About Alex Harrowell

Alex Harrowell is a 33-year old research analyst for a start-up telecoms consulting firm. He's from Yorkshire, now an economic migrant in London. His specialist subjects are military history, Germany, the telecommunications industry, and networks of all kinds. He would like to point out that it's nothing personal. Writes the Yorkshire Ranter.

A simple solution for #Brexit-related uncertainty

Prominent Brexiter Andrew Lilico, I see, argues that we could avoid the uncertainty created by triggering the Article 50 process by not doing so:

The Treasury says an instant triggering of Article 50 post-referendum would be a driver of uncertainty. In which case, maybe don’t do that?

Indeed. Article 50 of the Lisbon Treaty lays down the process for voluntary withdrawal from the EU. You trigger it if you want to leave the EU. If you haven’t, you haven’t left the EU. Not triggering it – staying in the EU – would indeed avoid quite a lot of uncertainty.

But, Andrew, we could go one better. We could completely eliminate it. All we need do is vote to stay in.

#Brexit, trade, and the J-curve

A couple of thoughts on the economic consequences of #Brexit. HM Treasury, the Institute for Fiscal Studies, and others have published their efforts to forecast the short- to medium-term impacts of leaving the EU, and it’s fair to say none of them are good. The point I would like to highlight is that everyone seems to expect a big – 15% is a consensus number – devaluation in sterling post-Brexit.

I’m usually quite a “cheap pound” guy, so you might think I’d see this as an offset to the risks of Brexit. Actually I don’t, and here’s why. Just as a “strong” currency isn’t good in itself, but instead good for some groups in society and bad for others, a “weak” currency is good for some people – exporters, basically – and bad for others – importers, basically. A fall of 15% in the sterling trade-weighted index will help exporters in that it’s an immediate 15% price cut, and harm importers by the 15% increase in their prices. On balance, you’d expect it to reduce the current account deficit by 15% * some elasticity parameter.

It’s not that simple, though – there’s the famous J-curve effect. It might take time for exporters to increase their volumes, while import prices go up straight away. As a result, devaluations often have a contractionary effect immediately, and then a greater, expansionary one later. The problem, in the Brexit scenario, is that we propose to do something that will induce a substantial devaluation at the same moment that we commit ourselves to a whole lot of uncertainty regarding trade with Europe.

The case for it all turning out OK is basically a bet that the lower sterling trade-weighted index will lead to enough growth in export volumes to make it up. However, we’re meant to be taking this bet just at the time we do something that’s likely to constrain volumes on about 44% of our exports, even if only temporarily. Also, a lot of export-heavy companies are manufacturers integrated in international supply chains, who probably use quite a lot of intermediate products sourced from inside the EU. These companies will see their input prices rise sharply, while they may not be able to take advantage of the cheap pound on about half their market. As a result, they will experience quite a dramatic margin squeeze.

I can certainly see this leading to a beast of a J-curve recession, even if it doesn’t manage to push the housing market off the wall. One important trigger for a big drop in sterling, by the way, would be a drop in foreign portfolio investment in the UK. A hell of a lot of that is real estate, and there is already evidence of investors putting purchases on hold.

Before you all write at once, I stick with the 44% number. This has been criticised due to the so-called Rotterdam effect, where goods going to the wider world get trans-shipped through EU load centre ports like Rotterdam, Antwerp, or Hamburg, and therefore counted in the port statistics as exports to the Netherlands, Belgium, or Germany. There’s a good account of it here. I do not accept that this is a problem. Rather, I do not accept that it is a valid argument that European trade is less important than we think.

If shippers in the UK choose to ship to, say, China via Rotterdam rather than direct ex-Felixstowe or Southampton, they presumably do so for a reason, typically that bigger volumes and bigger ships mean lower freight rates and more choice of routes and sailings. There is no reason, I think, to expect Maersk or whoever to call at UK ports more often post-Brexit. Shipping via Rotterdam to somewhere extra-European represents trade with the EU in that the UK imports port services from the Netherlands, paid for out of the revenue from exporting. If we had a port the size of Rotterdam, we certainly wouldn’t discourage European shippers from using it! And of course, we do – just it’s an airport, and it’s called Heathrow, and just listen to the business lobby hollering for more capacity there.

In conclusion, one of the contradictions of Brexit that bothers me is that its strongest advocates seem to believe that relatively petty regulatory burdens are enormous restraints on the economy, whose removal would lead to a surge of growth, while they also seem to believe that incurring even relatively petty trade barriers would mean, well, nothing much. You can’t have it both ways. Either the economy is robust to petty interference, in which case we might as well stay in, or it’s not, in which case we surely have no business putting a new layer of it between us and Europe. After all, it’s unrealistic to imagine the electorate ever agreeing to some sort of Donner Party libertarian utopia – we wouldn’t be swapping open trade, with levels of regulation that don’t seem to do German exporters any harm, for a tariff, but zero regulation. Instead we’d likely get a worse relationship with Europe by quite a lot, offset by a few doubtfully useful regulatory changes at the margins.

I find this baffling. Perhaps, in the end, the belief is that even trivial regulatory changes would be transformative, and the relationship with the EU would, well, somehow turn out OK in an unspecified manner. That strikes me as too many leaps of faith for one lunchtime.

PS – don’t trust me, ask a Felixstowe docker!

It will make a difference. FXT will surely suffer as they will no longer be able to tranship to R’dam and elsewhere without documentation as they can now. Why would shippers go through two lots of clearance procedures when they can cut FXT out and ship straight to the continent?

Why IS hates refugees, and what that tells us about it

The Syrian passport found on one of the Paris attackers turns out to be a fake. The Egyptian one Le Point thought belonged to another turns out to belong to a bystander. The only attacker for whom we have a positive identification so far is a Frenchman. There are a couple of possible readings for this – it’s possible that a home-grown terrorist who went to Syria used the fake document to return discreetly, that a terrorist who entered the EU as a refugee used a fake document because they came from Daesh country, where valid ones are not issued, or that the attackers wanted to label their act as a blow struck in the Syrian war, or alternatively, that they wanted to smear the refugees. Mike Giglio, of Buzzfeed, was early with this one.

This may seem a bit conspiratorial, but you ask Germany’s interior minister, Thomas de Maiziére. Since I drafted this post on Sunday, more information has emerged and it turns out all the passports so far found are stiff, and every one of the perpetrators so far identified are either French or Belgian nationals. Even the Daily Hell has recast its original OMG REFUGEES coverage as how easy it is to buy fake passports. It seems to be approaching the status of conventional wisdom.

In fact, there’s quite a lot of evidence that the leadership of Daesh is furious with the refugees. Aaron Zelin has collected a string of their propaganda videos in which Daesh leaders alternately implore the refugees heading for Europe to stay, denounce them as traitors, and assert conspiracy theories about replacing proper Sunni Muslims with Shias, Druze, and Christians. With exquisite irony, this last mirrors the ideas of Umvolkung or the grand remplacement dear to European right-wing extremists. During September, as the exodus began, this seems to have been a major theme of IS propaganda. Over the weekend, they reprised the theme.

The explanation of this is the S in IS – it’s a state, and it’s a particular kind of state. It offers a particular religious and political group – Muslims who accept its claims – three things. First, a defensive haven of security. Second, a beacon of inspiration. Third, a champion of strength, waiting in overwatch to defend them outside its borders. This is to be achieved by emigration as a form of revolution.

Moving to the Islamic state helps to create it. It also helps to achieve its aims. And it is also a way of pursuing personal transformation. Emigration to Daesh is both a physical journey, and a journey in the sense of Tony Blair’s memoirs. Participating in the creation of the state is meant to change both the community, and the individuals who take part. War is either accepted as necessary in self-defence, or actively sought as an accelerant to the process.

This was true, more or less, of many other states. The United States of America incorporates this mythos into its official founding story. This tweet is snarky, but it gets at the point.

The Soviet Union started off a bit like that. You could say the same for the Crusader kingdoms – they aimed to protect the Christians of the Levant and their holy sites, to deter anyone else who threatened them once that was achieved, and to transform themselves by demonstrating both Christianity and chivalry. Bits of those four elements show up repeatedly in colonial-era narratives about emigrating to escape the decline of the old country and to be a better person. And Israel probably expressed all four elements more thoroughly than any other state. In fact, I borrowed the elements pretty much from Theodor Herzl.

A more radical and aggressive version of this sets out to force its people to leave and join the new state. Consider some more IS texts. The point is to eliminate even the possibility of coexistence, to force everyone to take sides.

There were even people in the Revisionist wing of Zionism who were willing to treat with the Nazis for exactly those reasons, as the ultimate polarising force. Whatever you might say about this Hitler fellow, he wasn’t going to leave any grey zones of coexistence lying around.

This ought to be familiar, again, because it’s the doctrine of Barry from Four Lions:

The idea of seeking security in Paris – or, heavens forbid, Berlin – is intensely subversive to such a state. It crushes their claim to provide a safe haven for the faithful. It tramples Daesh’s claim to be an inspiration to Muslims. And it makes the idea of providing a defensive overwatch to them around the Middle East look absurd.

The refugee exodus is also harmful materially. IS is a state, and a state at war craves manpower. It has frequently been pointed out that young men are over-represented among the refugees. This is because they went ahead, hoping to find a home and bring the rest afterwards. And it is also because IS is most likely to conscript them. It may also be because when the World Food Programme temporarily ran out of cash, people calculated it was more likely to keep feeding the most vulnerable. They had a choice; believe in IS, or in Europe.

Perhaps we should see the last few weeks as the result of an IS crisis. The movement of refugees was a political disaster. Although a lot of people are sceptical about Russian aims, they can hardly have been pleased to see the roaming Hinds overhead. US airpower has been hitting high-value targets again, after it was reinforced recently. Other Syrian forces have been receiving a lot of guided weapons again. The Kurds have been advancing towards Sinjar, which they took on Saturday, and threatening to cut the road from Deir ez-Zour to Mosul. What to do?

The answer seems to be to strike in the deep, using their ability to recruit in Europe as a kind of terrorist air power. The point is simply to impose costs and spread fear, but also to put soldiers on the streets who might otherwise be deployed somewhere closer. And if they’re really lucky, on the strategic level, to prove that we agree with them deep down on at least one issue.

Growth is a driver of migration. Get used to it.

A seriously important blog post. Migration is a problem of success, not failure.

As sub-Saharan Africa increasingly rises out of deep poverty, more people can afford to emigrate and are aware that life might be better somewhere else. The propensity to migrate is positively correlated with real per-capita GDP. In Latin America, however, the correlation is negative. Potential migrants are likely to be better off at home, except the poorest of the poor.

The conclusions we can draw from this are salutary. First of all, they’re not going away. The development train has left the station, and one of its effects is that migration has become an option. Perhaps the pressure will reduce as more countries reach the middle-income level, but it’s not as if there aren’t plenty of migrants from Latin America to the US.

Second, neither calling for more development aid (that you have no intention of delivering) or giving lectures on corruption and good governance will help at all, because migrants, as opposed to refugees, are not motivated by desperation but rather by hope. Nor will yelling about “benefits”, because they’re not beggars but economic migrants in the truest sense of the word.

It’s also worth pointing out that the distinction between a refugee and a migrant is a spectrum rather than a bright line – if you can’t think of a way to persecute people by economic means you’re not trying, and as Rick points out above, development encourages movement for refugees, too.

Third, very visibly, they are following the same routes trade follows, carrying their smartphones and wearing their FC Barca shirts. You can’t have 44-tonne trucks driving in two or three days from Dover to eastern Turkey and not have people moving along the same roads.

The overwhelming conclusion is that we’ll just have to live with them. Punkt, ende. However I expect a lot of squirming on the hook before this sinks in. Like the War on Drugs or the rules of the eurozone, immigration is one of those issues where nobody believes in the system, nobody would design anything like it again, but it stumbles forward by the sheer inertia of incumbency.

What is happening to the soft Eurosceptics?

A while ago I wrote at the Pol that British public opinion had been moving steadily towards staying in the European Union. I used the YouGov poll series as my source. This is a different polling firm, Survation, but it is telling that their basic result is 45% YES, 37% NO, 18% DK. They also provide a breakdown of voters by level of conviction.

suv

There are substantially more hard YES voters than hard NOs. Interestingly, there are fewer soft YES voters than soft NOs (12% vs 14%), which is good news for the YES – they have fewer potential switchers from their side, and more potential gains from the NOs.

Survation polled the same question back in May, and they got 47% YES 40% NO 13% DK. However, at the time they had a different relationship between soft and hard votes; 30% soft-YES, 16% hard-YES, 27% soft-NO, 12% hard-NO.

Clearly there’s movement from the “soft” category to the “hard” category. It’s not the same for the NOs as it is for the YESs, though. The percentage of hard YESs has doubled (16% to 30%), while that of soft-YESs has fallen only 4 percentage points (16% to 12%). The percentage of hard NOs has increased rather less (13% to 23%), while the soft NOs have roughly halved (28% to 14%). Although both camps seem to be firming up their vote, the YESs are gaining overall and the additional voters are coming from the soft NOs. This is roughly what I predicted in the Pol.

This is fascinating, given that since May we’ve had the #Grexit drama and a massive refugee crisis. Perhaps, though, when bits of Kent can’t restock the shops because the M20 is full of lorries parked up due to disruption at the Tunnel and the port of Calais, it’s unusually obvious that we are in fact part of Europe, and it’s not as if leaving the EU would change anything. Does anyone imagine the tunnel would be bricked up, or the flow of trade down the M20 just stop? No. Does anyone seriously want that? I doubt it.

Pofalla

Remember Roland Pofalla? Sure ya do. The minister in charge of Angela Merkel’s private office, and therefore Germany’s intelligence services, who vehemently denied anyone had been spied upon when the Snowden leaks hit. Pofalla denied everything, on the basis that the Americans had told him so. When it became clear from the documents that huge amounts of mobile network data were available in XKEYSCORE from a German source, he said it came from the German army’s field ELINT team in Afghanistan.

At every turn he denied everything, and it may have been him who invented the talking point that European intelligence services picked things out like a harpoon, rather than scooping everything up like a trawler, like the horrible Americans. This would later be used repeatedly to justify French surveillance legislation and was presumably coordinated with them. Of course, you can’t “pick out” items of signals intelligence without first scooping them up and examining them to see if they’re the ones you want to “pick out”.

Now it turns out they were listening to Pofalla’s mobile phone, on the number he still uses today.

Europe muddles through: Mediterranean edition

This Politico piece of mine argues that Europe has talked itself around to sharing the effort to rescue shipwrecked migrants in the Mediterranean, having floated a variety of draconian threats to justify getting warships down there and then quietly backed out of them.

I hang this story on the voyage of HMS Bulwark, which started off by sitting the crisis out in Turkey, was then offered by the British to take part in some ill-defined military option, and ended up being congratulated by Defence Secretary Michael Fallon and, dear God, the Daily Mail for its role in the search-and-rescue operation.

Bulwark‘s deployment is up in a few days, and the government has promised to relieve her – however, the relief is HMS Enterprise, a specialised hydrographic survey vessel of all things, lacking Bulwark‘s flock of landing craft, vast flight deck, field hospital, or headquarters facilities. The answer is that the Italians have taken over the command, with the carrier Cavour offering many of the same capabilities (less from landing craft, more from aviation).

Operation Mare Nostrum from last year has, indeed, been internationalised, and this is a major policy change. But what a manipulative and twisted way we took to get there! The lessons for other major European issues, I trust, are obvious.

Very, very foolish words.

This FAZ story, suggesting that Angela Merkel and Wolfgang Schäuble are not on the best of terms over negotiations with Greece and that Wolfi might even resign, should be read in the context of Merkel’s past career.

Schäuble wiederum habe nur zufällig von dem Treffen vorab erfahren und zwar nicht von der Kanzlerin, sondern weil ihm Lagarde davon erzählte, berichtet die „Bild“-Zeitung. Und zitiert einen anonym gebliebenen Berater Schäubles mit den Worten (über Merkel): „Das war eine Solo-Nummer von der Dame.“ Außerdem habe der Beamte in Schäubles Ministerium noch hinterher geschickt: „Merkel lässt sich gerade über den Tisch ziehen.“

So the Bild reckons Wolfi wasn’t invited to the meeting in Berlin where Hollande, Merkel, Juncker, Draghi, and Lagarde got together. (A Bild trigger-warning is probably appropriate, but still.) They also quote an anonymous source as saying “it was one of the lady’s solo numbers” and that Merkel “is getting the wool pulled over her eyes”.

All I can say here is: Watch out! Also, there’s this, which at least has a name attached to it and some direct speech:

„Wolfgang Schäuble geht keine faulen Kompromisse ein, er wird seine Glaubwürdigkeit nicht gefährden“, sagte der CSU-Politiker Hans Michelbach der „Bild“. Und fügte hinzu: „Und ohne Schäuble stimmt die Fraktion nicht zu.“

So, according to a CSU MP, Michelbach, the party won’t vote for anything Schäuble doesn’t support. The first problem here is that Michelbach isn’t in his party. The second, and much more important, is that there’s a word for grey men from Bavaria who patronise Angela Merkel: dead. Or at least mundtot. And just try re-reading that first quote. Either Bild really did make it up – not impossible for them – or someone really went out of their way to make trouble.

Everyone’s now rapid-rebutted the story, which of course they would have done if it was true. But nobody should doubt that she would get rid of Schäuble in a hot minute if that seemed expedient, nor that she’d be entirely willing to use SPD votes to crush Michelbach and Co, if she didn’t just call their bluff. That the AfD was last seen suing itself over whether to elect delegates to a party conference or find a hall big enough for the whole membership only underlines the point.

The graveyard is full of the indispensable, and the CDU chapel within it is full of grand sub-Helmut Kohl male egos who got in Merkel’s way.

Occupational shifts in the UK

Following up on the ideas in this post, here’s an interesting chart from the Bank of England Inflation Report.

composhift

In our model, people advance along at least locally optimal career paths in expansions, and then have to find a new one in recessions. So you’d expect job tenure, marked in green, to reflect the business cycle – people accumulate it during expansions and lose it in recessions – and that’s precisely what we see. In 1996-2000, when unemployment dropped sharply, it was a strongly negative contributor to wage growth. After that, it began to be a positive contribution as the new hires progressively accumulated tenure and advanced along their career paths. We also see a bit of this after the .com crash. However, it didn’t become a big negative item after the great financial crisis, perhaps because unemployment didn’t rise as much as expected.

The effect of change in qualifications has been quite surprising; it was negative for most of the boom, and then very positive immediately post-crisis.

From 1999 to 2007, workers changing between occupations seems to have been a significant contributor to wage growth (about +0.2% a year). Between 1996 and 2002, workers changing between industries was a positive contribution, but it then swung negative between 2002 and 2006, before becoming positive again in 2007.

During the great financial crisis, it was significantly negative, and it then became positive in the recovery. Since then, it’s disappeared as a factor. Change between occupations, however, was strongly positive in the crisis, erratic and noisy in the recovery, and since Q1 2013, has become very strongly negative. So has the effect of job tenure. At the moment, the combination of tenure and occupational change accounts for -0.75 percentage points of wage growth. The strong negative tenure effect is comparable to that in the late 90s expansion, implying significant net hiring. The occupational change effect is, however, unprecedentedly awful, and it is increasing.

This is consistent with the perverse selection I proposed in the original post. The big difference between now and the 90s experience, though, is that the occupational shift effect is much bigger.

Which is also consistent with making Jobseekers’ Allowance claimants stand around Finsbury Park station wearing a hi-viz vest to no particular purpose.

The snakes-and-ladders model, again

They say the first rule of editing is “kill your darlings”. The first rule of science, however, is “sacrifice your darlings humanely in accordance with the research ethics committee guidelines, but keep their brains for further investigation”. So it is with this post. Per Mason, apparently the GFC looks a lot different to past recessions and it’s important to include the full span of the ECEC data back to 1986. So here goes.

The ECEC civilian workers series doesn’t go back to 1986, and neither does all workers, so I picked on the series for “private industry” – after all you’d expect public sector employment to be less responsive to the business cycle by definition – which does. The orange dots on the chart mark ECEC data points, while the blue ones mark the composition-weighted ECI series for private industry. ECEC after 2002 is quarterly, and is averaged to give an annual figure.

snakes

The big orange outlier is 2002. ECEC was issued as a slightly different series in 2002-2003, so perhaps we should exclude that one. I’ve plotted regression lines for the two series, orange and blue respectively, and for ECEC excluding 2002, black.

As you can see, ECI is still more cyclical than ECEC (R^2=0.33 vs 0.03 – ten times as much). Excluding 2002 helps a bit, but not enough (R^2=0.33 vs 0.11, three times as much). The correlation between the change in ECEC for the private sector and the output gap is 0.19, and that between private sector ECI and the output gap is 0.58. The blue outlier is 1985-1986.

Purely visually, it looks like the difference between the two series is in fact greatest in the 1980s, but any effect is accounted for by three data points (’86, ’87, ’88) and in any case, it seems to have disappeared 30 years ago. Alternatively, the BLS has changed the method it uses to collect ECEC several times in that period and this might be an artefact.