There were two posts yesterday. The first was “Notes on Brexit:”
I guess it’s time to weigh in on an issue I have mostly been avoiding: Britain’s vote on whether to leave the EU, aka Brexit.
Not to keep you in suspense: if I had a vote, I’d vote “remain.” But I wouldn’t be as enthusiastic as I’d like – and if “remain” wins, as I hope it does, I’ll still feel a sense of dread about what the future holds.
Why? Some notes on the issue:
- Conventional trade analysis says that unless Britain can make a deal that essentially preserves full access to the EU – which seems unlikely given what a “leave” vote would do to relations — Brexit would make Britain poorer, on a sustained basis, than it would otherwise have been. I’ve done my own back of the envelope calculation, and come up with a sustained 2 percent of GDP loss; this is in the same range as other calculations. The number isn’t at all a hard fact – it could be smaller, but it could also be bigger — but the direction is completely clear.
2. On top of these conventional losses, there’s the special issue of the City of London, which looms very large in the British economy thanks to huge exports of financial services to the rest of Europe. The City’s role, like that of other financial centers, rests on hard-to-model agglomeration economies. Would the frictions and extra costs of Brexit hurt the City sufficiently to undermine its role, at big cost to the UK? Nobody knows, but if so that could add a lot to the economic costs.
3. Pay no attention to claims that Britain, freed from EU rules, could achieve spectacular growth via deregulation. You say to-mah-to, I say voodoo, and it’s no better than the US version.
4. On the other hand, I would greatly discount claims about dramatic financial crisis or whatever. Maybe the pound would fall – but for a country that borrows in its own currency and has an excessive current account deficit, that’s a good thing.
5. It’s also true that the economic impact of Brexit would fall quite differently on different groups within Britain. The City and those whose incomes are tied to its fortunes would probably lose badly, but some regions of the country might actually benefit from a weaker pound.
6. Despite such distributional issues, the straight economics is pretty clearly on the side of Remain. Why, then, am I at all ambivalent? Because the EU is so dysfunctional, and seems utterly resistant to improvement.
7. The euro is the most obvious case: it was a mistake in the first place, and this mistake was greatly compounded by the handling of the post-2009 crisis. A big technical problem of adjustment after a sudden stop in capital flows was turned into a morality play requiring destructive austerity. And there is no hint outside the ECB that any of the major players have learned anything from the debacle.
8. But it’s not just the euro. The EU seems unable to come to grips with migration issues – not just the refugee crisis, but the interaction among extensive welfare states, large internal income disparities, and open borders. I’m sure anti-European forces are exaggerating the burden created for Britain by migrants from eastern Europe, but it’s a flash point to which the EU doesn’t seem able to respond.
9. So something has to give. I’d like to imagine that a close Brexit vote in favor of Remain would be a wake-up call – but there have been many such calls in recent years, and nothing seems to happen.
10. And yet, and yet – the European project has been a source of tremendous good in the world, and it’s still very important. The EU has historically been a key force, not just for increased trade, but for democratization. Even when it falls short, as it has when dealing with the rise of authoritarianism in Hungary and now Poland, the EU and its institutions are an important restraint. If Brexit greatly damages the European project, it would open the door to a lot of ugliness.
11. So I would vote Remain, but with some feelings of despair, because what I’d be voting to remain with is a system that desperately needs reform but shows little sign of reforming.
Yesterday’s second post was “Don’t Take a Hike:”
I’m hearing some buzz that the Fed may still be considering a rate hike at its upcoming meeting, or if not then soon. Let’s really, really hope this is wrong.
It’s true that measured unemployment is low by historical standards. But that’s a number depressed by low labor force participation; nobody really knows how far we are from full employment. Meanwhile, wage increases have risen but are still nowhere near worrying inflationary levels; actual inflation is below 2 percent, and both inflation expectations from surveys and implied market inflation predictions are low and falling.
Oh, and job growth has slowed, along with the economy. Why would we expect an inflationary surge anytime soon, if ever?
The behavior of long-term interest rates is, I think, especially telling. Such rates reflect a combination of inflation expectations and expectations about future economic strength — and they’ve been plunging, and are once again below 1.7 percent:
So the market doesn’t see a near or even medium-term future in which the Fed would have good reasons to raise rates. Are people at the Fed at all sure that they know better?
On top of all this is the asymmetry of risks, which I and many others have been arguing for again and again. If the Fed waits to raise rates, and inflation overshoots its target, that’s not a deep problem — it can always raise rates, slow the economy, and get inflation down. If it raises rates and this turns out to have been premature, with the economy losing momentum and inflation falling, that’s a mistake that’s very hard to reverse when rates are still not much above zero.
So even if the data suggested that a rate hike was appropriate if you abstract from uncertainty — which they don’t! — it would still make sense to wait.
With everything else going on in the world, the really really last thing we need is an unforced error by the Fed.