This paper, The Political Caste, was written as far back as 2007, but it is still very relevant to today’s situation. It discusses the disconnect between the views of the élite and those of the electorate as a whole, attempting to explain the reasons behind this.
This is an interesting article on why Trump won the US presidency.
The common explanation is that Whites without college degrees were motivated, either by economic distress or racial resentments. But such analysis ignores a fundamental part of Trump’s appeal … voting for Trump was about values and identity
Levittowners feel Trump understood and cared for people like them
‘Voters like those in Levittown feel like their government has abandoned them’
‘The institutions that used to help you are now working against you’
‘Trump is telling them “it’s OK to be you” ‘
‘The rest of culture is telling them “it’s not OK to be you” ‘
Trump gives them that, and they are willing to overlook nearly everything else in exchange.
For these Americans, Trump’s blunt, crude talk is just another way of showing he understands and values their way of life.
Trump won because he cared – lessons from Levittown Henry Olsen 29 May 2018
Why would Americans elect a crude political novice who calls Third World countries “shithole countries”? That’s a question, 19 months on from Trump’s shock win, that many are still trying to answer. The common explanation is that Whites without college degrees were motivated either by economic distress or by racial resentment. But such an analysis ignores a fundamental part of Trump’s appeal. For many of his supporters, as I found on a recent trip to White, blue-collar Levittown in Pennsylvania,1 voting for Trump was about values and identity.
Levittown, a medium-sized suburban community north of Philadelphia, was created by developer William Levitt, starting in 1951, as one of America’s earliest affordable suburban communities. Over sixty years after its first house was sold, it remains a White, working-class town, but unlike better-known Trump-friendly, White blue-collar places like Pennsylvania’s Lackawanna County or Ohio’s Mahoning County it is still economically well-off. Yet despite this relative affluence, it behaved just like these other places, moving dramatically away from a traditional Democratic voting history to make Trump the most successful Republican nominee in these areas in the last thirty years.2
My visit unearthed just how complicated and varied Trump’s appeal to these voters is. Some people mentioned economic concerns as an explanation for Levittown’s shift, while others mentioned immigration and the cultural and economic issues it raises. But more than anything people mentioned a deep psychological resonance that made Levittowners feel Trump understood and cared about people like them. They may not like Trump’s tweets, but his brash manner and his open embrace of the value of work was for them a breath of fresh air in an otherwise long-stale political climate.
Although the town is doing well – the median household income is over $72,000 a year above the US median – economics still resonates because of Levittown’s past. Many of its original residents worked for one of five large manufacturers, the largest of which was United States Steel. As elsewhere in the Rust Belt, the factories gradually closed down or dramatically reduced in size. Jane,3 a sixty-year Levittown resident, told me that the U.S. Steel plant went from a high of nearly 10,000 employees in the 1980s to a current total of about 150. While Levittowners eventually adapted and found new jobs, they paid less and had less generous benefits than the old jobs that had gone. “Bringing manufacturing back was a big thing for Levittowners,” says Jane. It’s a now familiar refrain: “US Steel workers used to make $25 an hour [close to $50 an hour in 2018 money] and get up to 13 weeks of vacation each year. The jobs they have now don’t pay anything near that well.”
For Bill, a retired carpenter, Trump’s economic message was personal. Telling me about how his union couldn’t get work when competing against contractors employing foreign labourers, who may be in the US illegally, it was not hard to see why Trump’s message resonated so deeply. “If Trump had been President,” he says, wistfully, “I probably wouldn’t have had to retire.” Some people even think Trump will get them their old jobs back, says Jane, not just bring back manufacturing more generally.
The sense that these jobs were unfairly lost also helps explain this Trump-friendly narrative. Jane emphasises that US Steel’s foreign competition was subsidised by foreign governments. “We sent our jobs overseas and then we sent money [via foreign aid] to countries that turned around to stab us in the back,” she said. Bill went further: “immigration is a big thing because it is a big handout. We can’t get big handouts like they can.” It was a odd comment, US laws do not offer legal immigrants anything different from what it offers citizens and immigrants not here legally are often not allowed to receive many government benefits, but whether Bill and Jane are correct is beside the point – what matters from a political standpoint is that voters like those in Levittown feel like their government has abandoned them.
“There’s a sense that not everyone is playing by the same rules. Many of these folk think ‘I’m working my ass off, and this just isn’t working for me’.”
This sense of abandonment – of being “left behind” – came up time and again in my discussions with local people. “They want officials to pay attention to them,” Anthony, a young 30-year old anti-Trump Republican, told me. “They aren’t seeing any direct benefit from any of the policies” politicians talk about. In fact, the disaffection goes deeper. Levittowners, one astute local politico named Greg told me, tend to believe that “if I work hard and play by the rules it will work out.” But, as Greg said as we drove round the old steelworks, “there’s a sense that not everyone is playing by the same rules. Many of these folk think ‘I’m working my ass off, and this just isn’t working for me’.” That’s a common view among the White blue-collar workers who turned to Trump.
Disaffection with the status quo – the ‘establishment’ – drove voters to Trump the outsider: “The institutions that used to help you are now working against you, many people think. The game is rigged and it’s time to change it.” Interestingly, as both Bill and Greg told me, that outsider could just as well have been socialist populist Bernie Sanders. I was told about exchanges on primary day where Democratic voters told their GOP counterparts that they were voting for Hillary Clinton’s challenger, Sanders, but they were voting for Trump in November if Clinton won.
These pro-Trump feelings rarely extended to specifics. Time and again I would ask people what exactly voters thought they would get from Trump, and time and again I found only a general sense that things would get better for people like them.
But perhaps they were already getting the specific thing they craved more than anything else: the feeling that someone in power cared. Bill surprised me by repeatedly saying that “Trump is a very compassionate person.” He mentioned a story he had heard from Trump’s personal airplane pilot about how Trump once sent his jet to pick up a young person who couldn’t get to a hospital for medical treatment he needed, but it was clear that this idea of caring extended well beyond that one specific example. “Supporting Trump was the second-best decision I ever made”, he said – quite a statement from a self-described “life-long Democrat” who voted for Obama in 2008.
To really understand this devotion-inspiring appeal, however, you have to look beyond the economic. For many blue-collar Whites, Trump’s pull was personal. Greg put it this way: “Trump is telling them ‘it’s OK to be you’. The rest of culture is telling them ‘it’s not OK to be you’.”
As Greg told me, whether the message is economic – “you have to go to college to succeed” – or cultural – “I like to listen to AC/DC; what’s wrong with that?” – Levittowners and people like them have felt the brunt of elite disdain. In voting for Trump, these blue-collar workers were rebelling against the idea that America is no longer for people like them.
“Levittowners just want a good Christmas for their kids and go to the Jersey Shore for a couple of weeks. They want some acknowledgement that is OK,” Anthony said. Trump gives them that, and they are willing to overlook nearly everything else in exchange.
It is against this backdrop that another aspect of Trump’s appeal starts to make sense. Anthony told me that one reason his neighbours liked Trump was that he “says what everyone thinks”. And that even extends to some of his cruder comments. “If I was down at the bar, that’s exactly what people would say,” the young Republican says of Trump’s “shithole countries” remark. For these Americans, Trump’s blunt, crude talk is just another way of showing he understands and values their way of life.
Greg put it this way: “Trump is telling them ‘it’s OK to be you’. The rest of culture is telling them ‘it’s not OK to be you’.”
I left Levittown with more questions than answers. How would Levittowners feel if the US economy wasn’t roaring? Would they still overlook Trump’s shortcomings if he suffers a serious foreign policy reverse that threatens America, such as in the dispute with North Korea? Most importantly, I wondered how deep this psychic longing for recognition was.
Like almost everyone I know, I am a college graduate with a good job who enjoys all the benefits the wide global economy brings. My life experiences are largely those that are treated with respect by media and academic elites, and the unsubtle message Levittowners, and blue-collar workers like them across the country, get is that their children should be more like me than like themselves. Returning to Washington from Levittown I couldn’t help but reflect on what it felt like to be, if not on the bottom, then on the downslide. Rather than viewing global blue-collar discontent through an economic lens, we ought to be looking at populist-backing voters more as people like us, holding similarly cherished identities and hopes. And maybe if we did that, we might all be a little bit better off.
- .89 percent of Levittown’s residents are non-Hispanic Whites and over 83 percent do not have a four-year college degree. Yet it remains firmly middle-class: the median household income is over $72,000 a year, above the U.S. median and more than 60 percent higher than more well-known Trump-friendly white, blue-collar places.
- Trump received 45.6 percent of the vote in Levittown the highest share received by a Republican nominee since at least 1988. Mitt Romney, the 2012 nominee, received less than 38% of the vote and lost by over 24% to President Obama. Trump, however, lost by less than 6%, an improvement of over 18% on the margin. Trump’s improvement over Romney on the margin was roughly 24% in Lackawanna County and about 25% in Mahoning County. See https://uselectionatlas.org/RESULTS/
- All names of interviewees are pseudonyms, allowing their ability to speak openly about their community
Photo by Heblo (Pixabay)
This revised version of Anthony Scholefield’s briefing note can also be downloaded as a pdf here.
We don’t start with a ‘clean sheet’
If we were considering ideal future trading arrangements for the UK from the basis of a clean sheet, it would probably not be sensible for the UK to join the European Economic Area [EEA]. However, the decision to remain in the EEA is quite different from a decision to join the EEA from outside.
Today, the UK does not face a clean sheet. The UK has been in the EEA for 26 years (40 years in the EU) and its trade has developed in this environment. Following the decision to leave the EU the question of whether to change trading arrangements is only one of a number of political decisions the government has to take.
The background fact to be borne in mind is that a huge part of the UK’s export trade has always been with Europe. According to Professor Ashworth, in his ‘Economic History of England, about 40% of UK gross goods exports in the mid-nineteenth century went to Europe.
The definition of ‘Europe’ in the nineteenth century was different from the EU of today, of course, and included the Russian Empire but, notably, excluded Ireland
Free Trade Agreements
The underlying rationale of any trading agreement is not free trade but an increase of trade between the participants at the expense of third party countries. Indeed, a ‘free trade’ agreement is a contradiction in terms. It will also usually benefit producers at the expense of consumers in the participating countries. But the point is that such ‘agreements’ cause trade to flow in certain ways which are not ‘free trade’ but once actioned have costs when they are dismantled.
Political advantages of staying in the EEA
It is very important to consider that staying in the EEA will massively reduce the political upheaval and workload of the government organising Brexit, reassure business, achieve a degree of national unity and make it easier to negotiate on other matters with the EU which will favour this scenario. It also reverses the burden of responsibility for causing a breakdown in negotiations. Finally, it offers a secure refuge (the UK already being in the EEA) should the talks break down. For the EU also, the political upheaval and workload is minimised. It is always good negotiating strategy to consider the difficulties of your opposite numbers. If, after experience, it does not work, the UK can leave the EEA by giving 12 months’ notice. Therefore, there are political reasons to remain in the EEA.
There is also the need to balance the costs of disruption against the calculation of the net benefits and disbenefits of the EEA membership. At present, no such cost/benefit analysis exists, which is an essential preliminary to negotiation. It is possible to recall the exhaustive studies by the Swiss government before their referendum on joining the EEA.
Theory of Trade
There are two unspoken assumptions about the advantages of trade as put forward by the conventional economic wisdom:
‘Any trade is good trade’
‘All trade is of equal value’
Therefore, bulking up trade is ‘a good thing’.
However, the political economists of the nineteenth century recognised there was more to it than the above two assumptions.
John Stuart Mill included the question of the different profitability of different types of trade and which party got the most benefit in his study entitled ‘Essays on Some Unsettled Questions of Political Economy’ in 1848. The particular question of the profitability of various trades is still ‘unsettled’ but ground-breaking work has been done by the OECD and WTO in focussing on trade as a value added phenomenon rather than just gross trade statistics. The OECD/WTO joint paper entitled ‘Trade in Value-Added: concepts, methodologies and challenges’, sets out the intellectual case for viewing trade through the lens of value-added rather than gross figures.
One significant example, which has been widely referred to in the literature is the case of the Apple I-phone, which is assembled in China and whose ex-factory price appears as exports in Chinese trade statistics. Estimates are that only 8% of the ex-factory price accrues to the Chinese assembler with 92% being spent on imported components and thus showing up in Chinese import statistics and then again in the Chinese export statistics as part of the Apple phone.
Another interesting area arises in the case of the UK where Switzerland in 2014 became the UK’s fifth biggest export market and, in December 2015, was actually the UK’s single biggest export market (£4293 million of exports, according to UK Overseas Trade Statistics, December 2015) and twice the size of the German market. Much of this export trade was non-monetary gold which, of course, is not produced in the UK. Therefore, the value added to national factors of production in both these examples is very small.
Plainly, therefore, trade is not an undifferentiated item. All trade is not of equal value. Some trading is more profitable than other trading. Simply increasing exports of any type is not an adequate policy.
Profitability of Trade
Profitability of trade for a national economy is dependent on value being added so the factors of production, such as labour and capital, get increased returns after buying in necessary supplies to effect increased exports. Therefore there is a hierarchy of added value in trading activities. Simply bulking up gross exports is meaningless.
Generally the most profitable areas of trade from the point of view of the national economy are in services or manufactured goods with a high skill content because they involve very little imports or have a high added-value content. In these examples the gross revenue flows through as very high added value. At the other end of the spectrum are re-exports of raw materials or precious metals with very little added value.
UK gross services exports have recently approximately overtaken UK gross goods exports when considering UK overall trade outside the EU. However, the percentage of UK exports to the EU which relates to services is much lower than in UK trade outside the EU.
Therefore, in principle, UK trade with the rest of the world generates greater added value per unit and, consequently, greater returns to labour and capital than the UK’s trade with the EU. For this reason, a clean sheet consideration would not favour joining the Single Market where services exports are weak whether because of greater competition or restrictive practices.
Paul Samuelson and ‘over trading’
So some trade is more profitable than other trade. But we can go further than that in critiquing the conventional wisdom that all trade is good, following the line of argument put forward by Paul Samuelson, the most influential ‘liberal’ economist of the post-war generation, in a revolutionary paper just before he died.
This was entitled ‘Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization’, 2004.
In this work he questions the alleged benefits of ‘more trade in modern conditions’.
The kernel of his argument was that trade is beneficial to start with but can cease to be beneficial when shifts in capital and skills make it hard for a country to compete in its supposed (Ricardian) superior productivity industries. Having already given up its supposed (Ricardian) inferior productivity industries, it is faced with a retreat to national autarky to balance its payments situation. At some point the disruptive effects of trade outweighs the benefits. In effect, Samuelson is enlarging on a long-standing critique of the theory of comparative advantage. This is that trade advantages do not stand still. England had comparative advantage in the cotton industry in the nineteenth century and over-concentrated on this industry. In the twentieth century, other countries with cheaper labour out-competed the English cotton industry. In the terminal phase, after 1945, the cotton industry even imported cheap labour from Asia to try to maintain competitiveness but was unable to do so.
So, concentration on what is presently a trade where there is comparative advantage is not necessarily an advantage in the long-term.
The Supply Chains
It is estimated that a majority of trade in manufactured goods takes place within supply chains, co-ordinated by major corporations and worked through legal subsidiaries, associates or clusters of component and assembly suppliers.
These supply chains have adjusted themselves, for good or bad, to working within the EEA.
To leave the EEA would be to disrupt these supply chains, at least in the European Area. There is exactly the same situation which was experienced in the agricultural sphere when the UK joined the EU and the food and raw materials exports of Latin America and Australasia, which were geared to the requirements of the British market, were heavily disrupted.
Weighing up the Balance
The decision to remain in the EEA, however, is quite different from a decision to join the EEA.
UK trade with the Rest of the World appears more profitable than trade with the EEA.
However, once settled inside the Single Market, the argument for not disrupting supply chains is a major issue, counterbalanced by the clear fact that trade with the EEA in services is not proportionate to their role in trade with the Rest of the World and the endless prevarication about removing the barriers to services trade in the EEA.
If the warnings of Paul Samuelson are correct, seeking extra gross trade from supposedly superior productivity activities is not beneficial in itself in the long run. Better is to ensure a balance of manufacturing and service activity with, to be sure, an emphasis on what appears to be superior productivity industries but with particular emphasis on new industries.
Hidden Costs of Trade
Of course, a deeper analysis of the benefits of trade would need to address issues connected with the social or financing costs of trade. It is widely noted, in the case of EU membership, that there is a substantial budgetary cost for British taxpayers for the trading arrangements with the EU as they stand now. (This budgetary cost would be massively reduced by a move from full EU to simple EEA membership.)
A further point is that trade secured by the use of extra factors of production, rather than use of existent national factors, should be strictly analysed for cost. Many advocates of bulking up trade are also advocates of the importation of capital and labour rather than utilising existent capital and labour. These advocates belong to a kind of ‘deus ex machina’ school of economics where problems can be solved by outside actors.
Extra factor inputs are not costless. For example, in the UK foreign owners of UK assets can receive dividends tax free while UK owners pay income tax. Of course, these dividends are also negative. This is, therefore, an outright subsidy to foreign capital. Similarly, the provision of extra labour through migrants require massive social and economic capital such as buildings, roads, hospitals, schools, etc. to be paid for by natives either by taxation or by displacement of capital investments from supporting native workers to meeting the needs of migrants. Additionally, there are two further costs in the UK as regards foreign labour. The way the income tax system is set up now means very few low income workers pay any tax (many of these are migrants) despite being heavy users of public-financed capital investment and of public services. So, both foreign capital and foreign workers are subsidised by the British tax system.
Additionally, many migrant workers make substantial remittances to their home countries. These remittances are a dead loss to UK national income.
These extra costs should be considered when looking at the purported benefits of increased trade dependent on introducing extra factors of production.
As a basic starting point, cost/benefit analyses are needed in two areas:
- What are the net benefits and disbenefits of EEA membership vis-à-vis, say, WTO stand-alone trade?
What are the costs of disruption of leaving the EEA?
- Where is any trade with the EEA which is lost going to be replaced?
This article can also be downloaded as a pdf here.
The survey of voting motivation in the EU Referendum of 2016 carried out by Lord Ashcroft on 24th June 2016, showed that the principal motivation of 62% of Leave voters was the return of democracy to the UK, ‘The principle that decisions about the UK should be taken in the UK’, or about ‘How the EU expanded its membership or its powers in the years ahead’.
An important number (33% of Leavers) voted primarily for leaving as it ‘… offered the best chance for the UK to regain control over immigration and its own borders’. Only 6% said their main motivation was that ‘When it comes to trade and the economy, the UK would benefit more from being outside the EU than from being part of it’.
It is fair to say that trade and economy issues have dominated politics since the referendum although this was a minor motivation for Leave voters.
The sheer magnitude and impact of migration from the EU27 to the UK has not been understood by the British political and media class, who have regarded those who were concerned by the impact as ignorant and racist.
In fact, the EU27 migration to the UK has a 50 times greater impact on the UK labour market and wages than the migration of British nationals to the EU27 has on the EU27.
‘Rights’ of Migrants
While control of migration has frequently been emphasized by the current Prime Minister, the actual negotiations between the EU and the UK on migration have revolved around ‘rights’.
The Joint Report from the Negotiators of the European Union and the United Kingdom government in December 2017 emphasised this when it recorded:
“Both parties have reached agreement in principle … on protecting the rights of Union citizens in the UK and UK citizens in the Union”
The Labour Market
While the matter of citizens’ ‘rights’ affects all UK citizens living in the UE27, and vice-versa, whether working or not, the labour market effects are quite different.
The arrival of non-working pensioners in a country means that the labour supply is not affected and, indeed, extra demand is likely to pull up wage rates.
Despite the fact that the UK labour force is just under 15.6% of the EU27, total worker migration between the UK and the EU is heavily skewed so that worker migration is many times greater from the EU into the UK than vice-versa.
When the total size of the workforce is considered (the EU27 being 211 million and the UK 33 million) this skewed migration becomes overwhelmingly one-sided with EU27 migration having some 50 times the impact on the labour force and the UK economy than UK migration has on the EU27 labour force and economy.
What were voters concerned about
Best calculations (and all subsequent figures are only best estimates) show that about 320,000 UK nationals work in the EU27 which has a labour force of 211 million, therefore, adding 0.15% to the EU27 labour supply. Simultaneously, 2.3 million EU27 workers work in the UK which had a previous workforce of 30.8 million, adding 7.46% to the UK labour force, an impact about 50 times as great.
It is hardly surprising that the motivation to leave the EU, defined as ‘To regain control over immigration and its own borders’ was so widespread while, at the same time, the EU leaders, not facing in general (although some EU labour markets had sizeable immigration) the same scale of migration, simply continued to make a red line out of freedom of movement.
What is baffling is why UK politicians did not seem to understand the different scale of migration into the UK and into the EU27 and through their pre-occupation with ‘rights’ they seemed not to understand the arithmetic.
It should be noted that EU free movement rules are based on citizenship and residence, not where you were born.
Why did the politicians (British and EU) emphasize ‘rights’?
The one-sided relative level of migration (50-1) has been masked for a long time by the issuance of false totals on UK nationals living in the EU. These have been reported on numerous occasions by the UK government and the media.
These gross errors can be traced back to a report by the IPPR think-tank in 2010 (entitled ‘Global Brit’) based on an earlier report in 2008. In 2008 the IPPR estimated that 1.8 million UK nationals were living in the other EU countries (2.2 million for part of the year). This wildly inaccurate estimate was recycled in a House of Lords’ answer by Baroness Warsi on 4th February 2014, who admitted her figures (for 2010) from the Foreign Office were compiled by the IPPR.
Nevertheless, the theme of 2 million UK nationals living in the EU27 continued. It was quoted by Dominic Grieve in March 2015 and it reappeared from the depths in HM government’s paper of February 2016, ‘The process for withdrawing from the European Union’, “This [negotiation] would include the status and entitlements of the approximately 2 million UK citizens living, working and [bizarre] travelling in the other 27 member states of the EU.”
Meanwhile some journalistic sources muddied matters further by reducing the number of EU27 citizens in the UK. For one example, on 10th February 2014 euobserver.com stated, “British figures indicate that just as many UK citizens live in the EU as vice-versa, despite popular perceptions”. Lord Oakeshott’s contribution in The Times, 10th February 2014 was “scaremongering … could poison the atmosphere for 2 million of our fellow countrymen in the rest of Europe [sic]”.
However, a page was turned on 11th January 2018 when the House of Commons issued new figures for migration between the EU and the UK which quoted Office for National Statistics estimates for 2011 which concluded that there were only 890,000 British nationals living in other EU countries in 2011. 80% were in five countries: Spain (309,000), France (157,000), Ireland (112,000), Germany (96,000) and Netherlands (41,000).
In other words, the UK government had been employing and propagating figures for UK nationals living in the EU 27 which were of the order of a 125% plus error.
This error inevitably had an impact on the Brexit negotiations and the lack of UK response to EU pressure to maintain migrant rights. It also explains the relative insouciance with which British politicians approached the immigration issue. This was in part based on the comforting, but absurdly wrong, notion that UK nationals were working in the EU27 on the same scale as EU27 nationals were working in the UK. Not only were the absolute totals of UK migrants wrong but the relative totals of EU27 and UK migrants to each other were of a completely different scale.
It should be noted that the IPPR has withdrawn the figures in its 2008 and 2010 reports.
On looking at Baroness Warsi’s reply to Lord Oakeshott on 4th February 2014 (where the IPPR role is clearly set out) which estimated the figure of UK citizens living in other EU countries at 2.2 million, there was also supplied to Lord Oakeshott the number of UK citizens claiming a UK pension within the 2.2 million. These were listed country by country and totalled 395,450. Baroness Warsi stated that this did not include UK citizens not drawing a UK pension, for example, certain categories of widows, persons who worked entirely abroad, etc. [omitted from the following calculations] and also, vice-versa, persons drawing a UK pension, but not of British nationality, would be included [also omitted from the following calculations].
The estimate for UK pensioners, according to Baroness Warsi, was based on information available from UK government sources. Presumably the UK government is readily able to count how many pensions are paid to British pensioners to each EU27 country. These were reasonably hard figures compared with the IPPR’s estimates.
EU Citizens in the UK
The House of Commons’ study (based on the ONS statistics) stated that “the available data suggests” there were around 3.6 million EU27 nationals living in the UK in 2016. It also quotes the ONS figures for employment, that around 2.3 million EU27 nationals are in work (64% of total).
From the figures quoted elsewhere in this study it can be seen that the economically active percentage rate of the total population in the EU is 47%. Bearing in mind that the pensioner population (defined as those over 65) in the EU is around 19% of the total population, and few pensioners retire from the EU27 to the UK (UK government figures show about 100,000 EU27 citizens in the UK receive EU27 pensions), these figures seem coherent.
It should be noted that not all EU27 nationals come to work, some are students, some, of course, are married women and children, some are spouses of UK citizens. Some of these join the workforce.
The calculations on the impact of migration on the Labour Market
Eurostat’s estimate is that the populations of the EU in 2016 was 510 million and the labour force (including unemployed) was 245 million (47% of population). For the UK the population (ONS for 2014) was 65.5 million and the labour force 33 million.
The EU27 totals are, therefore, EU totals minus UK totals which amounts to EU27 population 445 million, labour force 212 million.
The pensioner (over 65) population in the EU27 and the UK was almost the same level – at 19%.
According to the UK government approximately 100,000 EU citizens in the UK receive EU27 pensions.
The situation of EU27 citizens in the UK is as follows:
3.6 million EU27 nationals living in the UK (ONS, House of Commons)
2.3 million are workers, 64% of total and 7.46% of the UK labour force, which is 30.8 million (2017) exclusive of EU27 workers.
The 100,000 EU27 pensioners have been omitted since the number of EU non-pensioners has risen by more than 100,000 in the last year.
The situation of British citizens in the EU27 is as follows:
ONS, House of Commons’ total (2011) 890,000
Pensioners per Baroness Warsi’s country-by-country breakdown 395,450
Workers, dependants, etc. 494,550
[Assumed 64% of these are workers, as with EU27 workers (excluding Pensioners) in the UK]
Therefore, British nationals working (primary purpose) 316,000
Rounded up to 320,000
This totals 0.15% of the EU27 labour force which is 212 million.
As with EU27 citizens in the UK, not all UK nationals go to the EU27 to work. Some are students, some are dependants. Some of these join the EU27 workforce.
The comparatives, therefore, when considering the labour market impact on the UK and EU27 labour force, are that 7.46% is approximately 50 times greater than 0.15%.
The relevant rate of migration of workers between the EU27 and the UK has a different impact on the two entities, namely 7.94% of the UK workforce and 0.15% of the EU27 workforce.
In order to understand the difference in impact, it is worth estimating:
- What the EU27 migrant worker total in the UK would be if it was the same size relatively as the UK migrant workforce in the EU27.
The calculation is 0.15% x 30.8 million = 46,250 instead of 2.3 million
- What the UK migrant worker total in the EU27 would be if it was the same size relatively as the EU27 migrant force in the UK.
The calculation is 7.46% x 212 million = 15.81 million or approximately half the UK labour force
In other words, it is necessary for the EU27 and British politicians and business and workers and electorate to understand that the UK position on restricting migration is conditioned by an impact of the same magnitude as if 15.81 million British workers arrived to work in the EU27.
At present there is no sign that most British or EU leaders appreciate the size of the issue. What is more tragic is that British politicians have continually issued false figures and played down the magnitude. There is a lot of talk about ‘rights’ but none about the real impact on wages and constant political bewilderment about poor wage rates and inequality.
THE FINANCIAL SETTLEMENT
The Prime Minister has stated that the financial settlement and any payment thereof would depend on a satisfactory overall agreement which meets the objectives of the Florence Speech, including a trade arrangement.
THE PRESENT POSITION
When going into negotiations with the EU for a ‘single financial settlement’ it is necessary to consider the current established financial relationships between the UK and the EU.
These come in two parts:
The UK’s EU budget contribution (after rebate) amounts to around £13.5 billion per annum. That is about 20% of the total net savings of the UK economy. It is also a legal obligation of EU membership and exists in perpetuity. Any sum spent by the EU in the UK is not an obligation but is a matter of EU policy. Since 1973 the total net UK contribution to the EU budget at 2017 prices is about £500 billion and, at present, the perpetual obligation adds to this every year. (The last time it was fully worked out was for the period 1973-2010 when it amounted to £379 billion at 2010 values.)
The second part of the current relationship is that there is UK exposure to the liabilities of the EU and its entities such as the ECB (European Central Bank), EIB (European Investment Bank), etc. There is no corresponding EU exposure to UK liabilities such as those of the Bank of England. The UK also has ‘joint and several’ liability for all EU debts.
In comparison with the UK situation, non-EU EEA countries, such as Norway, have no exposure to EU liabilities nor do they contribute to the EU general budget (contrary to what is often asserted).
It should be noted that this study addresses only financial and fiscal matters. There are other costly economic effects of the UK-EU relationship, such as food costs, migration costs, etc. which are not referred to here. There are also some benefits in the internal market relationship.
The present financial situation is described more precisely in a pre-referendum study:
THE UK’S NECESSARY FINANCIAL ASPIRATION
It is, therefore, prudent and a financial necessity that the UK ceases to hand over 20% of its net savings to the EU in perpetuity with virtually no influence of how these savings are spent (only a tiny fraction is spent on investment in the UK).
It is also urgent for the UK to extract itself from the partly one-sided exposure to the liabilities and contingent liabilities of the EU as soon as possible. Adopting the position of the EFTA/EEA states which have no responsibility for EU liabilities would be prudent finance.
THE ‘FINANCIAL SETTLEMENT’ AS AT DECEMBER 2017
The fundamental two aims of stopping EU budget contributions with the consequent erosion of UK savings/investment and extracting the UK from EU liabilities are on the table and in the Joint Report of 8th December 2017.
These are the two core financial benefits of departure.
It is important to understand that the EU referendum was about the long-term future and not about the details of departure, not all of which are favourable. Further, if the referendum had been won by Remain, both the half-a-trillion pound hit to UK savings would have increased every year by some 2 or 3%, and the UK would still have been responsible for its share of EU liabilities.
These will cease over the next five years, although in a somewhat unsatisfactory and messy settlement.
THE FINANCIAL SETTLEMENT – THE QUANTUM
Michel Barnier is quoted in The Guardian (19/12/2017): “He [Barnier] would not confirm British estimates that the final Brexit bill – the UK’s outstanding obligations to the EU – would be no more than Euro 45 billion (£39 billion).”
This was hardly unreasonable of Barnier because at least two of the principal subjects of financial discussion, the UK’s stake in the EIB and EU pensions seem to have been left as ongoing yearly matters and, therefore, it is difficult to form capitalized totals thereof in any meaningful way. Pensions will be paid when this amount falls due. This means the UK could still be paying pensions up to 2100 although the amounts will be insignificant by then.
It has also been agreed that the UK will continue its normal financial relationship with the EU until the end of 2020, that is, making budget contributions and collecting the rebate.
Some questions arise over the following (the references are to the Joint UK EU Report of 8/12/17):
- It is not stated that the UK will receive its rebate for the year 2020 (it is normally repaid one year in arrear).
- Item 61, “The UK will contribute its share of the financing of the budgetary commitments outstanding at 31st December 2020 (RAL).” The ‘rebate’ is not mentioned but even if the UK agrees to pay its share of RAL then this should be subject to the rebate (paying a share of the RAL is a political concession by the UK). The whole point of the RAL is that money has been spent or authorized above the EU budget although Item 67(b) appears to negate the rebate in RAL matters.
- Then there is ambiguous phraseology over the balance sheet. “The UK will contribute (para 62) its share of the financing of the Union’s liabilities incurred before December 2020 except for liabilities with corresponding assets and assets and liabilities which are related to the operation of the budget and the Own Resources division.” The English is poor and obscurantist. The clear fair method is for the UK to establish its share of the EU balance sheet (assets and liabilities) and pay its share of the net amount if there is an excess of liabilities over assets. This is the method recommended by the Institute of Chartered Accountants. (some of the net may be subject to the rebate).
- The European Investment Bank (EIB): The UK has agreed (item 74 onwards) that it will not receive any profit from the activities of the EIB but will participate in a share of any losses entailing Extra Capital calls. This is a poor negotiating decision.
Since we published Anthony Scholefield’s Futurus Briefing paper on the financial settlement with the EU, the author has undertaken some further research which has resulted in a revision to the original document. The revised version can be downloaded here.
It should be pointed out that the headline figures, suggesting that the EU owes us a refund, have not been revised, but extra background information, such as our realistic future pension liabilities, has been added.