What A ‘Brexit’ Could Mean For New Business
Steve’s breakdown: Your guess is as good as mine but you’ll need to keep an eye on what happens!! 😀
Have a great weekend & Happy Fathers Day!
EVERYWHERE, USA: Imagine that the states of the Northeastern U.S. — New York and New Jersey, plus New England — don’t like the outcome of November’s election (not that far-fetched!) and decide they would rather split off on their own. After all, the Northeast is culturally different from the rest of the U.S., it has the most prestigious universities and the dominant financial capital, and it pays far more in taxes than it gets back in benefits. Why should people there let leaders they didn’t vote for impose policies they dislike?
That is more or less the scenario that could play out across the Atlantic next week when Britons go to the polls to decide whether the United Kingdom should leave the European Union. It’s a monumental decision: The U.K. accounts for about 13 percent of the EU’s population and nearly 15 percent of its economic output — a bit less than the share of the U.S. made up by the Northeastern states. The outcome is highly uncertain; after enjoying a comfortable lead in the polls for weeks, the pro-EU “Remain” coalition trails narrowly in the most recent polls. (Campaigning on both sides of the issue was suspended on Thursday after Jo Cox, a member of Parliament, was killed by a gunman.)
Supporters of a “Brexit,” as a British exit from the EU is known (because of course it is), argue that the EU has flooded the U.K. with immigrants, forced it to accept burdensome regulations and charged billions a year in dues, all with little in return. Opponents counter that Britain is going to have to deal with the EU no matter what, so it might as well remain a member and preserve its voice in Brussels.
Of course there are critical differences between a Brexit and a breakup of the U.S. Most obviously, the EU isn’t a country. Britain already has its own government, military and currency (Britain never adopted the euro). And while the details of a country’s leaving the EU would be complicated, no one is suggesting that Europe fight a war to keep the union together.
The impact of a Brexit would be mostly economic, not political. The “Remain” camp, which includes the leaders of the two biggest British political parties, argues that leaving the union would deal Britain a crushing economic blow. Many economists agree. And many experts also contend that a breakup of the EU could cause trouble for the rest of Europe and even the U.S. On Wednesday, Janet Yellen, chair of the U.S. Federal Reserve, cited the possibility of a Brexit as one reason for the Fed’s decision to leave interest rates unchanged.
The reality is, though, that no one really knows how bad a Brexit would be, either for Britain or for the rest of the world. No country has ever left the EU, and there has never been another institution quite like it, so there are no true historical parallels. And, just as importantly, no one really knows what Britain’s relationship with the EU would look like after it left.
There are three big unknowns. First, what would happen to trade within Europe? Trade between the U.K. and the rest of Europe has long been vital to economies on both sides of the English Channel, and it has become even more important since the EU removed tariffs and other barriers. If Britain leaves, it will have to renegotiate those deals or see trade decline significantly. (Britain would also have to negotiate new deals with the U.S. and other non-European countries that have trade deals with the U.K. through the EU.) The “Leave” campaign and its backers argue that Britain would quickly reach new deals since doing so would be in all sides’ interests. But the EU would likely insist that Britain agree to many of the rules and regulations that Brexit-ers find so objectionable in the first place — and Britain would have much less leverage to write those rules to its advantage.
The second unknown is what a Brexit would mean for London’s status as a world financial capital. The City, as London’s version of Wall Street is known, has grown to rival New York in importance, in part because of its status as a gateway to the rest of Europe. Losing that status could take a major toll on the British economy, which has become heavily dependent on the finance industry (for better or worse). But most experts expect a slow withering rather than a sudden demise, and some argue that the finance sector would in fact do better if freed of Europe’s regulation. (There is a similar debate over how a Brexit would affect investments from multinational companies, many of which set up their European headquarters in Britain.)
The third unknown is the most important to the U.S.: how global financial markets would react to a Brexit. The sudden shift in the polls in recent weeks has already roiled markets and weakened the pound. Betting markets still expect “Remain” to eke out a victory, which means a loss would come as a surprise, which could further spook investors. The longer-run issue is that a Brexit could call into question the future of the EU itself at a time when Europe is still trying to get its economy moving again after a nearly decade-long slump. Markets don’t like uncertainty; they like depressions even less.
The Fed’s decision this week not to raise interest rates was almost universally expected; only 6 percent of economists surveyed by The Wall Street Journal ahead of the Wednesday meeting expected a hike. But that wasn’t always the case. Back in December, the Fed hinted it expected to raise rates four times this year — it hasn’t raised them yet — and as recently as April, a majority of economists expected a June rate increase.
What changed? Yellen and other Fed policymakers argue they were just reacting to the changing economic outlook. Back in December, job growth was on a tear and most economists expected overall growth to start the year on a strong note. Instead, gross domestic product barely grew in the first quarter, job growth has slowed significantly, and the global economy is weakening. Throw in the uncertainty surrounding the Brexit vote, and holding steady on rates is a no-brainer.
But there is also another narrative: Perhaps the economy was never as strong as policymakers thought, and by raising rates in December, the Fed sapped the recovery of what little momentum it had. The timing lines up: The economy began to slow right after the Fed raised rates.
Yellen doesn’t buy that argument, and she and her colleagues have made it clear that they’re hoping to raise rates as soon as the economy is strong enough to withstand it. But because the economy responds to expectations, not just actions, even talking about raising rates can act as a drag on growth. In an op-ed article in The Washington Post this week, former Treasury Secretary Larry Summers argued that the Fed should stop talking about raising rates and instead make it clear that it would tolerate a period of higher inflation in order to generate faster economic growth.
One of the most popular explanations for the runaway cost of higher education in recent years has been the supposed explosion in the number of administrators on college campuses. To hear critics tell it, colleges and universities are crawling with unnecessary (and highly paid) assistant deans, associate provosts, senior vice presidents and other functionaries. But new research from the Federal Reserve Bank of Cleveland this week suggests that the administrator explosion is a myth. The research, based on government data, found that the number of executives and other managers at four-year colleges has been more or less flat since the mid-1980s.
What has increased is the number of other professional employees, such as computer specialists, human resource managers and lawyers. Those positions add to costs, of course, but they are separate from the academic bureaucrats that are often the targets of critics. And the increase in professionals on campuses has been at least partly offset by a decline in the number of clerical, secretarial and maintenance staffers.
The number of faculty members has been rising, too. But that is at least partly due to the increased use of adjuncts and other part-time instructors, who are generally paid far less than the full-time faculty. In 1987, about 75 percent of college instructors were full-time; by 2011, less than 60 percent were.
Number of the week
U.S. public schools spent just over $11,000 per student in 2014, the Census Bureau reported this week. That’s up 2.7 percent from 2013, the biggest increase since 2008.
Education spending weathered the recession relatively well due to an influx of federal stimulus dollars, which helped offset cuts at the state and local level. But inflation-adjusted spending fell during the early years of the recovery, as federal funds dried up and states failed to pick up the slack. Now, however, state and local governments are increasing spending as tax revenues rebound.
More from us
On Monday, Andrew Flowers and I chatted with Fordham economist Shushanik Hakobyan about trade and the election.
Ahead of Wednesday’s Fed meeting, Andrew Flowers explained how weak productivity growth is making Yellen’s job harder.
On Thursday, we launched Kitchen Table Politics, a new podcast miniseries hosted by Farai Chideya about issues affecting Americans and their wallets. First up: Family leave and the cost of childcare, featuring Andrew Flowers and Heather Boushey, executive director of the Washington Center for Equitable Growth.
Next week, we’re discussing the cost of higher education and how it affects your wallet. And we want your stories. Call 646-820-0538 to leave a message.
James Surowiecki looks at why U.S. entrepreneurship is struggling, and what it could mean for the economy.
Julia Preston reports that more laid-off workers are refusing to sign non-disparagement clauses so that they can criticize their former employers.
New research from the Economic Policy Institute tracks rising income inequality in different parts of the U.S.