Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 14 June 2016

How to avoid Brexit

My initial fears about how the EU referendum would play out appear, unfortunately, to have been realised. The debate over the size of the economic costs has been turned into Project Fear by Brexit campaigners (with the media’s help), leaving most voters to believe they would be no worse off if we left. Media coverage has been dominated by Conservative politicians and political commentators, rather than those with some expertise who might have been able to convince the public that the costs of Brexit were not just another macroeconomic forecast. Among all the tedious noise of claim and counter claim, one apparent fact stands out: we cannot control EU immigration from within the EU. How can Conservative leaders who have pandered to popular concerns about immigration with impossible targets now convincingly turn around and say immigration isn’t really so important? To do so would lack credibility, so they have not even tried.

Just as in the Scottish independence referendum, it is going to be up to those who are not Conservative politicians to save the day for Remain. One way to do that would be to take the immigration issue and play on the general public distrust of politicians. [1] Ask this: if we Leave, why do you think those in charge will really cut immigration from the EU? After all, net immigration into the UK from outside the EU is at least as high as from the EU, and the UK has complete control over non-EU immigration. Yet non-EU immigration has hardly fallen since 2010, and is itself way above the government’s own target.

There is a simple reason that Conservative politicians have not brought non-EU immigration down, and that is because the costs to the economy of doing so clearly outweigh the benefits. They continue to pretend they are trying to bring immigration down (and doing some harm in the process) only because immigration is a convenient scapegoat for the impact of their own policies.

If we cut immigration, it would not ease pressure on public services, because on average migrants - because they are young - pay more in taxes and utilise public services less than non-immigrants. In fact the reverse would happen: a larger government deficit would see more cuts to the NHS and to tax credits. As Conservative MP Dr Sarah Wollaston, who defected from Leave to Remain, said: “If you meet a migrant in the NHS, they are more likely to be treating you than ahead of you in the queue.” Yes of course we could train more doctors and nurses, but the politicians in charge of Leave and who would be running things after Brexit have been reducing the share of national income spent on the NHS.

Cutting immigration might in itself directly improve the pay of low earners if the numbers of jobs remained the same. But the number of jobs would not remain the same. Both UK and overseas companies would take their jobs abroad so that these companies benefited from being inside the single markets. The net outcome for British workers would almost certainly be worse. [2]

Leaving the EU does not give UK voters control over their border and who comes in. It gives control to the politicians running the Leave campaign. Politicians who have so far cut spending on the Border Force budget. In particular do you trust Boris Johnson, whose main interest in supporting Brexit is that it will let him rather than George Osborne be the next Prime Minister, and who has argued in the past that low immigration could lead to economic stagnation?

This referendum is about trust. Do you trust 9 out of 10 economists who say that Brexit will be bad for the economy, or do you trust the politicians who say they will cut immigration if you Vote Leave, but have failed to significantly reduce immigration from outside the EU over the last six years?

[1] This line of attack is partly suggested by this post by Jonathan Portes, but also by the finding here that although immigration is the main issue for those voting leave, they are somewhat divided on how much Brexit will solve the ‘migration problem’. See also this and this. A worthy but ineffectual alternative is to stress the benefits of immigration head on. Desirable though that might be in the longer term I don’t think you can turn around the ‘received wisdom’ in 10 days. An unwise alternative is to emulate what the Conservatives did, which is to say that we need to convince the EU that migration needs to be controlled more strongly than it is at present.

[2] I suspect arguing about the size of the impact of immigration on low pay (is it large or small) will achieve little, particularly as reasonable opinions differ. It is a bit like arguing over the £350 million a week figure: it plays into Leave’s hands by focusing on the negative (there is a negative effect of immigration on low pay, and there is a net contribution to the EU).



20 comments:

  1. Alternatively, you could go historical and finger Enoch Powell as the cultural originator of leaving the EEC now EU.

    After his Rivers of Blood speech in April 1968, in October 1968 Powell set up his alternative budget to the official Tory one in which he called for, amongst other things, the scrapping of overseas aid.

    In 1970, just after the election, Powell said he could no longer follow his principles by standing as a Tory MP, and that he had voted for Labour because of their then anti-EEC policy. Powell’s critics at the time pointed out that he only saw EEC membership as a threat to UK sovereignty after being sacked from the shadow cabinet in 1968.

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  2. There’s a flaw in the above claim that “the UK has complete control over non-EU immigration.” It’s that the EU has abandoned any pretense of controlling immigration from Africa, the Middle East etc. And once in the EU, those immigrants won’t have to wait long before gaining EU citizenship, at which point they can walk straight into the UK.

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    1. That is fairly misleading. Not only does gaining citizenship of a member country require rather more years of residency than your "not long" would suggest (e.g. I think at least 6 for Germany), it typically also requires fulfilling various other criteria regarding employment, language skills, and citizenship test. By the stage that someone is in a position to do that, they will necessarily be pretty well settled and so not particularly likely to move to the UK. And in any case, in doing so they will have proven themselves to be economically useful citizens. One does not get citizenship merely by waiting.

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  3. "If we cut immigration, it would not ease pressure on public services, because on average migrants - because they are young - pay more in taxes and utilise public services less than non-immigrants."

    As they say, economics is the science of confusing stocks with flows, and this sentence perfectly sums it up.

    The "stock" is the wealth of this country in terms of housing and infrastructure in schools and health services. The "flow" is the income we all, immigrants and non-immigrants provide.

    However, all immigrants need some "stock" immediately they arrive from abroad, even before they start to work. The have to live somewhere, that housing is exceedingly rare and expensive at the moment. To build housing new costs about £100,000 per person, I suggest. So even if immigrants earn £25,000 per year they have an immediate need of the nation's wealth of about £100,000.

    So to completely ignore, as all economists seem to do, the up-front cost of migration (in terms of housing to be provided immediately) seems to indicate that the old saying about confusing wealth with income is correct.

    What is happening is that the wealth per person declines (the cost of migration is externalised) as the population grows. That is what the masses complain about.

    Also, Jonathan Portes shows, with his glib calculation that immigration only costs us 1 penny of our hourly wage per year, eocnomists ignore the "Paradox of Immigration". Just like the Paradox of Thrift, what is good for the nation is not good for the individual. Undercutting of wages on an individual level exists, the BoE study shows that immigrants work on average for up to 15% less. That is the average, but individually wages could be undercut by a lot more.

    You are of course right that immigration will not be cut by the liers and propagandists of the right wing Brexit campaign. But the refusal of the economics profession to deal with the issue of immigration on a more detailed level (as I set out above) is an intellectual dereliction of duty.

    If economists complain why their voice is not heard, I would suggest theyare on the issue of immigration rightly ignored.

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    1. So, on an individual level there is some up-front cost due to increased demand for housing, with a payback time? I won't argue with that, but it is a gradual process, and at the same time that more people arrive, we are also getting payback from those who arrived previously. You have given no evidence that, taken in aggregate, the up-front costs outweigh the benefits at any time.

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    2. Each new immigrant has to have somewhere to live. We either squeeze up, or provide new housing for net 300k new arrivals per year.

      The cost of providing housing is £30bn immediately (each year if we do not want to fit into existing housing), each year new immigrants provide about contribute about £6bn new GDP.

      More details:

      https://radicaleconomicthought.wordpress.com/2016/06/15/economists-and-immigration-no-wonder-people-vote-for-brexit/

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    3. Matt I think this is starting to change in the profession. David Card for example , even though a proponent of immigration in general, argues that high immigration does not always give the win-win outcomes neo-classical theory suggests and has been critical of a lot of methodology that is conventionally used, and particularly how it is used. A major new book by Borjas actually has quite a negative view of the overall impact of large scale immigration. Deaton has also pointed out more generally the social costs of hyper-globalisation.

      These views used to be confined to parts of the heterodoxy; they are now mainstream.

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    4. "What is happening is that the wealth per person declines (the cost of migration is externalised) as the population grows. That is what the masses complain about."

      The Lord's Report argued that immigration did not reduce per capita income or increase it either - the effect was largely neutral. I suspect though there have been very large distributional effects - and I think that is where the problem is. And of course GNP does not measure environmental or other such consequences.

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  4. Migration in some ways feeds the problem: a growing population requires more public services, which requires more migrants. A lot of these migrants are from outside the EU (whether Australian and Indian doctors or Filipino nurses.) Where people really see the pressures on public services are in transport (congestion), schools, and maternity wards and in the environment - high density housing and the inevitable loosening of building regulations such as on the green belt which is going to have to happen if we see a huge increase in housing supply and the road and other infrastructure to support it. There is also a lack of incentive to train up our own workers if there is and infinitely elastic supply from the East. As Ms Duffy wonders - why so many migrants with so many unemployed? We know how the elite responded, but this is actually a question that deserves a respectful answer, even if it is a little naive. Also, immigration is much easier to cut than non-EU immigration (once free movement rules are removed) because a lot of it is not necessary, economically or morally.

    I think the elite are not taking immigration seriously. Even if the forecasters are right (I am not convinced of their methodology - especially if Krugman's means of calculations are any guide), people seem to be happy to risk a smaller economy if they can get some relief from what they see as the pressures on their communities of very high levels of immigration.

    Maybe it is time to do some field work and start really asking what is going on? Put the models away and get out there. As someone says, don't keeping ignoring people's complaints and leave it to a Trump to sort this out. Behind the fear and prejudice are almost certainly some legitimate concerns.

    Ultimately Britain needs to deal with slowing productivity. It has been shown how this has not improved with very high population growth. A different approach is needed, in or out of the EU.

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    1. I am not convinced about the congestion issue. An increasing population density will tend to lead to a higher density of available jobs, hence a likely reduction in commuting distances (the corollary of people in rural areas tending to have longer journeys to work). Even if it takes longer to travel a fixed distance (and even this is not automatically true, as increased tax revenues can fund transport infrastructure improvements), journey time to work could just as well decrease.

      Regarding schools and maternity wards, again, it is all too easy to look at demand and ignore the contribution by migrants to increased supply, both in terms of tax revenue and also the skills needed to both build and staff new schools and hospitals.

      Yes, Ms Duffy's question deserves a respectful answer. But there is an answer, and it is the job creation that migration facilitates, in both public and private sectors. Too often the implicit assumption that there are a fixed number of jobs to be shared out goes unchallenged.

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    2. "Yes, Ms Duffy's question deserves a respectful answer. But there is an answer, and it is the job creation that migration facilitates, in both public and private sectors. Too often the implicit assumption that there are a fixed number of jobs to be shared out goes unchallenged."

      What you are saying is true if you assume that income effects outweigh the substitution effects. It is pretty clear there have not been large output (per capita) effects from migration, or large native employment creation from immigration. There is also likely to have been a deflationary effect on the economy from surplus labour (arising from an infinitely elastic labour supply that accepts ever lower wages). This has not pushed up overall wages, it has pushed them down - particularly in the unskilled/low skilled/low income sector. This is all independent of austerity policy - which of course has made this much worse - although macro-expansion could intensify the inequality between wages if it brings in more low skilled low wage competing labour from outside. This seems to be what has been happening and what a large proportion of the population has directly experienced.

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  5. "do you trust the politicians who say they will cut immigration if you Vote Leave, but have failed to significantly reduce immigration from outside the EU over the last six years?"

    Are you perhaps underestimating the signalling effect of leaving the EU towards immigration in general? I.e. "Voting conservative clearly isn't the kick up the backside my politicians need to understand the british public want to curb immigration, both in the EU and out; so I'm going to leave the EU to allow controls on immigration within the EU and to send a strong signal that I don't want immigration from outside the EU either".

    In terms of effects, I agree that it's barmy. But the signal is quite a strong one I think (until waiting times at hospitals go up because there aren't enough doctors and nurses...)

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  6. The problem now is that so many Leave voters have completely closed their minds to any argument from Remain. The expression 'Project Fear' is thought stopping: it allows them to ignore any argument that suggests leaving the EU will be a bad idea. I worry where scapegoats will be found when the dream turns sour.

    Even if Remain wins, which is now looking doubtful, there will be clamouring for another referendum in the future, much as in Scotland. This is a farce.

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  7. "There is a simple reason that Conservative politicians have not brought non-EU immigration down, and that is because the costs to the economy of doing so clearly outweigh the benefits."

    They have brought it down actually, it's slightly lower than it was in 2010. But it would be significantly higher if the Conservatives' immigration policies weren't enacted. They've included deporting migrants who earn less than £35,000 and forcing graduates to go back to their home country to reapply for a visa.

    This is obviously doing lots of economic damage and it's all because of open door EU immigration putting political pressure on needlessly reducing immigration.

    I'm voting Remain, but, it's very hard to argue that open-door immigration with countries whose GDP per capita is just 20% of the UK's is a good or beneficial thing, given the long-term political and social effects which economists almost never take into account even though it is the primary determiner of government policy.

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    1. Enacting a living wage (one that lives up to its name) would reduce scope for undercutting by migrants.

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  8. You should be offering this material to the Guardian & Independent. (Ideally to the others, too, though I accept that they'd be reluctant to publish it.)

    I just heard Minford on Radio 4, again, banging on about "free markets", but unchallenged how immigration controls would fit in.

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  9. This post is bizarre. It is about quality not quantity on EU immigration:

    https://medium.com/@aldursys/never-mind-the-quality-look-a-squirrel-8bf271bb2e99#.r764qkbq7

    All the immigration studies get the null hypothesis wrong and aggregate together a big group "EU immigrants." They fail to separate out those who would get a Visa with those who wouldn’t. So they are simply wrong. Limiting lossless unskilled immigrants from the EU allows us to expand immigration from outside.

    The statistics are quite clear:

    http://migrationobservatory.ox.ac.uk/reports/potential-implications-admission-criteria-eu-nationals-coming-uk

    "Overall, therefore, most EU-born workers—like most workers of all origins—are not in jobs that meet the criteria for Tier 2 visas. Because EU workers are underrepresented in high-paying graduate jobs, a lower share of those who are already living in the UK are working in jobs that meet the occupation and salary thresholds described in this report, compared to the average across the UK labour market. In 2015, 19% of people born in EU countries and working as employees in the UK were in a skilled job earning more than £20,000. "

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  10. "Leaving the EU does not give UK voters control over their border and who comes in. It gives control to the politicians running the Leave campaign."

    Maybe but so? They can be voted out in 2020. That's how democracy works. Can't follow your reasoning on this.

    Why should we cut immigration outside of the EU?

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  11. If, for any given immigration cap, you have fewer low-paid people coming into the country, then that frees up slots for more high-paid people, and that increases the net benefit to the resident population.

    88% of EU immigrants would not get a Tier 2 Visa at present. That's an awful lot of slots freed up for higher quality individuals from the rest of the world.

    Those at the low end know that and they feel that. That is the economics that they understand - not getting a job, seeing no productivity improvement due to lack of investment, and no wage rises if they are lucky enough to get a job.

    And that is why ordinary people are voting out. There is nothing complex or nuanced about it. With control *we* as a country can decide where we want to go.

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  12. You assume that a vote for Brexit is a vote against migration.
    That ain't necessarily so.
    Many voters will vote Brexit knowing that migration will continue, and are happy to do so. For many Brixit is not about migration.

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