Ep. 41 Brexit and Liberty: Krugman Wrong Again

21 June 2016     |     Tom Woods     |     26

Krugman urges the British to remain in the European Union, and thinks free-market arguments against it are mere fantasy. In fact, British exit from the EU would be a great step forward for freedom, as Bob and Tom show in this week’s episode.

Krugman Column

Fear, Loathing, and Brexit” (June 17, 2016)

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Contra Column

The Euro: The Folly of Political Currency,” by Bob Murphy

Video Mentioned

Link Mentioned

Boris Is Bad Enough,” by Paul Krugman

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  • http://www.economicmanblog.com Roger Barris

    A few comments:

    1. There is nothing “Keynesian” about optimal currency area theory. This is standard neoclassical economics. In fact, one of the earliest and loudest objections to the Euro was expressed by Milton Friedman in 1997 (way before Krugman got in on the act). See this blog posting about optimal currency theory applied to the Euro: http://www.economicmanblog.com/2015/07/19/getting-it-exactly-right/

    2. The Swiss example, which is always brought out by the pro-Leave camp, is largely fallacious. First, under the terms of the free-trade deal that Switzerland has with the EU, it has to abide by many of the EU laws, including freedom of movement of EU citizens (the curtailment of which is the biggest demand of the pro-Leave camp). In fact, Switzerland is currently in a dispute with the EU over precisely this policy following a referendum in Switzerland curtailing immigration. Moreover, and extremely importantly for the UK, Switzerland does NOT have free access to the EU for services, which account for about 15% of UK exports and are key to the City of London. Finally, the EU would not consider a deal even as favorable as Switzerland’s for the UK since they would want to penalize the UK for leaving (so as not to encourage other departures).

    3. The bigger fallacy of the pro-Leave camp is that they compare the EU rules (which are certainly stupid and counter-productive) to a hypothetical, free-market, heavily deregulated UK FOR WHICH THERE IS ABSOLUTELY NO POLITICAL SUPPORT. This is the fallacy, for example, of the Brexit movie you have linked to. This is the point I make in “Brexit” in this blog: http://www.economicmanblog.com/2016/06/06/legacy-building/
    4. The “free-market” case for Brexit is further undercut when you look at the actual supporters of Brexit. In fact, the pro-Leave crowd is similar to the supporters of Trump: anti-immigration (and therefore against the free movement of labor) and also against free trade. The idea that Brexit would precipitate a free-market revolution in the UK is as delusional as believing that a Trump presidency would be libertarian.
    5. In fact, the EU has been pro-free markets in one very important way: it has led the charge against government support for failing industries such as steel and it has pushed for deregulation in many areas, such as telecoms (which used to be dominated by government monopolies). In fact, the reason why the EU is hated on the continent (in places like France and Italy) is that it is seen as being too pro-competition and free markets. Without the EU, the level of state support and protectionism would be higher, including in the UK. For example, the recent closure by Arcelor steel of its last mill in the UK would have certainly been resisted with government subsidies without the EU prohibition on these. The inability to provide these subsidies is, in fact, one of the arguments of the pro-Leave camp.
    There is no doubt that the EU is a disaster, particularly with respect to the Eurozone and Schengen, BUT THE UK WAS WISE ENOUGH TO STAY OUT OF BOTH OF THESE THINGS. The EU also should have stuck to its original intent of being a customs union and that is all. But, unfortunately, the current case for leaving the EU is weak, especially because of the “path dependency” of the decision — ie, you wouldn’t want to join the EU at this point, but that is a different decision from leaving it after spending 40 years integrating yourself. There is a good chance that a near-loss in the Brexit referendum will actually wake up the EU bureaucrats and they will cease their centralizing tendencies, although they have been pretty tone deaf so far. If this is not the case and if the EU becomes even more dysfunctional than it currently is, then there will be other opportunities to leave. But there is no current case to do so.

    • John Colt

      1. No-one here is arguing in support of the Euro.

      2. Bob and Tom make the point that the kind of issues you refer to are reason to be *critical* of the EU. I mean, arguing ‘if we leave they will punish us like the dictators they are’ hardly constitutes high praise of the EU!

      3. Whatever the voting public in the UK want, be it more economic freedom or less, they will be more able to affect UK policy if the UK is out of the EU.

      4. Tom and Bob do not speak for the pro-leave ‘crowd’; nor does this ‘crowd’ speak for everyone who is in favour of leaving the EU.

      • http://www.economicmanblog.com Roger Barris

        1. Never said they were. I am just pointing out that, unlike Tom’s comment, this is not a “Keynesian” position.
        2. Don’t understand your point. See my response to Dan “Moot” Mathews above.
        3. Frankly, as an individual, I don’t get much of a greater thrill being an ignored and downtrodden libertarian minority in the UK than I get being an ignored and downtrodden libertarian minority in Europe. About the same to me.
        4. My comment is about the majority of the support for pro-Leave. For sure, there are some solid libertarians among them — Matt Ridley, for example. But a great majority are “little Englanders:” resentful of change, resentful of foreigners, resentful of immigrants and resentful of free trade. This fact would severely limit the ability of a post-Leave government to implement pro-market reforms.

        • The East Mercian

          May your chains set lightly upon you, and may posterity forget that you were our countryman.

        • authentic8

          On what basis do you conclude a “great majority”, rather than a minority, of Leave voters are “little Englanders: resentful of change, resentful of foreigners, resentful of immigrants and resentful of free trade”?

          • http://www.economicmanblog.com Roger Barris

            Exit polls, my friend, and the demographic and geographical composition of the vote. Why was London overwhelmingly in favor of Remain? Why were old people overwhelmingly in favor of Leave? Why were the young in favor of Remain? Why were low-educated, working-class in favor of Leave? Why was the Labour party leadership surprised by the extent of Labour support for Leave, contrary to the party line? Do you think that these Labour supporters are really closet libertarians?

            Maybe a “great” majority would be difficult to establish, but a sold majority being Little Englanders, absolutely.

            Here’s one anecdote: There was a WSJ article before the vote that featured discussions with a Brit in a seaside town walking around and pointing at the food stores and restaurants established by Polish EU immigrants. He successively pointed at each one and declared “that’s not British!” The amusing part: he was black and his parents had probably immigrated from Jamaica or some other former colony. This was the spirit of the Leave camp.

          • authentic8

            As I thought – mostly opinionated prejudice. Your language gives you away: You could have said something like “Leave voters are wary of the detrimental effects of too much change, too quickly”, or “concerned for the economic and physical well-being of those (including all ethnic groups) who already live in this country” but you chose to use language that denigrated – something you have no justification for besides prejudice and stereotyping. To top it off you highlight one example no doubt deliberately sought out by WSJ and extrapolated this out to a “great / solid majority”. Have you heard of the fallacy of hasty generalisation? I’m sure you can give a few more anecdotal examples to support your case but for every example you give I can produce one the supports the opposite. This proves nothing.

            Did these exit polls ask “Are you resentful of foreigners / immigration / free trade?” Unlikely. Demographics do not answer to that question.

            Many reasons explain why London voted for Remain e.g. the London population benefiting disproportionately from EU policies. Why should the rest of the country vote for the sake of London and not for their own regional benefit?

            Again – wanting less immigration isn’t the same as “resenting immigration”. Even if you we establish that more older voters voted Leave because they wanted less immigration it does not necessarily follow that they are “resentful” or “Little Englanders” – that’s simply your characterisation about which many reasons can be given to disagree.

            (None of this is to state that these reasons for voting Leave are correct or accurate, but it is to state that your denigrative characterisations of Leavers are unsubstantiated and unfair.)

            I have no doubt such attitudes do exist in the Leave camp. However, I watched a wide variety of discussions from many different platforms leading up to the referendum and the opinions and reasons I saw and heard expressed could not be objectively categorised in the manner that you have categorised them. This is not a scientific survey, of course, and it does not account for those unexpressed or unheard opinions but it is certainly no less scientific a judgement than yours since you do not have access to those hidden opinions either.

            Instead of trying to claim some scientific validity by referring to exit polls, demographics and geography why don’t you just say it’s only your opinion?

            You seem like an intelligent person from reading your comments here and some of your blogs but you let yourself down with this one particular irrational theme.

          • http://www.economicmanblog.com Roger Barris

            Read the exit polls about half way through this article:

            http://reason.com/archives/2016/07/12/why-libertarians-should-be-wary-of-brexi
            This is just one. I am sure that I could get my hands on others.
            Unless you want to claim that all exit polls are completely worthless and unscientific — in which case, there is no point in carrying on the conversation any longer because you then must think that this will never be anything more than conflicting opinions — then I am afraid that my characterization, although perhaps somewhat exaggerated, is certainly more correct than the view that Brexit was some kind of libertarian uprising.
            You may have heard many of the leaders making good, libertarian arguments for Brexit. but this is not what drove the grassroots. Sorry, but this is the simple truth.

          • authentic8

            I didn’t argue that Brexit was a libertarian uprising, nor said anything about the arguments I heard being libertarian. Libertarianism is a very small concern in Britain, sadly, I agree. I said your characterisation of Leave voters and their reasons, and the “great majority” quantification was based on prejudice. Case-in-point: the exit poll you refer to (one of the many with which I am familiar) states that the number one issue was immigration. It does not characterise this concern any further than stating it exists. You have gone on further to characterise it, however, which isn’t factual, it is opinion. I refer you back to my previous replies regarding why it is prejudice. If you have a survey that goes into motives and reasons, I’d be happy to consider it and change my mind. Please note: I am the one asking you to back up your assertions with evidence. I am arguing there is no convincing evidence for motives and hence sweeping generalisations are unscientific. My own personal observations suggest well-meaning (whether or not accurate) concern for Britain and all its varied population and, in some cases, for Europe too.

          • authentic8
    • Dan ‘Moot’ Matthews

      2. I’m torn on this because it seems to me if we go in saying we don’t want anything other than free trade, but we do want free trade, it would make no sense for them to put up barriers since trade restrictions harm both parties. British people might be willing to suffer in return for freedom, but Europeans won’t suffer out of spite.
      Ideally we just trade with everyone else while waiting for them to take the restrictions down. While meantime enjoying freer trade with the rest of the world, less regulation, no fees, better border control, etc. Hopefully we’d get a better deal since 5th biggest economy with much higher population than Switzerland

      3/4/5. You’re probably right that UK people don’t necessarily support deregulation, but the high up Tories do and they usually manage to bundle it in with more popular policies on lowering the deficit and tighter border control. If we have Tories in for another 8 years they could pretty much deregulate- and stop bailing out industries- whether people like it or not. Hopefully they’d come to like it if we get good jobs figures and such

      Like the guy says we know what the future looks like in the EU and it’s pretty stagnant. Nobody really wants to labour under lost freedom only because leaving angers EU bureaucrats in the short term.
      But I’m not an expert and I’m not very sure. Part of me thinks ‘if Tony Blair likes it must be bad’, but then part of me thinks ‘if the communists hate it it must be good’

      • http://www.economicmanblog.com Roger Barris

        Thanks for your comments, Dan.

        Regarding your comments on 2, the problem is, of course, that the UK trades far more with Europe than it does with the rest of the world (although the proportions are changing). Therefore, the ability to take down barriers with the ROW — assuming that this is possible; don’t forget that the current pro-Leave coalition is NOT pro-free trade — is unlikely to be, at least in the short run, as beneficial as losing free trade with Europe is going to hurt. In addition, as I am sure you know, the EU is negotiating free trade agreements with the ROW also. Very slowly, I will admit, but it is happening; for example, there is a recent agreement with Canada.

        As you point out, the impact of losing free trade with Europe can be mitigated by unilateral free trade from the UK side. However, since the UK unilaterally repealed the Corn Laws in the 1840s, I doubt that there has been a single case where a country has unilaterally dropped tariffs, even though trade theory says that this makes sense. It is politically impossible.

        “Nobody really wants to labour under lost freedom only because leaving angers EU bureaucrats in the short term.” I think that this greatly overstates the case. No one cares about angering EU bureaucrats (who will not be the deciders in any case, since this will be negotiated directly with the other countries, especially Germany and France). Losing free access to the EU, including for services (which is a major driver of the UK economy), is a big problem for the UK. I would also argue that the UK has benefited tremendously from labor flows from the EU, which would also be lost since curtailing this is the major motivation for the pro-Leave group.
        What does the UK get in return? Freedom to de-regulate (which they probably won’t use). Freedom to control their border (which they probably will use, to the country’s detriment). Easier trade with the ROW. The ability to ignore the rulings of the European Court of Justice (which they are already starting to do in any case). That’s pretty much it. The reality is, by dodging the Euro and Schengen bullets, the English have left themselves with much less motivation to leave than the rest of Europe.

    • ad

      I am torn on the issue. The UK is underrepresented democratically in every level of the EU. That alone would make me want to leave.

      I understand your point on immigration but if Farage wins, as unproductive as the resulting immigration policies would be, I am not sure if the UK doesn’t have enough power as a consumer to push the EU around a bit. If the EU were a rationale organization, I don’t think the resulting disruption in trade would be too detrimental to the British consumer (the EU needs the British consumers). All the while trade from other countries will accelerate and that may be beneficial in the long run.

      • http://www.economicmanblog.com Roger Barris

        Don’t forget that the EU is bound to be irrational while negotiating with a post-Brexit UK. They definitely would not want to encourage anyone else to leave. Therefore, even if it is detrimental to them, they will be very tough on the UK. They will not be motivated only by rational economic reasons.
        One area that has received very little comment is the impact that a Brexit would have on foreign direct investment (“FDI”). There is a huge amount of FDI in the UK, which has really been a major factor in advancing the UK economy in everything from cars to financial services. FDI is attracted to the UK because it is a relatively low-tax, relatively low-regulated, English-speaking entry point for the EU. If the UK leaves the EU, then a huge amount of this FDI will choose to locate in the EU or relocate to the EU. This would severely hurt the dynamism of the UK economy.

  • http://www.economicmanblog.com Roger Barris

    I am just now watching a televised debate between the pro-Leave and the pro-Remain camps. Both sides are falling over each other claiming to be the biggest supporters of workers’ rights, such as minimum wages, guaranteed parental leave, maximum working hours, overtime pay legislation, etc., etc., etc.
    Sadly, Brexit does not equal free market. Not by a long shot.

  • JimD

    Almost thought we were going to get a balanced critique of the Krugman column but (alas) after a good intro by Murphy on optimal currency areas, Woods launched a rant about the reactions to the MP’s murder (which occurred after K’s column) followed by a anti-WTO rant. (BTW seems extremely unikely) that the UK could get Swiss terms if they left.

    In fact Krugman’s column was one of his best – maybe because he did not spend all his time attacking Republicans. It was a balanced assesment of the likely costs of Brexit and certainly was not very positive on the EU. As Krugman says it is a choice between bad and worse.

    • The East Mercian

      Krugman’s column is a platform for a wider discussion, I enjoyed it.

  • Andy Cap

    This was a pretty bad podcast this week. Completely missed the main points in the Brexit campaign:

    1. Immigration – The Swiss, Norwegians etc all have bilateral trade agreements with the EU however those agreements are based on the free movement of EU citizen’s between both Switzerland/Norway and the EU block. The UK’s problem with immigration is largely driven by right-wing media hysteria surrounding (a) Turkey joining the EU (which is a strawman argument – the Turkish leaders have even said they were so far away from hitting the accession hurdles both fiscally and socially that they’ve ceased working towards gaining qualification to join), (b) the Callais Jungle in France which has nothing to do with EU citizens but is instead mainly full of Syrians and North Africans looking to gain access to the UK (although the left-wing media largely try to gloss over the fact that a huge proportion of these people are economic migrants rather than refugees – Guardian etc), and (c) population growth of fully legal British Muslims, Hindus etc from former colonies. The Callais issue is a real problem which France & the EU need to sort out. The media hysteria about Eastern European migrants & benefit claiming is nonsense – similar to the US, EU migrant employment rates are higher than those of domestic British people.

    2. Regulation – The pro Brexit position is that they will be able to trade as normal with the EU once the country leaves the EU as it will be in both parties interest. This is partly true however, while the UK trades more with the EU than vice-versa much of that trade is FS services (London) which is something both the French and the Germans want to in-house in Frankfurt or Paris – both would happily not import those services. On a goods basis, trade with the UK makes up a small portion of the EU’s overall trade. In order to trade with the EU, British goods & services being exported into the EU will still need to conform to EU standards i.e. all those all hated regulations. It is similar to the US – pharma factories in India or Europe etc are required to comply with FDA regulations (and incur regular inspections from FDA officials) in order to be permitted supply product into the US. There would be no benefit – all there goods will still need to have the “CE” stamp on theme.

    3. You completely misstepped on the Jo Cox murder. The killer gave his name at his first court appearance as “death to traitors”.

    4. You claimed the EU was undemocratic/unelected. The British like all other EU states get to vote in MEPs every 5 years who draft and decide on EU wide legislation. The commission is comprised of member state representatives appointed by the elected governments of the member states – it’s like saying Cameron appointing the Chancellor is undemocratic. It’s nonsense.

    5. It was a daft idea having a uniform currency across mainland Europe without any fiscal union. However, this is not a concern for the British. The EU is seeking to rectify that but at this stage it’s probably gone too far down the rabbit hole.

    Love the podcast normally.

  • SB

    Tom, where did you get those regulation stats on bread milk spoons etc?
    Insane.

    • Martin E. Anding

      Looks like there are at about 34 minutes into the Brexit movie.

    • http://www.medievalrecruiter.com/ Medieval Recruiter

      The Brexit movie makers apparently just did a keyword search to determine how many regulations applied to that keyword, which lead to a lot of false positives. John Oliver spotted a few in his program, a few other sources on the internet have followed suit. I am not in favor of the EU or any other government, but an honest assessment of their regulatory burden would be a bit less sensationalist.

  • LAS

    I though the humor was better in this one. Maybe do to the fact you were together and not on phone?

  • Richard Arlen

    ALL I CAN SAY HERE IS READ DR.ROBERTS REMARKS ON BREXIT.THE BRITS AREN T OUT AND MAY NEVER GET OUT.THE PARLIAMANT CAN AND I BELIEVE WILL OVER RIDE THE POPULAR VOTE.LOOK TO GREECEAND WHAT HAPPENED THERE.SZIPRAS WAS AND IS A ROTHCHILD TRAITOR AND USED THE GREEK BODY TO OVER RIDE THE PEOPLES VOTE AND GET GREECE DEEPER IN DEBT OF WHICH THEY WILL NEVER GET OUT FROM UNDER.AND JUST ONE MOR E POINT ABOUT SO CALLED BREXIT IS TO WATCH THE CRIMINALS WHO ARE AND HAVE BEEN THE LEADERS OF THE U.K. GET ON THE M S M AND BELLY ACK THAT LEAVING WILL RUIN THE U.K.. IN FACT THE BRIT ARE THE BASE OF THIS NATIONS LAWS AND I M REFERRING TO THE DOCUMENT CALLED THE CONSTITUTION.WAY TO MUCH TO GO INTO HERE.

  • http://www.jamesbbkk.com/ jamesbbkk

    Wasn’t Krugman’s resolution of the questions quite similar to the advice they used to give to battered wives?

  • Timothy

    Excellent episode. And honestly the way Tom made his pitch for the cruise into a joke half way through, it was pretty effective. Still can’t afford it though

  • David Arum

    The problem with the EU is that those making the decisions face absolutely no moral hazard and can not be overruled .