Brexit: Why The Threat Of High Tariffs Wasn’t Enough To Stop It

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Brexit: Why The Threat Of High Tariffs Wasn’t Enough To Stop It

Authored by Ryan McMaken via The Mises Institute,

Chris Johns at the Irish Times is dismayed by all the support he sees for Brexit. He’s vexed by the fact so many of Brexit’s boosters are – in Johns’ eyes – going against their own economic interests.

Johns notes, for example, that Brexit may take a significant toll on British manufacturing, and may be problematic for income growth and tax revenues. Resigned to Brexit as a fact, Johns suggests trying to make the transition as painless as possible, but insists, “Britain will either be poorer or much poorer.” But it’s too late the avert at least some damage. Thus, the narrative goes something like this: “we tried to warn you people about the dangers of Brexit to your pocketbook. But you went ahead and supported it anyway. So now you’re worse off.”

Johns is missing a big part of the economic argument made by Brexit supporters.  At the moment, even the economic data suggests the British are better off today, but the Brexit gambit for many has always been one in which supporters calculate political independence will bring long-term economic gains, even if there are problems in the short term.  This hardly proves supporters are acting against their own economic interests, or that they don’t understand economic realities. It simply shows their predictions of the future are different from Johns’s.

But Johns’ misunderstanding is bigger even than this.  A big part of why he assumes people will soon be worse off thanks to Brexit is because he is too limited in how he understands the process of calculating costs and benefits. Once we move beyond “homo economicus” notions of benefits being limited to monetary gains, we realize the benefits of Brexit can be found in ways that aren’t tracked by any government office, and don’t show up in any statistical data.   Economists and pundits who limit their calculations to measurable statistics are missing a big chunk of how humans measure and value the world around them.

We Can’t Put a Number on the Opportunity Cost of EU Membership

Government statistics have been devised to keep track of identifiable and countable events and dollar amounts. This is why numbers such as “unemployment rates” and “median incomes” form the backbone of government stats. They can be identified and counted with relative ease based on survey data or direct observation. But these numbers are hardly comprehensive in measuring the real world.

But much of the concern over EU membership has focused on issues that are hard to quantify, such as government regulations and lost opportunities. How exactly does one quantify a new regulation on British businesses handed down by EU bureaucrats? An individual business might be able to hazard a guess, but aggregate data is far less reliable and far less available.

Even harder to count is the opportunity cost of EU membership. As noted by EU critics, for example, membership in the EU has limited the ability of the UK to expand trade outside the EU bloc. There’s no way to put a number on how much these lost opportunities have cost British households. Certainly some researchers have tried. But we end up debating the accuracy and relevance of the research. Ultimately, it all requires a judgment call as to whether or not EU membership is “worth it” to a specific person.

The “Psychic Profit” of Leaving the EU

Other things are even harder to quantify than lost opportunities. These are what many voters perceive as the intangible benefits of leaving the EU.

For example, a pro-Brexit voter might argue that British laws should be decided in Britain—even if this means paying higher tariffs. Thus: political independence is more valuable than selling goods to France at a lower tariff rate. Obviously, there’s no way to determine exactly how much benefit “political independence” produces for a person who values it. But the value is real.

We’re now in the realm of “psychic profit,” which is the profit that a person perceives in his own mind from a certain action or state of affairs. The problem with psychic profits is that they are not quantifiable as money profits are. As economist Ludwig von Mises noted, at a fundamental level, profits and lossses are “psychic qualities and not reducible to any interpersonal description in quantitative terms.” Moreover, Mises notes that the “psychic phenomena” from which these valuations derive involve “incalculable intensive magnitudes.” Even if a person values Brexit more than low-tariff trade, it’s impossible to put a number on how much more.

A similar accounting problem arises with the immigration issue. Some voters support Brexit because they suspect or hope that it will reduce immigration. In this case, some have concluded that their psychic profits are improved by being surrounded by people of similar language and culture. 

Faced with the idea that greater controls on migrant labor could push up the cost of living, some may nonetheless conclude the psychic loss resulting from immigration outweighs the monetary benefits of low-cost labor at the supermarket.

All of this should illustrate that when we’re talking about a voter’s decision to support a certain policy, we’re not exactly employing an exact science. By supporting policies that might ultimately lead to higher prices or higher foreign tariffs, one is not necessarily falling victim to economic illiteracy. One is simply taking a position that, in one’s mind, something that can’t be measured in pounds is more valuable than something that can be measured in pounds. There is a rational—and possibly well-informed—process of calculation going on here. It’s just a calculation that’s impossible to quantify.

Some economists find this sort of thing quite irksome, however. Johns, for instance, bemoans the fact that the “culture war” behind Brexit has led to ” the economy tak[ing] acceptable collateral damage.” He apparently means that voters have abandoned what he considers to be sound economic thinking in favor of “benefits” that can’t be counted in any ledger.  In the minds of pundits like Johns, people are irrational if they chose a policy that might reduce their incomes as measured in dollars or pounds.

The Real Problem: Majorities Forcing Policies on Minorities

Brexit critics like Johns would do well to admit their adversaries aren’t necessary irrational economic illiterates. But even if we all agree different people calculate economic benefit in their own non-measurable ways, we haven’t solved our political problems. 

Policies like Brexit will always be problems so long as people who make very different value judgments are forced to live under a common government.  We have a problem because the democratic majority can impose a preferred policy on the losing minority. 

In the case of Brexit, for example, nearly half the population appears to be either indifferent to membership in the EU or actively in support of it. And just as statistical economic data can’t tell us whether or not pro-Brexit supporters are “right,” it can’t make a judgment about EU supporters. Many EU advocates simply like the fact the EU hands down lots of environmental regulations to all member states. Supporters may like that EU membership (presumably) increases total immigration for reasons totally unrelated to economic factors. Some feel they benefit emotionally from a politically united Europe.

But this doesn’t mean that this minority of voters ought to be forced into leaving the EU because 51 percent of the population says so.

The ideology underlying democracy offers no answer to this. We have a situation in which about half of the population believes that it profits (psychically or otherwise) from one policy. But about half of the population believes it profits from the opposite policy. This problem becomes even worse when reduced to a regional level. An outright majority of residents in Scotland, for example, apparently opposes Brexit. Now that Brexit is a reality, a slim majority of Scots support independence. It would seem to violate basic notions of justice to insist that Scotland be held to the dictates of the English majority forever.

Scottish Separatists Are Now the “Crazy” Ones?

In spite of years of being told how economically inept they are for supporting Brexit, some are now turning the same arguments on the Scots. This pundit, for example, might as well be saying  “look at those crazy Scots. They want to cut themselves off from their best trading partner (England)!” In the minds of those opposing independence, the dictates of economic good sense mean that Scotland should stay in the UK. But the anti-independence pundits may be making the same mistake the anti-Brexit pundits were making. It could be pro-independence Scots feel that they would gain more from independence than from unity—even if government stats say otherwise. If many Scots truly believe this strongly, it will be very hard to convince them otherwise, no matter how many studies by economists are trotted out.

Ultimately, we’re still left with a political problem that can’t be solved by insisting all the intelligent people agree with us because our spreadsheets and bean counters tell us which political position is “best” for us.

None of this should be construed to suggest that sound economics is wrong. Yes, low tariffs are better than high tariffs. Yes, business owners ought to be free to hire workers regardless of what country those workers are from. Yes, government regulations on businesses are a destructive burden, whether imposed by London or by Brussels. But the Brexit debate wasn’t really about whether high tariffs are better than low tariffs. It was about who should decide tariffs, and where and how. It was about issues far beyond whether or not an additional 1 percent growth could be wrung out of GDP next quarter. Many have tried to turn Brexit into just a debate about economic policy. But economics has never been a reliable guide as to how many people calculate the value of leaving the EU.

Tyler Durden

Fri, 02/07/2020 – 05:00

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