Brexit: The Real Message is Political, not Economic by Ed Leamer

Financial markets and economic pundits are overreacting to Brexit.   It’s Chicken Little again hollering “Uncertainty is Coming!” “Uncertainty is Coming!”    with the same shrill voice used last summer when Grexit was the crisis in vogue.

Best to notice that office buildings and factories in the UK are not being consumed by catastrophic fires and London asset managers are not jumping out of buildings.    There have been no fires or floods or earthquakes or tectonic shifts.  The $2 trillion decline of global asset valuations are only numbers on hard drives, reflecting the mob psychology of investors, but not necessarily the fundamental values.

Although having voted to leave the EU, Britain will remain an island nation close to the Western border of Europe.    The tangible assets (including location) and most intangible assets that have established Britain’s international comparative advantage remain completely intact.   There is no new currency to introduce and none of the uncertainties that would come with a new British pound.   The only intangible asset that has changed is governance:  the rules that apply to trade in products between the UK and the EU, and the rules that apply to cross-border investments, and the rules that govern how tradable goods and services are produced.      No need to mention immigration in a discussion of international competitiveness.     There is scope for international migration to affect competiveness, but it takes time and large immigrant flows to have demonstrable effects.

There is much to be said for local control over the rules of production.  Take the minimum wage in the United States, for example.   A minimum wage of $15 per hour might work well in San Francisco but work poorly in Los Angeles and Houston.   A US federally mandated minimum wage of $15 could do a lot of damage to a lot of communities, just as regulations promulgated by Brussels EU bureaucrats could damage some communities in Britain. This part of Brexit seems undeniably good for Britain, provided that Britain can make wise choices of its own regulations.

As for the other aspects of governance, it is virtually inconceivable that the UK and the EU will adopt new rules that fundamentally alter the free flow of goods and contracts and ideas between the UK and the EU.   There is a lot of evidence that governments are capable of choosing extreme inward-looking rules which create harmful effects that make everyone worse off, but there is nothing about the Brexit vote that necessarily pushes Britain in this highly unwise direction.

The Brexit vote does have an anti-globalization underbelly which has been met by a chorus of economists chanting “free trade is good,” but there is no evidence that all forms of protectionism are unwise.  On the contrary, the great economic success stories are the Asian countries which have policies and cultures and savings rates that encourage  exports while discouraging imports.     In that regard, Germany is the China of Europe.

Furthermore, traditional theories of international trade support the common sense proposition that relatively abundant factors of production (e.g. capital in the case of Britain) benefit from the larger markets that globalization affords but the relatively scarce factors (e.g. unskilled labor in Britain) are hurt  by increased competition from foreign sources of supply.    The support for globalization by the elites comes from a class that has much to gain from globalization.  These pundits seem tone-deaf with regard to the needs of the middle-class workers who are finding their livelihoods attacked both by globalization and technological change.    And these same pundits were shocked when the British commoners expressed with their votes the common-sense proposition that free trade is not universally a good thing – there are winners and losers.    The commoners are telling us:  If you don’t show greater sensitivity to the large groups of hard-working people who are being left behind, you don’t get to have your globalization benefits anymore.   (Are we listening to the Donald Trump voters?)

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