Friday, 26 October 2018

The business and economic effects of Brexit matter: ask Brexiters

As the politics of Brexit continues to go round in circles, there is an increasing atmosphere of concern, possibly even desperation, amongst British businesses. The latest CBI Industrial Trends survey, published this week, showed new manufacturing domestic and export orders falling at the fastest pace for three years and optimism regarding export prospects falling at the fastest pace for six years. Meanwhile, concerns about access to skills and labour are the highest they have been since 1974, and manufacturing investment is set to fall at the fastest rate since the financial crisis.

A separate new CBI survey, of both large and small businesses’ Brexit preparedness, shows some even more alarming trends. These include that 80% of firms surveyed said Brexit has had a negative effect on their investment plans (up from 36% a year ago). Of course Tory Brexit Ultras such as Steve Baker have, in a rather extraordinary about-turn considering the historic link between the Conservatives and the CBI, nowadays written off the business group as a “grave menace”, whilst Boris Johnson’s view of business concerns about Brexit is well known.

In another new set of figures, the Society for Motor Manufacturers and Traders (SMMT) has announced a 16.8% fall in UK car manufacturing in September, the fourth consecutive month in which output has fallen. This comes amid ever-louder warnings from the industry of the damage Brexit could cause, the most recent being a very unusual public intervention from the global President of Toyota.

Brexiters dismiss business concerns

Again none of this matters to hardcore Brexiters. A dismissive article by Iain Duncan Smith the other day (cheered on by pro-Brexit economist Ruth Lea) railed against the car industry’s “prophets of doom” suggesting that the industry was of little account anyway. Strangely, the overwhelming importance they ascribe to the German car industry is not matched in Brexiters' regard for that of their own country. But apart from the disdain shown by this former leader of what was formerly called the party of business, the article contained at least two howlers.

One was the observation that UK auto manufacturing had been greatly “rejuvenated by the arrival of the Japanese under Lady Thatcher” – apparently in ignorance of the fact that she attracted them by virtue of British membership of the EU and the single market. The other was an apparent failure to understand the difference between global supply chains and regional just in time supply chains. Duncan Smith appears to think that since car makers source parts from outside of the EU single market and customs union, this must be through the same technique as those sourced from within. Thus he is able to conclude that all those car firm bosses don’t, in fact, understand their businesses in the way he does.

Duncan Smith calls on Anthony Bamford of JCB to pray in aid for his analysis, but he’d do better to look to James Dyson, the second of the triumvirate of businessmen invariably called upon by Brexiters (the third being Tim Martin. In passing, these three feature so regularly because there are so very few pro-Brexit business people – Duncan Smith also invokes the CFO of Aston Martin for the less than ringing endorsement that “Brexit doesn’t materially impact our plans”).

Dyson is relevant here in relation to his announcement this week that he would build his electric car in Singapore. The main discussion about this has been whether or not that is hypocritical in view of his pro-Brexit stance. But that isn’t really the key issue. Rather, it is his stated reason for doing so: “the decision of where to build our car is complex, based on supply chains, access to markets, and the availability of expertise …”. In other words, precisely those matters that UK car makers keep trying, unsuccessfully, to get Duncan Smith and the other Brexit Ultras to understand.

In any case, even if the car industry were as insignificant as the article imagines – and, apart from the fact that it actually employs about 1 million people directly or indirectly and accounts for 12% of UK goods exports, it’s important to consider the strategic significance of the industry as an R&D intensive (£3.65billion per year), high skill hub of the wider economy – it is hardly the case that it is the only one issuing “dire warnings”. Aerospace, pharmaceuticals, financial services … well, why bother to list them: it’s difficult to think of any sector of business, either in manufacturing or in services which is not issuing ever-greater cries of alarm. Brexiters write each individual one of them off, and in the process write off the greater part of the collective voice of business.

The paradox of Brexiters’ economic analysis

The most striking thing of all, though, is the way in which they do so. A few – a very few – Brexiters are quite open in saying that they are advocating and pursuing a policy which will cause considerable economic damage, but judge it to be worthwhile, normally on grounds of sovereignty. A much larger number of Brexiters – and no small number of bien-pensant remainers – chide the remain cause and especially its referendum campaign for over-focussing on economics and on dry analysis, thus misunderstanding what motivated leave voters. Yet, in fact, most Brexiters are at pains to try to make, precisely, economic arguments for what they are doing. Indeed, Duncan Smith’s article is replete with such arguments.

So too was a recent piece in the Daily Express by Jacob Rees-Mogg, claiming Brexit would bring about a leap in prosperity. Just as Brexiters always turn to the same tiny minority of business leaders, so too do they look to a similarly small group of economists. In the case of the Rees-Mogg article it won’t be a surprise to learn that, yet again, Patrick Minford and the Economists for Free Trade (EFT, formerly called Economists for Brexit) are cited for the evidence (as they are in Duncan Smith’s piece).

This time it was their recent ‘Budget for Brexit’ report, which had already been comprehensively taken to pieces by trade expert Frances Coppola, whilst former Chief Economist at the Cabinet Office, Jonathan Portes, tweeted that it “contained fantasy numbers” and was “an insult to the intelligence of its readers” (this, interestingly, in relation to a specific claim about the small size of the auto industry, which is apparently the Brexiter meme de jour).

None of this should be a surprise: the underlying basis of the EFT’s analysis of Brexit has been discredited over and over again (see a previous post for links to several examples). Moreover, whilst Rees-Mogg correctly acknowledges that Minford’s is a minority view he is surely wrong to say it should be given attention because of his “remarkable record” of successful forecasting, as – to take one of many examples - this chart from Chris Giles, Economics Editor of the FT, shows.

Of course, no matter how often this is pointed out and whoever does so it will make no difference. But it reveals again the fact that the Brexiter case is very much based on economics and that they are more than happy – indeed seek – to bolster that case by appealing to expert authority. Contrary to what seems to be the received wisdom on all sides of the debate, the question of whether Brexit will or will not make people worse off is still a key battleground. One of the achievements of the Brexiters is to continue to fight on that ground whilst, paradoxically, arguing with some success that it is not the ground that actually matters.

The enduring importance of economics

Yet it is clear that the reason both remain and leave advocates continue to discuss Brexit in economic terms is because it is a key dividing line amongst remain and leave voters. Polling evidence shows that some 56% of leave supporters (compared with 6% of remainers) think the economy will be better as a result of Brexit, whilst 69% of remainers (12% of leavers) think it will be worse as a result. It’s not at all clear where the cause and effect lie here (i.e. if people’s views of the economic impact explain their position on Brexit or vice versa), but it does suggest that economics – or perhaps more accurately people’s jobs, standard of living, taxes and public services – has not ceased to matter.

And we are no longer in the territory of forecasts. The latest (30 September) assessment by the Centre for European Reform’s Deputy Director John Springford is that the UK economy is 2.5% smaller than it would be had the vote been to remain in the EU, with a knock on effect of £26billion on public finances. The test of whether or not these and other economic effects of Brexit matter to voters is this: do Brexit advocates say that they do not matter? Or do they deny that the effects are happening and/or say that they are nothing to do with Brexit? The answer, almost invariably, is the latter.

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