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Economists Can’t Forecast The Future, But They Enjoy Pretending When It Helps Them Trash Opposing Views.

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The headline was unambiguous: “Brexit Is Done: The U.K. Has Left the European Union.” As of January 31, the European Union (Withdrawal) Act of 2018 has become law and the United Kingdom has begun the withdrawal process from the European Union. The transition process will continue throughout 2020 as the UK and EU governments negotiate the nature of the future relationship between the UK and the EU.

Now that the British exit from the European Union is a legal reality, the economic situation in the UK has been surprisingly sedate.

This will be a surprise for those who believed the assurances of media pundits and economic experts that the UK’s economy would become every more crippled as Brexit edged closer.

Yet economic turmoil has been sparse. Certainly, markets and companies have moved to adapt to the new coming reality of the UK as largely outside the EU’s common market. But it is hardly clear that the country is poised on the edge of a Brexit-caused economic disaster. This is true even though Brexit has clearly been all but inevitable since December’s general election.

Predictions of Doom

It wasn’t supposed to happen this way.

Opponents of a British exit—and the economists they employed—insisted that not only would the eventual withdrawal be disastrous for the UK economy, but that even the market uncertainty associated with an eventual withdrawal would cripple the British economy.

For example, the UK Treasury released a report in May 2016 stating:

A vote to leave would cause a profound economic shock creating instability and uncertainty which would be compounded by the complex and interdependent negotiations that would follow. The central conclusion of the analysis is that the effect of this profound shock would be to push the UK into recession and lead to a sharp rise in unemployment.

According to the report, this economic disaster didn’t require a completed exit from the EU. The mere act of voting in favor of leaving, Brits were told, would trigger enormous economic problems.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) in an April 2016 report predicted that Brexit would cost Britain the equivalent of more then three thousand pounds per household and “would be a major negative shock to the UK economy, with economic fallout in the rest of the OECD.”

More nuanced analyses debated the effects of “no-deal Brexit” as opposed to a more “soft” Brexit. But in the lead-up to the election—and in the years following—the message was clear: Brexit is going to make Britain significantly poorer.

Yet investors, entrepreneurs, and consumers, appear unconvinced that the barriers to international trade raised by Brexit will be sufficient to send the UK economy into a tailspin. Investors have not abandoned UK investment opportunities, and entrepreneurs are not anticipating a crushing tariff burden. Even if the EU insists on being petulant, the UK has other important trading partners. Accordingly, by January of this year, The Telegraph reported, “The strength of the British economy is defying predictions of post-Brexit doom,” and Bloomberg reports that in spite of predictions of massive losses in the financial sector, “London has extended its lead in foreign exchange and interest rate derivatives trading since the referendum.” The Telegraph has also noted that as a finalized Brexit edges closer, hiring has increased and economic growth—as measured by economists’ usual methods, has increased.

“Transaction Costs” Include More Than Trade Barriers

The claim that Brexit would make everyone poorer was premised on an obsession with the idea that Brexit would drive up so-called “transaction costs” for British businesses in terms of tariffs and other barriers to the free movement of labor and goods. The assumption was that business with the Continent was streamlined and basically frictionless, while withdrawal from the EU would raise many new barriers.

This is a common argument among economists and politicians who favor greater streamlining of trade and migration through international agreements.

Certainly minimizing transaction costs in this way is always a good thing, all else being equal. It’s good when trade increases, and when countries—and the individuals within them—are able to take advantage of the the division of labor. It’s also good when consumers and entrepreneurs are left to choose for themselves what products they wish to buy and from where.

But the problem with economic integration of the EU sort is that it also tends to come with political integration.

Thus, economic integration comes with a host of strings attached in the form of bureaucratic management from above. That management has been extensive, and the regulatory burdens associated with it are significant.

Ralph Peters at the Hoover Institution refers to the EU as “a bureaucratic monster” that interferes absurdly with “the structures of everyday life.”

Even worse, trying to reduce this bureaucratic burden is extremely difficult for any single member of the EU. Any significant change to Europe-wide bureaucratic edicts requires an enormous amount of effort in marshaling support from other member states and pushing through reforms. The weight imposed on smaller businesses and entrepreneurs is especially damaging. As Peter Chapman noted at Politico, “the EU’s general antipathy towards entrepreneurs remains a huge barrier” to economic improvement. Although the nominal benefits of membership in the EU may be easy to see in terms of reduced trade barriers, the net benefits are far less clear to those who are aware of the true cost of the EU bureaucracy. Not only does EU membership come with high transaction costs in terms of added regulations, but the nature of the EU’s unelected and foreign institutions likely made the bureaucracy less responsive, less flexible, and more permanent. That in itself is an added burden above and beyond the regulations themselves.

Some anti-Brexit commentators have noted the obvious: namely that Brexit does not automatically bring relief from regulatory burdens. This is certainly true, but all this means is that British entrepreneurs and consumers are presently banking on the idea that at least some regulatory relief will come, and that the cost of international trade will not rise to crippling levels.  But it also means that if UK policymakers want to change or reduce these bureaucratic burdens, it’s not necessary to go to Brussels to beg for relief. In other words, the private sector appears to be taking a long-term view while the anti-Brexit pundits are obsessing over the immediate future.

What Young People Want From Politicians Are Proposals To Drive The Private Economy, Not Schemes For More Government Spending.

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By this point, many readers have struggled to help children or grandchildren assemble impossible puzzles or intricate Lego contraptions. In this spirit, we invite you to puzzle through the pieces of Nancy Pelosi’s impeachment project. Our list includes clues to the final picture.

Dec. 5: Speaker Pelosi announces the Democrats will draft articles of impeachment against Donald Trump.

Seven days later, Prime Minister Boris Johnson defeats Jeremy Corbyn in the U.K. general elections. It is the Conservative Party’s greatest margin of victory since Margaret Thatcher’s third win, in 1987, and Labour’s biggest defeat since 1935.

Dec. 12-15: Mr. Trump’s approval ratings begin to rise.

Dec. 18: The House votes to impeach Mr. Trump, with no Republican support.

The next day, seven Democratic presidential candidates debate in Los Angeles. Virtually all approve the impeachment, denounce wealth and offer agendas of increased public spending.

The day after that, the British Parliament votes overwhelmingly to support Mr. Johnson’s intent to pull out of the European Union.

I think we have enough pieces to see the shape of things to come.

After Mr. Johnson walloped Mr. Corbyn, some Democrats and American progressives asserted that the U.K. result had little relevance to the U.S. They said it was Mr. Corbyn’s personal failure, not a repudiation of Labour’s agenda. Which sounds similar to the notion that the Democrats’ loss in 2016 was Hillary Clinton’s fault, not theirs.

Still, the British result got me wondering about the point of Mrs. Pelosi approving the construction of a Potemkin impeachment—a grand facade to hide the reality of weakness inside her party.

Socialism is in the air these days, at least in the U.S., and the U.K. has long experience with socialism. The stark fact of the British election is that thousands of longtime Labour voters turned away from the party despite Mr. Corbyn’s promise of large-scale public spending.

Mr. Johnson’s victory may have been mainly about Brexit, but the result exposes what looks to be a tipping point for left-leaning liberalism in the U.S.: The Democratic Party has a big problem with the vision thing. It’s possible that government today, which is to say government that is everywhere all the time, has become a big bore to the voting public.

Like Britain, the U.S. has lived for most of the past century with high levels of public spending for an infinity of public programs. The population should be content and the left should be happy. They aren’t.

The average voter listens to an Elizabeth Warren or Bernie Sanders promise vastly expanded public spending—and shrugs. The top Democratic vote-getter is Joe Biden, a party war horse in harness for 50 years.

The “average” Democratic voters supporting Mr. Biden are black, Hispanic or white baby boomers. What remains beyond these more-traditional Democrats are the party’s millennial utopians. They sound angry, but the truth is, they’re bored.

Instead of the political vibrancy of the 1960s, young progressives see their world in the grip of political stasis. They weren’t around for the hard work of building the Great Society, brick by brick, amendment by legislative amendment, the way their elders did, such as—just to pick a name— Rep. John Dingell.

No wonder Mrs. Pelosi was agog at the aggression from Reps. Alexandria Ocasio-Cortez, Ilhan Omar and the rest of the progressive “Squad.” They act as if none of this hard work ever happened and barely acknowledge its legacy exists.

Older leftists and liberals revere the alphabet soup of assistance programs and rotely support all of it. The New New Left treats all this pre-existing government as virtually an abstraction.

Note how Mayor Pete Buttigieg, 37, routinely waves off the achievements of Sen. Amy Klobuchar’s generation: “If you’re my age or younger . . .” The pedestrian dailiness of “government” has become a liability for traditional Democrats, despite all they’ve done. Dismissing U.S. history in general, progressive activists and gentry liberals want their own Great Society program. (For a reality check on the original version, read Amity Shlaes’s “Great Society: A New History.”)

But the left has a problem: The liberal legacy—extraordinarily big government (this year’s spending bill is more than 2,000 pages)—has sucked all the revenue out of the system. Elizabeth Warren’s multiple “plans” financed by beating taxes out of billionaires—like Jeremy Corbyn’s 21st century nationalizations—are the reductio ad absurdum.

She’s hardly alone. One listens in vain to the Democratic presidential debaters, including Mr. Biden and Ms. Klobuchar, for proposals to drive growth in the private economy. Instead, they all promise to keep shoveling more coal into the spending furnace.

The promise of more public spending is no longer an animating political philosophy for most people. It’s just there, a dull humming noise. Britain proved that. America, while it watches the Pelosi impeachment revels, may follow.

This article first appeared at wsj.com.

Where Will The Next Crash Begin? Smart Europeans Suggest Italy Is A Good (Or Bad?) Bet.

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Over the last couple of years, the main challenge to EU cohesion has been Brexit, with the media sharply focused on the negotiations and all relevant developments. Since the release of the draft withdrawal agreement, largely perceived as a victory for the EU, those who support the European project and believe in a strong leadership from Brussels have projected confidence and optimism for the future. According to these voices, the divisions caused by the rise of nationalism and populism in the past years are healing, the relationship between member states is normalizing, while a future of stability and harmony awaits.

However, such a vision might prove naive, as it discounts a much greater risk to the EU than Brexit ever was: the political and economic powder keg that is Italy.

The budget fight

For over three months, Italy’s 2019 budget plans and the resulting friction with Brussels have made been making headlines and bringing to the surface numerous concerns over the country’s economic stability and relationship with the EU. The Italian government, aiming to honor its heavily populist pre-election promises, has presented a budget that is sharply at odds with the plans and goals of EU officials. Hailed by the Italian coalition government as a budget that will “end poverty”, the plan includes (among various other spending programs and tax cuts), a lower retirement age and a state-guaranteed basic income of €780. In order to finance its ambitious spending spree, the new Italian government plans to increase the budget deficit to 2.4% of GDP, a number that EU officials found very difficult to reconcile with, especially since the previous government’s plans only required a 0.8% deficit. Given Italy’s extreme national debt levels, Eurozone officials saw a clear threat of future instability in the new government’s plan that could easily spread throughout the bloc.

In October, the tensions culminated in an unprecedented move by the EU Commission: Italy’s draft budget was rejected and revisions were mandated. Italy defiantly announced it would stick to its plans, and in response, the Commission said that significant fines and sanctions against the country were “warranted”. The fines that the Commission threatened could amount to 0.5% of Italy’s GDP, while additional disciplinary measures could include a freeze on development funds. At this stage, a last-minute compromise solution could be hammered out in order to avoid the sanctions, however, the entire incident has heavily bruised the already strained relationship between Italy and the EU.

A history of friction

While the rejection of the Italian budget by the Commission was seen by many as an unusually aggressive step, it is useful to remember that this was not the first time that the new coalition government has been strong armed by Brussels into towing the line. In June, when the new government was still in negotiations to fill its key posts, Paolo Savona emerged as the first choice for finance minister. A professor of economics with experience at the Bank of Italy, Savona was summarily railroaded by pressure from the EU, as his positions were hardly in line with the European project and even less so with the common currency, which he described as “a German cage”. The nascent government quickly conceded and instead made him minister of European Affairs, placing a much less controversial candidate as finance minister.

However, it is important to note that the two parties that the Italian government consists of together won over 50% of the vote in this year’s election. The most outspoken member of the government, Matteo Salvini, leader of the nationalist Lega party, Deputy Prime Minister and Minister of the Interior, has repeatedly expressed his opposition to the Euro which he called “a crime against humanity” and to EU overreach, as he said only last month that “people like Juncker and Moscovici have ruined Europe and our country”. Going a step further and moving from mere discontent with the status quo to actionable plans, the coalition also made clear that, should the EU push them too far and attempt to micromanage their policies, they will not follow the surrender paradigm of Greece, even if that means turmoil in the markets. Instead, they will drop the Euro and adopt a parallel currency; a move also known as ‘Plan B’.

A ticking time bomb

Italy is the third-largest economy in the Eurozone, but it carries the second largest debt-to-GDP, only surpassed by Greece. At 131% of its entire economic output, Italy’s debt stands at over €2.3 trillion. The country last year spent 3.7% of its GDP just on interest payments, a figure that is projected to rise to 3.9% by 2020.

To make matters worse, economic growth has also essentially flat lined. The government’s projections foresee a 1.5% growth for 2019, a sharp contrast with Morgan Stanley’s latest forecast of just 0.5%. These figures might sound dismal, but they are consistent with Italy’s growth record in recent years. Since 2008, the country has gone through a triple-dip recession, from which it has yet to recover. Today’s GDP per capita, inflation- adjusted, is lower than in 2000.

Furthermore, the country is facing a severe demographic problem, that is bound to exacerbate its debt crisis. A report by Italy’s national institute of statistics revealed that the country’s birth rate once again declined in 2017. This persistent downward trend of recent years raises significant concerns, as, after Japan, Italy is the world’s second-oldest country in terms of elderly people as a ratio of the total population.

Also, Italian banks are still a major weak link. Overall, European banks have amassed about €944 billion in bad and non-performing loans that clog up their balance sheets. Italian banks are at the top of the list, holding the lion’s share of this bad debt, with €224.2 billion ($255.9B) weighing down the country’s banking sector.

It is thus clear that, apart from the political friction and the rift with the EU, Italy’s problems are multifaceted, compounded over decades and run very deep, posing a real systemic risk not just to the country itself but also to the entire bloc. Anemic growth, an ailing banking sector, skyrocketing national debt, unfavorable demographic trends and increasing financing costs form a toxic combination that can seriously destabilize the Eurozone.

“Too big to save”

Last time Italy found itself near bankruptcy, it was saved by the ECB’s decision to launch into a decade of money-printing, heavy intervention and massive government bond purchases.

However, the ECB is now set to stop and reverse the measures that facilitated this favorable environment that supported the entire European economy after the last recession. This might prove catastrophic for Italy. Rising interest rates will make the debt near-impossible to service without impacting major spending programs and government services. Without external, systemic and extensive support, the country is bound to struggle heavily over the next years. Unlike Greece, Italy will be a far greater challenge to bail out and the failure to do so will have far grimmer implications.

While the economic problems have a slow-burning fuse and will inevitably lead to a serious crisis eventually, it’s the political troubles that might actually speed up that process. The recent tensions have drawn attention to the capacity that Brussels actually has in interfering with national policies and member state affairs. It has also served, to many, as evidence of how far it is willing to go and to exercise these powers, should a member state refuse to tow the line.

On top of this, issues such as the increasingly wide divide with the EU over migration have also heightened the public’s discontent. The real, on-the-ground implications of the multifaceted challenges that burden Italy have taken a toll on the average citizen’s life and this is strongly reflected in their views and outlook on the future. According to a study released in August by Ipsos and the More in Common initiative, only 16% of Italians believe that globalization has had a positive impact on the economy, while 73% say that traditional parties and politicians do not care about people like them. As more and more voters are attracted to the extremes of the political spectrum, the rift between Left and Right keeps growing.

It might not be yet clear exactly what kind of move by the EU the Italian government would interpret as “a step too far” and cause them to make good on their warning to launch their Plan B. However, what we can tell for sure, is that the European project, the common currency and the Brussels bureaucracy will definitely not be able to sustain the blow of another exit, especially if it’s Italy that decides to leave.

Claudio Grass, via pro aurum. All rights remain with the author and pro aurum.

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