Don’t believe the good news about Brexit

That is my latest Bloomberg column.  I perform some back of the envelope calculations to estimate very roughly that:

Nonetheless imports are almost 30 percent of British GDP, which you can take as one possible measure of what eventually might be spent on the outputs of foreign nations. So plausibly, in the long run that 30 percent becomes 10 percent more expensive because of the weaker British currency. Thirty percent of 12 trillion [national wealth] is 3.6 trillion, and the 10-percent value decline from that figure is 360 billion pounds, or about 5,625 pounds per capita. a pretty steep price for the Brexit vote.

To put that 360 billion pounds in context, that is about 19 percent of 2015 British GDP, much costlier than a typical recession. The bigger loss, however, is less psychologically painful because it is spread out over many years, basically the rate at which the British will spend down their wealth. And if you view the country as a wealth-generating mechanism for the future, in fact the actual costs will be higher because hitherto-unproduced wealth will be worth less too, although those costs are more distant yet.

This isn’t any kind of formal international trade model, with a full set of measurements and moving variables. It’s just a simple way of showing that the costs of Brexit can be high without a recession. It is quite possible and indeed likely that various adjustments, including a move away from foreign imports, would lower these costs. On the other side of the ledger, Brexit could help create a negative political and economic momentum that is not captured here either. Nonetheless this is a gross approximation of the first-order hit to British wealth.

Please let me stress again: I am not saying that is “the right number.”  It is rather a simple exercise to show Brexit can have significant backloaded costs, without necessarily bringing a recession today.  My conclusion is this:

The notion of a recession is actually a narrow way of thinking about economic cost, and it focuses attention too much on short-run, highly visible, and painful burdens. I worry that the spreading out of Brexit costs over time will lead the British people to feel invulnerable, to demand too much from their politicians, and to limit their ties with the EU too much and too quickly.

Do read the whole thing.  And here is a good Francesco Guerrera piece on Brexit from Politico.


Apologies for my ignorance, but can someone help explain what the 12 trillion refers to?
British GDP is about £2tn, as per the 19% reference. Can't see the context.


Many thanks.
So you are saying national wealth will drop by 19% of GDP over the long/medium term due to costlier imports arising from the currency correction (all else being equal, which is quite an assumption).
If this is based purely on the sterling depreciation and not on any Brexit-specific factors, would this not apply to any country that devalued its currency? Usually you would expect local firms to become more competitive, and local assets appear cheap spurring investment.
Could be argued pound was overvalued pre-Brexit.

No no no, we're only looking at one side of the ledger here.

Ok ok ok, all very muddled to me, assumptions look oversimplified to the point of meaninglessness, I'm going to have another drink and stop thinking about it.


UK GDP is in fact less than £2tn. Who is this joker? Someone who calls himself an economist, but is in fact pedaling his own political agenda. It is hardly a surprise that nobody trust economists any more.

I'm missing something. "Nonetheless imports are almost 30 percent of British GDP. [...] Thirty percent of 12 trillion is 3.6 trillion" What is this 12 trillion figure? Certainly not British annual GDP which much small... so I'm confused...

Well maybe it will be bad in the long run for the UK to be out of Europe, but don't who predicted short term problems ( like Tyler) have a bit of a credibility problem now in presenting their new view that it is actually a long term issue.

The cheekiest comments of all are the ones where they say that their predictions of short term problems were correct but the BOE saved the day. Surely intervention by the BOE should been factored in. Its like the peak oukers who claim they were right except for shale.

My guess is that there's both a short and long-term view, not either/or. Furthermore, what is meant by the "short-term" effect of "Brexit?" That is, people seem to conflate the vote with the effects of an actual exit. Granted, the role of expectations can make distinguishing those separate effects a bit murky. It's worth reminding people that the actual exit hasn't happened. Most economists I read, when talking about short-term Brexit effects were speculating about the short-term effects of leaving the EU. As that has not yet happened, their "short-term" predictions are still just that, predictions. We will have to wait until the UK actually leaves the EU to judge their predictions.

I like Peter Schiff's standard answer when his predictions don't come true. "I was early, not wrong".

Here's a useful study on what is happening to the libertarian economists over Brexit:

+1 I love it

Al Gore must have read this book, and learned from it.

True Shamans never pick a specific date for the end times!! Much better to say our children won't have a world unless we submit to the Shaman within five years. Repeat this every five years. It will seem like news every time.

I have never understood why self-proclaimed libertarians are so enthusiastic about rule by unelected activist bureaucrats in a faraway city. I suspect most libertarians are primarily opposed to government by people they consider yahoos (i.e., their fellow citizens), or worse yet the hated "Christianists"; they don't object to intrusive rule by PLUs.

I agree,

I can never understand why so called liberalists have forgotten the huge sacrifices made over several hundreds of years to arrive at democratic governments, whose powers they are then happy to give away to unelected bureaucrats. If you then have the temerity to say no to the status quo, as in vote to leave the EU, you are then branded as a right wing xenophobe. Er, actually, Anthony Wedgewood Benn was opposed to the EU for exactly the same reasons, in that it was undemocratic and he was hardly right wing was he?

Brain drain: smart, ambitious, and talented young people in Britain may choose to move to the continent, both because the freedom to travel freely between Britain and mainland Europe will be curtailed and because of the perception that opportunities will be greater in the EU. That's the kind of negative effect that may take many years to feel or be able to measure. On a related topic, this morning I told my Godson' father that my Godson's choice of Chicago over Yale likely clinched the tie for Chicago. It matters where smart, ambitious, and talented young people choose to go.

The Brain Drain is all the other way at the moment, hard to believe elites will want to leave a more deregulated less equal environment for the pleasure of paying more tax in a more socialist regime. It's just not the way the world works.

I go into my local town and it is full of Italians and French escaping the Third Workd

~ 80% of the Maths PhD's in FR are in the UK.

In the City.

yes lots of bright Europeans come over and start or join startups in London. The only risk to this, IMO, is if the rules change so that they can't. That would be probably the worst thing about Brexit, again IMO.

The brain drain is a flow, not a stock. Every year millions of young people graduate from colleges across Europe. Before Brexit, many of them headed for London (the rest of the UK outside the capital doesn't get much love). Now those new graduates are looking towards Germany instead.

British graduates tend to leave for Australia rather than to the continent, so not much change expected there.

"Now those new graduates are looking towards Germany instead."

What did the FT say? Do people really want to live in Frankfurt?

Maybe Paris has a chance, but there's no way the new financial capital is in Germany. It has to be somewhere cosmopolitan, highly compensated people want to live. The smart money is definitely on London retaining the crown.

It's also conceivable that the new financial center of Europe will be NYC.

Or Hong Kong, for that matter.

I think that's unlikely, but not because of Hong Kong's relative attractiveness as a place to live. Anyway, there's no buzz about it.

yes I think that's right Lord Action - if investment bankers leave London they will most likely go to New York, rather than, and with all due respect, Dublin or Frankfurt. And with their taxes and regs I don't think anybody trusts the French enough to double down there, even if Paris has some appeal. If they leave London I think bankers will move to NYC.

You might not understand how banking and financial products regulations work.
Some jobs will move to a place where companies will be required by law to have legal residence to be allowed to cater to EU customers.

That was funny Peldrigal, tell us another one!

Well I left Britain for Germany because the visa requirements at the time preferred EU citzenship over PhDs.

Now I am headed back to Australia.

I travelled all over Europe when I was a kid and we had not even joined the EU. Later I worked in four different European countries and it had nothing to do with the EU or free movement.

The 12 trillion is an asset value. If you read the article, there's a slightly strange mish-mash of stocks and flows. So I think the £5625 figure is a wealth effect, not an income one.

The mish mash is helpful it you want to con someone.

How much of this is reversed if the ECB stops its shoot self in foot monetary policy? Strong currencies are great and all, unless you don't have a job.

More likely the ECB will increase it.

Some confusing math here. " Imports are 30% of British GDP", since they're 10% more expensive this increase is worth 3% of British GDP, not 19% .

One hopes its a typo.....

Not a typo. He is extrapolating from GDP share to what people will want to spend their wealth on, when they spend it down

Ok, I see he is saying that this 10% drop is a permanent condition that goes on for ever. I would think other things would change, i.e. exports would increase due to the weaker pound.

How much of its value relative to the dollar has the Euro lost since 2008? Compare to the British Pound.

'and to limit their ties with the EU too much and too quickly'

No, it is better for the EU to have the City be dropkicked as far away as possible, at least in a regulatory sense.

The faster the better.

"When the facts change, I change my mind. What do you do, sir?"
"I find different facts."

Wouldn't the British substitute imports with domestic goods, causing a concomitant rise in domestic investment to meet the demand? Is there any reason to believe that the 30% import figure would remain fixed under all circumstances?

Other people have already questioned the 12trn number, which seems to have come out of thin air. I am asking a different question, which is why Cowan seems to thinks exchange rate declines leave import and export *volumes* unchanged. Obviously they don't. The 1992 Sterling decline sparked off an export-led economic expansion that was the UK's longest peacetime expansion, and the decline in 2008 led to export volumes rising by 30% between 2009 and 2012.

So if there are no benefits whatsoever to Britain from leaving the EU, the average income of its citizens over the next several decades will be 97% of what it would have been if the vote had gone the other way?

One of the UK's primary competitive advantage is that it provides easy access to the European common market for foreign investors.

Nobody wants to put their European head office in Frankfort, they want to be in London.

Move London out of the EU and suddenly Frankfort looks more appealing.

Those rich elite that the countryfolk hate so much pay a disproportionate share of British income tax. The Treasury will miss these people dearly.

Imagine if the US got so angry at bankers that we imposed a 5% tax on all financial transactions, forcing many of the Wall Street banks to relocate to Toronto. Would that be a net win for America? Probably not.

"Would that be a net win for America? Probably not."

How do you define"win"? Tax receipts in the short run, clearly no.

Reduction in excessive influence on US politics by Wall Street. More affordable housing in NYC. Better US economic balance between finance and the productive economy.

More to life than tax receipts.

If you take finance out of NYC the place would look like Cleveland in no time. Affordable housing indeed.

Art Deco, please spare us your 'finance is only 23% of NYC production share' nonsense. Finance is what makes NYC what it is.

Cleveland is not so bad. Affordable housing, good hospitals, friendly people, short commutes, world class art institutions.

Didn't mean to knock that city in particular, just making a point about the importance of finance in creating our greatest global city. Let's change my snark to bashing Detroit, everyone can get behind that. :-)

Finance is one of this country's great strengths and exports. It needs to be regulated of course, but we don't want it gone.

@Heorogar: I don't know the exact %, I'm just pre-empting Art who likes to find some stat that shows Russia's or Oklahoma's economy is only 27% hydrocarbons and say that means it's not a concentrated economy. Maybe only 27% or 24% or whatever is direct receipts from that industry, but take it away and you lose much more than that.

I studied physics at CWR in Cleveland in the summer of 1989. My adviser went to Hawaii for a couple of weeks, so I was told to ask Leslie Foldy any questions if I had them. He was a great guy, and to this day I've never seen a mind work so fast, nor have a heard a faster talker. I was tempted to ask him what planet he was from, and I hated bothering him because I knew my questions had to be trivial to him.

I later read his obituary a few years ago, and it stated that he was often mentioned as a possible Nobel Prize winner but likely denied for two reason: First, he was outspokenly against the Vietnam War when that was not a popular view in the physics community. Second, the top universities on both coasts wanted him to research there but he always declined -- he really liked Cleveland and CWU and saw no reason to go anywhere else.

Also Cedar Point.

What did Cleveland ever do to you?

If it's not 23% what % is it?

Either way, IMO 23% is proximate to a "risk" concentration which would be judged to exist at or above 25% (benchmark). A more diverse economic structure is preferable.

The finance accounts for about 4% of the value added in the economy at large. Re the New York consolidated statistical area, it is the source of about 10% of personal income.

I grew up in an area where 13% of the local workforce was employed by one company. The company hardly exists anymore. The city's still there. The place has its problems, but it's not Detroit.

And, of course, we're not talking about the British financial sector evaporating, just speculating that it might lose some business.

None of this is that esoteric, but it does cause emotional upsets to unstable and innumerate internet stalkers.

You never disappoint.

And here, I'll give you a great response: "You always do."

Pretty rich calling me a stalker when you spend so much time here and at Money Illusion insulting the hosts.

My guess is that it will take a decade or longer to know if the UK took a significant financial hit by voting for Brexit (assuming it actually occurs). But it's probable that most people won't care much either way at that point. We don't always decide to forsake ever other consideration for the highest financial gain. Sometimes other factors are dominant.

Yep, this. More to life than money, and lots more to votes than money.

Professor, I'm unsure whether you have considered all the factors.

Import (into GB) price rises possibly would have similar or equivalent detrimental effects in the exporters (to GB).

I think Milton Friedman (RIP) would disagree with your analysis.

From Barron's years ago. "Speaking in 1998, just before the launch of the euro in January of the following year, monetary economist Milton Friedman said he was "not optimistic" about the new currency's prospects. 'Suppose things go badly, and Italy is in trouble," he observed with eerie prescience.

"'An independently traded Italian lira, he pointed out, meant the problem could largely be addressed by a plunge in the lira's exchange rate. The downward adjustment in the exchange rate would, in effect, push the troubled economy's prices and wages much lower, in relation to those of neighboring economies, greatly enhancing relative competitiveness. But with a single currency shared by all neighbors, the surgical advantage of this single price-correction mechanism is no longer available. Prices and wages would actually have to fall instead, a much more difficult feat. The likelihood of such "asymmetric shocks hitting the different countries," said Friedman, meant that the euro had an uncertain future.'"

Of course, Dr. Friedman could be wrong. I can't say. I am not an econ. PhD.

One possibility that Tyler's piece doesn't consider is that it will be very simple for the UK to unilaterally lower tariffs on a range of goods that are currently relatively high because they are EU-wide policy, and part of the EU's broader system of protectionism for its relatively inefficient farmers. Once the UK establishes itself as a WTO member once again (more simple than you might think), it will be in a position to simply re-submit its tariff schedules however it sees fit. This will potentially make the UK a significantly more attractive destination for major agricultural producers on the other side of the Atlantic, without the problems of exporting to the EU. I am specifically thinking of the US, Canada and Brazil.

In short, what a non-EU UK can do is use trade policy to its advantage, without being hamstrung by the requirement of a consensus position from all the other member states -- something that has held the bloc back in terms of both trade and foreign policy.

Yes, that's the classic liberal's case for Brexit.

But if you look at the actual voters, they don't want more free trade. They want less of it.

The Brexit voters don't want to turn the UK into Hong Kong, they want to turn back the clock and remove all those darn Polish immigrants and Romanian nannies. They want tariff protections for high paying manufacturing jobs and more money for the NHS.

They aren't liberals and there's no political consensus to move Britain in a more economically liberal direction.

Yes, I tend to agree with you that that is what pro-Brexit voters were after, particularly in manufacturing and services (outside of the City). However, I was referring to agricultural tariffs rather than the relatively more politically contentious and economically important manufacturing and services sectors.

There is little doubt what happens with UK trade policy will be a political calculation -- isn't it nearly always the case?

But my broader point is that they have an opportunity to actually work towards outcomes for the UK, rather than the entire bloc. One of the reasons the EU has not been particularly successful at negotiating free trade agreements outside of the EU is its need for consensus among all the members; this actually gives them very little flexibility at the negotiating table.

And, again, I'm not predicting they will do any of this, rather that they have the opportunity to do this. The actual political calculation is a separate question.

I hear lots of people *say* that what British voters want is protectionism, but I have not actually seen much evidence of it.

When I lived in Britain, the people around me seemed to haveless truck with economic nationalism than any others I've seen -- indeed some TV ads even poked fun at the idea that you might buy their brand just because it was British.

Now *immigration* did seem to be a concern. But that is a different issue.

"Now *immigration* did seem to be a concern"

The majority of the British public seems to understand something that open borders supporters don't - Far more people would like to live in the UK than the UK can take in (while remaining the UK - that is a place many people would like to live in).

How many tens (or hundreds) of millions would flood in if border controls were removed? What kind of say should the local population have in deciding who gets in and who doesn't?

'How many tens (or hundreds) of millions would flood in if border controls were removed? '

Actually, that figure is considerably lower when looking at the open borders of the EU. Nonetheless, it seems as if many in the UK were simply unable to handle the idea of several million EU citizens living there.

Which is interesting on its own terms, of course. It seems like the UK had a real problem integrating Europeans, which just might underline the point that the UK isn't really a part of Europe.

Excuse me, since when did you have the gen on who the actual voters were? You are being very patronising, assuming that all the leave voters were a bunch of reactionaries. A lot of us voted leave based on fundamental democratic principles. Something that seems to have been forgotten by a lot of people. Including you, I suspect.

I kinda agree with Khalil above. The EU is more akin to a cartel than a free trade zone. The brits are no longer constrained by all the restrictive covenants the EU imposed. They can lower or raise tariffs or subsidize exports, or whatever, to gain whatever advantage they desire.

That assumes nobody retaliates against them.

If they raise tariffs against Europe, Europe will raise tariffs against them.

There's no free lunch.

"If they raise tariffs against Europe, Europe will raise tariffs against them."

Then they shouldn't- but that normative argument is moot if the UK lacks such sovereignty in the first place.

How does one model sovereignty?

Not an unreasonable column, though I wonder how you reconcile your "trust the asset markets' instant reaction about this shock, and don't believe the second guessing and people who tell you that Brexit isn't so bad" with your consistent doubt of the asset markets' instant reaction to proposed rate hikes or the end of QE each time that happens. Surely this means you should raise your estimate that Scott Sumner's analysis of monetary policy is largely right, rather than arguing that monetary policy can't possibly still matter much at this point?


I wonder about a couple of things:

1. Don't we need to ask *why* the pound dropped? One possibility is that the pound dropped because Britain is going to become extra prosperous, so imports will rise more than exports. A second possibility is that Britain has become a bad place to invest, so nobody wants pounds to invest with. The difference is crucial--- in the first case, the pound drops precisely because on net, British wealth rises.

Actually, there's a third reason which would make the exchange rate change relatively unimportant--- if expected inflation in Britain has now increased, but the *real* exchange rate isn't expected to change.

2. Usually we can expect that the current exchange rate is a good estimate of the future, because it is something like an average of the opinion of the smart money. Here, however, we have a highly unusual event. The exchange rate is still the average opinion of the smart money, but the smart money may not be so smart in this case. The event is too novel for their experience to be worth much, and they are very likely all caught up in elite group media opinion, like how the American Establishment thinks (thought?) Trump's campaign was going down the tubes as it gradually gained ground in the polls since the Democratic Convention. There is still a short-run loss to Britain from an unfavorable exchange rate, but eventually reality will catch up.

Tyler is just doubling down on a bad bet to avoid facing the fact that he may have not been right.

The economic consequences of Brexit are too various, there are too many second and third order effects, there are too many other variables, and the political future of the UK and the EU are too uncertain for anyone to foresee what will happen. And even after it has happened, whatever that will be, it will be impossible to accurately trace the causation that caused it.

The Brexit recession seemed to me to just be campaign spin by internationalists to influence the electorate. I'm surprised to learn that anyone intelligent thought it was based on reality.

If it's too complicate to measure, the problem goes away. I like it.

"the problem" is just life Axa. work hard, treat your staff OK, you might be unlucky, but you'll probably be OK.

If that's the metric, everything's perfect and time for a glass of wine.

If the problem is too complicated to measure, then try using a different part of your brain.

If the problem is too complicated to measure, dont assume your bad measurements of it are OK just because its all you have.

"Yes, I know I said the world was going to end last week and that we should all gather on the mountaintop to be lifted up into glory. But what I really meant was next week, or possibly the week after. It's all very complicated but trust me, I'm a prophet, bad things will happen eventually."

And, of course, when any bad thing does happen I'm sure he'll find a way of attaching a Brexit label to it while ignoring follow up events that contradict.

Anyone remember the "It is bad" reaction to the June PMI figures (

Remember seeing anything about the July PMI figures? No, me neither.

"Actually, that figure is considerably lower when looking at the open borders of the EU"

Actually back in 2004 they were predicting something like 50,000 immigrants from Poland. The actual number was something like 15 times greater than that.

Look at Calais. For every migrant throwing trees in the road so they can climb on a truck there are.... how many? 10? 20? more? back home thinking about trying their luck. If it were just a question of raising the cash for a plane ticket how many would arrive?

" It seems like the UK had a real problem integrating Europeans"

They haven't had much luck with Pakistanis either.....

Exactly, how the problem of illegal immigrants at Calais will be solved by getting out of the EU?

Brexit is about rights of citizens and country and borders. There are those who are "looting" England and the other Euro countries and Brexit is the stick between the spokes to their plan. The people are taking the country back. It should have happened 20 years ago before most of the looting took place. The looters are outraged. Good!

What will the effect of collapse of the EU be when, I mean if, it happens?

Thought you might like this piece on the demographics of alienation behind Brexit:

It's part of a series on related topics, which includes a mammoth analysis of Trump supporter demographics:

Oh such a great post , thanks for sharing this cool post with us.

Some solutions may be economically inefficient in isolation, but politically efficient in ways that are economically efficient (i.e. they raise utility) in aggregate -- more localized units of self-determination have some of the same benefits as competition in private markets.

Would one unified global government offer some significant economic efficiencies? Of course. Is that a good idea? The answer is, let us say, much less clear.

Of course, efficient solutions must feature strong commitments to free trade, but that's almost too obvious to mention. Free exit would also matter a lot. I think Patri Friedman has been correct that a competing system of small countries with free exit and free trade is probably a better one.

To be honest, I don’t think it matters much whether it’s good or bad, it’s always exciting with things like Brexit, I believe if we wish to be successful then we got to keep our self into good shape and only then we will be able to work nicely. I never worry much at all with broker like OctaFX, as they are very special having low spreads starting from 0.1 pips to high leverage up to 1.500 plus mind blowing bonus up to 50% which is also use able, it’s all brilliant.

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