Britain’s Deepening Confusion

“Enough is enough,” proclaimed British Prime Minister Theresa May after the terrorist attack on London Bridge. Now, it is clear, almost half of those who voted in the United Kingdom’s general election on June 8 have had enough of May, whose Conservative majority was wiped out at the polls, producing a hung parliament (with no majority for any party). Whether it is “enough immigrants” or “enough austerity,” Britain’s voters certainly have had enough of a lot.

But the election has left Britain confusingly split. Last year’s Brexit referendum on European Union membership suggested a Leave-Remain divide, with the Brexiteers narrowly ahead. This year’s general election superimposed on this a more traditional left-right split, with a resurgent Labour Party capitalizing on voter discontent with Conservative budget cuts.

To see the resulting political terrain, imagine a two-by-two table, with the four quadrants occupied by Remainers and Budget Cutters; Remainers and Economic Expansionists; Brexiteers and Budget Cutters; and Brexiteers and Economic Expansionists. The four quadrants don’t add up to coherent halves, so it’s not possible to make out what voters thought they were voting for.

But it is possible to make out what voters were rejecting. There are two certain casualties. The first is austerity, which even the Conservatives have signaled they will abandon. Cutting public spending to balance the budget was based on the wrong theory and has failed in practice. The most telling indicator was the inability of George Osborne, Chancellor of the Exchequer from 2010 to 2016, to achieve any of his budget targets. The deficit was to have vanished by 2015, then by 2017, then by 2020-2021. Now, no government will commit to any date at all.

The targets were based on the idea that a “credible” deficit-reduction program would create sufficient business confidence to overcome the depressing effects on activity of the cuts themselves. Some say the targets were never credible enough. The truth is that they never could be: the deficit cannot come down unless the economy grows, and budget cuts, real and anticipated, hinder growth. The consensus now is that austerity delayed recovery for almost three years, depressing real earnings and leaving key public services like local government, health care, and education palpably damaged.

So expect the ridiculous obsession with balancing the budget to be scrapped. From now on, the deficit will be left to adjust to the state of the economy.

The second casualty is unrestricted immigration from the EU. The Brexiteers’ demand to ‘control our borders’ was directed against the uncontrolled influx of economic migrants from Eastern Europe. This demand will have to be met in some way.

Migration within Europe was negligible when the EU was mainly West European. This changed when the EU began incorporating the low-wage ex-communist countries. The ensuing migration eased labor shortages in host countries like the UK and Germany, and increased the earnings of the migrants themselves. But such benefits do not apply to unrestricted migration.

Studies by Harvard University’s George J. Borjas and others suggest that net immigration lowers the wages of competing domestic labor. Borjas’s most famous study shows the depressive impact of “Marielitos” – Cubans who immigrated en masse to Miami in 1980 – on domestic working-class wages.

These fears have long underpinned sovereign states’ insistence on the right to control immigration. The case for control is strengthened when host countries have a labor surplus, as has been true of much of Western Europe since the crisis of 2008. Support for Brexit is essentially a demand for the restoration of sovereignty over the UK’s borders.

The crux of the issue is political legitimacy. Until modern times, markets were largely local, and heavily protected against outsiders, even from neighboring towns. National markets were achieved only with the advent of modern states. But the completely unrestricted movement of goods, capital, and labor within sovereign states became possible only when two conditions were met: the growth of national identity and the emergence of national authorities able to provide security in the face of adversity.

The European Union fulfills neither condition. Its peoples are citizens of their nation-states first. And the contract between citizens and states on which national economies depend cannot be reproduced at the European level, because there is no European state with which to conclude the deal. The EU’s insistence on free movement of labor as a condition of membership of a non-state is premature, at best. It will need to be qualified, not just as part of the UK’s Brexit deal, but for the whole of the EU.

So how will the shambolic results of the British general election play out? May will not last long as Prime Minister. Osborne has called her a ‘dead woman walking’ (of course without acknowledging that his austerity policies helped to seal her demise).

The most sensible outcome is currently a political non-starter: a Conservative-Labour coalition government, with (say) Boris Johnson as Prime Minister and Jeremy Corbyn as his deputy. The government would adopt a two-year program consisting of only two items: the conclusion of a ‘soft’ Brexit deal with the EU and a big public investment program in housing, infrastructure, and green energy.

The rationale for the investment program is that a rising tide will lift all boats. And an added benefit of a thriving economy will be lower hostility to immigration, making it easier for Britain to negotiate sensible regulation of migrant flows.

And who knows: if the negotiations force the EU to re-cast its own commitment to free labor movement, Brexit may turn out to be a matter less of British exit than of an overhaul of the terms of European membership.

Republication forbidden. Copyright: Project Syndicate 2017 Britain’s Deepening Confusion