There are at least five reasons why Brexit is too complex to deliver. The most likely outcome is a transition period that continues until the political demographics have changed.

The news that Labour has resolved its policy on Brexit is welcome for short-term, medium-term, and long-term reasons. It is also smart politics, because it is becoming increasingly clear that Brexit is too complex to deliver. Richard Murphy made this suggestion on his blog recently. And when I say, “too complex to deliver”, I don’t mean “too complex to deliver in a two year window plus a transition period”. I mean too complex because Britain has become institutionally and economically interlocked with the rest of the European Union. It can check out but it can’t leave.

The first reason is that the relationship between Britain and the EU is fantastically intricate. Just after Article 50 was triggered Buzzfeed published a memorable list of the 30-odd things that Britain had to do resolve Brexit, and it was immediately clear, reading the list, that all of them were complicated and that the government didn’t have a clue what to do about well over half of them. Since then, these issues have kept on getting more complex. Euratom, for example: it’s both essential to Britain’s nuclear power industry, and it requires accepting the jurisdiction of the European Court of Justice.

Henry VIII

The second is the “Henry VIII” clauses in the repeal Bill. They give far too much discretionary power to the Executive, and are repellent in terms of the balance of powers which is implicit in Britain’s unwritten constitution, the idea of Parliamentary sovereignty, or the rights of British citizens. Yet they are still probably insufficient to get the necessary legislation through Parliament.

The third is that the infrastructure required to manage anything but staying in the customs union and the single market won’t be in place any time soon, or at least that’s what I see when I read news reports about HMRC’s IT rebuild. The IT system that is being written and rewritten as we speak was scoped before the Brexit vote, and is now having to be modified. To say the least.

[HMRC] says more than 20 agencies are involved at the border, with new IT systems needed in everything from VAT, to alcohol and tobacco warehousing, to databases on trader registers… Passport and visa, or work permit, checks will be needed for EU drivers who travel into the UK. At present, there are no visa requirements because of the free movement of people under EU law.

Knowing the UK’s track record on big complex public IT systems, what could possibly go wrong? And that’s before we get onto the hard infrastructure that would be needed.

Derision

The fourth is that it turns out that all those regulatory agencies which the EU has in place, and which we have been contributing to through our payments, are difficult to set up from scratch. Then they need to design a set of European-compatible rules (because that’s where most of our trade goes), and they also, of course, need to recruit whole swathes of technically knowledgeable regulatory staff. I guess there might be suitable recruits in Europe if we don’t have enough good people here.

The fifth is that any agreement still needs to be ratified by the EU27, in accordance with the negotiating principles set out by the Commission. One such is the requirement for an open border between the North and the rest of Ireland, which is set in British and Irish law as a result of the Good Friday agreement. The position paper published by the government was met with derision by Ireland, and with good reason. The Irish journalist Fintan O’Toole caught the tone.

Your neighbour, who you like but do not quite trust (there’s a bit of history there) comes to you with a proposition. She’s establishing an extremely risky start-up venture with a high probability of catastrophic failure. Will you join her? Well, you ask, what are the possible rewards? Ah, she says, if – against the odds – everything goes splendidly, you’ll get the same pay and conditions you have now.

Informed choices

And this last one is the reason why surveys that tell us what Remainers and Leavers now “want”, even academically reputable surveys, are broadly meaningless. Most of these outcomes will not be settled by UK voters. And the LSE survey which got quite a lot of airplay recently didn’t put its respondents in a position where they could make informed decisions about trade-offs. The trade-offs involved in managing Brexit are too complex. If you want to get to a meaningful assessment of public opnion, you would need to do it through some kind of deliberative process.

So what’s the most likely outcome? We live in a world of complex supply chains, where part finished goods shuttle between countries, where Britain is substantially dependent on the EU as a trade partner (“Gravity theory” does work, whatever Patrick Minford thinks), and where a significant portion of British exports are in high value services which require all sorts of inter-governmental agreement to work. There’s also Britain’s worsening trade gap.

Extended transition

So the most likely outcome is the thing that Labour has just signed up for, which involves staying in the single market and the customs untion after the Brexit date, probably with some cast-iron guarantees for EU citizens who are here, and an extended transition period while people try to work out what happens next. This is one of the reasons why Labour’s decision is a sensible one: there’s no point in advocating a position that is likely to unravel in front of you.

That takes us through to 2023 or so. By that time, given the current demographics of Britain’s political values, there won’t be a majority for Brexit any more. And kudos to the comedian (Sara Pascoe?) who said on one of Frankie Boyle’s recent shows that it was so much sadder when old people died these days because it meant they wouldn’y get to see the Brexit they’d voted for so enthusiastically.

The democracy thing

Ah, yes, but what about respecting the result of the referendum? Well, what is there to be respect? By the kind of criteria usually applied to democratic decision-making, it falls quite a long way short.

The usual set of criteria is based on the work of the sociologist Ray Pahl. These are for democratically-run associations, but they extend to democratic decison making generally. There are five:

1. Effective participation
2. Voting equality
3. Enlightened understanding
4. Control of the agenda
5. Inclusion of adults

The only one of these five where the Brexit referendum can keep its head above water is [2], just about: “every member must have an equal and effective opportunity to vote, and all votes must be counted as equal”. “Just about,” because of the effects of different voter registration measures introduced since 2010.

Effective and fair

But even ignoring that, it fell a long way short on [5]: “All, or at rate most, adult permanent residents should have the full rights of citizens that are implied by the first four criteria.” EU citizens resident in the UK, who had a clear interest in the outcome, were excluded from voting. As were 16-17 year olds who would also be affected by the outcome. And also excluded were were British citizens who had lived outside of Britain and in the EU for more than 15 years, who clearly also had an interest in the result.

It also fell short on [1]: the whole reason we have rules about campaign financing in this country is to ensure that participation is effective and fair. The source of the “dark money” channelled through the DUP, and which financed Leave advertising, has still not been made clear despite Open Democracy‘s sterling investigative work.

And clearly on [3] as well: “Each member must have equal and effective opportunities for learning about the relevant alternative policies and their likely consequences.” Clearly when the advocates of one set of policies makes up stuff about the likely consequences, and then disowns it the day after the vote, this hasn’t happened.

And on [4], those people who thought we were having a referendum because David Cameron had lost control of the right wing of his party, and was therefore putting party management before the national interest, didn’t really have a say. But then, as Anthony Barnett says memorably in his Brexit book, Cameron is, or perhaps was,

one of those politicians who enjoy unlimited personal ambition untroubled by the burden of larger purpose.

A second referendum?

Does that mean we’ll have a second referendum? It seems possible; it is certainly possibly to say that people who voted Leave weren’t actually clear what “Leave” meant. At the Royal Economic Society blog, Thomas Colignatus argues that the question was unsatisfactory for demonstrable theoretical reasons. Vernon Bogdanor thinks it will happen for reasons of political legitimacy.

I’m not so sure. I suspect that the transition period will be long-ish, and may well then be extended. Politicians hate complex problems they can’t resolve, which make them seem ineffective to voters. And after a while, one of our political parties will announce, when the young pro-Europeans represent a clear political majority, that it will seek to make the Transitional arrangements permanent and get voting rights in Europe to go with our payments. I can’t work oout whether it will take a Millennial political leader (who by then will be in their mid-40s or younger) who can make a case for Europe and for universalism, or whether (as with Zimbabwe’s independence) it needs an older leader who can sell this to disappointed older voters as unfortunate but necessary. But I’m fairly sure it will be a whimper, and not a bang.

The image at the top of the post is by ilovetheeu and is published here under a Creative Commons licence.

The EU’s ruling on Apple’s Irish tax affairs is a sign of two different sets of change: the ending of the ICT boom, and the decline of globalisation

Silicon Valley seems surprised, and not for the first time, by the fact that the European Union has a different view of its business practices than it does. Apple is perplexed (even maddened) by the decision of the EU’s Competition Commissioner, Margrethe Vestager, that it should pay the same rate of corporation tax as other companies doing business in Ireland–and that it therefore owed €13 billion, perhaps more, in back taxes. Bloomberg explains the issue well.

Google, similarly, has been perplexed by the three separate anti-trust suits that the EU has filed against it. One relates to its advertising business; a second to its shopping service; the third is about whether Google has been giving preferential treatment to both Search and Chrome in its Android operating system.

So what’s going on here? Two separate things: first, it’s about the coming end of the ICT boom that has dominated innovation and culture since the mid-1970s; second, it’s about the limits of corporate power and influence as economic globalisation declines.

Patterns of innovation

I’m a fan of Carlota Perez’ model of the relationship between finance and technological innovation. She suggests that since the British industrial revolution, we’ve been through five technological “surges,” each lasting around 50-60 years, and following a similar pattern. There’s an “installation” phase, in which infrastructure investment is funded by finance capital. There’s a crash, when investment returns fall short of expectations. And then there’s a deployment phase, when companies with customers (“production capital”) pick up the pieces as the market moves from early adopter to mainstream, and make a fortune, before the market matures, the rate of growth cools, and the return on investment falls.

It’s a heuristic, not a law, and not everyone likes it (Paul Mason is particularly critical in PostCapitalism), but as a heuristic, it has quite a lot of explanatory power. Some of that explanatory power is about how dynamic economic sectors run out of steam.

‘Twilight of the golden age’

The characteristics of the market in the “maturity” phase of a technology surge are falling productivity and profitability, caused by the saturation of markets, maturing technologies and commoditisation. This underlying story is disguised, because there are still “shooting stars” (my phrase, not hers) with short life cycles, because they benefit from learning curves and launch into saturated markets. It is also disguised because, as Perez writes in Technological Revolutions and Financial Capital, “the signs of prosperity and success are all around.” [p54]

The companies that have prospered during the market acceleration phase are large enough to postpone the problem, whether through mergers, through acquiring smaller firms, or squeezing them out of the market, or diversifying into other sectors. [p82] The result? It “is the twilight of the golden age, though it shines with false splendor.” [p54]

In particular, it shines with false splendour because of the gap that has opened up between societies and corporations. “[U]nfulfilled promises had been piling up.” There “is an increasing socio-political split.” The social optimism of the early part of the technological surge started has not been realised. In making this point, Perez uses as examples the machine breaking and corn law protests of the early 19th century and the protests of 1968.

The dissatisfaction and frustration driving them both is of a fundamentally similar origin: capitalism had been making too many promises about social progress and not delivering enough, showing too much capacity for wealth creation and not distributing enough [p55].

Social and political costs

The dissatisfaction over corporate tax avoidance, and even the Google buses, perhaps represent elements of a similar mood now.

If that’s the big picture, the detail also changes. One of the things that creates this change in mood is that the social and political costs of the new technologies, the “externalities,” start to become clear. And as the businesses start to slow down, in terms of their accumulation or return on investment, so regulators and policy-makers, even politicians, start to catch up. They start imposing constraints to reduce these external costs.

A comparison with the last technology surge might help. In the UK, during the late 1950s and 60s, the final leg of the cars/auto technology surge, we saw the introduction of parking meters, and drink-driving limits. Seatbelts followed a few years later.

Pushing to extremes

In futures terms, borrowing from the McLuhan’s Tetrads, the gap between the policy-makers and the businesses is down to their mental models. The policy makers are worried about what the technology is “reversing into”: the Tetrad question here is, “What does it flip into when pushed to extremes?”. In other words, what it becomes when it saturates society. The businesses, in contrast, are still caught in their founding myths, captured in the Tetrad model by “retrieval”: “What does it retrieve that had been obsolesced earlier?” This question is about the metaphor that the technology has wrapped itself around.

And thus, for example, we have the frankly embarrasing sight of Mark Zuckerberg of Facebook hailing the anniversary of the World Wide Web, apparently on the wrong day, while his business does everything it can to subvert the principles of openness on which the Web was built.

So what do these different businesses reverse into? Google and Facebook make money by selling the network surplus created by the interactions of their billions of users on to advertisers. (“If you’re not paying, then you are the product.”) As revenues stutter, they have to find new information about them to sell, as Facebook is currently doing with WhatsApp. Or privilege certain advertisers, as Google is effectively alleged to have done by the EU.

‘You didn’t build that’

For Apple, which is still mostly a design and manufacturing company, with a content distribution business layered on, the argument is that “you didn’t build that“. Businesses are built on public assets, as Mariana Mazzucato argues in her book The Enterpreneurial State. She has a particular interest in the iPhone.

Of course, all of these businesses also largely rely on the public sector, in every market in which they operate, to educate their workforces, to keep them healthy, and to put in useful infrastructure such as road and rail, often sweetened with development grants or soft funding.

The limits of globalisation

And this takes on to the second aspect of the EU decision, which is about the limits of globalised businesses and their relationships with states. One of the more interesting aspects of the EU judgment is that it’s not a fine that would be collected by Brussels. Instead, the competition decision is that because Apple was allegedly given a different rate of tax in Ireland from other corporations, then this tax agreement represented a form of state aid that is illegal under EU rules. Therefore, Apple is obliged to pay to the Irish government €13 billion in unpaid taxes.

We’ll pass over the disingenuous special pleading that Tim Cook offers in his “message to the Apple community in Europe,” in which he walks through the history of Apple’s investment in Cork, even calling up the sainted Steve Jobs in support, as if it were an act of charity rather than because the company needed a manufacturing base in the EU and Ireland offered an educated English-speaking workforce in a relatively low-wage area with added inducements.

European landing stage

It’s not chance that it was Ireland that ended up in this position. In his book Ship of Fools, the Irish Times columnist Fintan O’Toole, of whom more shortly, observes that Ireland’s particular history means that by the 1990s it the country was part of a modern global economy but with a pre-modern political system. It has missed out on the messy modern stage where the norms and expectations of democratic government are created.

The way the Irish economy modernised over the last fifty years, in effect, was by being offered as a European landing stage to mostly American businesses, while offering the kind of crony deals that were the meat and drink of local Irish politics.

This had its upsides. As Fintan O’Toole notes this week in an article,

If Ireland has sold its soul to the corporations, it has arguably got a very good price for it – not just jobs and tax revenues but a relatively peaceful transition from conservative nationalism to global modernity.

New rules of engagement

After a couple of days of dithering Ireland’s government decided to appeal against the EU decision. But the country’s traditional ruling parties, whose hold on government has been fragile since the financial crisis, are squeezed two ways here. For one thing, citizens, and opposition parties, will have a view on whether the government should be helping Apple hold tight to €13 billion.

Perhaps more significantly, O’Toole reads the EU decision as another marker that the rules of engagement between states and corporations have changed.

The EU ruling is itself a symptom of a much bigger shift: amid a longterm crisis in global capitalism, massive corporate tax avoidance is becoming politically unsustainable. And a vision of Ireland that places the facilitation of that tax avoidance at its heart is therefore not sustainable either.

Other signs of this change: the OECD’s anti avoidance campaign and the leaking of the Panama Papers.

Taking the lid off tax

As Bloomberg columnist Justin Fox put it,

it seems pretty clear that the devices used by U.S. tech giants to shift their European income not just to low-tax jurisdictions but to nonexistent ones are proving to be a step too far.

And generally, you have to say that when US companies have lost the support of Bloomberg in a fight with the EU, they’re a long way out of step with opinion.

But as the European Commission diagram at the top shows, there’s also a bigger box that might be prised open. The opacity of Apple’s tax arrangements (and many other corporations) makes it hard to do the sums reliably. Correcting that problem leads quickly to country-by-country reporting, which tax justice campaigners have long advocated as part of the  route to greater tax transparency. If you’re a global multi-national, the squeeze is on.

I wrote about the disaster that is the Irish economy about eighteen months ago, just after Fianna Fáil government, true to form, had bought up bad property assets from its crony capitalists on unduly generous terms. I was revisiting the Irish economic miracle ahead of a workshop in Dublin this week, and found an interesting structural explanation of the Celtic Tiger boom in Fintan O’Toole’s book Ship of Fools. It’s not the explanation of “business friendly” policy, low tax and light regulation that’s normally offered, and it has implications that go beyond Ireland.

In that earlier post, I quoted the economist David McWilliams as saying that the Irish boom was built on “easy credit, cheap oil, and ready sources of migrant labour”; all three have now gone. (McWilliams is a good – if populist – economist, and this is his ‘elevator’ explanation for lay people). Certainly the consequences of the crash have been disastrous. Ernst and Young’s latest economic report on the country was characterised by Amárach Research as “Biblical. In the ‘seven lean years’ sense…”. Just the headings of that report (opens pdf) paint a grim picture:

“Domestic economy very weak… as austerity measures damage consumption… while investment will fall due to weaknesses in the construction and banking sector.”

Ireland’s demographic dividend

O’Toole’s analysis in Ship of Fools puts one of the main explanations for the years of the Celtic Tiger boom down to the downwards fertility shift in the country as the influence of the Catholic Church declined and contraception became more readily available:

Irish fertility had been startlingly high well into the 1980s, with the result that there were a lot of youngsters around in the 1990s. At the same time, those fertility rates dropped dramatically as women gained more freedom… In 1986, every ten workers in Ireland supported 22 people who were too young or too old to work, who were women working in the home, or who were unemployed. By 1999, those ten workers were supporting just fourteen dependents, and by 2005, just five.

As it happens, this is a familiar story about economic development, told by Fred Pearce in his book Peoplequake, which I summarised in my recent World In 2020 report for The Futures Company. As Pearce says, “As countries move from high to low fertility, they experience a period of a couple of decades when demographic conditions for rapid economic growth are near perfect”. Much of China’s long boom was an unintended consequence of the ‘one child’ policy, which – unintentionally – created just such a demographic dividend.

Not all countries which get this demographic windfall succeed: the decisive factor is the “literacy years” – the average number of years for which people are literate – of the population, according to the geographer Wolfgang Lutz. But here, Ireland was blessed with one of the most educated workforces in Europe, as a result of heavy public investment n education.

Catching up on under-development

There were other factors as well. The long boom in the global economy meant that almost all countries gained economically. Ireland’s long period of under-development (a century long) meant that it was, to some extent, just catching up with its potential. In this they were helped, lavishly, by the redistributionary policies practised by the European Union, which designated Ireland as one of its disadvantaged areas, and poured in some IR£8.6 billion of European investment funding between 1987 and 1998.

It is worth remembering how successful the Irish economy was in the 1990s. Unemployment levels halved, and the level of consistent poverty fell by two-thirds. Between 1986 and 1999, GDP per head of population climbed from tw0-thirds of the EU average to being above the average (and higher than that of the UK). Ireland’s share of foreign investment by US corporations rose from 2% to 7%. And so on.

But as Ian Jack observes in his long NYRB review, the incoming Fianna Fáil government in 1997, under Bertie Ahern, thought it could do better.

The new government, however, believed it had discovered a quicker-acting formula for wealth creation: tax cuts to stimulate consumption, property to replace manufacturing as the source of wealth, Dublin to become a tax haven for businesses seeking to avoid the more rigorous regimes of London and New York.

Well, we know how all of that turned out.

Throwing it all away

O’Toole is cross – actually, he’s furious – about the way that Ireland’s economic opportunity of the 1990s has been squandered, and with good reason. As a country, you only get one shot at the demographic dividend. China shows what you can do if you manage the opportunity well. Ireland, in contrast, is an example of how to blow it even when you should be perfectly poised to take advantage.

Effectively, O’Toole argues that Ireland’s political system was under-developed: that the country was part of a modern global economy with a pre-modern political system. The specific history of Ireland is relevant, and the close personal and political connections in particular between Fianna Fáil and property developers which go back to the ’50s and ’60s. Inevitably this was a recipe for corruption, and some of the corruption reported in Ship of Fools is eye-watering, as was the ability of governments and business people to ignore judicial findings of fraud. The result was a dangerous cynicism about politics which has only now, it appears, been dislodged by Fianna Fail’s humiliation in the general election following their acceptance of the IMF’s bail-out terms.

Economic success stories are contingent

There are two wider lessons here which go beyond the Irish context. The first is about how we understand successful economic growth stories. The so-called ‘Miracle of the Celtic Tiger’ was a lucrative source of lecture circuit income for Ahern after he stepped down as Taioseach, and the ‘business friendly’ narrative he proposed attracted other admirers, from George Osborne to John McCain. But closer inspection of the reasons for economic miracles always reveals them to be highly contingent, rooted in their own specific circumstances. Close analysis of the long success of Silicon Valley, for example, shows the same thing. As the economist John Kay notes in The Foundations of Corporate Success, ‘copycat strategies’ don’t work because they are unable to distinguish between which aspects of the growth story are essential and which are peripheral.

The second point is that most of Ireland’s growth came from structural, social, and external factors which were not created by the country’s business class. The effect of Fianna Fail’s aggressively pro-business tax and economic policies had little impact on developing the underlying economy in the short-term, and was disastrous in the medium term. But they had a huge impact in ensuring that the profits from growth were pocketed by a tiny minority – at the expense of the Irish public, and the public good.

The picture of Dublin’s ‘Spike’ is from the photo site Creamy Goodness, and it is used here with thanks.

Having been in Ireland during some of August, as the government tried to set up its “bad bank”, the National Assets Management Agency (NAMA), on what appeared to be extremely favourable terms to bank shareholders amid the collapse of one of the country’s biggest property developers, Liam Carroll’s Zoe Group, the joke looks alarmingly close to the truth.

August unemployment in the Republic was running at 12%, almost twice as high as in the North, and even allowing for measurement differences it was a clear sign that the good times have gone. Ireland’s deflation rate is now the highest of any rich country.

As the Bank-of-Ireland-economist-turned-writer/broadcaster David McWilliams has observed, the so-called “Celtic Tiger” was built on easy credit, cheap oil, and ready sources of migrant labour. The easy credit has gone, the cheap oil can no longer be taken for granted, and migrant workers are less willing to move to weak economies. The collapse of the property bubble has been swift; the value of commercial property has fallen 50-60% from its peak. I was told that on the Inishowen peninsula, in the north of Donegal, three-fifths of the houses were empty, built speculatively as holiday or second homes against demand that is no longer there.

NAMA leaves quite a lot to be desired, and without going into the small print, it fairly clearly buys the toxic assets at over-valued prices at the taxpayers’ expense. At time of writing, the Greens, the junior partners in the governing coalition, may still scupper the proposals. The Irish Independent’s resident grumpy old columnist, Kevin Myers, even suggested that such corruption was endemic to the political history of Ireland’s ruling Fianna Fail party:

The honest folk of NAMA are, in effect, being assembled to rescue our rapacious developer-class, the shady ruffians who were such generous contributors to Fianna Fail over the years. And naturally. For modern Ireland is the diseased polity that Sean Lemass created out of de Valera’s failed state. He conjured a new speculator class into existence, on the quid pro quo that it would then subsidise his party, as meanwhile the state protected it.

David McWilliams, for his part, wondered why the government wanted to prop up banks or developers when they could buy cheap land from them instead.

With so much prime land now available to the State for a song, the obvious thing is for the State to profit from the bankers’ and developers’ stupidity and greed by buying the land for next to nothing and then putting it to public use. In almost every banking disaster we have seen in the past two decades, the obvious thing to do is let banks go. The State guarantees deposits, transfers these deposits to a new bank and the economy starts again. From the Swedish crisis of the early 1990s to the Asian Tiger collapse and the USA today, banks go bust and the countries recover.

Brendan Keenan, writing in the Irish Independent’s business section, observed that even if the Irish government hits its improbably optimistic budget targets, it will still have one of the largest proportions of public expenditure as a share of the overall economy. Cuts seem inevitable, since the country is almost completely dependent, economically, on the goodwill of the international bond markets, which worry about the share of public expenditure in an economy.

There are some hard lessons here. In the ’80s and ’90s Ireland sucked in inward investment (much from the US) from companies looking for a base in the European Union with low-cost skilled labour. The English language was an advantage. But low wages are only ever a temporary advantage (they increase rapidly on the back of economic success) and Ireland now has some of the highest wages in Europe (and highest living costs as well). And as English continues to spread as the language of business, having native speakers may be less of an advantage.

Historically, Ireland has exported its skilled workers through migration. The view on RTE’s O’Gorman programme (he talks to members of the public, in this case at a social welfare office in Cork) was that the depth of the current recession worldwide meant this was not an option this time. One commentator suggested that Ireland should concentrate on its traditional strengths, of food and tourism. They won’t bring back the boom years, but at least both should be sustainable in the medium-to-long term, as food security becomes more important and energy costs make tourism increasingly short-distance. And the well-educated workforce will continue to be an asset, especially if the government, or the state of the world economy, can persuade them to stay at home.