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Archive for the ‘Brexit’ Category

My views on Brexit haven’t changed since I wrote “The Economic Case for Brexit” back in 2016.

It’s a simple issue of what route is most likely to produce prosperity for the people of the United Kingdom. And that means escaping the dirigiste grasp of the European Union.

The European Union’s governmental manifestations (most notably, an über-powerful bureaucracy called the European Commission, a largely powerless but nonetheless expensive European Parliament, and a sovereignty-eroding European Court of Justice) are – on net – a force for statism rather than liberalization. Combined with Europe’s grim demographic outlook, a decision to remain would guarantee a slow, gradual decline….Leaving the EU would be like refinancing a mortgage when interest rates decline. In the first year or two, it might be more expensive because of one-time expenses. In the long run, though, it’s a wise decision.

But if I was rewriting that column today, I would change the title to “The Economic Case for Hard Brexit.”

That’s because Prime Minister Theresa May and other opponents are pushing for a watered-down version of Brexit. Sort of Brexit in Name Only.

Indeed, Dan Hannan, a member of the European Parliament, explains in the Washington Examiner that the deal negotiated by Theresa May is the worst possible outcome.

This is the sort of deal that a country signs when it has lost a war. Under its terms, Britain will remain subject to all the costs and obligations of EU membership, but will give up its vote, its voice and its veto. …EU exporters will enjoy privileged access to the world’s fifth-largest economy. They won’t need to worry about world competition. …In the two-and-a-half years since the referendum, civil servants, politicians, financiers and politically-connected business cartels have worked assiduously to overturn to result. …Some, including George Soros and Tony Blair, sought to overturn the result outright with a new referendum. Others, more craftily, sought instead to ensure that, while something technically called Brexit may happen, nothing actually changes. Sadly, they have achieved something far worse than no change. Their deal — Theresa May’s deal — will leave Britain in a more disadvantageous place than either leaving cleanly or staying put. It keeps the burdens of EU membership but junks the advantages.

Brian Wesbury and Bob Stein, both with First Trust Advisors, point out that Hard Brexit is the best option. Trade would continue, but based on WTO rules instead of the EU’s free trade agreement.

Some analysts and investors are concerned about a “Hard Brexit,” in which the U.K. supposedly plunges into chaos as it crashes out of the EU without an agreement. …Count us skeptical. …Any harm to the U.K.’s economy would be relatively mild… It’s not like there would be no trade between the U.K. and the EU after a Hard Brexit. Trade rules would simply shift to the ones that apply between the EU and other countries under the World Trade Organization, like those that apply to EU-U.S. trade.

While WTO rules are quite good, they’re not as good as complete free trade.

But there would be pressure to move in that direction under a Hard Brexit.

…the EU would be under enormous pressure to lower tariffs and cut a new deal with the U.K. In 2017, the rest of the European Union ran a roughly $90 billion trade surplus with the U.K. So if a Hard Brexit makes it tougher for the rest of the EU to export to the U.K., every national capital in the EU would be flooded with lobbyists asking to cut a deal. Meanwhile, leaving the EU means the U.K. would have the freedom to make free trade deals with the U.S. and Canada, and any other country it wanted, without having to wait for the EU. Yes, a Hard Brexit risks some financial jobs, but the same argument was used when the U.K. decided not to join the Euro currency bloc, after which London kept its role as Europe’s financial center.

For what it’s worth, I’m more interested in whether we can get a really good trade deal between the US and UK following a Hard Brexit.

Regardless, any possible slippage on trade between the UK and EU would be more than offset by the likelihood of better policy in other areas.

…there’s another basic reason why a Hard Brexit would be in the long-term interests of the U.K….any organization powerful enough to overrule the democratic process in the U.K. regarding economic laws and regulations…is also powerful enough to impose anti-free market policies… And, over time, since men are not angels and power corrupts, any international body with such power would gravitate toward policies that aggrandize the international political elite… In fact, the EU has already issued rules that stifle competition, like setting a standard minimum Value-Added Tax rate.

Felix Hathaway from London’s Institute of Economic Affairs, debunks Project Fear in an article just published by Cayman Financial Review.

…the only option ahead with a clear path, and requiring no new legislation in parliament, is some form of ‘Hard Brexit.’ …By Hard Brexit I mean the U.K. leaving the EU on March 29 without a withdrawal agreement. Unlike most other options, this does not require the cooperation of the EU to proceed. In this scenario, the U.K. leaves both Single Market and Customs Union of the European Union at 11 p.m. on March 29, 2019, along with leaving the various political institutions of the EU and the jurisdiction of the Court of Justice of the EU. …many of the more alarming warnings of no cooperation at all can be dismissed as fanciful. A more believable ‘no deal’ Brexit might look as follows. …the Commission is doing all it can to publicly rule out this sort of “managed no deal,” yet in doing so has stated that it would unilaterally extend agreements in selected sectors, including for financial services, following a WTO exit. …one could reasonably expect further agreements, possibly at the 11th hour in March… These would likely cover citizens’ rights, road haulage, and facilitated customs checks for certain classes of goods, and would be negotiated with the member states with which the U.K. does the most business.

For what it’s worth, I think vindictive EU bureaucrats probably want to inflict some needless harm, even though it will hurt them as much – and maybe more – than it would hurt the UK.

But Felix is right that common sense – sooner or later – will lead to agreements to smooth over any bumps in the transition. Indeed, he just wrote another article demonstrating how this is already happening.

Here’s the most important part of his article, which I like because it echoes my arguments about the pressure for better policy in an independent United Kingdom.

Ultimately, the most significant factor will be domestic policy decisions by the U.K. government, particularly in areas of taxation and housing. This may be fairly unexciting news at the end of an article about Brexit, but if the U.K. is to succeed as a “free trading, buccaneering nation,” such success will depend in large part on the ability of companies to attract investment through low corporate taxes, and the ability of workers to move to where they will be most productive through further housebuilding in key areas. …perhaps as an unexpected consequence of the conversation surrounding Brexit,… A recent ComRes poll found that, although divided on almost every other aspect, a clear two thirds of voters agree that when Brexit is complete, “the U.K. should try to become the lowest tax, business-friendliest country in Europe, focused on building strong international trade links.”

And keep in mind that bureaucrats in Brussels are pushing to make the European Union more statist (which, sadly, is contrary to the continent’s historical tradition), so it’s becoming ever-more important to escape.

This is why what happens with Brexit is among my greatest hopes and fears for 2019.

Let’s close with a bit of humor.

The Cockburn column in the Spectator mocks the New York Times for its anti-Brexit fanaticism.

The Times usually supports democracy in backward and violent states, but it hates Brexit. No news is too fake for the Times to print when it comes to Brexit. This week, the Times hit new heights of fantasy. ‘Roads gridlocked with trucks. Empty supermarket shelves. An economy thrown into paralysis,’ a would-be novelist named Scott Reyburn wrote earlier this week. His story, ‘As Brexit Looms, the Art World Prepares for the Fallout’, was recycled as a front-page item on the Times’s international edition. …Britain is in a ‘crazed Brexit vortex’, adds Roger Cohen, holder of the Tom Friedman Chair in Applied Chin-Stroking. …Yes, the British government are useless. But nobody in London is stockpiling food. Nobody is fighting in the streets, as the French are every weekend. The markets factored in their Brexit uncertainty two years ago. The supermarkets and roads are as jammed as ever. …The economy is doing much better than the Eurozone, which is slipping into recession. Polls show the British, who the Times characterize as sliding down a neofascist vortex, to be more welcoming of immigration than any other European people.

Bad journalism from the New York Times is hardly a surprise.

I’m mostly sharing his column because this satirical paragraph got me laughing.

The scene that met Cockburn’s eyes upon exiting the terminal at Heathrow reminded him of his days as a foreign correspondent during the Lebanese civil war, or a night out in south London. A dog was eating the innards of a corpse, because supplies of Romanian dog food have broken down. A naked fat man had carved off a slice of his own buttock and was roasting it over a burning tyre, because imports of Bulgarian lamb are held up at Calais. A woman offered to prostitute herself for an avocado, and to sell both of her blank-eyed children for a packet of French butter. There were no black taxis either, because London’s notoriously pro-Brexit taxi drivers had all joined one nationalist militia or other. Finally, a black-market cheese dealer with a rocket launcher affixed to the back of his pickup agreed to take Cockburn into the city. They bribed their way through the checkpoints with wedges of brie. Or not.

Speaking of laughs, Hitler parody videos have become a thing.

Here’s a new Brexit-related installment in the series.

Not as clever as the first Hitler parody I shared as part of my collection of Brexit humor, but it has some funny moments.

And if you have time, this Brexit tapestry is quite amusing.

P.S. There are some anti-Brexit people who support free markets, which is rather baffling since I can’t imagine why they would want the U.K. to be part of a bureaucracy that tries to brainwash children in favor of higher taxes. Indeed I was only semi-joking when I wrote that Brussels was “the most statist place on the planet.”

P.P.S. Though there are many reasons to question whether U.K. politicians can be trusted to adopt good policy.

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I started my end-of-year “best and worst” series back in 2013, but didn’t begin my start-of-year “hopes and fears” series until 2017.

In that first year, I got part of what I hoped for (some tax reform and a bit of regulatory easing) and part of what I feared (no Medicaid and Medicare reform), but I mostly felt relieved that some of my fears (border-adjustment tax and an infrastructure boondoggle) weren’t realized.

For 2018, none of my hopes (government collapse in Venezuela and welfare reform) became reality, but we dodged one of my fears (Trump killing NAFTA) and moved in the wrong direction on another (a bad Brexit deal).

Time for third edition of this new tradition. It is the first day of the year and here are my good and bad expectations for 2019.

We’ll start with things I hope will happen in the coming year.

  • Hard Brexit – There is a very strong long-run argument for the United Kingdom to have a full break with the European Union. Unfortunately, the political establishment in both London and Brussels is conspiring to keep that from happening. But the silver lining to that dark cloud is that the deal they put together is so awful that Parliament may vote no. Under current law, that hopefully will lead to a no-deal Brexit that gives the U.K. the freedom to become more free and prosperous.
  • Supreme Court imposes limits of Washington’s power – I didn’t write about the fight over Brett Kavanaugh’s nomination to the Supreme Court because I don’t know if he believes in the limits on centralized power in Article 1, Section 8. But I’m semi-hopeful that his vote might make the difference in curtailing the power of the administrative state. And my fingers are crossed that he might vote with the Justices who want to restore the Constitution’s protection of economic liberty.
  • Gridlock – Some people think gridlock is a bad thing, but it is explicitly what our Founders wanted when they created America’s separation-of-powers system. And if the alternative to gridlock is politicians agreeing to bad policy, I will cheer for stalemate and division with great gusto. I will be perfectly content if Trump and House Democrats spend the next two years fighting with each other.
  • Maduro’s ouster – For the sake of the long-suffering people of Venezuela, I’m going to keep listing this item until it eventually happens.
  • Limits on the executive branch’s power to impose protectionism – Trade laws give a lot of unilateral power to the president. Ideally, the law should be changed so that any protectionist policies proposed by an administration don’t go into effect unless also approved by Congress.
  • Chilean-style reform in Brazil – Brazil recently elected a president who is viewed as the Trump of Latin America. But he might be the good kind of populist who uses his power to copy Chile’s hugely successful pro-market reforms.

Here are the things that worry me for 2019.

  • Trump – The President does not believe in small government, so I’m concerned we may get the opposite of gridlock. In my nightmare scenario, I can see him rolling over to Democrat plans for a higher minimum wage, infrastructure pork, wage subsidies, and busting (again) the spending caps.
  • Recession-induced statism – If there’s an economic downturn this year, then I fear we might get an Obama-style Keynesian spending orgy in addition to all the things I just mentioned.
  • More protectionism – Until and unless there are limits on the president’s unilateral power, there is a very real dangers that Trump could do further damage to global trade. I’m particularly concerned that he might pull the U.S. our of the very useful World Trade Organization and/or impose very punitive tariffs on auto imports.
  • Fake Brexit – This is the flip side of my hope for a hard Brexit. Regardless of the country, it’s not easy to prevail when big business and the political elite are lined up on the wrong side of an issue.

Sadly, I think my fears for 2019 are more likely than my hopes.

And I didn’t even mention some additional concerns, such as what happens if China’s economy suffers a significant downturn. I fear that is likely because there hasn’t been much progress on policy since the liberalization of the 1980s and 1990s.

Or the potential implications of anti-market populism in important European nations such as Germany, Sweden, and Italy.

Last but not least, we have a demographic sword of Damocles hovering over the neck of almost every nation.

That was a problem last year, it’s a bigger problem this year, and it will become an even-bigger problem in future years.

We know the right answer to this problem, but real solutions are contrary to the selfish interests of politicians.

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I just spent several days in London, where I met with journalists and experts at think tanks to find out what’s happening with Brexit.

By way of background, I think voters in the UK made the right decision for the simple reason that the Brussels-based European Union is a slowly sinking ship based on centralization, harmonization, and bureaucratization.

Membership already involves onerous regulations, and remaining a member of the EU would mean – sooner or later – sending ever-larger amounts of money to Brussels, where it then would be used to prop up Europe’s failing welfare states.

Getting out may involve some short-term pain, but it will avert far greater pain in the future.

At least that was the theory.

The reality is that the Tory-led government in London has made a mess of the negotiations. The newly announced deal isn’t a real Brexit.

Writing for the Telegraph, Dan Hannan, a British member of the European Parliament, sums up why the deal is a joke.

The deal, as one Italian newspaper puts it, represents “a resounding victory for the EU over Her Majesty’s subjects”. Yet there was nothing inevitable about this climbdown. On the contrary, there is something extraordinary, awe-inspiring even, about the slow-witted cowardice that led British negotiators to this point. …there is something extraordinary, awe-inspiring even, about the slow-witted cowardice that led British negotiators to this point. …the disastrous acceptance of the EU’s sequencing, which meant that all British leverage, including the exaggerated financial contributions, would be tossed away before the EU even began to discuss trade. …Can you blame Eurocrats for gloating? They sensed right at the start that they were dealing with a defeated and dispirited British team, whose only objective was to come back with something – anything – that could be described as a technical fulfilment of the referendum mandate. …we have ended up with the sort of deal that a defeated nation signs under duress. Britain will be subject to all the costs and obligations of EU membership with no vote, no voice and no veto.

But it gets worse.

Unbelievably, Britain has given the EU a veto over whether it can leave these arrangements: unlike EU membership itself, we have no right to walk away. Brussels will run our trade policy, our economy, even elements of our taxation for as long as it likes. As the usually Euro-fanatical Bloomberg asked incredulously last week, “Once Britain has acceded to this, what reason is there for the EU to agree to any other kind of deal?” …Leavers never did “own” this process. From the start, it has been controlled by those who wished it wasn’t happening, and who defined success as salvaging as much as they could of the old dispensation.

That final sentence is key. Theresa May was not a Brexit supporter. She failed to play some very strong cards and she basically worked to come up with a fake Brexit.

It remains to be seen, though, whether Parliament will approve this humiliating package. The House of Commons will vote in about two weeks and here’s how the UK-based Times describes the possible outcomes if the plan gets rejected.

Scenario 1: a second Commons vote The prime minister fails to secure Commons support for her withdrawal agreement… Her response is to…then bring…it back for a second vote…, as happened in America after Congress initially rejected its government’s bank rescue plan in 2008. …Scenario 2: change of prime minister May fails to get the deal through and either resigns, or faces a confidence vote among Tory MPs which, if she lost, would also see her step down. …The question for Tory MPs would then be whether to back the deal mainly negotiated under May… Scenario 3: a second referendum A defeat for May could result in a second referendum but only if she or her successor supported it. Tory policy is to oppose a second referendum. …Scenario 4: no-deal Brexit Tory Brexiteers in the cabinet and in the party would respond to a defeat for the May proposals by pushing for a no-deal Brexit, or a “managed” no-deal. …Scenario 5: the Norway option Though there is no parliamentary majority at present for the May deal, or for no deal, there could be for a closer relationship with the EU. This could take the form of…the EEA (European Economic Area), the so-called Norway option.

For what it’s worth, I fear “Scenario 1.” Members of the Conservative Party are like American Republicans. They occasionally spout the right rhetoric, but most of them are go-along-to-get-along hacks who happily will trade their votes for a back-room favor.

So I will be disappointed but not surprised if this deal is enacted. It’s even possible it will be approved on the first vote.

My preference is for “Scenario 4” leading to something akin to “Scenario 5.”

A report from the Adam Smith Institute offers a user-friendly description of this “Norway option.”

We cannot however be subordinate to a supranational institution… Nor should we make do with a semi-detached position inside the EU that also gives us semi-detached influence while still constraining the UK in the wider world. …we have to leave and reform the relationship in a characteristically British, outward-looking and open way. …The UK therefore requires something of a “soft” exit that maintains open trade but removes Britain from political union and from all that Britain has consistently struggled with – the Common Agricultural Policy, the Common Fisheries Policy, the hollowing out and the outsourcing of democracy, the constraints on global trade deals.

And what does that look like?

…the most optimal way to exit would be to take up a position outside the EU but inside the European Economic Area (‘EEA’), which very likely means re-joining the European Free Trade Association (‘EFTA’). As Britain is already a contracting party to the EEA Agreement there would be no serious legal obstacle and it would mean no regulatory divergence or tariffs but it would mean retaining freedom of movement for EU/EEA nationals. …Such a deal would require agreement from the EU and EFTA but both would have strong reasons for allowing it…with the UK on board, EFTA would instantly become the fourth largest trade grouping in the world. …In short, EEA countries have a market-based relationship with the EU by having full single market access. They are free of the EU’s political union ambitions, and can class themselves as self-governing nation states. …The EEA position also opens up the ability to make trade agreements with third countries (something the UK cannot do now), would provide the UK with the freedom to set its own levels of VAT, and would allow the UK to step away from its joint liability of EU debts. That would be very attractive to Britain seeking a liberal soft exit.

Here’s a table showing the difference between EU membership and EEA membership.

Sounds like the outline of a acceptable deal, right?

Not so fast. The crowd in Brussels doesn’t want a good deal, even though it would be positive for the economic well-being of EU member nations. They have an ideological desire to turn the European Union into a technocratic superstate and they deeply resent the British for choosing self-government and democracy.

As such, the goal is to either maneuver the British government into a humiliating surrender (Theresa May was happy to oblige) or to force a hard Brexit, which would probably cause some short-term economic disruption.

But there was also resistance on the British end to this option since it ostensibly (but perhaps not necessarily) requires free movement of people. In other words, it might mean unchecked migration from EU/EEA nations, which arouses some nativist concerns.

Since I mentioned that a hard Brexit could lead to potential short-term economic disruption, this is a good opportunity to cite a very key section of Mark Littlewood’s recent column in the UK-based Times.

The Treasury has suggested that GDP could fall by as much as 7.7 per cent if Britain exited the EU without a deal. However, is there any reason to treat this projection any more seriously than the Treasury’s view that the Leave vote itself would lead to a recession and a reduction in GDP by between 3 per cent and 6 per cent? Almost all official predictions relating to the economic impact of the Brexit vote have been shown to be enormously over-pessimistic. Why should one assume that present forecasts are not beset by the same flaws?

Amen. The anti-Brexit crowd (the “remainers”) tried to win by arguing that a vote for Brexit would cause an economic collapse. That “Project Fear” was exposed as a joke (and was the target of some clever humor).

And the new version of Project Fear is similarly dishonest.

In a column for CapX, Julian Jessop of the Institute of Economic Affairs has additional details.

The public is being bombarded with warnings of potentially devastating impacts on the economy, their security and their welfare if the UK becomes a “third country” at 11pm on 29th March 2019, without the Withdrawal Agreement and framework for a future relationship anticipated in Article 50. …the daftest headline…is that a “no-deal” Brexit means that the UK would run out of food by August 2019 (the 7th, to be precise). This relies on the bizarre assumption that the UK would no longer be able to import food, not just from the EU but from anywhere in the world, and that we would continue to export food even as our own people starve. …it is often assumed that the EU would ignore its other legal obligations, including WTO rules. …the EU would not be able to treat the UK any less favourably than other WTO members.. Relying on the courts to fix things is also ra.rely a good idea. But it is absolutely right that the EU can’t go out of its way to make life difficult for the UK either.

Run out of food? Good grief, I thought the global-warming Cassandras were the world’s worst when it comes to exaggeration, but they’re amateurs compared to the anti-Brexit crowd.

Anyhow, this column is already too long, but here are links to four other CapX columns for interested parties.

I especially like the last column. One of the behind-the-scenes aspects of the Brexit debate is that the eurocrats in Brussels are scared that the UK will become more market-oriented once it has escaped the EU’s regulatory clutches.

And just as the EU has gone after Ireland and Switzerland for supposedly insufficient taxation, it also now is trying to hamstring the United Kingdom. All the more reason to escape and become the Singapore of Europe.

P.S. Donald Trump could help the United Kingdom by negotiating a quick and clean free-trade agreement. Sadly, that violates his protectionist instincts.

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If I was a citizen of the United Kingdom, I would have voted to leave the European Union for the simple reason that even a rickety lifeboat is better than a slowly sinking ship.

More specifically, demographic changes and statist policies are a crippling combination for continental Europe, almost surely guaranteeing a grim future, and British voters wisely decided to escape. Indeed, I listed Brexit as one of the best things that happened in 2016.

This doesn’t mean the U.K. has ideal policies, but Brexit was a good idea precisely because politicians in London will now have more leeway and incentive to liberalize their economy.

Though I wonder whether Prime Minister May and the bumbling Tories will take advantage of the situation.

The Financial Times has a report that captures the real issue driving Brexit discussions. Simply stated, the European Union is scared that an independent U.K. will become more market-friendly and thus put competitive pressure on E.U. welfare states.

The EU is threatening sanctions to stop Britain undercutting the continent’s economy after Brexit…the bloc wants unprecedented safeguards after the UK leaves to preserve a “level playing field” and counter the “clear risks” of Britain slashing taxes or relaxing regulation. Brussels…wants…to enforce restrictions on taxation…and employment rights. …the EU negotiators highlight the risk of Britain ‘undermining Europe as an area of high social protection’…the UK is “likely to use tax to gain competitiveness” and note it is already a low-tax economy with a “large number of offshore entities”. …On employment and environmental standards, the EU negotiators highlight the risk of Britain “undermining Europe as an area of high social protection”.

In case you don’t have a handy statism-to-English dictionary handy, you need to realize that “level playing field” means harmonizing taxes and regulations at very high level.

Moreover, “employment rights” means regulations that discourage hiring by making it very difficult for companies to get rid of workers.

And “high social protection” basically means a pervasive and suffocating welfare state.

To plagiarize from the story’s headline, these are all policies that belong in a bonfire.

And the prospect of that happening explains why the politicians and bureaucrats in continental Europe are very worried.

…senior EU diplomats, however, worry that the political expectations go beyond what it is possible to enforce or agree. “This is our big weakness,” said one. Theresa May, the British prime minister, last year warned the EU against a “punitive” Brexit deal, saying Britain would fight back by setting “the competitive tax rates and the policies that would attract the world’s best companies and biggest investors”.

Sadly, Theresa May doesn’t seem very serious about taking advantage of Brexit. Instead, she’s negotiating like she has the weak hand.

Instead, she has the ultimate trump card of a “hard Brexit.” Here are four reasons why she’s in a very strong position.

First, the U.K. has a more vibrant economy. In the latest estimates from the Fraser Institute’s Economic Freedom of the World, the United Kingdom is #6.

And how does that compare to the other major economies of Europe?

Well, Germany is #23, Spain is #36, France is #52, and Italy is #54.

So it’s easy to understand why the European Union is extremely agitated about the United Kingdom becoming even more market oriented.

Indeed, the only area where the U.K. is weak is “size of government.” So if Brexit led the Tories to lower tax rates and shrink the burden of government spending, it would put enormous pressure on the uncompetitive welfare states on the other side of the English Channel.

Second, the European Union is horrified about the prospect of losing membership funds from the United Kingdom. That’s why there’s been so much talk (the so-called divorce settlement) of ongoing payments from the U.K. to subsidize the army of bureaucrats in Brussels. A “hard Brexit” worries British multinational companies, but it worries European bureaucrats even more.

Third, the European Union has very few options to punitively respond because existing trade rules (under the World Trade Organization) are the fallback option if there’s no deal. In other words, any protectionist schemes (the “sanctions” discussed in the FT article) from Brussels surely would get rejected.

Fourth, European politicians may hate the idea of an independent, market-oriented United Kingdom, but the business community in the various nations of continental Europe will use its lobbying power to fight against self-destructive protectionist policies and other punitive measures being considered by the spiteful political class.

P.S. Here’s a Brexit version of the Bayeux Tapestry that probably won’t be funny unless one is familiar with the ins and outs of British politics.

P.P.S. Here are some easier-to-understand versions of Brexit humor.

P.P.P.S. And here’s some mockery of senior politicians of the European Commission.

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Happy New Year!

We listed yesterday the good and bad policy developments of 2017, so now let’s speculate about potential victories and defeats in 2018.

Here are two things I hope will happen this year.

  • Welfare reform – If my friends and contacts on Capitol Hill are feeding my accurate information, we may see a bigger and better version of the 1996 welfare reform in 2018. The core concept would be to abolish the dozens of means-tested programs (i.e., redistribution programs targeted at low-income people) in Washington and replace them with a “block grant.” This could be good news for federal taxpayers if the annual block grant is designed to grow slowly. And it could be good news for poor people since state government would then have the ability and flexibility to design policies that help liberate recipients from government dependency.
  • Collapse of Venezuela – Given the disastrous deterioration of the Venezuelan economy, it’s difficult to envision how the Maduro dictatorship can survive the year. Yes, I know the regime is willing to use the military to suppress any uprising, but I suspect hungry and desperate people are more likely to take chances. My fingers are crossed that the corrupt government is overthrown and Venezuela becomes another Chile (hopefully without a transition period of military rule).

Here are two things I fear may happen in 2018.

  • Pulling out of NAFTA – America dodged a bullet in 2017. Given Trump’s protectionist instincts, I worried he would do something very dangerous on trade. But pain deferred is not the same thing as pain avoided. The President has made some very worrisome noises about NAFTA and it’s possible he may use executive authority to scrap a deal that has been good for the United States.
  • A bad version of Brexit – Given the statist mindset in Brussels and the continent’s awful demographics, voting to leave the European Union was the right decision for our British friends. Simply stated, it makes no sense to stay on a sinking ship, even if it sinking slowly. But the net benefits of Brexit depend on whether the United Kingdom seizes the moment and adopts pro-growth policies such as tax cuts and free-trade pacts. Sadly, those good reforms don’t appear likely and it appears instead that the feckless Tory leadership will choose to become a satellite member of the EU, which means living under the thumb of Brussels and paying for harmonization, bureaucratization, and centralization. The worst possible outcome in the short run, though at least the U.K. is better positioned to fully extricate itself in the future.

I’m adding a new feature to my hopes-and-fears column this year.

These are issues where I think it’s likely that something consequential may occur, but I can’t figure out whether I should be optimistic or pessimistic. I sort of did this last year, listing Obamacare reform and Italian fiscal crisis as both hopes and fears.

It turns out I was right to be afraid about what would happen with Obamacare and I was wrong (or too early) to think something would happen with Italy.

Here are three things that could be consequential in 2018, but I can’t figure out whether to be hopeful or fearful.

  • Infrastructure reform or boondoggle – I put an “infrastructure boondoggle” as one of my fears last year, but the President and Congress postponed dealing with the issue. But it will be addressed this year. I’m still afraid the result may be a traditional pile of pork-barrel spending, but it’s also possible that legislation could be a vehicle for market-based reform.
  • Normalization of monetary policy – I try to stay clear of monetary policy, but I also recognize that it’s a very important issue. Indeed, if I was to pick the greatest risk to the economy, it’s that easy-money policies (such as artificially low interest rates) have created a bubble. And bursting bubbles can be very messy, as we learned (or should have learned) in 2008. The Federal Reserve supposedly is in the process of “normalizing” monetary policy. I very much hope they can move in the right direction without rattling markets and/or bursting bubbles.
  • A China bubble – Speaking of macroeconomic risks, I’m very glad that China has partially liberalized and I’m ecstatic that reform has dramatically reduced severe poverty, but I also worry that the government plays far too large a role in the banking sector and interferes far too much in the allocation of capital. I’m guessing this eventually leads to some sort of hiccup (or worse) for the Chinese economy, and all I can do is cross my fingers and hope that the government responds with additional liberalization rather than the bad policies being advocated by the OECD and IMF.

By the way, I fully expect the Democrats to sweep the 2018 elections. And since the Party is now much farther to the left than it used to be, that could lead to very bad news in 2019 – particularly if Trump unleashes his inner Nixon.

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Since I’m in London for a couple of speeches, I’ve taken advantage of this opportunity to make sure I’m up to speed on Brexit.

Regular readers may recall that I supported the U.K.’s decision to leave the European Union. Simply stated, the European Union is a slowly sinking ship. Getting in a lifeboat doesn’t guarantee a good outcome, I noted, but at least there’s hope.

The European Union’s governmental manifestations…are – on net – a force for statism rather than liberalization. Combined with Europe’s grim demographic outlook, a decision to remain would guarantee a slow, gradual decline. A vote to leave, by contrast, would create uncertainty and anxiety in some quarters, but the United Kingdom would then have the ability to make decisions that will produce a more prosperous future. Leaving the EU would be like refinancing a mortgage when interest rates decline. In the first year or two, it might be more expensive because of one-time expenses. In the long run, though, it’s a wise decision.

Others reached the same conclusion.

“Black Swan” author Nassim Nicholas Taleb…told CNBC’s “Power Lunch” the EU has become a “metastatic and rather incompetent bureaucracy” that is too intrusive. “The way they’ve been building it top down from Brussels is doomed to fail. This is 2016. They are still thinking 1950 economics,” said Taleb, who is also the author of “Antifragile” and is an advisor to Universa Investments. Taleb has warned about an EU breakup for some time, calling it a horrible, stupid project back in 2012.

That being said, there is a lot of angst in the U.K. about what will happen during the divorce process, in part because of the less-than-stellar performance of the Tory leadership.

There are three things, however, that British politicians need to remember.

First, the EU bureaucrats are terrified at the prospect of losing $10 billion of annual payments from the U.K., which is why they are desperately trying to convince politicians in London to cough up a big pile of money as part of a “divorce” settlement.

And “desperately” is probably an understatement.

The UK…contributions to the EU do come to over €10 billion a year. That is a substantial fiscal hole for the European Commission to plug… The Commission would prefer not to reduce expenditure since the structural funds and agricultural subsidies it distributes help to justify the EU’s existence. …it is not surprising that the Brexit divorce bill has become a sticking point in the negotiations. If the amount is big enough, it could tide the EU over for a few years. In Brussels, a problem kicked down the road is treated as a problem solved. This gives the British some leverage because it is most unlikely that the Commission will have lined up any new sources of funding, or agreed what it can cut, before March 29, 2019, when negotiations have to be completed. With no deal, the EU might end up with nothing at all.

Second, European politicians are terrified that the U.K., which already has the world’s 10th-freest economy, will slash tax rates and become even more competitive in a post-Brexit world.

If you don’t believe me, maybe you’ll believe European officials who say the same thing.

European leaders will insist that the UK rules out tax dumping as part of any trade deal struck during Brexit negotiations… Matthias Machnig, the German deputy economy minister, called for a “reasonable framework” in tax and regulation, and warning “a race to the bottom in tax and regulation matters would make trade relations difficult”. Donald Tusk, the European Council president, also warned this morning that a deal must “…encompass safeguards against unfair competitive advantages through, inter alia, fiscal, social and environmental dumping”. The fear is that unless the trade deal which binds the UK into the European standards on tax, competition and state aid the UK will lead a regulatory “race to the bottom”.

Third, failure to reach a deal (also know as a “hard Brexit”) isn’t the end of the world. It’s not even a bad outcome. A hard Brexit simply means that the U.K. trades with Europe under the default rules of the World Trade Organization. That’s not complete, unfettered free trade, but it means only modest trade barriers. And since Britain trades quite successfully with the rest of the world under those rules, there’s no reason to fear a collapse of trade with Europe.

Moreover, don’t forget that many industries in Europe will pressure their politicians to continue free trade because they benefit from sales to U.K. consumers.

Around one in seven German cars is exported to the UK. Around 950,000 newly registered vehicles in the UK last year were made in Germany. As many as 60,000 automotive jobs in Germany are dependent on exports to the UK. Deloitte have explored the potential effect of a “tariff war” on the industry. …German politicians are realising this. The Bavarian Minister for Economic Affairs, Ilse Aigner, has said that “Great Britain is one of the most important trading partners in Bavaria. We must do everything we can to eliminate the uncertainties that have arisen.” …The Minister is correct. …A comprehensive free trade agreement is not only vital, but should be easy to achieve. In other words, spiteful protectionism from the Commission would accomplish nothing but impoverishing all sides.

The bottom line is that the U.K. has plenty of negotiating power to get a good outcome.

So what does this mean? How should British politicians handle negotiations, considering that they would like free trade with Europe?

Part of the answer is diplomatic skill. British officials should quietly inform their counterparts that they understand a hard Brexit isn’t a bad outcome. And they should gently remind EU officials that a hard Brexit almost certainly guarantees a more aggressive agenda of tax cuts and deregulation.

But remember that it’s in the interest of U.K. policymakers to adopt good policy regardless of what deal (if any) is made with the European bureaucrats.

The first thing that should happen is for British politicians to adopt a low-tax model based on Singapore. Some experts in the U.K. are explicitly advocating this approach.

I call this the Singapore effect. When Singapore separated from the Malaysian Federation in 1965, it apparently faced a grim future. But the realisation that no one was going to do it any favours acted as a spur to effective government – with spectacular results. We could do the same. We need a strategy that lays out the path to reductions in corporation tax, lower personal tax.

Marian Tupy of the Cato Institute explains why copying Singapore would be a very good idea.

Why Singapore? Let’s look at a couple of statistics. In 1950, GDP per capita adjusted for inflation and purchasing power parity was $5,689.91 in Singapore. It was $11,920.58 in the U.K. Average income in Singapore, in other words, amounted to 48 percent of that in the U.K. In 2016, income in Singapore was $82,168.33 and $42,287.17 in the U.K. Put differently, Singaporeans earned 94 percent more than the British. During the intervening years, Singaporean incomes rose by 1,344 percent, while British incomes rose by 256 percent. …the “threat” of Singaporean tax rates and regulatory framework ought not to be a mere negotiating strategy for the British government vis-a-vis the EU. It ought to be a goal of the British decision makers—regardless of what the EU decides!

Here’s a chart from Marian’s article.

Or the U.K. could copy Hong Kong, as a Telegraph columnist suggests.

Our political leaders still seem to lack a vision of what Britain can achieve outside the EU… Perhaps they are lacking in inspiration. If so, …Hong Kong…is now one of the richest places in the world, with income per capita 40 per cent higher than Britain’s.

And much of the credit belongs to John Cowperthwaite, who unleashed great prosperity in Hong Kong by limiting the role of government.

Faced with…the approach being taken in much of the West: deficit financing, industrial planning, state ownership of industry, universal welfare and higher taxation. How much of this did the British civil servant think worth transposing to Hong Kong? Virtually nothing. He had a simple alternative: government spending depended on government revenues, and this in turn was determined by the strength of the economy. Therefore, the vital task for government was to facilitate growth. …He believed in the freest possible flow of goods and capital. He kept taxes low in order that savings could be reinvested in businesses to boost growth. …Cowperthwaite’s view was that higher government spending today destroys the growth of tomorrow. Indeed, over the last 70 years Hong Kong has limited the size of the state to below 20 per cent of GDP (in Britain it is over 40 per cent) and growth has been substantially faster than in the UK. He made a moral case for limiting the size of government, too.

In other words, the United Kingdom should seek comprehensive reforms to reduce the burden of government.

That includes obvious choices like lower tax rates and less red tape. And it also means taking advantage of Brexit to implement other pro-market reforms.

One example is that the U.K. will now be able to assert control over territorial waters. That should be immediately followed by the enactment of a property rights-based system for fisheries. It appears that Scottish fishermen already are agitating for this outcome.

The Scottish Fishermen’s Federation says the UK’s exit from the European Union will boost jobs in the sector, reports The Guardian. It’s chief executive Bertie Armstrong said the exit will give them “the ability to recover proper, sustainable, rational stewardship through our own exclusive economic zone for fisheries”.

Let’s close with some Brexit-related humor.

I already shared some examples last year, and we can augment that collection with this video. It’s more about USexit, but there’s some Brexit material as well.

And here’s some more satire, albeit unintentional.

The President of the European Commission is so irked by Trump’s support for Brexit that he is threatening to campaign for secession in the United States.

In an extraordinary speech the EU Commission president said he would push for Ohio and Texas to split from the rest of America if the Republican president does not change his tune and become more supportive of the EU. …A spokesman for the bloc later said that the remarks were not meant to be taken literally, but also tellingly did not try to pass them off as humorous and insisted the EU chief was making a serious comparison.

I have no idea why Juncker picked Ohio and Texas, but I can state with full certainty that zero people in either state will care with a European bureaucrat thinks.

And speaking of accidental satire, this tweet captures the mindset of the critics who wanted to pretend that nativism was the only reason people were supporting Brexit.

Last but not least, we have another example of unintentional humor. The pro-tax bureaucrats at the OECD are trying to convince U.K. lawmakers that tax cuts are a bad idea.

The head of tax at the Organization for Economic Co-operation and Development, which advises developed nations on policy, said the UK could use its freedom from EU rules to slash corporate tax but the political price would be high. …”A further step in that direction would really turn the UK into a tax haven type of economy,” he said, adding that there were practical and domestic political barriers to doing this. …The UK is already in the process of cutting its corporate tax rate to 17 percent.

Though maybe I shouldn’t list this as unintentional humor. Maybe some British politicians will be deterred simply because some tax-free bureaucrats in Paris expressed disapproval. If so, the joke will be on British workers who get lower wages as a result of foregone investment.

By the way, here’s a reminder, by Diana Furchtgott-Roth in the Washington Examiner, of why Brexit was the right choice.

As we celebrate Independence Day on July 4, we can send a cheer across the pond to the British, who declared independence from the European Union on June 23. For the British, that means no more tax and regulatory harmonization without representation. Laws passed by Parliament will no longer have to be EU-compatible. It even means they will be able to keep their high-efficiency kettles, toasters, hair dryers and vacuum cleaners. As just one example of the absurdity of EU regulation, vacuum cleaners with over 1600 watts were banned by Brussels in 2014, and those over 900 watts are scheduled to be phased out in 2017. Brussels bureaucrats say that these vacuum cleaners use too much energy. No matter that the additional energy cost of a 2300-watt vacuum cleaner compared with a 1600-watt model is less than $20 a year, that it takes more time to vacuum with a low-energy model, and, most important, people should be able to choose for themselves how they want to spend their time and money. I, for one, prefer less time housecleaning.

Amen. As much as I despise the busybodies in Washington for subjecting me to inferior light bulbs, substandard toiletssecond-rate dishwashersweak-flow showerheads, and inadequate washing machines, I would be far more upset if those nanny-state policies were being imposed by some unaccountable international bureaucracy.

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