London School of Economics – Brexit’s reality

The economic warnings of a no-deal Brexit keep coming. Economist, experts, government departments, the civil service, NGO’s, economic and social commentators – it seemingly makes no difference to the ideology of crashing out of the EU by the militant fanatics now driving Britain over a cliff. The old adage of – ‘it’s the economy stupid‘ – has been abandoned to the creed of the Jihadists of Brexit who have smothered the very principle of economics and democracy.

 

John van Reenen is a professor at MIT’s department of economics and Sloan School of Management. From 2003 to July 2016 he was a professor of economics and the director of the Centre for Economic Performance (CEP) at LSE. In 2009 he received the equivalent to the US Bates Clark Medal, awarded every two years to the best economist in Europe under the age of 45.

This is what he thinks a no-deal Brexit will bring.

 

The no-deal crisis matters viscerally, as crashing out will hit hard. However, even after the adjustment when medicines and food supply chains recover, the worst is yet to come. Johnson has been promoting his economic lackey, Gerard Lyons, to head the Bank of England and therefore end its political independence. Lyons admits that no-deal Brexit will cause pain, but believes in a “Nike Swoosh” recovery. But the true picture will be one of a “dead cat bounce”. There will be a temporary recovery after the No-Deal chaos subsides, but then the inevitable relative economic decline will kick in making Britain poorer than it would been if we remain.

The economics of Brexit are almost trivially easy, which is why there is near-universal agreement among experts that Brexit will cost us dear. Trade costs rise with our closest neighbours from both tariffs and regulatory divergence, so trade will fall. Since the lesson of human development is that trade makes us average richer, Brexit will make us poorer. And the more extreme is the form of Brexit, the bigger is the fall of trade and income. The gory details and spurious counter-arguments are follow.

The pain will accumulate gradually. Brexit is a cunning domestic abuser of the economy. It hits us where the bruises do not show easily – it will be a gradual accumulation of financial pain over many, many years. Johnson will not be able to hide the violent assault of a No Deal. However, when the economic police are called, he will inevitably blame our nosy European neighbours. Alternatively, it will be the traitors within who are the enemies of the people.

We can argue over the exact magnitude of the Brexit pain. My best guess is that after a decade or two, British national income per head will be a tenth smaller under a no-deal Brexit than it would be if we remain in the EU.

 

Ten per cent of GDP sounds anodyne – is a loss of £200 billion per year a manageable number? Ten percent off public services means 11,000 fewer hospital doctors, almost 3,500 fewer GPs and 31,000 fewer nurses. Therefore, less diagnosis and treatment, longer waiting times and more people living in more pain. It means 12,600 fewer police – more crime, fewer clear-ups and more misery. It means 45,000 fewer teachers – bigger classes, less learning and more failure before kids’ lives have even begun.

 

Please do not tell me that we can avoid the cuts to the NHS because we can take bigger cuts elsewhere. Fewer cuts to the NHS mean more cuts elsewhere.

Instead of cutting services, could we just raise tax? Offsetting £82 billion less public spending means increasing the basic rate of income tax by another 15 pence in the pound. At a time when wages will be stagnating, this will not be a pretty sight.

Let us be generous and say the losses are only half what I think they are – 5 per cent of GDP. This is actually the estimated long-run loss of Theresa May’s deal made by the independent UK in a Changing Europe, a softer situation than no deal. This will mean “only” a £100bn lower income hit so 22,500 fewer teachers and 15,000 fewer nurses.

 

Read the full article by John van Reenan at the London School of Economics

 

 

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