Competing Brexit visions. Jon Danielsson. Modelsandrisk.org

Competing Brexit visions

February 25, 2017
I have been struggling to make sense of the Brexit debate. Perfectly reasonable, well informed and highly intelligent people reach diametrically opposite conclusions, all impeccably argued. In order to make sense of the debate, I did what any quant might do and made a graph of the competing Brexit visions.

Consider 4 alternatives for the GDP of Britain:

  1. The red line shows what the remainers think will happen if we were to stay in the European Union. Nothing. The economy will continue on the same path as before;
  2. It then Brexit happens, there will result in an immediate fixed cost and permanent lower growth as shown in the blue line;
  3. For the Brexiters, if Britain remains, it will pay a permanent dead weight cost, dragging growth down, as represented by the green line;
  4. And finally, they recognise upon leaving, there will be an immediate cost, but because Britain will be more competitive, it will grow more rapidly, as represented by the purple line.

Of these, the last is most interesting. Will leaving the European Union unleash the forces of economic growth, giving us Singapore or Hong Kong style economic growth instead of continuing stagnation.

Before the vote I wondered if we would get the 1950s or Hong Kong. We now know much more about what Brexit actually means.

For many living in the London liberal bubble, the libertarian Hong Kong/Singapore vision certainly is real, after all, it represents their views or the views of their friends. What is discussed in dinner parties. For me, if I believed this, I would have voted for Brexit. But, I voted remain.

2 reasons

  1. As I argued before the vote, we like our financial regulations. Knowing the history of policymaking in Britain, I don't have that much faith in the ability of our policymakers;
  2. Besides that, most Brexiteers did not sign up for a Hong Kong/Singapore style economy. The only reason they can do what it does is because they are not democracies. While we can endlessly debate what motivated the Brexit voters, I am pretty certain that a Sunderland Brexiteer does not want Hong Kong. They want an end to austerity, more government spending, more social protection, really the opposite to Hong Kong. Many want more protectionism and less globalism. More government regulations. Higher taxes on the wealthy.

Recall what what happened with universal suffrage (when the poor could also vote) in the early 20th century, and what happened to economic policy.

In the political marketplace, I think the Sunderland view is going to win.

Britain will be hit by a double whammy, the cost and inefficiency of leaving the European Union and the cost and inefficiency of the future populist economic order.


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