Beliefs about Brexit

I have nothing to say on yesterday’s agreement that cannot be found in what Chris Grey or Ian Dunt writes. The difference in tone between the two seems to me to depend on different assessments of how far down the road the Irish border issue can be kicked. What I want to do instead is ask why public opinion seems oblivious to the failures of all those claims before the negotiations that ‘we hold all the cards’ compared to the reality that the UK has largely agreed to the terms set out by the EU.

I think as good a place to start as any is this poll result from ORB.

The view of the overwhelming majority of economists, and all the analysis from serious academics, the OBR, IMF, OECD, and now even the government, is that leaving the EU will involve significant economic costs. Yet despite all this the poll above shows as many people think we will be better off leaving as think we will be worse off. This is the kind of polling that should stop everyone in their tracks, much like the polls before the US election that said more people trusted Donald Trump than Hillary Clinton.

The result in this poll is all the more incredible because so far people are worse off as a result of Brexit. They are worse off because a depreciation immediately after the vote led to higher import prices that have not been matched by rising nominal wages. We have moved from the top to the bottom of the OECD growth league table. A belief that we will be better off has to involve Brexit in some way reversing what has already happened.

I can think of two classes of explanation for this apparent paradox. The first is that people are fully aware of what experts and the government thinks, but ignores this because they simply do not trust experts. Instead they fall back on simple ideas like there will be less immigrants after Brexit so they will be better off. Ideas that experts also say are wrong, but where experts are again ignored.

If that is the line you want to take, then it has a clear implication. The implication is never hold a referendum on anything. It is not normally a good idea to take decisions where you ignore all expertise.

There is however a second and much simpler explanation for the poll result shown above. I know about the view of the overwhelming majority of economists, the analysis from serious academics, the OBR, IMF, OECD and now even the government, and so do most people reading this blog or who read the Financial Times and a few other newspapers. But do people who pay far less attention to economics and politics know this? How would they know this?

They will know very little about it from reading the papers that campaigned so hard for Brexit in the first place. At best the information will be reported in a dismissive way with some reference to how economists always get things wrong. (Hence, by the way, a distrust of economists, because most of the media is either unable or unwilling to make the distinction between conditional and unconditional forecasts.) Against such reports will be a constant stream of comment and reporting extolling the imagined benefits of Brexit.

This propaganda could be countered by informed and informing reporting by broadcasters. Unfortunately, with the exception of Sky News, the standard of reporting by broadcasters on Brexit has been very poor. In particular the BBC treats Brexit like any other Westminster based issue, with an additional touch of nationalism. We hear a great deal from May, Fox, Johnson etc, with virtually no expert analysis of what the true state of negotiations are.

I’m not an expert on international trade, but because I read some of the now numerous people who write stuff on Brexit who are experts, or who have made themselves experts, I feel I am reasonably well informed. I have never seen the same level of expertise from the broadcast media. If I just listened to the BBC or read any newspapers bar two or three, I would know almost nothing about what was really going on in the negotiations.

Let me give a personal example. I missed the importance of the Irish border until September last year. I do not think I was unusual in this respect. I suspect I did so because I was influenced by the UK line that this issue was really a phase 2 problem, a line we heard over and over again on the MSM. What the MSM rarely did was ask what people in Irish Republic felt about the border, and hence why it got to be a first stage issue in the first place.

Once I realised its importance, I could see that the Irish border issue would have a fundamental influence on any final deal, and so could many other experts. But the BBC in particular seems unable to incorporate expert opinion, either directly or indirectly, into its coverage of the negotiations, in much the same way as they failed to do so before the referendum. As a result, most voters are left with bland and uninformative coverage. I see the same Brexiter MPs over and over again being interviewed by the broadcast media, but I cannot recall any occasion in which they have been reminded of the false claims they made before the vote.

The idea that the media can heavily influence popular opinion is not new. It has been widely acknowledged that people think crime is always rising, and overestimate the number of immigrants in the UK, the extent of benefit fraud and so on. These mistakes are almost always in the direction you would expect if people were far too influenced by newspaper headlines. We also now have published papers that demonstrate that the media influences rather than just reflects voters views. (See here for Fox News, and here for the UK press. Here is another study that also finds the Murdoch switch to Labour had large effects. Here is a study about how the media influenced attitudes to welfare after the 2011 riots.)

I also think this is not the first time in recent memory that the media has failed to accurately report what was going on and what experts thought. Before the 2015 election the media accepted the idea that getting the budget deficit down was the most important goal of macroeconomic policy, and that the economic fundamentals were strong. Few experts would agree with the former, and the latter was simply false. What I call mediamacro swung the election for the Conservatives.

The UK government wants a Brexit that will involve the UK not just ending free movement, but leaving the Single Market for goods and services and leaving any customs union with the EU. It is a form of Brexit not dictated by the referendum result but by the wishes of the Brexiters in the Conservative party. The only people who can stop this happening are other Conservative MPs, but many have said that these MPs will only be able to defy their government if public opinion swings against Brexit.

But that is not going to happen. So far the shift in the public’s view of Brexit has been small, and is largely down to previous don’t knows making up their mind. This is not surprising if as many people think they will be better off after Brexit as think the opposite. The most obvious explanation for this is that people remain unaware of the overwhelming expert opinion that they will continue to become worse off after Brexit. That in turn represents another victory for right wing press propaganda, and another critical failure from most of our broadcast media.

Immigration and Real Wages: Reality and Perceptions

Reality

Robert Skidelsky’s recent piece applies a textbook model to the question of immigration, which implies real wages do fall for some time. The story goes like this. There is sudden increase in labour supply because of a wave of immigration. Immigrants compete for jobs, which forces down real wages, encouraging firms to switch to more labour intensive forms of production (automatic car wash to hand car wash), which reduces labour productivity. However as firms respond to higher profitability and invest, everything including real wages and productivity goes back to where it was, the only difference being that the economy is now larger. So immigration leads to lower real wages for as long as it takes firms to invest.

Did the large increase in EU immigration that started in 2004 have this effect? There is no noticeable change in the rate of increase in nominal or real aggregate wages until after September 2007, which was when the Northern Rock crisis happened. Everything from 2008 onwards is dominated by the recession. But we have emerged from the recession with an economy with low productivity and low real wages, and as yet firms are not investing. Is this the model working, and has the second stage involving more investment somehow stalled for some reason? Do we need to cut immigration so we can have increasing real wages again?

There are many problems with this textbook model. First, there was a large increase in work related immigration from non-EU sources in the second half of the 1990s, but no associated decline in real wage growth. Second, the model treats immigration as an exogenous shock, by which I mean immigrants just turn up and start competing for jobs. If that was the case, we would expect to see a temporary increase in unemployment associated with immigration inflows. You do not see that in the late 1990s, or immediately after the start of EU migration in 2004. And third, econometric evidence suggests immigration has no noticeable impact on real wages (see also here. Results are similar in the US).

There is a simple explanation for all these difficulties: we are using the wrong model. An alternative model is one where firms find it advantageous to produce in the UK, but have problems getting workers, a problem that is solved by recruiting from overseas. It is very telling that under Theresa May the Home Office commissioned many studies designed to show how immigration was holding down real wages, and all were suppressed because they could find no evidence. In this production led model, there is no reason for real wages to fall. The additional employment, investment and output go hand in hand.

What about the experience of low real wages after the Global Financial Crisis (GFC)? The first point to make is that there is nothing about real wages that a combination of productivity growth, higher indirect taxes (in 2011) and exchange rate depreciations cannot explain. We have not seen a significant shift in the distribution of income towards profits. So any immigration effect would have to come through via lower productivity. As I explained here, you can tell a story where poor UK productivity performance since the GFC is the result of (a) a global productivity slowdown (b) poor UK investment in R&D and new technology (c) unexpected negative shocks: first the recession, then the lack of recovery (austerity) and finally Brexit.

I would say at the moment the evidence strongly suggests that real wages are not noticeably reduced as a result of immigration, but I remain open to seeing contrary evidence. We should also note the undisputed fact that immigration provides more resources to the public sector, so workers are better off via this route. But if this is the case, why on earth do the public believe the opposite so strongly?

Perceptions

To many, in all social classes, it is obvious that immigration reduces real wages. The logic appears watertight. If more people with skill X come into an area, that reduces what the existing workers with skill X can charge. For the self-employed plumber, it means more competition for a fixed number of plumbing jobs, so quotes for any job will have to fall. For workers being paid a wage, it means they can be more easily replaced if they or their union asks for a higher wages.

The same thing happens in reverse when people point to Brexit leading to shortages in labour in some sectors because immigrants are no longer coming. Are, they say, that will raise wages in that sector, which is bound to make the remaining workers in that sector better off.

Telling people that econometric evidence suggests that there is no evidence that immigration lowers real wages cuts little ice on its own, because the logic above seems so clear. There is also no point in telling them that immigrants will increase demand, because it is obvious that immigrant plumbers will do their own plumbing, or immigrant workers producing X will demand far less X than they produce.

The mistake people are making is right at the beginning of this thought experiment. By talking about real wages, people immediately think about themselves as workers. As a result, they imagine a world where there are more immigrants doing the kind of work they do. And, understandably, they keep everything else constant. But immigration controls are never about one group of workers, or the immigrants that have just appeared in the neighbourhood. They are about workers across the economy, influencing not just their nominal wage but the overall level of demand in the economy. 

How do we get over the failure to generalise? One way is to ask people to imagine the opposite of most people’s implicit thought experiment. Ask what would happen if there was more immigration in every trade except their own. They should realise that immigrants would require the services that this person provides, so the demand for their trade would increase, allowing them to increase their quotes and raise their standard of living.

Another mistake some people make is to assume that because many EU immigrants are from poorer East European countries, and immigration happens because of differences in standards of living, we have to get some kind of equalisation of living standards as a result of immigration. To see why this is the wrong way of thinking about it, imagine if workers were forced to move the other way, from rich to poor countries. Would this raise real wages in poor countries? Of course not: they would be paid the same as domestic workers producing the goods the poor country does.

A far better way of thinking about EU immigration is that it is allowing production in the UK to happen which would otherwise go abroad. Of course there may be a small number of cases where overseas workers are exploited by restricting their ability to leave their employment, but domestic laws and resources should exist to stop that happening.

One way proponents of less immigration play on these misleading perceptions is to talk about just controlling unskilled immigration. That is clever, because it diverts people away from thinking in terms of a labour shortage model. The best response to that is to suggest various occupations that are not classed as skilled, and ask people whether they really want less care workers or nurses and so on.

But what if people still feel that immigration must reduce wages in some way. Perhaps just the possibility of potential immigration restrains workers for asking for pay increases. The final mistake that people make so often is to assume that lower nominal wages means lower real wages. For that to happen prices have to be unresponsive to lower wages. And that in turn would mean the share of profits in national income would have steadily risen since we had large migrant inflows, which it has not. The main determinate of real wage growth in the UK has and always will be productivity growth.

Falling nominal wage growth would still have an important effect, however. It would keep inflation low, which would allow policymakers to let unemployment fall relative to previous trends while keeping inflation on target (it would allow the NAIRU to fall). And that has to be a good thing.

Implications

Although the evidence overwhelmingly suggests that immigration does not reduce real wages, it is fairly easy to see why people would think otherwise. That contrast is ripe for exploitation. How it was exploited, and how it is turned a previously outward looking, tolerant nation into one that tries to deport someone who have legally lived here for over 50 years, will be the subject of a second post.