23 April 2016

The New York Times: Boris Is Bad Enough

Nobel Prize-winning economist Paul Krugman weighs in on the Brexit debate: "It’s not as easy a case as I’d like – but Johnson’s intervention makes it clear: Britain should stay in, lest it empower people like him."

Let me start with the economics. There are a number of estimates of the economic impact of Brexit out there, from HM Treasury and independent analysts, but I like to have a quick-and-dirty calculation I understand; it’s not out of line with other, more detailed results.

Here it goes: before it joined the EU, Britain did only about a third of its trade with Europe. Now it’s about half, and it’s unlikely that much of that represents trade diversion. So unless Britain can negotiate something that looks like Norway’s deal – which would basically mean accepting EU policies in which it would no longer have a voice – we might expect Brexit to reduce the share of trade in British GDP from about 30 percent to about 25 percent.

What’s that worth? I’ve previously used the elegant Eaton-Kortum trade analysis as a benchmark for assessing globalization; it tells us that real income, for given technology, is (1-trade share)^(-1/theta), where theta is a parameter reflecting how much comparative advantage there is in the world (don’t ask). Eaton-Kortum suggest theta=4 fits best. In that case, Brexit would reduce British real income by 1.7 percent. Call it 2 percent, with the understanding that there are big error margins around all of this.

Should we, as some argue, multiply this by two or more to reflect dynamic gains? In general, I’m not fond of this practice – it smacks way too much of 101 boosterism, deriving a policy argument from basic economic models then invoking factors not in the models to make the argument seem much stronger than it is. Why tout the dynamic effects of trade as opposed to lots of other things?

But 2 percent is a lot! It’s very, very hard to come up with policies that will make a country 2 percent richer in perpetuity. You’d have to have very good reasons to leave the EU to be willing to make that big a sacrifice.

What about income distribution, which is a big issue in many trade agreements? In this case, it’s pretty much irrelevant: the EU is, on average, comparable in wages and per capita income to the UK, with much of the trade intraindustry specialization that has little distributional effect. So Trumpsandersism shouldn’t matter here.

So what’s this all about? In a word, governance. The case for Brexit is, basically, that EU membership ties Britain to a very badly run institution. And that case is, unfortunately, reasonably strong. Eurocrats have a lot to answer for: the huge mistake of the euro, the reckless and feckless promotion of austerity, the hapless response to the refugee crisis and in general the failure to take seriously the strains of internal migration. Oh, and Europe has been largely useless in dealing with the destruction of democracy in Hungary. [...]

And that’s where Boris Johnson’s tirade against President Obama is so wonderfully clarifying. It tells us who the anti-EU wing of the Conservatives really are; it tells us not just that they are pretty close to UKIP, but that intellectually and emotionally they live in the same fever swamps as the American right. And they would, all too probably, take on a strong, even dominant role in British politics post-Brexit.

So Britain, don’t do this. You would pay a fairly large economic price, and in return you would get governance so bad that it would make the EU look good.

Full article on The New York Times

© New York Times