The Hidden Damage of Brexit

On the 29. March, the UK is suppose to exit from the EU. That day is not very far away, and yet it is still not clear how exactly this exit is going to happen. Possibilities range from a clean, no deal break, to no Brexit at all, and everything in between. As I argued in my last piece, I expect there to be a very soft Brexit. Either the UK or the EU is going to give in to a compromise at the last minute. But there is a possibility that either side is so afraid to make concessions that we are going to get a clean break.

A lot of people seem to be very frightened by that possibility. We are being bombarded with horror scenarios in case the UK will “crash out” of the Union. The most pessimistic ones are even predicting an outright breakdown of the economy, with shortages in important products like food and medicine. But how much is there really to these negative predictions? Are we dealing with genuine concerns, or is this a deliberate “project fear”?

Of course, governments can cause a lot of damage to the economy, no question. In fact, most of what governments do is damaging. But if economic history has taught us anything, it is that market are robust systems. We are always getting the combined wisdom and luck of all participants. It takes a hell of a lot of interventions to visibly disrupt markets.

A majority of the damage caused by governments is not directly visible. Yes, regulations and taxes are damaging the economy, but most of the damage comes in the form of misallocating resources.

This misallocation has two effects. On the one hand it causes an artificial boom in certain industries. If, for example, we are going to get more tariffs then this will cause a boom in people dealing with the bureaucracy of these tariffs. This is the most visible side to the intervention. Usually, most people do not perceive this to be a problem. After all, what they see is that jobs are being created. What could be wrong with that?

What is wrong with that is that the resources being used to create these jobs are not available for the real needs they where suppose to satisfy. This is the damage side of the regulation. Unfortunately, this damage side is not very visible at all. We do not easily see the opportunity costs that are lost from a government intervention. The great 19. century economist Frédéric Bastiat already described this phenomenon in his famous article “That which is seen, and that which is not seen”.

Libertarians know this phenomenon all too well. The fact that the damage is not easily visible is the main reason why it is so difficult to argue against government interventions. Theoretical arguments like this are not very persuasive. At the very least, they are less persuasive than to argue that visible jobs are being created. Arguing against job creation appears to be cruel. In addition to that, the interventionist argument is also being supported by a number of economists at Universities. These academics think they are very smart by showing the visible side in statistics to “proof” that government interventions work. In reality they are clueless.

Strangely enough, it is a lot of the usual interventionists who are now hysterically pointing out the destructiveness of government interventions. Be that as it may, there can be no doubt that Brexit has and will cause economic damage. Tariffs and access barriers are a big disruption to the free flow of markets. If Brexit is going to be a long term economic success, the UK government will have to use it to abolish more barriers and regulations than Brexit creates. Given how protectionist the EU is, this, in principle, should be easily doable. But we are talking about governments here. Nothing is easily done with governments.

In the short term however, there is no way around Brexit causing some economic disruption. In fact, we have already seen quite huge damages since the 2016 vote. The value of the Pound fell by over 15%! That is a hell of a move for a major currency. It means every asset valued in Pounds has lost at least 15% of its value, an enormous damage for the UK.

In addition to that, since the referendum, all international businesses with activities in the EU had to reallocate resources to plan for the exit. And since May’s government was unable to lay out a clear plan for its Brexit strategy from the beginning, or really at all, businesses had to plan with an additional amount of uncertainty. Nothing is more destructive than uncertainty for a business. Consequently, this too has added a lot of unnecessary damage.

How much of that damage was visible though? Sure for people who buy a lot overseas or run an international business, it has been very visible. This however, is a minority of people. The average person in the street probably has not noticed much of it. That does not mean they were not effected, it just means they did not notice.

Here is where the no deal horror scenarios get it completely wrong. They are not wrong that Brexit has and will cause damage. At least in the short term, it will! But where there are wrong is that this damage will be very visible to most people. In fact, we have probably already seen most of the damage. Sure, in the last 2 ½ years, businesses had to put resources into planning the exit. This damage, however, is probably mostly done by now. Going forward, we are unlikely to see anything close to the disruption we saw in 2016.

I am always amazed how good markets are to solve problems. Like many libertarians, I have expected the economy of most western countries to collapse under the burden of welfare states and central banking by now. It has not happened. I still think it is going to eventually, but I have clearly totally underestimated the ability of markets so solve problems. Somehow, entrepreneurs always seem to find new ways to optimize wealth creations and get around regulations.

The fact, for example, that we still have car manufacturers, able to produce cars profitably, is nothing short of a miracle. This industry has been bombarded with a constant tsunami of new regulations, and yet they have not drowned in it.

That is not to say that governments are incapable of breaking the economy. Markets are not indestructible. We have seen many governments succeeding in causing an almost total collapse. The most resent example is Venezuela. Chávez declared an outright war on the market. Nevertheless, it took the openly socialist government in Caracas a number of years before the economy finally completely broke.

A lot of damage has to accumulate for it to become clearly visible. And by the time that happens, the connection between interventionism and the decline in wealth is not that obvious anymore. Governments often have no problems blaming the damage on the market rather than their own doings.

That is why many libertarians almost long for a collapse of the system. Not because they are cruel and want to see people suffer. But only if the damage becomes visible enough, we will be able to win the argument against interventionism. At that point we could finally move to a better system.

Realistically, however, even if we get to that point, we will only see the state being moved back just enough to make the damage less visible. Once the damage is reduced enough, interventionism continues to triumphs again.

The same will be true for Brexit. Don’t expect there to be too much visual disruptions of a no deal. I know, the remain crowd longs for big Lorry queue and empty supermarket shelves. Not because they are cruel, but because they want to be proven right. But even though, at least in the short term, they are right, they are not going to be visibly proven right.

For that to happen, governments would need to decide that they want disruption. They would need to actively decide to control every Lorry, and take their time doing it. But that is unlikely to happen, given that this would cause enormous damage to both sides. The political pressure to not do that is significant, and most likely bigger than the gain from visible disruptions.

But even if it happened, that would just cause lorry queues. There is almost no chance of product shortages in the UK. While there might be a very small possibility that the EU will decide to actively disrupt the flow of goods, there is not much incentive on the UK side to do that when it comes to imports. The UK government has a strong interest to make Brexit look like a success. So they are going to let the goods in, unchecked if necessary. Many Tories have already said that they would take unilateral measures to ease import disruptions.

The only imports that No.10 seems hell bound to disrupt is immigration. Theresa May has declared that she will do everything to stop foreigners from coming in large numbers. And unfortunately, she will probably succeed. Meaning, that particular disruption is mostly still ahead of us. But again, it won’t be that visible for most people. Brexit is only as good as the government that does it. And the UK government is pretty terrible at the moment.

  2 comments for “The Hidden Damage of Brexit

  1. Ken Ferguson
    Feb 11, 2019 at 8:54 am

    Since the Brexit vote, politicians and bureaucrats have conspired to thwart the decision.
    I am no fan of it but there is no question but that democracy itself is being betrayed.

    My prediction is that if they succeed in foiling Brexit there will be a major backlash.

    My favourite fantasy is for a Facebook campaign to encourage everyone driving a white van to park it outside their nearest oil refinery. A week later, when there is nothing to buy in the supermarkets, we will leave the EU.

  2. Paul Marks
    Feb 11, 2019 at 10:19 pm

    Ken Ferguson is correct – many politicians (all but about a 100 or so Members of Parliament) and all the bureaucrats have conspired against independence.

    As for Nico’s questions.

    Of course, if (sadly it is IF) independence happens the establishment will try and do damage in order to discredit it – and this will not just be Civil Servants, it will much of BIG BUSINESS as well.

    “But why should Corporate Executives harm the business enterprises they manage?”

    For the same reason that the head of Lloyds Bank basically bankrupted the bank by buying a bankrupt bank – to please his mate Prime Minister Gordon Brown.

    Corporate Big Business is dominated by “liberal” left establishment types who do not really care very much about maximising long term profits. The lack of real OWNERS is often the problem. Although even some billionaire owners can be “Woke” – they really can, remember they get their political opinions from the universities and the mass media.

    In the long term I think a lot of these Corporations are going to go bankrupt – but they will do a lot of political damage whilst they are still about.

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