How many people care about immigration?

I wrote this for Politico Europe, but they won’t have it, perhaps because it’s not OMG BREXIT enough. To update it, let’s note that Ipsos MORI reckons only 20% care about immigration and more people think they, personally, have benefited from it than not.

With ten days to go, the two Brexit campaigns are talking about almost nothing but immigration. Gone, the expansive talk about whether the “Norway model”, the “Canadian model”, or indeed the “Albanian model” so dear to Michael Gove’s soul would be preferable. Nobody is now pushing the virtues of unilateral free trade. Instead, it’s all about immigrants, immigrants, immigrants, or sometimes Turkey, a placeholder for immigrants.

This worries a lot of people. Immigration polls badly. Surely this is the Leavers’ strongest suit? The problem, though, is that something can be your strongest suit and still be pretty damn weak. Consider a chart I used back in April, 2015, for this Politico piece. Back then, using YouGov’s online poll, immigration was rated the No.1 issue nationally, with 50% of the public saying it was their biggest concern for the country.

If you asked them what they, themselves, worried about, well. Immigration plummeted from 50% to 20%, far behind the economy, the NHS, pensions, and tax. Even UKIP voters displayed the same effect, although the level was different. 90% thought immigration was the top issue for the country, until they had to put some skin in the game, when it came down to 49%.

YouGov’s most recent referendum poll, from the 6th-7th of June, hammers the point home. This was a forced-choice question, where the respondents had to pick one issue and one only. Only 20% of the public say immigration will decide how they vote. 31% say the economy. Another 31% say it’s:

Which is likely to strike a better balance between Britain’s right to act independently, and the appropriate level of co-operation with other countries

And 4% say it’s foreign policy in the classic sense. Now, Remain is camped all over the economy, which it’s hitting from all angles, and Leave has pretty much stopped even trying. We can try different assumptions about the vaguely defined “appropriate co-operation” question. If the Remain side is getting as little as a third of those, though, it suggests they are addressing about 45% of the electorate, with an upper bound around 60%. The problem with All Immigrants, All The Time is that only about 20% of the public care all that much.

Of course, perhaps there are so many more people worked up about immigration out there. They’ve managed not to show it at any general election in their lifetimes. But now der Tag is upon us, and they will rise like lions after slumber. Could happen, as we said in Yorkshire. Meaning: don’t hold your breath.

Daniel Kahneman, of Judgment under Uncertainty and Thinking, Fast and Slow fame, got his Nobel prize in part for his contribution to prospect theory, the study of how human intuitions about risk diverge from rationality. In principle, a 40% chance of gaining €100 should be worth exactly as much as a 100% chance of gaining €40. In practice, it’s much more complicated than that; the curve bends, so people generally prefer the sure thing even when the expected value is identical.

More interestingly, your decision depends on your starting point. If you’re in the money, rather than being more recklessly confident, you’ll pass up more chances. If you’re out of the money, though, you’ll tend to double down and pick opportunities with worse chances and bigger payoffs in order to chase your losses. Like: betting the farm on those 20%. That said, that YouGov poll does say 40% of the public think #Brexit would be good for the NHS. I stick by my call, but chance is chance.

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?

Timeliness challenge

The IMF Board considered the annual surveillance of the UK economy barely 2 weeks ago, and the associated report was published even more recently. And a couple of days after that, its main findings about fiscal policy — trumpeted by George Osborne during the visit — are effectively dead. Here’s what the Fund says (page 10) —

Relative to the last pre-election budget (March 2015), the authorities’ latest fiscal plans as announced in the 2015 Autumn Statement envisage a smoother path of deficit reduction. Consolidation is also now based somewhat less on spending cuts than previously projected, partly due to revised revenue and interest expenditure projections and new revenue measures. The consolidation path is appropriate in the baseline scenario. Continued consolidation is needed to rebuild buffers, thereby allowing more aggressive countercyclical policy during the next recession.  

Similar language is peppered throughout the report. The problem is now out in the open in that Osborne used a G20 trip to Shanghai and a linked interview with the BBC’s Laura Kuenssberg to confirm what had been obvious to analysts for a long time: the revenue, growth, and modeling assumptions underlying the Autumn Statement cannot be met.

Imagine if an African country finance minister uncorked a worse economic scenario than he’d told the Fund just weeks after their visit!

Ireland and Iceland: when cosiness kills

The fate of the Irish and the Icelandic banks are intertwined in time: as the Irish government decided on a blanket guarantee for the Irish banks, the Icelandic government was trying, in vain, to save the Icelandic banks. In spite of the guarantee six Irish banks failed in the coming months; the government bailed them out. The Icelandic banks failed over a few days. Within two months the Icelandic parliament had decided to set up an independent investigative committee – it took the Irish government almost seven years to set up a political committee, severely restricted in terms of what it could investigate and given a very limited time. The Irish report now published is better than nothing but far from the extensive overview given in Iceland: it lacks the overview of favoured clients and the favours they enjoyed.

A small country with a fast-growing banking sector run by managers dreaming of moving into the international league of big banks. To accelerate balance sheet growth the banks found businessmen with a risk appetite to match the bankers’ and bestowed them with favourable loans. Lethargic regulators watched, politicians cheered, nourishing the ego of a small nation wanting to make its mark on the world. – This was Iceland of the Viking raiders and Ireland at the time of the Celtic tiger, from the late 1990s, until the Vikings lost their helmets and the tiger its claws in autumn 2008.

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Language adjustment

The IMF World Economic Outlook update is out. Despite all the China and financial markets talk, the movement in the forecast is more about the uselessness of BRICS as an economic concept: deeper recessions than foreseen even 6 months ago in Brazil and Russia, extreme sluggishness in South Africa, what the Fund still views as an adjustment and not a crash in China, and strong growth in India.

But anyway, the projection contains its typical sentence from the post-2008 years: Risks to the global outlook remain tilted to the downside.

Why does it never say The projection remains tilted to the upside?

The wealth of the masses

From the Davos-timed Oxfam analysis of global wealth distribution —

In 2015 the net wealth of the 3.6 billion people living in the bottom 50
percent was $1.75 trillion.

That means average wealth for those 3.6 billion people was US$486. It’s a wonder they’re not all trying to move to richer countries, but at that wealth level, they probably can’t afford to!

Edward Hugh, RIP

Unfortunately the dark and cold days of winter tend to bring some untimely departures and this season’s deaths now include our blogging colleague Edward Hugh, who we gather died yesterday in Spain. Edward’s posts here and on other platforms marked him out as someone with the fresh eyes of an economist who had made his own way to an analytical framework that found its ideal subject in the Eurozone financial crisis. The slow-burning demographic strains of which Edward had long written remain even as the banks get very slowly cleaned up, and are of course a subtext to the current migration crisis. Here’s a link to the New York Times profile of Edward from a few years ago which further broadened his audience.  Our condolences to those who knew Edward best.

UPDATE: The New York Times has a nice obituary.

Right said George

imf_gbr

From UK Chancellor of Exchequer George Osborne’s opening statement at the joint news conference with the IMF yesterday, Mme Lagarde in attendance, to conclude the IMF assessment of the UK economy –

Yes, there are still risks. The IMF have identified the risks, and they are the same risks we’ve identified and are taking action to prevent. I take this as an endorsement of our plan to fix the roof while the sun is shining.

The table above is from the IMF’s July 2008 assessment of the UK economy. Bear in mind that the first tremors of the global financial crisis had happened nearly a year earlier. The debt and deficit are now over twice as high as these numbers. The IMF team of course doesn’t have much choice but to sit there politely when Osborne uses his 7 year old political slogan about fixing the roof etc. But by the IMF’s own standards, the roof was in good shape in summer 2008. The pile of rubble fell afterwards.

Asymptotic Austerity

OBR_Nov2015

If George Osborne continues to be able to find enough new future cash via changed modeling assumptions to spread around, he might yet get the growth of GDP, and eventually the level, back to where it would have been before austerity started!

Figure source Office for Budget Responsibility Economic and Fiscal Outlook November 2015. Chart 2.1: Selected vintages of ONS real GDP estimates and OBR forecasts.