The Snake Oil Sellers

| About: Vanguard FTSE (VGK)

Click to enlarge

The fallout from Britain's historic decision to leave the European Union continues. Domestically, there are regrets, recriminations and accusations. Young people, particularly those aged 16-17 who did not have a vote, complain that the vote did not take their interests into account.

A petition for a second referendum reached over 3m votes in a few days, although it was subsequently found to have been hacked: the true number is uncertain. The media have spent the weekend tracking down people who voted to Leave and now regret it, and publishing increasingly desperate schemes for avoiding Brexit. There is a sense of denial. If only we could turn back time....

But it's too late. The UK is now persona non grata in the EU, and EU foreign ministers are pushing for formal exit procedure to be triggered as soon as possible. The political meltdown in both main parties currently makes this impossible, but chaos can't continue forever. Eventually, Article 50 will have to be triggered, and the UK will leave the EU, never to return.

The lies that made Brexit

There is now clear evidence that the Leave campaign deliberately misled the British people in order to achieve victory. Within hours of the vote, Leave campaigners were backtracking on the two principal promises of the Leave campaign - immigration control, and £350m per week funding for the NHS.

In an interview with the BBC's Ewan Davies, Dan Hannan said that regaining control of immigration didn't necessarily mean reducing it: "We never said there was going to be some radical decline," he said. "We want a measure of control." Davies was flabbergasted. "Come on, that's completely at odds with what the public think they have just voted for!" he cried.

Denying that they had ever made the promises seems to be a strategy. "I never said that", said Iain Duncan Smith about the £350m NHS funding. "I just stood in front of buses and posters". And he went on to say that the Leave campaign had never promised the money anyway. A furious Chris Giles of the FT didn't mince his words:

He was right to be angry. Duncan Smith's words were mealy-mouthed. The Leave campaign's advertising explicitly promised £350m would go to the NHS:

Click to enlarge

The man on the right in this picture, Liam Fox, now admits that the £350m figure itself is fiction. This had been pointed out prior to the vote both by the IFS and by the head of the UK's statistics service, Sir Andrew Dilnot, who reprimanded the Leave campaign for using the figure:

I conclude that there is a lack of clarity in the way the official statistics have been drawn on in the statements I have considered. In particular, I note the use of the £350 million figure, which appears to be a gross figure which does not take into account the rebate or other flows from the EU to the UK public sector (or flows to non-public sector bodies), alongside the suggestion that this could be spent elsewhere. Without further explanation I consider these statements to be potentially misleading. Given the high level of public interest in this debate it is important that official statistics are used accurately, with important limitations or caveats clearly explained.

The Leave campaign ignored Sir Andrew and continued to present £350m as funding that would be available to the NHS. And Nigel Farage undermined the IFS's credibility by claiming that EU funding for some of its work made it untrustworthy - a claim robustly denied by the IFS. At least Fox now admits that the experts were right. I suppose we should be thankful.

But the lies continue. Boris Johnson, in an op-ed in the Telegraph, describes negative prognostications as "wildly overdone", and insists that nothing will really change:

British people will still be able to go and work in the EU; to live; to travel; to study; to buy homes and to settle down. As the German equivalent of the CBI - the BDI - has very sensibly reminded us, there will continue to be free trade, and access to the single market. Britain is and always will be a great European power, offering top-table opinions and giving leadership on everything from foreign policy to defence to counter-terrorism and intelligence-sharing - all the things we need to do together to make our world safer.

Though the freedom of movement Johnson promises British people would not be available to citizens of EU countries:

Yes, the Government will be able to take back democratic control of immigration policy, with a balanced and humane points-based system to suit the needs of business and industry.

So Britain can give bad deals to others while retaining all its existing rights and privileges? No way. This is not remotely credible. None of it is. It is cloud cuckoo land.

The reality is that the UK will be smaller, poorer and less significant because of Brexit. I grieve for the lost opportunity to put the UK at the heart of Europe, leading the non-Euro bloc and forcing through necessary reforms. And I am furious that a bunch of sleazy, power-grabbing chancers - on both sides - have played fast and loose with the lives and the hopes of the people of the UK. It is an utter disgrace.

The negative consequences of Brexit

It is already clear that the short-term consequences of the Brexit decision will be negative. Sterling fell sharply on the announcement and is continuing to fall, bank and corporate shares crashed and there was high volatility on stock markets around the world. Capital is leaving the UK, and will continue to do so while the present uncertainty continues. And there are no guarantees that it will return.

The sharp fall in sterling, trumpeted as "good for exporters" by the economically illiterate Nigel Farage, may give little benefit to businesses: it is worth remembering that sterling devalued by 25% in 2009 to no avail. This is because the UK is a major importer of intermediate goods, the prices of which rise when the currency falls, increasing input costs for business. Consumers will also be hurt: the summer holiday plans of Brexit-voting Daily Express readers have already been disrupted because the pound in their pocket doesn't buy so much furrin currency. Tragic.

Fiscally, increased borrowing costs as government debt faces downgrade will eventually feed through into spending cuts and tax rises. And for consumers, the effect is likely to be higher prices for some goods, particularly fuel and energy. Daily Mail readers, your SUVs are about to become a lot more expensive to run. And so are your tasteless Christmas lights, your wasteful patio heaters and your flights to Ibiza. Pity the Daily Mail didn't warn you about that.

All of this will eventually feed through into lower growth, lower real incomes and higher unemployment. And there will be a negative impact elsewhere, too. In a fascinating blogpost, David Beckworth describes the Brexit decision as a global monetary shock comparable with the fall of Lehman. His argument is twofold. The rapidly strengthening dollar tightens monetary conditions in emerging market economies which peg to the dollar, and puts pressure on governments and corporations with high levels of dollar-denominated debt:

So between tightening monetary conditions for the dollar bloc countries and increasing real debt burdens for all the non-resident issuers of dollar debt, the global economy has been hit with a large dollar shock. Put more crudely, the strong dollar noose that has been choking emerging economies since mid-2014 has now been complemented by the opening of trap door on the gallows via Brexit. This makes the strangulation of global economy complete.

Beckworth adds that the flight to safety, which is causing yields on USTs, bunds and JGBs to crash, will eventually result in a fall in output as the global economy hits the effective lower bound on interest rates. If he is right, then the world is facing recession.

And that would have not only short-term, but long-term consequences for the UK. The Brexit argument is that freed from the EU, the UK can increase trade with the rest of the world. But the rest of the world might be in no shape to cooperate.

So Leave campaigner Andrea Leadsom's claim that Brexit would have "no economic impact" was wildly wrong. The IFS, the Bank of England, the IMF and other reputable institutions that warned about the negative consequences of Brexit were right. In fact, if anything, their warnings were understated. But they were not believed.

Why weren't the experts believed?

"I think the people of this country have had enough of experts", said Michael Gove. His words resonated. People had indeed had enough of experts. The Remain camp's reliance on "expert witnesses" backfired badly. It failed to capture the public imagination, and - worse - it undermined the credibility of the experts themselves. They were no longer seen as neutral.

Negative forecasts about the effects of Brexit were dismissed on the grounds that all experts except those that supported the Brexit cause were biased towards Remain. Patrick Minford was credible: ten Nobel prize winning economists were not. The Institute of Economic Affairs was credible: the IFS was not. The Leave campaign came up with all manner of reasons why respected institutions could not be trusted, and although the institutions fought back, they were not believed. "They would say that, wouldn't they?" was the response. They couldn't win.

That the Leave campaign systematically undermined the credibility of experts is understandable. If people believed the experts, the foundation of the entire campaign would be shown as the deceit we now know it to be.

But why did Leave's lies appeal to the public? Christine Lagarde, the head of the IMF, asked this question in Aspen yesterday:

Why is it that the populist voices, sometimes based on so-called truth that they now have to retract - why is it that those voices carried a lot more, and a lot further, than the voices of 'experts' who were largely unanimous about the outcome and consequences of the decision?"

Partly, it was because populist campaigners such as Nigel Farage promoted Brexit as the fight of "the people" against "the establishment". The vote to Leave was above all a massive kick to the "establishment", both in the EU and the UK. And the experts were seen as part of that establishment.

But it was also because Leave's lies resonated with what people want. People want immigration seriously reduced: so Leave encouraged them to think "taking control" would mean much lower immigration. People want the NHS's funding problems to be solved: so Leave conjured up a fictional source of NHS funding.

And the deceit still continues. People want to be able to live and work wherever they want, while denying that right to others - so that is what Johnson promises them in today's op-ed. They want an "independent Britain" to dictate the terms under which it will trade with other countries, to their benefit - so he promises them that, too. They want Britain to be a great power - so he gives them that impression. Johnson's op-ed is a tissue of lies that play to people's deeply held beliefs, their hopes and their fears. It is evil beyond belief.

But there is a wider issue here. Populist movements arise from a huge disconnect between people's dreams and the reality of their lives. People dream of prosperity, but they have poverty. They dream of being important, but they are insignificant. They dream of fulfilling, enjoyable work, but they have drudgery. They dream - but they have no hope. Populist movements sell them hope.

Deceit is the stock in trade of such movements, since to convince people to support them they must deny reality. So experts who might reveal their dishonesty must be undermined. It is the very honesty of experts that leaves them vulnerable. If experts see no hope, they say so. And that is not what people want to hear.

When people have no hope, the sellers of snake oil become rich.

Image from