Brexit - The Dog That Didn't Bark

Sydney M. Williams

Thought of the Day

“Brexit – The Dog That Didn’t Bark”

August 15, 2016

Gregory (Scotland Yard): “Is there any other point to which you you would wish to draw my attention?”

Holmes: “To the curious incident of the dog in the night-time.”

Gregory: “The dog did nothing in the night-time.”

Holmes: “That was the curious incident.”

                                                                        “The Memoirs of Sherlock Holmes: Silver Blaze,” 1892

                                                                        Arthur Conan Doyle (1859-1930)

Brexit, like the Trump phenomena in the U.S., was, at least in part, a consequence of elitist politicians, along with corporate and banking CEOs. Together they have constructed a crony capitalist system that works for them, but not for those they claim to represent. In granting extraordinary salaries and benefits to public union employees, they have assured themselves of money and support from that sector as well. (In America there are about 22 million government workers, according to the Bureau of Labor Statistics – 10% of all registered voters.) Western democracies no longer fit Lincoln’s description of the United States, when he spoke at Gettysburg in 1863: “…government of the people, by the people, for the people…”

President Obama has been right to point out that there is “one percent and a ninety-nine percent,” but it is not just the rich versus the poor that is the problem; it is also those that use government as a springboard for personal wealth and power, and the rest of us.  The former move back and forth from Congress to K Street, from corporate offices and Wall Street to Administrations. Such movements were not unknown in years past, but never have corruption and arrogance been so widespread. Think of the Clintons, and then recall what ex-President Truman said, in response to an offer of a corporate board seat: “You don’t want me. You want the office of the President, and that doesn’t belong to me. It belongs to the American people and it’s not for sale.” And the same can be said for Congressional seats, Cabinet posts and Ambassadorships. The concept of service is but a distant memory. Political correctness is ubiquitous, and risks First Amendment rights. A lack of border control has caused immigration to become a wellspring of terrorism, instead of a fount of cultural diversity. It has brought multiculturalism, instead of pluralism. A recent McKinsey study noted that stagnant incomes bother people more than inequality. People in England, like the United States, are tired of the hypocrisy and lies told by politicians, alienated from those they represent.

In the late 1940s, after thirty years of depression, oppression and war, Europe was determined to find peace and prosperity. NATO was created to provide a common defense against a menacing Soviet Union. The European Economic Community (EEC), better known as the Common Market, came into being a dozen years later to foster trade and boost commerce. Both worked. But like all organisms, a desire to grow caused bureaucrats in Brussels to over-extend their reach. It is a truism: As governments get bigger they consume more space and encompass more people. And leaders become isolated from those they lead.

Left unchecked, this is a trend that will have dystopian conclusions. Like the ancien regime of pre-revolutionary France, those in charge, along with those who feed off government, care foremost about their own affairs. How else, for example, could you explain America’s Affordable Care Act, which does not apply to those who conceived and implemented it? Why does compensation in government jobs exceed similar work in the private sector by thirty percent? Why are Congressional retirement benefits so generous and vest after only five years? Does someone whose retirement plan is based on defined benefits understand the needs and concerns of those on defined contribution plans?

Like their American counterparts, European politicians and bureaucrats lead a coddled life, with their lives having little in common with those they represent. The cultural challenge brought about by unrestrained immigration affects the poor and middle classes, not those who opened the gates. Politicians and bureaucrats in London and Brussels have grown comfortable with a system that has treated them well and that has protected them against the vicissitudes of the market place. Knowing that Brexit would be personally uncomfortable they did all they could to scare the electorate, even going so far as to enlist President Barack Obama in their cause. In his “no man is an island” speech last April, with then Prime Minister David Cameron by his side, Mr. Obama warned that exiting the E.U. would have “dire economic consequences,” and that an England outside the European Union would, in terms of trade with the U.S., have to go “to the back of the queue.”

After the vote, there was a sense of incredulity, expressed not only by politicians but by their media partners. Why were polls so wrong? How could people do the unexpected? Why didn’t the electorate listen to their betters? The academic and banking establishment leapt into the melee, forecasting recession if not depression: The British Pound would sink, financial markets would collapse and chaos would ensue. One commentator in the Financial Times suggested five possible outcomes, ranging from London becoming “Detroit” to the City becoming “Shangdon,” with foreclosed properties snatched up by foreign buyers.

Immediately after the vote, markets did fall. The Pound dropped 10% from where it had been a week before the vote. (While it had rallied in the days going into the vote, it had been in decline for two years) Since dropping, it has stabilized. The Bloomberg GBP Investment Grade European Corporate Bond Index is 4% higher than where it was prior to the vote. (Admittedly, bonds were helped by the Bank of England’s $100 billion asset purchase program.) The FTSE 100, however, is 8% above where it was before the vote. On July 23^rd, the Financial Times, which had been an adamant voice for “Remain,” headlined their lead editorial: “Brexit fears of market contagion look overdone.” While that appears obvious, it seems that many in England and on the Continent still hope for collapse, to vindicate their prior views and to set an example for other nations considering vacating the European Union.

As much as anything, and similar to the Trump phenomena in the U.S., the Brexit vote expressed disillusionment with the status quo: big government, with bloated and distant bureaucracies, financed with high taxes and suffocating regulations that protect favored businesses and industries and which impair competition. The consequence of the status quo has been slow economic growth and increasing disquiet. The establishment’s answer to stagnating wages and diminishing productivity is more of the same – demand-side economic policies that rely on government spending, and on Central Banks to assure the continuance of cheap money. What have been ignored are fiscal reforms and reliance on the private sector.

I do not want to trivialize the difficulties of leaving the European Union. One doesn’t walk away and shut the door. Borders will require increased security. The processing of Residency Rights will have to be expedited and simplified. (The existing document is, according to one source, 85 pages.) New trade agreements will have to be negotiated. Uncertainty lingers for the 10% of the City’s workforce that are non-British EU citizens. The UK may no longer have automatic access to the European Investment Bank.

But the reaction of markets, as the dog in Doyle’s short story tells us, suggest exiting is feasible; and if the lesson is that the people are once again in charge and the bureaucrats are put out to pasture, the future should be better than the past. Democracies have many benefits, but one thing they are not is efficient. Technocrats like efficiency, but in the long run, free markets, the give and take in debates, and classically liberal ideas do more to better lives than all the “smart” people tucked away in Brussels, London and Washington.