The Costs of Maintaining the Status Quo

Madeline Grant

https://fee.org/articles/the-unseen-economic-benefits-of-brexit/

In a now-famous essay, “What is Seen and What Is Not Seen,” the great economist Frederic Bastiat warned against judging the value of any activity in a vacuum.

Bastiat’s “broken window fallacy” brilliantly exposes a common tendency to focus on the visible, tangible benefits of an action—the “seen”—while neglecting the “unseen” penalties and long-term drawbacks associated with the same activity—the invisible cost of opportunities foregone.

Though he wrote the essay in 19th-century France, Bastiat’s insights have a timeless wisdom. We live with the consequences of reductive “broken window” thinking every day, especially where public money is concerned. Politicians often praise the visible benefits of public spending, e.g. the number of jobs “created,” without considering whether the funds could have been spent more wisely elsewhere or even how the taxpayer might have spent the cash had it remained in his or her pocket.

For my money, the fraught Brexit debate badly needs a dose of Bastiat.

So far, discussions of the gains and losses of Brexit have understandably tended to focus on the most obvious costs, like the amount Britain may pay in any “Divorce Bill,” the potential “Brexit hit” to companies exporting to the EU, and so on. Of course, these concerns are vitally important, but our focus on the immediate costs of EU departure risks blinding us to the very real costs of maintaining the status quo.

Membership in the European Union carries huge unseen penalties whose implications may not be immediately apparent. The EU’s Common External Tariff, for example, raises prices and so reduces the quantities of goods and services available to ordinary consumers. Since shoppers in the EU lack the counterfactual experience of trading at world prices, this penalty goes unnoticed, but it involves a misallocation of resources on a vast scale.

In adopting the government’s proposed model for close customs cooperation and a common rulebook, we run the risk of finding ourselves with little scope to diverge from EU regulations on goods and unable in practice to strike new trade deals with the rest of the world.

Negotiating the terms of our departure also comes with huge hidden dangers. In adopting the government’s proposed model for close customs cooperation and a common rulebook, we run the risk of finding ourselves with little scope to diverge from EU regulations on goods and unable in practice to strike new trade deals with the rest of the world. It is often pointed out that the UK’s interests in trade agreements are primarily in services, but this makes it even more vital to maintain flexibility over what we can concede in goods to incentivize potential trading partners to strike a deal. The status quo, or anything close to it, carries huge opportunity costs of its own.

The EU Stands in the Way of Innovation

Due to a combination of the precautionary principle enshrined in the Lisbon Treaty and the difficulties of getting 28 countries to agree on anything, the EU, intentionally or not, often stands in the way of innovation.

In particular, the precautionary principle, the preferred risk management strategy of EU regulators, places the onus on creators of new technologies to prove their invention is safe where some risk may exist—even if there’s no scientific consensus to suggest any actual harm will occur.

In particular, the precautionary principle, the preferred risk management strategy of EU regulators, places the onus on creators of new technologies to prove their invention is safe where some risk may exist—even if there’s no scientific consensus to suggest any actual harm will occur.

The result? It’s often too much bother to innovate.

During the 19th century, many viewed the emerging railways with a great deal of suspicion. As recorded by cultural anthropologist Genevieve Bell, critics of early locomotives believed “that women’s bodies were not designed to go at 50 miles an hour” and worried that their “uteruses would fly out of [their] bodies as they were accelerated to that speed.” Had Victorian Britain followed some version of the precautionary principle, it’s hard to imagine a single track of rail being laid given the levels of contemporary railway fear.

Missed Technological Opportunities

Of course, moral panic over new technology is nothing new. Now, as in the 1850s, over-cautiousness risks hampering important drivers of future growth.

Given the EU’s structure, history, and current trajectory, the balance of probability suggests AI will be the latest in a long line of missed technological opportunities.

So far, the European Union has taken only tentative steps towards regulating artificial intelligence and robotics, though they are currently consulting on the issue. Yet given the EU’s structure, history, and current trajectory, the balance of probability suggests AI will be the latest in a long line of missed technological opportunities.

Take genetically modified crops. Since their commercialization in many parts of the world during the 1990s, GM crops have raised the quantity and quality of the global food supply while lowering fuel and energy usage, requiring fewer pesticides and reducing both soil erosion and carbon emissions—all with no scientifically-documented evidence of harm to human health. And yet, EU-wide precautionary thinking has meant a de facto ban on GM crops, only one variety of which has ever been approved and grown in Europe.

While farmers outside the EU continue to develop newer, better technologies, hysteria over man-made pesticides has kept European farming methods behind the times. Ironically, foregoing the GM revolution in insect-resistant plant breeding has left European farmers more reliant on pesticides than ever (as has the ECJ’s foolhardy ruling on genome editing earlier this year).

Hindering AI

Just last week, the French Finance Minister claimed that EU member states are “very close” to agreeing on a counterproductive tax on the turnover of tech companies, a policy likely to discourage new entrants and inflate costs for consumers.

Given all the above, are the EU’s hyper-cautious regulators likely to pursue a different path when it comes to AI and robotics? Or will it be “business as usual”—namely, when in doubt, tax and over-regulate? Certainly, initial signs, including misguided calls for a “robot tax” from the likes of Guy Verhovstadt, don’t inspire confidence.

If you have to get a human to explain the logic, why bother investing in an AI solution in the first place?

The EU’s new General Data Protection Regulation (GDPR), implemented earlier this year, will almost certainly hinder the development of artificial intelligence by raising costs and limiting access to data. In particular, Article 22 creates a new requirement for humans to review certain algorithmic decisions, a restriction that will significantly raise labor costs, thereby creating a strong disincentive from using AI. After all, the whole point of developing AI is to automate functions that would otherwise be slower, costlier, and more difficult to complete if performed by humans. If you have to get a human to explain the logic, why bother investing in an AI solution in the first place?

Hostility Toward Innovation

These may seem like small concerns in the grand scheme of things, but taken as a whole—and the EU creates a whole lot of regulation—it adds up to an environment often hostile to innovation.

It’s no coincidence that Europe has lagged behind the US for decades when it comes to new inventions, innovations, and entrepreneurship. There are of course important cultural differences between these continents, but much relates to the US government’s comparatively light-touch regulatory approach. Not for nothing are there no tech giants in Europe to rival Facebook, Google, Apple, or Amazon.

Creating a competitive, innovation-friendly atmosphere is a huge potential hidden “win” of Brexit—with correspondingly huge opportunity costs from failing to do so.

Creating a competitive, innovation-friendly atmosphere is a huge potential hidden “win” of Brexit—with correspondingly huge opportunity costs from failing to do so. Indeed, with more leading universities than the rest of Europe put together and an already thriving tech sector, Britain has much to lose compared to many of its neighbors.

One can only imagine what Frederic Bastiat would have made of things like robotics, AI, and machine learning. But I suspect the spirit of his advice would be the same: consider the unseen, and don’t destroy the jobs of the future in a misguided attempt to protect the jobs of today.

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Birds flying high, you know how I feel. Sun in the sky, you know how I feel. Leaves driftin’ on by, you know how I feel. With the serving of Article 50, Brexit becomes a legal fact.

When it comes to the media, though, I’m in a distinct minority. Our public discourse on Brexit is angry, discordant and, above all, morose. We’re often told that Leavers and Remainers have little in common – but judged solely by their online debates, they’re united in their grumpiness.

Britain grew more strongly in the six months after the vote than in the six months before it.

It’s fair enough for online Remainers to be in a strop, I suppose. They lost narrowly and unexpectedly and, frankly, I’d like to see much more acknowledgment of the closeness of the result. But that doesn’t explain why their mood has worsened as the economic climate has improved.

In the aftermath of the vote, many of my Remainer friends were genuinely worried about an abrupt economic shock. In a lot of cases, indeed, this was their chief reason for having voted to stay in.

And in fairness, it wasn’t just the Remain campaign that prophesied frogs and locusts. Most academic economists, along with the Treasury, the Bank of England, the IMF and the OECD, forecast an immediate downturn as a result of a Leave vote.

In the event, all these organisations have since been scrabbling to revise their predictions upwards, and you can see why. Britain grew more strongly in the six months after the vote than in the six months before it, and ended 2016 as the world’s most successful major economy. Employment, investment, share prices, retail activity, manufacturing output and exports are all rising.

In the real world, most of the 48 percent have breathed a sigh of relief and, if opinion polls are to be believed, there would be a slightly larger Leave vote today.

But the remains of Remain, the irreconcilable Europeans, are behaving like doomsday cultists, constantly deferring the date of the coming apocalypse. Being cultists, they can’t quite hide the fact that they relish the prospect of obliteration – however unappealing that attitude is to everyone else.

Not that they are alone in their gloom. There are plenty of Leavers who, after years of defeat and marginalization, simply can’t take yes for an answer. Again, these are loudest online, but a fair number of them are trying to breathe new life into UKIP as a vehicle for the permanently outraged.

Natural despondency is exaggerated by cognitive dissonance – that is, by an unconscious determination to fit facts to your opinions.

Like the Remainer residue, they absolutely refuse to infer anything from the fact that their previous predictions were too pessimistic, moving glibly from one failed forecast to the next: “Cameron won’t give us a referendum!” “Vote Leave won’t win!” “Theresa May won’t trigger Article 50!” “It won’t be a proper Brexit!”

Why such sulking? It’s hard to avoid the conclusion that we’re seeing an internal character trait rather than a response to external circumstances.

There were one or two Eurosceptics – I can’t deny it – whose hostility to the EU is an aspect of their hostility to life in general. They loathe Eurocrats, just as they loathe politicians, their boss and their ex-wife. Equally, there are some Remainers whose Europeanism was motivated from the start by a lack of confidence in the United Kingdom.

In the latter case, natural despondency is exaggerated by cognitive dissonance – that is, by an unconscious determination to fit facts to your opinions rather than the other way around. The more emotionally invested you were in Remain, the more you will subliminally block out reports that contradict your prejudices (that is, good economic news) and over-emphasise reports that sustain them (bad economic news).

You might, of course, accuse me of being subject to a confirmation bias of my own – though I try to guard against it. Still, be fair: which side’s predictions have so far proved more correct?

Not that pessimism is a Brexit-specific phenomenon. Forecasts are more often too gloomy than too hopeful. Irrational anxiety is an ingrained human trait, an inheritance from our hunter-gatherer past. As I wrote on CapX last year:

On the savannahs of Pleistocene Africa, pessimism was a survival mechanism. Our ancestors lived in a world of constant danger and violence: strangers were more likely to be a threat than an opportunity. Hopeful and trusting souls were less likely to survive.

If you doubt it, listen to the way the worst construction is put on every possible Brexit outcome.

If, for example, we plan to scrap a regulation, we are “taking away protections”. If we keep it, we might as well have stayed in the EU. The idea that it will be our decision, that we are a robust democracy, perfectly capable of running our affairs, doesn’t get a hearing.

Indeed, the real miracle is that this pessimism is not more widespread. The general population are more resilient than opinion-formers like to tell themselves. Offline, most Remainers, like most Leavers, want the best outcome for Britain.

If ever you find yourself confusing social media with public opinion, look at what Edmund Burke had to say about Twitter back in 1791:

Because half-a-dozen grasshoppers under a fern make the field ring with their importunate chink, whilst thousands of great cattle, reposed beneath the shadow of the British oak, chew the cud and are silent, pray do not imagine that those who make the noise are the only inhabitants of the field

Source: Brexit Is Happening – So Let’s All Cheer up about It | Daniel Hannan

Is a Freedom Revolution Possible?

Source: Is a Freedom Revolution Even Possible?

 

NOTE: I am not voting for Trump, but otherwise, I agree with this article. Lela

The Weird Hobbesianism of the Brexiphobes

Jeffrey A. Tucker

Tuesday, June 28, 2016

The UK “is part of Europe, and always will be,” says Boris Johnson, a leader of the Brexit campaign. Wait. How can you be part of something and not appoint a dictatorial, authoritarian, meddling, pillaging central state – a completely artificial creation having nothing to do with the real history of Europe – to manage it?

It’s called freedom. That’s how it works. It means the absence of external political restraint on shaping the future.

In the days following the British vote to leave the EU, we’ve seen apocalyptic panic among the opinion classes. The New York Times has published a long series of freak-out pieces about the end of the “postwar liberal order.” Except that there is nothing (classically) liberal about a distant bureaucracy that aspires to centrally plan every aspect of economic life.

Another writer worries that “we will have fewer people coming here, enriching our culture and our lives. There will be fewer opportunities. We will have less of a chance to explore the world for ourselves.”

Huh? No bridges have been blown up. Britons can still buy plane tickets. People from abroad can still visit and work. It’s not even clear that immigration will change that much. It really depends on what politicians in the UK do next. An untenable political union is under strain and that is all. Now Britain can actually make some political decisions for itself.

But here is the silliest thing I’ve yet seen. Try to wrap your brain around the claim in the Times that Brexit  “may just wipe out laissez-faire economics.” If there is no European-wide government authority, “where does capitalism go now?”

Capitalism? Does the Brussels bureaucracy really embody the essence of the capitalist spirit? What can the writer mean?

Well, you see, Reagan and Thatcher were “globalists,” and the global order was cobbled together in the postwar period under the influence of John Maynard Keynes, who had saved capitalism from being discredited by the Great Depression, and therefore laissez faire (which means leave it alone) owes its very existence to the man who wrote “The End of Laissez Faire.”

Or something like that. There’s no sense in trying to explain all these frenzied mind dumps because they make no sense.

Latent Hobbesianism

Having read a hundred articles warning of the coming Armageddon, I’m trying to understand the underlying source of the mania. True, there were plenty of unsavory types supporting Brexit, people who were driven to leave the EU by racist and xenophobic motives. They might imagine a new and more pure Britain is possible and desirable.

But, this is hardly news. It is not possible for democracy to function without an ugly underside. And people support good policies for bad reasons all the time.

That said, there is something deeper going on here. Some people just cannot imagine the possibility of order emerging without government planning. If there is no central state that can bind everyone, forcing good behavior and unity, surely the results will be an atavistic and chaotic mess. Life will become, in Thomas Hobbes’s words, “solitary, poor, nasty, brutish, and short.”

There is a certain tradition of Enlightenment thought that imagined that government serves the one great purpose of cobbling together order in place of the war of all against all of the “state of nature.” Without Leviathan, we would be slitting each other’s throats, and unable to figure out any other way of living. The state, in this view, is the wise planner that can rise above the people’s base instincts and tell us what is best for us. In the most extreme rending of this story, all things must be either forbidden or mandated, with nothing left to chance.

(This same perspective explains so much of domestic politics. People who can’t imagine order without imposition always end up favoring power over liberty.)

Hobbes Was Wrong

Brexit doesn’t establish economic and civil liberty for Britain. But it gives those ideas a chance.But is this really the history of Europe? Remember that Hobbes wrote during the English civil war when vying for control of the state was indeed a violent undertaking. This was not because human beings are incapable of figuring out a better way, but because there was a state there to control in the first place. It was responsible for the moral hazard that unleashed the violence.

The bigger picture of the middle ages through World War I was of small states minding their own business, with people free to move, and trade relations growing ever more sophisticated. States were limited by borders in their geographic jurisdiction and in their internal political power by legal and cultural restraints. The right of exit and the decentralization of power made it all work.

F.A. Hayek was fond of quoting John Baechler: “The first condition for the maximization of economic efficiency is the liberation of civil society with respect to the state…The expansion of capitalism owes its origins and raison d’être to political anarchy.”

By anarchy, he didn’t mean everyone going bonkers. He meant a lack of a centralized authority. The result is not the end of laissez faire but its institutionalization in political habit. That doesn’t mean a turn against “globalization.” It makes international cooperation essential for survival.

Brexit doesn’t establish economic and civil liberty for Britain. But it gives those ideas a chance to escape the EU’s subversion of the classical idea of what Europe is all about. Yes, a post-Brexit Britain could screw it up, especially if the extremes of right and left prevail against an emergent libertarian third way. Brexit is a beginning, not an end.

At least one impediment is out of the way. That’s progress.

Found on FEE

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Husband and I are doing our weekly news marathon on PBS. According to them, Brexit is an unmitigated disaster that will cause the end of the world.

Oh, how I wish this had happened before I started Transformation Project. Now I’m going to have to revise Life As We Knew It.

Here’s the thing — if PBS is against it, it is almost always a really good thing for ordinary people.

Carry on, Britain. Don’t listen to the nattering nabobs of negativity. Yeah, the seas may be a little stormy setting out, but then things will get better and it’s highly likely Europe will vote to follow your lead … and then … maybe the United States will relax the ties that strangle individual states as well. It doesn’t mean we can’t talk to our neighbors, trade, agree not to attack one another, but it does mean that the people of England will be free to be English and look to their own interests. Getting away from empire will make the world safer … after the shock wears off.

Smaller is better. Liberty is best.

Independence is not isolation.

Dan Sanchez   Dan Sanchez is the Digital Content Manager at FEE, developing educational and inspiring content for FEE.org, including articles

Friday, June 24, 2016

Found on FEE: https://fee.org/articles/brexit-wins-why-that-s-great-news-for-europe-too/

 

British voters have elected to leave the European Union in a national referendum. The UK Independence Party (UKIP) leader Nigel Farage declared Friday Britain’s “independence day.” That is quite a statement given British history. A little over two and a quarter centuries ago, America had its own first Independence Day, and the British Empire was the super-state from which Americans declared independence.

History has come full circle; in a sense, today we are seeing the American Revolution in reverse. In many ways, the European Union is a lever of US global hegemony. By seceding from the EU in spite of threats from Washington, Britain is declaring partial independence from America.

It must be noted that independence is not isolation. This is the key distinction that is intentionally blurred by the “Better Together” rhetoric of the “Remain” camp. When they scaremonger about “leaving Europe,” it conjures images of Britain abandoning Western civilization. But “the West,” as in the US-led alliance of neo-colonial powers, is not the same thing as Western civilization. And the European Union is not the same thing as Europe. Exiting a mega-state in defiance of an imperium is not withdrawing from civilization. In fact, such an exit is propitious for civilization.

Small Is Beautiful

Political independence fosters economic interdependence.

Advocates of international unions and super-states claim that centralization promotes trade and peace: that customs unions break down trade barriers and international government prevents war. In reality, super-states encourage both protectionism and warfare. The bigger the trade bloc, the more it can cope with the economic isolation that comes with trade warfare. And the bigger the military bloc, the easier it is for bellicose countries to externalize the costs of their belligerence by dragging the rest of the bloc into its fights.

A small political unit cannot afford economic isolationism; it simply doesn’t have the domestic resources necessary. So for all of UKIP’s isolationist rhetoric, the practical result of UK independence from the European economic policy bloc would likely be freer trade and cross-border labor mobility (immigration). Political independence fosters economic interdependence. And economic interdependence increases the opportunity costs of war and the benefits of peace.

The Power of Exit

Super-states also facilitate international policy “harmonization.” What this means is that, within the super-state, the citizen has no escape from onerous laws, like the regulations that unceasingly pour out of the EU bureaucracy. But with political decentralization, subjects can “vote with their feet” for less burdensome regimes. Under this threat of “exit,” governments are incentivized to liberalize in order to compete for taxpayer feet. Today’s referendum was a victory both for Brexit and the power of exit. That’s good news for European liberty.

During its Industrial Revolution, Britain was a beacon of domestic liberty and economic progress that stimulated liberal reform on the European continent. An independent Britain in the 21st century can play that role again. In doing so, Britain would help Europe outside the EU far more than it ever could on the inside. Brexit may be a death knell for the European Union, yet ultimately a saving grace for the European people.

A Project Fear, based on saying everyone else will be beastly to us if we Leave and we’re too weak to cope with that, was always, in my view, unlikely to sit well with the self-image of Britons. When Obama threatened us, Britons told him where to shove it. When the OECD and G8 said Brexit would destabilise the world, Britons were flattered by the notion we are that important. When EU leaders said they’d have an economic battle with us, Britons thought: “We may get a black eye, but you should see the other guy.”

Andrew Lilico    Andrew Lilico is Chairman of Economists for Britain.

Friday, June 24, 2016

So Brexit it is. After 25 years of complaining about the EU, the British people were asked to choose and they’ve chosen to go. Britain re-emerges, blinking, onto the global stage, bringing an end to its long regional slumber. The geopolitical map of the West from here is uncharted. Britain will seek new allies – but who? The European Union will react to the departure of its third largest member – but how? All, from here, is flux and change.

“We hate the EU too, but it would be too dangerous to leave.” The Remain campaign offered an extraordinarily negative (and frequently bitter) pitch of a sort we’ve never seen in national UK politics, at least in living memory. Sensing that many Britons had a deep and long-lasting suspicion of the EU, Remain tried to tell them, in effect, “We hate the EU too, but it would be too dangerous to leave.”

They tried to offer an anti-European’s case to Remain. Perhaps that was designed to appeal to swing voters, but it created a strange overtaking. Most Britons, I believe, are more positive about the EU than the Remain side, and in particular many who voted Leave are more positive about the EU than Remain was. Britons know that there have been many good things about the EU. But most don’t believe it’s right for us any more.

The one moment I started to fear Brexit might lose was after last week’s terrible events, when polls showed a huge and instant swing to Remain. But of course I should have known that Britons are used to using opinion polls to give their verdict on events rather than to say how they will actually vote. The British voter is bigger and more experienced with democracy than to let herself be swayed into long-lasting error by natural sympathy.

The British voter is also bigger and more experienced with democracy than to think expertise is a numbers game. She knows that most experts rejected Thatcherism, said we should join the euro, said Iraq had WMD in the 1990s and early 2000s. Having the majority does not make an expert right. That does not mean that Britons reject the efficacy of experts, though. Much press commentary confused not bowing to an experts’ consensus with not being interested in expertise at all. The British voter knows that democracy means she gets to choose which expert she listens to. She chose me.

There will be short-term economic consequences. I said 2-3% of lost GDP growth during the campaign, and I’m sticking with that. Voters were under no illusions. Polls said most expected negative economic consequences in the first five years, but improvement over the medium to long term – the Lilico-Lyons macroeconomic story turned into an opinion poll return.

Financial markets have been volatile, as is their wont in such cases. Change tends to be unpopular for markets, regardless of what that change is. There is an established economic literature studying the effects on financial markets of US presidential party changes. Markets always react badly to the President changing, regardless of who the candidates are or how good they prove to be for the economy.

Financial markets are not especially good at predicting political events. Betting markets had Remain at over 90% early on the referendum result night. The pound reached $1.50. But they were wrong about the political outcomes. They’re wrong about the political economy of Brexit as well. We will do new deals and make new alliances that financial markets are not reflecting at all at this stage.

Cameron was of course always going to have to resign immediately. Having secured so little with his renegotiation and having spent the campaign endlessly declaring what a weak negotiating hand we’d have with everyone in the world if we left the EU, there was no way he could play a role in negotiating what Brexit means.

Whatever we do, we must react to Brexit by being more open.We’ll do some new deal with the EU. That’s not the big issue now. The big issue is what new mates we manage to acquire over the next 15 years. I want us to try for Canada and Australia, creating a vast Fourth Player in global politics, to add to the US, Europa and China. Whatever we do, though, we must react to Brexit by being more open, more global, more welcoming of outsiders, more engaged with the world, not less.

Those who think as I do have won the Brexit war. Now it’s time to win the Brexit peace.

This article first appeared at CapX.

Found on FEE: https://fee.org/articles/winning-the-brexit-peace-after-winning-the-brexit-war/?action=push&utm_medium=push&utm_source=push_notification