-paid jobs of the past - many of them in manufacturing - are disappearing. What is replacing them is insecurity and uncertainty. Low-paid, part-time, temporary and seasonal work. The "feast or famine" of self-employment. The so-called "sharing economy", where people rent out their possessions for a pittance. The "gig economy", where people are paid performance by performance - or piece by piece. "Piecework", we used to call it. Perhaps we should rediscover this name.

Piecework has been the lot of most humans throughout history. Secure full-time jobs for wages have existed for less than a hundred years. And they were never available to everyone. In the post-war "golden age" of manufacturing to which many would like to return, most men had secure full-time jobs - but women did not. My father left school at 16 and went to work for an insurance company. He stayed with that company for his entire working life, finally retiring at 65. But my mother had a succession of part-time, low-paid jobs. Her educational level was higher than my father's, but her jobs were menial and insecure, while his was intellectual and secure. 

I have inhabited the "gig economy" for over thirty years. I listen with some amusement to the complaints of those for whom this is a wholly new way of working, since musicians and artists have always lived from performance to performance, and I have been a professional musician for half my life.  But even in my banking career, I often worked on short-term contracts, and on the odd occasion when I was employed, my job often lasted no longer than a contract. And now, as a freelance writer, I'm doing piecework.

I know what income insecurity feels like. I have experienced the embarrassment of having to borrow money from friends and family to pay essential bills, because payment for work done three months ago still has not arrived. I know how difficult it is to feed your family when you have less than £5 left in the bank and no prospect of extending your overdraft. I live with the ignominy of a wrecked credit rating because I was forced to default on a debt when a promised payment failed to arrive. True, I earn more than my mother ever did, and probably more than the majority of what Guy Standing calls the "precariat". But the problem is not the amount you earn. It is the mismatch between uncertain income and certain outgoings. 

When income is uncertain, but outgoings are certain, constant worry about where the money will come from to pay the bills eats away at the mind, destroying creativity and turning the intellect to porridge. It undermines relationships and erodes happiness. Ultimately, it wrecks physical and mental health. And yet we seem intent upon increasing income insecurity in the name of "efficiency". 

In the "dual labour markets" of Japan and southern European countries, older men have secure, skilled, well-paid jobs for life, while women and younger men have insecure, low-paid, low-skilled jobs. But in America and Britain, where labour markets are more deregulated, this distinction is fast disappearing as manufacturing jobs are outsourced to developing countries and routine skilled jobs are automated away. The labour market "reforms" beloved of institutions such as the IMF level the playing field for insecure workers not by making them more secure, but by destroying the security of those in employment. 

The scream of outrage from America's white working/middle class that led to the election of Donald Trump is to a large extent about the disappearance of men's secure, well-paid jobs and the erosion of comfortable middle-class lifestyles. And the scream is as much from women as men. Even today, despite the advancement of women's equality, many women depend on their men for financial support, especially when the children are young. They can cope with their own income insecurity if their menfolk have steady wages. Life is very tough for families when neither women nor men have certainty of income. 

Many people want to restore the secure waged jobs of the past - to resurrect manufacturing and bring back mining. So, Donald Trump promises to rescue the American coal industry. "I love those people", he cries. But just as the Luddites were wrong in the nineteenth century, those who want to turn back the clock are wrong now. Holding back technological progress by preserving the jobs and the industries of the past only creates the illusion of security - and it is not sustainable. Just as the prehistoric inhabitants of Doggerland were unable to stem the rising tide that would eventually inundate those lands, forcing the people to leave, so the tide of technology will eventually swamp all barriers. 

Robots will indeed take many of our jobs. Mind-numbing, repetitive jobs. There is a lot of that sort of work around, and we seem to like forcing people into jobs like this rather than allowing them to look for - or create - work that better suits their skills and abilities. But manufacturing no longer needs armies of drone workers on production lines, all doing the same thing day in, day out. Robots can do this far better than humans.  It is economically inefficient for humans to do jobs that could be better done by machines, and it is a shocking waste of human talent. People excel at activities that involve communication, imagination and problem-solving. They add more value to society - though not necessarily in monetary terms - in their spare time than they ever do at work. So bring on the robots, and let the humans go to the pub. That's where new ideas are generated, new connections made, new enterprises started. 

Other industries will be superseded. Renewable energy sources, for example, are fast replacing fossil fuels: Trump's beloved coal industry is already obsolete, and apart from those who work in that industry, few will regret its passing. Mining is a dangerous, dirty and degrading industry which has killed thousands of people. Why do we want to preserve an industry like this, just because it has historically provided secure jobs for men?

To my mind, the real issue here is not what jobs people do, but how they can have the security they so desperately need. If we are to embrace technological change, we need to take seriously people's need for a financial "anchor", a rock, a safe place, an income which will ensure that they can survive regardless of the work they do.  

Security of income does not have to come from work. Indeed, as work becomes ever more uncertain and insecure, more and more people will need some other sort of anchor. For the elderly, this is a state pension - yet the right to that is being eroded. For younger people, it is various forms of in-work benefits - yet the right to those, too, is being undermined. We are progressively shredding the safety net that provides people with some protection from instability of income. 

No attempt is being made to quantify the cost of the damage to health, wellbeing and relationships caused by rising insecurity. But those whose relationships break down under financial stress end up in the divorce courts, and for many - particularly women - that means material poverty and a life on benefits. Those whose health is wrecked by overwork end up in doctors' surgeries or hospitals: many find themselves living on sickness and disability benefits with the support of long-term prescription drugs. And those whose mental health is undermined by constant worry may end up in prison, since chronic underfunding of mental health services means that the prison service has become the backstop for the mentally ill. All of this adds up to increased costs for health and social services, not to mention the prison service, the police and the courts. 

Our crisis of work is causing a crisis of welfare. But all we see is the welfare crisis, and we try to solve it by inventing ever more draconian ways of forcing people into unsuitable and insecure work, rather than by addressing the root cause of the problem: disappearing traditional jobs and growing income uncertainty.

By implementing a universal basic income, we can end the necessity of human drudgery and the wasteful mismatching of people to jobs. We can restore security to the millions who live with uncertainty. 

Universal basic income should not be seen as welfare. By itself, it is inadequate to meet all needs: for example, the very disabled need more support than a universal basic income can provide and are less able to top up their income with work.  Other measures are needed as well to ensure that those who are marginalised by their inability to work are properly supported. Rather, we should see universal basic income as the foundation on which everything else is built - the level below which no-one will ever have to fall. By solving the problem of income insecurity with a universal basic income, we can end this costly and damaging epidemic of distress. 

Providing everyone with a basic income would also help to end the fear of technology that is holding back progress. We do not know what the jobs or the industries of the future will look like. But if we go about this the right way, there could be an explosion of productivity and entrepreneurial activity when humans are freed from drudgery. Universal basic income not only clears the path for robots to take over the jobs that humans don't want to do (and are not particularly good at), it also supports those who want to take the risk of trying out something new. People will be more willing to start new enterprises if they know that they will not lose everything if it all goes horribly wrong. The great businesses of the future will be born out of this explosion of experimentation, and they will create products and services we cannot yet imagine.

The way to prosperity is to invest - not only in robots, but in humans too. If we invest in robots but leave humans to scrape an uncertain living from increasingly insecure and poorly paid jobs, it would hardly be surprising if humans rebelled against the robots and their owners. But setting up such unhealthy competition would be destructive both of robots and humans. We don't want robot wars - we want robot colleagues.

I am amazed when people say we cannot afford universal basic income. To my mind, we cannot afford not to have it. The challenge of technology demands a fundamental reordering of society - a new social contract. By explicitly breaking the link between work and survival, we can free up humans to embrace this wonderful opportunity to reinvent work in our own image.

When we are no longer afraid of losing our prosperity, we can look forward to an exciting future, fully using the creativity and ingenuity that is the birthright of all humans and working productively in happy collaboration with our robot colleagues. 



This piece is a shorter version of my presentation at the Meaning Conference on Thursday 16th November. A video of the presentation itself will be on YouTube in due course. I will post a link here when it is available. 

Related reading:

The wastefulness of automation - Pieria

Image from NBC News.