Wednesday, March 13, 2019

The Implications of a "Hard Brexit" on Britain



When Britons voted on June 23, 2016 on whether or not to leave the EU there was no discussion of a "hard or soft Brexit". These terms were invented after Brexit passed by a surprisingly large margin and the mostly anti-Brexit Tory Party government, especially its leadership, decided that it needed to negotiate the terms of leaving. Brexit supporters regard such terms as betraying the 2016 Brexit referendum itself. These 17.4 million Britons undoubtedly believed that Brexit would mean exactly that: Britain would no longer be governed by any EU laws, regulations, etc. Nevertheless, all that the world has heard since that day in June 2016 is a debate over the terms of leaving, with any so-called terms being labeled as a "soft Brexit" and leaving without any agreement as a "hard Brexit".

In a "hard Brexit" Britain just leaves and all EU regulations, etc. are null and void. Pretty clear cut. A "soft Brexit" can mean almost anything that is not a "hard Brexit"; i.e., Britain would agree to continue some or all of the manufacturing regulations, tariffs, and intergovernmental agreements, such as ceding jurisdiction to the European Court of Justice, that apply to EU countries. The list is almost endless and the time frame very nebulous, a perfect playground for those who wish to have a BRINO; i.e., Brexit In Name Only.

Parliament Must Act

It came as a surprise to this American, and probably many Britons as well, but experts in British constitutional law claim that only Parliament can actually take Britain out of the EU and only Parliament can decide under what terms, if any, it will do so. Of course, one of the terms of separation could be that there are no terms of separation--thus, a "hard Brexit"--and this paper will address the implications of such a development on Britain from four viewpoints: the likely effect on British imports, the likely effect on British exports, the likely effect on the City of London (the name refers not to a geographical/legal entity but to the financial firms that are headquartered there), and the likely effect on border control.

The Effect on British Imports

The current government has been exploring the possibility of dropping all import tariffs to zero except on  "sensitive industries". This would be very good for consumers, because the EU imposes tariffs on almost all imports from nations not in the EU itself. Most notably in its attempt to insulate inefficient European farms from worldwide competition, the EU imposes onerous tariffs on non-EU agricultural products via the Common Agricultural Policy (CAP). Eliminating these and many other tariffs would significantly lower the cost of living for the British people. The success of Brexit may depend entirely on whether Britain does in fact eliminate tariffs on most goods. It is a golden opportunity. The EU itself is very export oriented, so it is unlikely that it would impose any restrictions on member countries selling goods to Britain. So far so good!

The Effect on British Exports

Exports are another matter entirely. No longer in the tariff free customs union, it is assumed that the EU would impose tariffs on British products as it does on any other non-EU country, raising their cost to EU buyers, which one must assume would result in fewer British sales. The real harm would not fall on British exporters but on Britain's EU customers, who now are forcibly prohibited from buying British goods at the previously advantageous price. On the other hand since it no longer must meet onerous EU manufacturing regulations, British industry might enjoy lower manufacturing costs which would enable it to sell more to non-EU countries. Although it might take time for Britain to develop new markets for its goods, some countries, led by the U.S. itself, have stated that they are ready to sign free trade agreements with Britain as soon as it leaves the EU.

The Effect on the City of London

The City of London is a massive global hub. Its banking and insurance companies are dominant in the EU and likely to remain so for reasons of depth of market knowledge and a high reputation for honesty and fair dealing. Although some companies have moved some operations to Frankfurt, it is unclear if these moves are significant in number and may be simply part of normal market flux. The same fears about the fate of the City were raised when Britain secured an opt-out from the 1992 Maastricht Treaty which formally created the euro. Unless the EU imposes some special tax or regulation prohibiting EU members from utilizing London firms, it is unlikely that the City will be much affected by a "hard Brexit".

The Effect on Controlling borders

Uncontrolled illegal Immigration into the EU became a key issue for passing the Brexit referendum. There had been much concern for decades over loss of British sovereignty to unelected bureaucrats in Brussels and the economic cost of belonging to a closed customs union with high tariffs and onerous regulations, but the movement to leave came to a head over border controls or lack thereof. One of the four pillars of the EU is freedom of movement of people within the EU. (The other three were freedom of movement for goods, services, and capital.) Illegal immigration came to a head following the crisis of refugees from the Arab world. Once inside the EU, these refugees could migrate anywhere within the bloc, including Britain, raising the cost of providing social services and disrupting settled life. Britain was not the only EU country that opposed this unforeseen migration. In fact immigration control may yet break apart the EU, as the elite in Brussels insist that every EU country not only accept a dictated number of refugees but also that every country then allow refugees to migrate freely within the EU. A "hard Brexit" would remove the requirement that Britain accept more refugees than it believes it can assimilate. Uncontrolled border crossings would end as modest checkpoints are reinstated.

 A separate border issue pertains to the relationship between Northern Ireland and the Republic of Ireland over goods. Northern Ireland is part of the United Kingdom of Great Britain and Northern Ireland and there has been much concern over continuing the free flow of goods into and out of the Republic of Ireland. This seems to be much ado about little. Most probably goods to and from the Republic of Ireland would be subject to random checks with very little hindrance on trade. The EU has lobbied for an "Irish backstop", whereby Northern Ireland would remain in the EU for some period of time. Naturally this has incensed loyal British subjects, especially in Northern Ireland, and has almost no chance of being part of a "soft Brexit" deal.

A Positive Conclusion

In conclusion the effect of a "hard Brexit" on Britain itself should be overwhelmingly positive, especially if Britain does in fact remove all tariffs and conclude free trade pacts with the rest of the world fairly quickly. Naturally my advice to Britain is to unilaterally remove all tariffs on all goods, including "sensitive industries". Free trade deals then become irrelevant. Britain could lead the way in showing the world the benefits of unilateral free trade, just as it did in the nineteenth century with the abolition of the Corn Laws. Perhaps this outcome is what the EU fears the most, because it would call into question the benefit of belonging to a closed customs union and would spell the end of the EU itself.

Sunday, March 3, 2019

My letter to the NY Times re: Taxing both workers and robots out of existence


Re: Don't Fight the Robots, Tax Them, by Eduardo Porter

Dear Sirs:
I suppose we should be pleased that Mr. Porter is a Luddite-lite; i.e., he doesn't want to smash new machinery out of existence but use the tax code to accomplish the same thing. Mr. Porter seems most concerned that government will lose payroll tax revenue, should machines replace workers. (I'll leave it for another day to remind everyone that workers will not be completely eliminated. Rather they will be re-employed making...wait for it...robots!) Mr. Porter claims that avoiding a payroll tax is the same as getting a tax subsidy, and that's where the interesting bit of twisted logic appears. According to Mr. Porter's logic, the bigger the payroll tax the bigger the supposed subsidy for robots. Therefore, logic requires that every increase in the payroll tax be accompanied by an increase in the robot tax. Nice little circular argument, isn't it, for ever greater taxes on both people and robots. Unfortunately, should government adopt Mr. Porter's tax regime, society will find that it gets neither workers nor robots.

Friday, March 1, 2019

My letter to the NY Times re: "Then Came the Global Financial Crisis"



Dear Sirs:
Reading Mr. Irwin's Doctor Strangelove-esque article about whether or not deficits really matter, I was struck by this sentence, which was a paragraph in itself in the middle of his article:

"Then came the global financial crisis."

Mr. Irwin treats the 2008/9 crisis as if it were an asteroid--completely random, unexpected, unpredictable, and beyond human volition. It was none of this. The global financial crisis was caused in large part by fiat money credit expansion, the very role of which Mr. Irwin's article attempts to investigate. Interest rates were suppressed in the early 2000's and continue to this day. The bitter fruits of this practice are inevitable.

Wednesday, February 27, 2019

My letter to the NY Times re: Ireland needs free trade, too


Dear Sirs:
This phrase in Mr. de Freytas-Tamura's article about Irish concern over Brexit should be instructive to Irish statesmen:


"But food producers worry most that if Britain crashes out of Europe, it would open itself to cheaper goods from countries outside the European Union, making Irish firms even less competitive."

Perhaps Ireland should open itself to "cheaper goods from countries outside the European Union", too. Oops, I forgot...since the EU imposes very high tariffs on food stuffs from outside the EU, the only way the Irish could have access to cheaper food stuffs would be to leave the EU and reduce its tariffs. Not a bad idea, really.

Sunday, February 24, 2019

My letter to the NY Times re: Increasing the Minimum Wage Will Increase Unemployment

Re: Dollars on the Margin by Matthew Desmond

Dears Sirs:
Has Mr. Desmond, author of "Dollars on the Margin", never heard of the "Marginal Productivity of Labor"? How about the "Laws of Supply and Demand"? No? Well, let me explain. If the productivity of one's labor is less than the government's arbitrarily mandated wage that businesses must pay for that labor, unemployment will result. Otherwise, capital will be consumed until the business goes bankrupt. If a price control, such as a minimum wage, is set at too high a level, demand for labor will fall and unemployment will rise. I am surprised that the supposedly knowledgeable editors at the New York Times printed an article that extols the benefits to raising the minimum wage without at least pointing out the probability of these outcomes. Sure, if one is lucky enough to keep one's job, one lives a better life, as illustrated by the minimum wage workers that Mr. Desmond found. But Mr. Desmond failed to find two groups of minimum wage workers--those who lost their jobs due to the increase in the minimum wage and those who never got jobs in the first place.

Sunday, February 10, 2019

The Truth About Central Banks



Most of the world takes it for granted that central banks are necessary for the smooth conduct of trade, both foreign and domestic. Nothing could be further from the truth. Let's be clear. Central banks are unnecessary barriers to commerce, harmful to economies, and enablers of war. A world of permanent peace and prosperity is impossible as long as they exist.

Unnecessary Barriers to Commerce

Through their power to control banking, central banks are unnecessary barriers to commerce. Even those who have spent their entire lives in banking, often in positions of great importance and responsibility, assume that cooperative exchange of goods and services requires a central bank's oversight. But consider a typical trade, whether foreign or domestic. Joe Smith in the US produces widgets. Of course he desires to produce and sell as many as he can at a profit. He has willing buyers in both the US and overseas. Because he manufactures and ships his widgets from the US he is required by legal tender laws to conduct his trade in US dollars. In fact were he to refuse to accept US dollars, by law the buyer could take delivery of Joe Smith's widgets and not pay him at all. But Joe is concerned that the US dollar is being systematically debased by the Federal Reserve Bank and that the dollars he accepts from his sales will depreciate in purchasing power before he can re-employ them to pay for the factors of production to produce more widgets. Therefore, Joe must increase his price to compensate for this currency risk.

But all this changes if the central bank and legal tender laws are eliminated. Joe can accept any form of payment to which he and his buyer agree. Since they both desire to trade, they will use whatever money is the most marketable; i.e., that money that others also will accept willingly. Gradually, sound money will emerge. It may be gold, silver, or something else, but it probably will be a commodity, a certificate (bank note), or account balance that is fully backed by a commodity (one hundred percent reserved).

The commodity itself may be used in hand-to-hand exchange for small, local transactions, but probably most exchange would be conducted no differently than today where electronic tools debit and credit bank accounts. A government controlled central bank is NOT required to settle this transaction. Any honest, private bank could do it and would do it. Nothing more is required than a book entry that increases the gold balance at Joe's bank and decreases the gold balance at his customer's bank, whether foreign or domestic. If Joe and his customer do not use the same bank, a third bank may be involved to settle the transaction. Such a bank is called a "correspondent bank", meaning that both Joe's and his customer's banks have gold accounts there for the purpose of settlement. Many private banks perform this service today, bypassing the Fed.

All three banks--Joe's bank, his customer's bank, and the private intermediate bank--would be subject to normal commercial law that prohibits fraud. Joe expects that his bank and his customer's bank have enough gold either in their own vaults or probably held in their names at a private, correspondent bank to satisfy their purchases and receipts. Regular audits by reputable audit firms would ensure against fraud. These firms would verify that each bank has enough gold on deposit to back their demand deposits one hundred percent.

Now, please tell me...where does government come into this transaction except to provide an honest court system in case of fraud or the occasional contract dispute?

People Trade, Not Nations

All trade is conducted by people. The statistics that aggregate a nation's companies' foreign purchases and sales are irrelevant and serve only to perpetuate the fiction that countries trade and not people. This leads to the completely fallacious claim that a nation whose companies and people sell more abroad somehow "wins" or benefits from trade and, likewise, that the nation "loses" if its companies and people in the aggregate buy more abroad than they sell. This fiction survives only because each nation has a central bank to control foreign exchange and legal tender laws that require its captive populace to use its ever depreciating currency. But if Joe Smith sells widgets to Honda Motors in Japan, each party benefits or the trade would not have occurred. Honda Motors' bank account diminishes by the amount of the purchase and Joe Smith's bank account increases. The reverse would be true if Joe Smith bought raw materials from a Mexican company. If each party benefits as expected from the trade, wealth is increased for the parties involved in the trade. Where in this transaction is the rationale for government control via a central bank and legal tender laws? Well, we all know the answer--government itself benefits by using the central bank to divert wealth to itself for wars and welfare.

Political Borders Are Irrelevant to Trade

The irrefutable observation that people trade and not nations leads to the epiphany that political borders and politically based trade statistics are irrelevant, meaningless, not necessary, and ultimately harmful. So-called "trade deficit" statistics lead to calls for monetary debasement to spur foreign trade and even protectionist policies to reduce purchases from people and companies in foreign lands. But such trade is no different than buying produce from a local farmer. You and your local farmer both benefit, just as Joe and his Mexican supplier of raw materials benefit. The world is made more prosperous. The truly tragic consequence of keeping national trade statistics is that such irrelevant yet seemingly important data can lead to international tensions. Today we witness our political leaders branding individual nations to be predatory because their people and companies sell more goods to Americans than Americans buy in return. But where is the predation if one ignores national borders? Buying raw materials from Mexico is no different than buying produce from a local farmer.

Misunderstanding International Trade Can Lead to War

As an informative thought experiment consider what would change if Hawaii were not the nation's fiftieth state and had remained a sovereign nation. Would the impact on the US trade balance of the other forty-nine states composing a slightly reduced US have any meaning from the fact that the US purchased pineapples from Hawaiian farmers who now would be branded as foreigners? Of course not! The same is true if Alaska had remained part of Russia and had not been sold to the US during our Civil War. Would our industries be worse off due to the fact that the oil from Alaska was produced by Russian citizens and not American citizens? Of course not! The oil is the same economic benefit, regardless of who produces it. Think this is unimportant? Consider that there is the potential for military conflict in the very far north over future oil exploration. Russians, Canadians, Norwegians and most ominously Americans all claim sovereignty over these heretofore untapped oil reserves and vow to keep out companies headquartered in foreign lands. This is reminiscent of the imperial wars that racked the European powers for centuries as each tried to monopolize world trade. World War II was caused in large part by the Japanese attempt to control all trade in Asia at the expense of the old colonial powers. Since 1945 the Japanese economy has benefited immensely from simple trade without the need to control its trading partners politically. This should be a lesson to today's world leaders, but don't hold your breath.

Conclusion

A world of peace and increasing prosperity depends upon strictly limiting the ability of governments to interfere in international trade through their central banks and legal tender laws. Eliminating both would expose many economic fallacies that purport to characterize international trade as a competition between nations with their own citizens either winners or losers depending upon whether they are net exporters (winners) or net importers (losers). Central banks not only are barriers to trade and prosperity, they are fomenters of international tension and even war. Time to scrap them. Remember, the US did not have a central bank between the Age of Jackson--after President Andrew Jackson was successful in preventing the renewal of the charter of the Second Bank of the United States in 1837--and just prior to the Great War in 1913 when the Federal Reserve System was founded. During this era, despite fighting a civil war, the US economy grew probably at the greatest rate of any economy in the history of the world.


Wednesday, November 28, 2018

My letter to the NY Times re: How to Eliminate Scandals Over Subsidies


Dear Sirs:
I have a sure fire way not only to minimize but completely eliminate scandals over government subsidies. Eliminate the subsidies!

You are welcome,

Patrick Barron