The EU referendum has inadvertently made us all economists, but it seems like most of us are driving without a licence.
In the run up to the EU referendum questionable economic arguments were made on both sides and often by people who it seemed had the slightest understanding of what they were proposing. I’m not an economist, but I did do well in economics courses while an undergrad student and I learnt quite a bit on the fly working in banking and financial regulation for three decades. Mostly, I learnt how to distinguish nonsense, poor understanding, and outright lies. And most of all, distinguishing between theory and practice. I’ll give you an example. One morning on the radio I heard a ‘markets’ professional suggest that Greece would be better off leaving the Euro, he argued a certain drop of forty per cent in the Greek currency would make foreign holidays to Greece forty per cent less expensive and sudden demand would rejuvenate Greece’s economy. He certainly didn’t consider that substantial parts of the holiday’s cost, including the cost of air travel (fuel and plane) and local air-conditioning (fuel again) and imported food amongst many others, would certainly adjust upwards by forty per cent. I ‘Googled’ the commentator and found no evidence of any economics training or study, but a long markets career was there – enough, though? Obviously, not.
So it was with a wry smile that I read recent accounts of rumoured disagreements on Brexit economics between Brexit Ministers, the Rt. Honourables Dr Liam Fox (studied to be a medical doctor) and Boris Johnson (who studied the Classics). So much of the pre-referendum debate was lost in theory (think those ‘we want to be in control’ comments) or ridiculous detailed economic projections (the ‘we will each be £1543.16 worse off’). Of course, the point of economics is that economics participants ‘participate’ and can’t control and, while they are often good at identifying historical trends, economists cannot see the future any better than anyone else. I agreed with the negative trend they suggested but their cause was hurt by the attempt at detail; imprecise assumptions underlie all forecasts, and it’s not just the 16p.
I’ve recently heard and read of disgruntled fisherman, restaurant workers, lorry drivers, and government workers all making somewhat complex economic arguments about Brexit without realising how complex these subjects really are. These are mixed with complex politics and personal philosophies as well. I empathise with UK fishermen’s complaints about understanding EU fishing rules, but these involve equal parts science (depleting the sea), politics, and economics so I will concentrate on the land.
Restaurant workers, lorry drivers, and many other largely hourly paid employees have suggested immigrant labour lowers their wages. Let’s use the coffee shop down the road to bring out the economics at stake. Most caffeine consumers won’t be surprised to know that the beans are a minor part of the cost of their enjoyment; store rent and wages are much more expensive. If wages go up, the coffee shop’s costs go up; the price of coffee will have to go up to pay those costs. How much? What happens if the price rise dissuades some from buying each morning? This could mean higher prices for those who continue to buy or perhaps fewer employees to serve them….fewer jobs. And those fewer employees will buy less at the grocery and everywhere else reducing the demand for lorry drivers. It just isn’t that simple, but it sounded good to think that I or we will benefit from reduced competition. Underlying this is a legitimate discussion about wage economics, but reduced competition may not be the answer. Better training and increased productivity are also economic arguments.
International trade, government, our pensions and morning coffee all are leading to increased demand for economic sophistication for all of us….top to bottom. The EU referendum has inadvertently made us all economists, but it seems like most of us are driving without a licence. Understanding banking & finance relies on more than a basic understanding of economics and I hope that most people in the banking & finance world are brushing up on their economics quickly as many more of our fellow citizens need our help and explanations urgently.
This column is going on holiday to September.
Dr Peter Hahn is the Henry Grunfeld Professor of Banking at ifs. You can read his entire series on Brexit and it's implications here.