It’s the Economy, Stupid
by Mustang- Our man on the beat in Great Britain
During the 1992 presidential campaign, where George H. W. Bush sought reelection against William Jefferson Clinton, the United States was in an economic recession. The impact of this can be demonstrated by the fact that in March 1991, Bush had a 90% approval rating (following the ground invasion of Iraq), but in August 1992, his approval rating was somewhere in the neighborhood of 36%.
James Carville, working for Clinton as his campaign manager, addressed his campaign staff on issues that might work for Clinton during the final run for the White House. Carville thought the campaign should focus on three things: (1) Change vs. more of the same; (2) Don’t forget about healthcare, and (3) It’s the economy, stupid.
We’ve heard that phrase repeated frequently in subsequent elections. The problem is that beyond its underlying truth, no one really knows how the economy works. We do have a sense about the level of our disposable income, but most of us have no clear idea how political policies impact against our financial circumstances. Not to worry, though … economists don’t know, either.
Here’s something else we do not know: recent history.
European Economic Community
In 1957, several European nations formed what was then called the European Economic Community (ECC). Great Britain was not part of this effort, primarily because French President Charles de Gaulle refused to allow British membership. The UK’s admission finally came in 1973, after de Gaulle stepped down as president. But two years later, in 1975, Britain’s ruling Labor Party held a referendum on whether the UK should remain in the EEC. Sixty-five percent of the British people answered with an overwhelming “yes”.
In 1983, the Labor Party was trying to win the national election on a platform of withdrawing from the EEC. The attempt failed and Margaret Thatcher was reelected by a significant margin.
In 1997, fourteen years after the EEC became the European Union (EU) James Goldsmith formed a Referendum Party, pledging to hold a national referendum on the question of the UK remaining in the EU. Goldsmith’s efforts garnered him less than 3% of the nation’s support and the referendum party failed to win even one seat in the Parliament.
In 2012, Prime Minister David Cameron rejected calls for a referendum on this issue, but a year later, he announced that a referendum would be held were he to be reelected in 2015. Soon after his reelection, the European Referendum Act was introduced to initiate the process of national referendum. In 2016, Cameron announced that the referendum would be held on 23 June. Cameron was a staunch advocate for remaining in the EU; when the vote overwhelmingly demanded withdrawal, Cameron resigned. Suddenly, the burden of creating an acceptable formula for Brexit fell upon Theresa May, who at the time was serving as Home Secretary … her political background was that of a “one nation conservative.”
This is the recent history of the Brexit novella. Now, as to economists …
In the USA, there are somewhere around 15,000 non-academic economists. They earn from around $83,000 to $150,000 annually. They earn these remarkable salaries even when their predictions and analyses are completely wrong. In fact, economics is such a lucrative vocation that American universities grant close to 1,000 PhDs every year. We find these people employed by private corporations, followed by federal and state governments; at the lower end of the income scale we find college professors who earn their pay by spouting economic theory.
In contrast to the foregoing, the United Kingdom only hosts around 1,000 economists, most of whom work for the government in more than thirty different departments. What this suggests to me is that there is less “noise” about economics in the UK than there is in the United States —which is not to suggest that we understand it any better than our British cousins, only that we’re exposed to more of it than they are.
Economists earn their robust salaries by “studying and analyzing” data in order to identify trends in various economic activities, predict confidence levels, and attitudes among consumers. To accomplish this, they rely on mathematics and computer programming (normally referred to as models). From these processes come recommendations about how to improve the economy or take advantage of developing trends. In the United States, there are no legally required educational requirements or licensure for an economist. All that’s needed in order to bill oneself as an economist is 21 semester hours of college study, bolstered by a few more hours of introductory statistics, accounting, or calculus. There are numerous fields within which an economist could be employed, including banking, finance, accounting, marketing, lobbying, and political consulting. In other words, an economist has about the same veracity in his field as a meteorologist has in his.
I’m no economist. In fact, the more I know about such things, the less I understand. Currently, I’m trying to understand the clamor in the United Kingdom regarding its impending exit from the European Union (called Brexit). Should I rely on anything British politicians are saying about Brexit, I would end up with less understanding, not more. In this, I join the ranks of most British citizens. Unhappily, for the British people, their economists know even less than I do.
So —I’ve been searching for a single document that will tell me what “we” might expect to happen in the post-Brexit world. I’ve sort of found the answer …
According to a paper created by Gemma Tetlow and Alex Stojanovic of the Institute for Government, the result of Brexit all depends on what your definition of the word is, is. This rather lengthy paper underwhelming concluded, “Brexit will lead to a significant change in the UK’s relationship with other European countries.”
1. There are as many economic projections about the effects of Brexit as there are British economists
2. Each projection depends on as many varying economic assumptions (otherwise known as guesses)
3. None of these economic models will be accurate if any of their assumptions are wrong
Well, I suppose that economic relationships are at best difficult to understand. As an example, two years ago, the United Kingdom was the tenth largest export economy in the world. That’s the good news. The bad news is that the UK imported from other countries far more than it exported. We call this a negative trade balance. In 2016, the UK had a negative trade balance of $235 billion. Of course, the British trade imbalance is far less than ours, but as a measure of the British economy, comparing it to the trade imbalance in 1995, (using the current value of money) it came to only $52 billion. The question then becomes, how has membership in the EU benefited the British economy or its people?
There is more that confuses me. Why wouldn’t the United Kingdom prefer trade with the United States over the European Union? The US and UK share a common language, a similar legal system, similar institutions, are culturally compatible, and, allowing for sophisticated marketing schemes, American consumers might prefer British goods over those made in China. In both economies, the service sector is the largest percentage of the national economy. Neither country produces as many goods as they did forty or fifty years ago … significant because the services sector simply sells things to people who earn their living by selling things to other people. Wealth isn’t what you sell, it’s what you produce.
The European Union hosts a single market. There are economists who argue that EU membership fails to serve the interests of the British people, particularly as it applies to agriculture. EU regulations control the way farmers produce their goods, how much of it they are allowed to produce, and amazingly, how much they can charge. This is not free-market capitalism—and agriculture is but one sector of several. Even if we ignore such limitations as language, legal systems, enforcement mechanisms, there is hardly any convincing argument favoring EU membership.
Granted, there is much I don’t understand about the complexities of a national economy —but here is what I do know: Great Britain is the third largest economy in Europe (after Germany and France). The agricultural sector is intense, highly mechanized, and perhaps the most efficient in all of Europe. The UK produces 60% of Europe’s food needs and does so with less than two percent of the total labor force. The British control large sources of energy. Financial services are key drivers of British GDP growth. It’s weakest link: manufacturing. Why, then, shouldn’t the UK capitalize on its strengths while working to improve its weakest sector?
My guess is that British politicians, much like our own, rely too heavily on the advice of egg-head economists, and not enough on basic common sense. High tax rates are harmful to every economy. In Great Britain, social service expenditures are far too high. Deficit spending is a major problem … one of the highest in the G-7 nations (3.6% of GDP). Currently, the UK is attempting to lower its corporate tax rate from 20% to 17% … a good first step, but income taxation is a disaster of epic proportions. British citizens are taxed at 20% of their income up to £46,350, and 40% of their income over that amount to £150,000. This makes no sense to me; every £1 (or dollar) a citizen pays in taxes equates to £1 (or dollar) that is unavailable for consumer spending or saving. Consumer spending benefits the national economy; saving money is in the long-term interest of individual citizens.
As Great Britain seeks to reestablish its economy, Brexit may indeed cause an economic slowdown, but in the long-term, the economy could grow substantially … but this depends entirely upon how well British politicians understand the impact of their all-too-often brainless policy decisions.
Maybe there is someone in reader-land who could sort this out for me. I’d certainly welcome the education.