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Brexit: Clearing Up the Economic Nonsense

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The second paragraph of the Greek memorandum of understanding reads: “The Government commits to consult and agree with the European Commission, the European Central Bank and the International Monetary Fund on all actions relevant for the achievement of the objectives of the Memorandum of Understanding before these are finalized and legally adopted.” This is what total loss of economic sovereignty looks like.

In no way does the United Kingdom’s position vis-à-vis the European Union resemble that of Greece with respect to the Troika. In fact, the United Kingdom, financially, can never be forced into a position where its leaders would be blackmailed into signing such a document simply because the UK retains the Pound.

And yet the referendum on the 23rd of June is being argued on the explicit premise that a stifling loss of economic sovereignty has already occurred, that if only the UK were out of the European Union its economy would be booming or that if it leaves its economy would be crushed, and implicitly on the assumption that the British Parliament is financially constrained in the same way as the Hellenic Republic. Total nonsense.

In fact, both sides of the debate use economic predictions that gloss over the role of private sector debt, the city of London’s position as the world’s leader in financial derivative products, and the policy space available to the UK as a rich country that issues its own currency.

Take the EU “membership fee.” For arguments sake assume that all of it is wasted, on let’s say muffins. What actually happens when over the course of a year £13bn is sent to the EU? What is the impact of this on the British economy?

First Parliament instructs George Osborn to send money to the European Commission. George Osborn tells someone who works for him to type a number into a computer (here British Pounds are literally ‘keystroked’ into existence) transferring a certain amount of money to a British bank account held by the European Commission. Since the British Pound is only used as a currency within the British economy the EC can only buy muffins from British Bakers, thereby boosting the demand for British baked goods and increasing British GDP.

What happens if the European Commission feels a bit snobbish and wants to buy French muffins? Well, then the EC sells these Pounds for Euros; the Pounds remain in the British banking system but are held by someone who wants to buy British goods and services, or save in British Pounds. This causes a downward pressure on the exchange rate (which is good for British exporters) and the money is either spent on goods and services inside the UK boosting GDP, or ends up, eventually, back in the Treasury when it is used to purchase Treasury bills. That’s it. No need to defund the NHS. British Pounds are always available for the British government because it issues them. What may or not be there is what is to be purchased, i.e. the real goods, services, and resources that the government or the private sector want to purchase, in which case there is inflation.

Since the UK is not in the Euro and does not abide by the macroeconomic restrictions agreed upon in Maastricht in 1992 it cannot be forced to make economic decisions the way that a bankrupt country like Greece can. That means that if funds are not made available to properly supply the NHS with the skilled professionals and the medical resources it needs to function, it is entirely because Parliament has decided that it doesn’t want to properly fund the NHS, or those resources simply are not there. The same goes for other public services such as public housing. As a very rich country with ample access to domestic and international resources arguing that a sum equal to less than .5% of its GDP being “sent” across the channel is somehow impeding economic growth or the proper funding of public services is as inane as a fat man blaming uncomfortable shoes for why he won’t hit the gym. As long as the shelves are stocked, new shoes can always be bought, and the UK is fully capable of finding the resources necessary to meet the needs of its population. The reason it doesn’t is because, like the fat man who won’t get in shape, the current Parliament doesn’t want to.

Then the question becomes why are people so pissed off that a sizable proportion of them want to leave the EU? Why do so many really believe that it’s the cause of their despair, that things will get better if they leave?

Could it be regulations? Are they holding back a prosperous future for Brits? They do suck, but no. It should be clear that when some like Nigel Farage uses the word “regulation” they are doing little more than using a sophisticated euphemism for standards. Is there a legitimate concern over the loss of some sovereignty from being an EU member? Yes. Are many EU regulations ridiculous? Yes. But the UK already among the least regulated economies in the developed world, and yet living standards are lower than in far more regulated EU nations. How many regulations are involved in the production and sale of pillows is not really what Brexiteers care about.

When a word as broad as regulation is used in conversation to make an economic point, know that you are being asked a very simple question: do you want higher or lower standards? Do you think that you should have more or less lead in your drinking water? Should workers have more rights or fewer? Should workers be given rights concerning their physical and emotional health? Should your food be more or less safe? Should your property rights allow you to ban fracking or should someone else’s allow them to do it on your land regardless of what you and your neighbors think is best for your children?

The belief that regulations are the main problem is a result of nearly 40 years of pretending that markets alone solve all problems and that fiscal policy should be domiciled to the poor house of austerity. The result has been an explosion of private debt and a working class trying to find reasons why life is more stressful even though they live in one of the wealthiest societies in human history. Like everywhere else in the west, working class anger is being misdirected towards destroying institutions rather than changing them or building better ones.

But the rage is legitimate. Private debt levels in the UK are obscene. According to the Bank of International Settlements, total credit to the non-financial sector is above 260% of GDP,  taking out public sector debt it is still well above 150% of GDP. With the cost of servicing this debt around 15% of GDP.

Private debt creation is extremely important in a well-functioning economy because, to quote the Economist Steve Keen, “Aggregate spending in the economy is financed out of both income and new debt. Mainstream economists ignore the latter source, on the fallacious argument that debt merely transfers spending power from one person to another. This proposition was rubbished recently by the Bank of England in an excellent publication: ‘Money creation in the modern economy’ where the Bank observed that lending creates new money—rather than allocating existing money between savers and borrowers—and the repayment of debt destroys money. This phenomenon means that the change in debt each year plays an integral role in changing the level of demand. A rising level of debt means a rising level of demand; a falling level the reverse.”

But, “the dangers are of course that debt has to be serviced, and repaid, and the ventures funded by debt have to succeed for both these conditions to be fulfilled. Debt can also be used to fund pure speculation rather than new investment or working capital, and speculation (while it can be individually profitable) doesn’t increase an economy’s productive capacity. When debt grows much faster than GDP for an extended period, it can lead to bubbles and an accumulation of failed ventures that ultimately lead to a financial crisis.” Hence the fall in living standards, the ridiculous price of housing in cities like London, the rise in consumer debt to somewhat maintain those falling livings stands, the ridiculous wealth of speculators such as Hedge Fund managers etc… Hence the rage.

On top of this credit are financial derivatives whose notional “value” according to the Bank of England stands at $608 Trillion dollars. To put that in perspective that is about ten times the size of Global GDP. The same report details that the UK “accounts for almost half of all global activity in interest rate derivatives and over a third of global activity in foreign exchange derivatives contracts.” These are among the types of products that helped nearly destroy the Global economy in 2008.

As reported in the Guardian “UK GDP would be between -3.8% and -7.5% lower depending on whether the UK strikes a Norway-type trade agreement or a bilateral (Canada, Turkey, Switzerland) agreement, or if we simply adopt World Trade Organization rules,” according to the Treasury. But they don’t really know that. An event like leaving the EU has never happened before and the Treasury’s analysis is little more than 200 boring pages of guess work. In the short run probably very little will happen as regards to trade if there is a vote to leave. In the long run, who knows? What really matters is what happens in the financial sector after such a vote in both the short and medium term. The US barely survived the secession of South Carolina 150 years ago- it took a civil war to keep the Union together.

Not that the situation is nearly as dire as that, but if the UK votes to leave and then there is the expectation that other countries, in particular, Eurozone countries such as France, are going to follow then just the fear of a collapse of the Euro could cause a financial crisis.  At which point, as in 2008, being a Global financial center because of lack of regulations works against you: banks fail, incomes fall, the private sector tries to deleverage (destroying money) further reducing demand and the incomes from which these debts are serviced and another deflationary event occurs.

Both sides argue that the Trade issue is on their side and a boon for reducing the deficit as well. But the deficit is the net financial savings for the UK economy, it’s simply a matter of accounting here and not at all in the interest of British households for the government to run a surplus with private sector debts as high as they are. For the government and the domestic private sector to both run a surplus- in order pay down its own debt- there must be a corresponding current account surplus of equal size. For those that want to leave here is where the “let’s turn the UK into the next Singapore” argument comes in. Of course, Singapore is a city-state with a population just above half that of the city of London. It is also a “de facto one-party state” ranking near the bottom of 167 countries on Freedom of the press which, on top of its small size, makes it very easy to employ such an economic strategy. Nonetheless, Singapore still has a very large public sector debt, over 100% of GDP, which like any country whose debt is held in a currency that it issues is not a problem.

Finally, many of the economic arguments and sovereignty concerns by both sides seem to circle around immigration and jobs. You should immediately be suspicious of any argument that immigrants are lazy and want to take advantage of the welfare system and public services while at the same time they take away jobs from native (whatever that means) Brits. In general, these arguments are blatantly racist. But there is a legitimate anger towards the state of employment and of public services in the UK that fuels this nativism.

According to the Office for National Statistics: the official unemployment rate is 5.1% 1.67 million people are “not in work but seeking and available to work,” and 8.92 million people are “economically inactive.” The unemployment rate is actually worse and leaves out those who have dropped out of the labor force, are underemployed, especially the young who work in meaningless service sector jobs, and those who are older and can no longer find jobs suitable to their training, and the capacity utilization rate is at a humble 79%, which means there are plenty of unused resources in the British economy.

Unemployment is always a creature of the government in any country with its own currency. If the private sector does not, or cannot create full employment on its own it is in the purview of the government to either generate sufficient aggregate demand or directly provide employment within the constraints of its societies’ natural, capital, and labor resources.  This was, after all, the economic lesson of the Great Depression and the Second World War.

If there are shortages in public housing, the solution is to direct resources towards affordable and public housing, not to hermetically seal the United Kingdom off from the rest of the world. The same goes for dealing with the shortfalls of the NHS. As previously stated the United Kingdom is a rich developed country with the resources to deal with its problems, that includes training medical professionals and making sure that they have access to the resources necessary to do their jobs.

As for the general level of employment, considering the demographic, health, and climate problems facing the UK (and the rest of the west) the only reason why meaningful employment is not found for those seeking work or working at places like Starbucks is because resources aren’t being applied to the right places or are being left unused.

About ¾ of total electricity production comes from fossil fuels and Nuclear energy, by 2065 26% of the population will be 65 or older, between 22-26% of children 5-7 are overweight and approximately 25% of adults are obese according to the OECD. Simply applying resources to the solving these problems would create substantial employment opportunities in both the public and private sectors.

A ten-year plan to change the energy system would mean weatherizing millions of homes, public and commercial buildings, adopting renewable energy sources (which would boost manufacturing and construction), changing food networks and the transportation industry. That means that private companies would know in advance that they would be receiving an income stream from these activities and boost their own investment to take advantage – what happened when the Interstate Highway system was constructed in the 1950’s United States. The same goes for expanding the caring sector to deal with health issues and an aging population.

Structural unemployment and underemployment are little more than the result of a refusal by parliament to properly employ these people either directly or indirectly. It is not the fault of French farmers- however pesky they maybe- or Polish construction workers. Contemporary social problems in immigrant communities largely, but not entirely, come about because of passive social policy and lack of organization. The solution is proper integration, which requires that resources and employment opportunities be made available, rather than allowing immigrants to pool in communities that become dens of unemployment and poverty.

In the end, to quote Alexander X. Douglas, from the University of London, “the question for Britain should never have been constructed as one of what is best for Britain. It should always have been a question of how Britain can be its best.” The UK’s participation in the European Union does nothing to impede its ability to deal with its problems. The fault lies with politicians who refuse to do their jobs and with citizens who refuse to make them do their jobs. The result has been working class anger and the rise of nativist organizations such as UKIP.

More articles by:

David L. Glotzer writes for Déclassé Intellectual

CounterPunch Magazine


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