Which One Is Brexit?

Hey everybody, time for a quiz. Here’s 15 graphs of the pound’s exchange rate vs. the dollar. The scale is the same on all of them: 60 days on the horizontal axis, from 100 (the initial value) down to 75 on the vertical axis. So, which one is the past two months?

Answer below the fold.


OK, that wasn’t very hard. It’s the last one. You might guess by the sharp fall at the end, or by the fact that they’re in chronological order. But you would not guess by the magnitude of the fall. If we make a list of the biggest falls in the pound since 1980, the current one wouldn’t make the top ten. In fall 1992, when the pound was forced out of the EMU, it fell by 25%. And yet, plenty of people who think the recent 10% fall in the pound is a disaster, think that one was a blessing in disguise — if it hadn’t happened, the UK would presumably be on the euro now.

Probably the panic, the sense of crisis was similar in late 1992 to today. But if you look at GDP or employment in the UK, there’s no obvious break, growth just chugs along. Perhaps there were consequences that don’t show up in the macro data.

I don’t claim exchange rate movements don’t matter. In some cases, clearly, they matter a lot. What I claim is that floating exchange rates move around a lot. They don’t smoothly respond to trade imbalances or price level differences, they change abruptly and unpredictably. In three weeks over December 2015 and January 2016, the pound declined by 6% — more than half the most recent decline. Then it gained almost 10 percent between April and May. You may believe this reflects varying objective probabilities that Leave would win. I don’t.

The claim that leaving the EU will be costly economically, comes down to the claim that large changes in relative prices disrupt the concrete activity of production and exchange. But if the fall in the pound, and the future changes in tariffs(trivial) and regulatory trade barriers (not trivial) are costly, so must be the exchange-rate changes generated by the market. If economies can’t easily adjust to changes in relative prices, floating exchange rates are a bad idea.

Here’s the thing. If the fall in the pound triggered by last week’s vote is a catastrophe, it’s a catastrophe that foreign exchange markets already generate every couple years. One day they impose the equivalent of 10 percent tariffs on European exports to the UK, the next day on exports the other way. That’s the argument for fixed exchange rates — a tightly integrated system of production can’t deal with large, unpredictable changes in prices across borders. But what if fixed exchange rates aren’t practical? Then maybe we need capital controls to make them practical. Or maybe it would be better to just have less trade and international finance. Maybe it would be better it national economies were less connected with each other. If, as Felix Salmon says, “the burghers of rural England have managed to destroy trillions of dollars of value globally,” might that not that suggest that the “value” wasn’t securely founded to begin with? But in today’s environment that is an unthought.


NOTE: The figures are November 1973-January 1974, March-May 1976, June-August 1981, January-March 1983, December 1984-February 1985, March-May 1988, April-June 1989, February-April 1991, September-November 1992, March-May 2000, May-July 2005, August-October 2008, December 2008-Februrary 2009, November 2011-January 2016, Aprril 2016-June 2016.


32 thoughts on “Which One Is Brexit?”

  1. First a quibble:
    Shouldn’t we look at the exchange rate of the Pound vs. The Euro instead than that of the P. Vs the Dollar? Maybe the story is the same, but it’s weird to use the $ as a benchmark here.

    Second: the tariffs and the effects of the exchange rate are “small”, but the competitors of the UK don’t have them. Something is a group of countries all with their currency and something is a big block that moves together with a small” satellite” that will likely be influenced by the big block anyway.

    Third and, actually, most important:
    What do the Britons want exactly? I thought Brexit was a protectionist choice, in which case the fall in the Pound would be a good thing. But reading comments by Britons at Crooked Timber it seems the brexiters want to keep access to the common market, so no protectionism.
    WTF? What they brexited for then? Is this just some sort of identity thing? Do they really dislike Poles THAT much?
    I suspect that the Brexit vote was something like a culture war inside the UK with scarce connection with the actually existing EU (Polish immigrants are the new welfare queens! ).
    This is all quite disheartening.

    1. You could do pound vs euro. I’m pretty sure the story would be similar, but I’ve already spent too much time on this post.

      I personally think that exchange rate changes can be quite disruptive to trade. I think there is a very good reason that Europe has had fixed exchange rates for pretty much as long as capitalism has existed. It’s hard to do business across borders when some random event in financial markets could cause your inputs to all cost 10% more than the price you contracted last month, or your sales to be worth 10% less. But this was already a problem, it wasn’t created by this vote.

      I agree with you about the supporters of Leave. But what bothers me is the obvious problems with the other side become an excuse not to acknowledge the IMO equally serious problems with the status quo.

      1. By “other side” do you mean “remainers” or “the EU” or “the eurocrats”?

        And also what are exactly the “serious problems”?
        I see that the euro is managed in such a way as to produce austerity everywhere, and this is a very serious problem, but the UK was not in the euro to begin with.
        I see that there is a “democracy deficit”, but in order to have an actual democracy in the EU we need a much stronger EU, that can override national parliaments and, crucially, national constitution.
        So in pratice the only way to have a “more democratic EU” is to weaken national governments: just the opposite of Brexit.

        1. Sorry, by other side I mean the side opposed to the EU — the Leavers or Brexiters.

          In my view, the use of the euro to enforce austerity isn’t simply a political failure of the current managers, it’s the logic of the system. And I think the euro is a natural outgrowth of the EU.

          You are right, a democratic EU would be a stronger EU. But I’m not convinced that’s possible — certainly all the evidence of recent years is negative. And if a democratic EU isn’t possible, better to roll back economic integration.

  2. Not sure about this. The pace is very important here to give a guide of future potential moves.

    Between the 23rd and the 29th the sterling fell 10%. To compare between 1st August 2008 — when the last sterling crash started — and the 8th of August the sterling only fell 2.5%. That 2.5% fall eventually turned into a 29.5% fall.

    Not saying that this says anything concrete. But the main fear behind the fall in the sterling is how quickly it happened. The hedgies are not aggressively bet against the sterling. My guess is that this bet will play out as recession sets in:


    Why may this be a bad thing? See here:


    1. I don’t disagree that a large fall in the pound would be disruptive. My point is that large, disruptive movements in exchange rates are a normal feature of foreign exchange markets.

      The larger point: If the international trade and financial system is sufficiently fragile that this vote can cause it to fail catastrophically, that is not a system we want.

      1. Agree. But the UK is unique. As you can see from the link, the price elasticity of exports is… NEGATIVE! This means that any contraction of the CAD must be due to a contraction in M via a contraction in real income and not an expansion of X. This means that the effects of a depreciation are pretty much wholly negative (in the short-run, anyway).

        What is more, if workers manage to insulate themselves from this real income contraction they could set off a wage-price spiral. Worst case scenario you could get an inflation-FX rate death spiral. That is not my base-case for the UK. But it is not impossible.

        1. Probably true, not sure how unique it is. I think the failure of Marshall-Lerner may be pretty common, actually. Which is another argument against floating exchange rates — if depreciation reduces net exports, then exchange rate responses to trade imbalances will be destabilizing rather than stabilizing.

          1. A failure of M-L is quite common. But a negative value for the price elasticity of exports is not. That has big ramifications.

        2. But the negative elasticity hasn’t held over the past few years, positive trend in both sterling and CAD deficit.

          1. Finding a trade weighted sterling index is annoyingly hard.

            But in ’14-’15, sterling is rising against Euro and sterling rises then falls agains dollar. Since euro is largest trading partner, I’m guessing trade weighted sterling was rising as well. During this same time period exports were flat.

            So not as conclusive as I first thought, but not great evidence of negative price elasticity of exports.

            In particular you would expect sharp rise in GBPEUR in 2015 to have more of an effect on exports.

  3. Here’s a suggestion:

    The goal for leftists and social democratic workers parties should be

    1) capital controls and limits on international finance and investment. The neoliberals say this will hurt but even the IMF and Bernanke are coming around.

    2) free movement of labor and people

    3) common regulations and a floor on welfare and human rights to avoid a race to the bottom.

    The left should be in favor of international cooperation. Extreme nationalism, xenophobia and scapegoating are the enemy!
    It’s divide and conquer.

    Jim Messina ran Obama’s 2012 campaign. Then he advised Cameron in 2015 which of course led to Brexit. That makes no sense to me. Leftist parties should cooperate and show solidarity.
    There should be an internationale.

    1. Free movement of labour and people will conflict with the other goals.

      The left really need to get a grip on this — they currently live in fantasyland. If they had their way the population of bloody Ghana would be competing for wages in East London.

      There must be constraints on immigration. The question is how are they legislated and what is the fairest and most ethical way of undertaking such legislation.

      1. Because leftists shouldn’t care of people from Ghana? I think that high minimum wages are a better solution.

        1. Run a model, JW. Like seriously do. Put a minimum wage in place and increase the population 15% in a year. See what happens.

          This is why the left will never win. They believe what they want to be true over what is actually true. And they’ll find themselves instituting low wage policies favoured by neoliberals until they get it together. Which is why anti-neoliberal policies will eventually be attacked by the far right and not the left. It’s happening already actually.

          1. I’m not JW, however I’ll try to write “a model” (scare quotes because I’m not an actual economist, this represents the way I think economies actually work).

            1) Let’s start with unemployment and wages in a single country.
            I assume that the wages and unemployment are related in this way: the wage level, defined as the wage share of NDP, depends on the relative bargaining power of workers and business, so tht when unemployment is high, business has an higher share, and wages are lower:

            1.1 w=f(u)

            However when the wage share is low, businesses will invest more, thus building new factories, thus decreasing unemplyment, thus raising wages.
            NOTE: building new factories works as an investiment multiplier, wich decreases as the wage share rises.

            On the other hand, if wages become too high, business will disinvest, thus lowering wages.
            When business disinvests, we have a situation where there is a lack of demand. For example, suppose that the average worker has a productivity of 10 muffins, and a wage of 6 muffins. This would give a wage share of 60%. But if business is disinvesting, there will be a lack of effective demand, so that some of the muffins will be unsold (or unproduced) and the economy works below capacity.
            In this situation, the worker still could produce 10 muffins, his wage is still 6, but of the four remaining muffins 2 will go unsold, hence the “effective wage share” is 6/(10-2), or 75%. Thus during a recession the effective wage share rises, because profits take a hit because of underconsumption. There is a difference between the “absolute” wage share (wages/productivity) and the “effective” wage share (wages/sold stuff).
            NOTE: the “unsold muffins” are a negative investiment multiplier.

            Businesses then disinvest, causing unemployment, until the “effective” wage share falls enough, or until demand ceases to fall, for example because of a fixed demand fromn the government sector, or because of a countercyclical effect of the import/export sector (as wages fall, imports fall but exports don’t, thus the shortfall of demand is counteracted).

            But when the disinvestment ceases, the shortfall of demand also ceases, so the “effective” wage share rises (because the negative investiment multiplier decreases), and the cycle begins again.

            For simplicity, let’s treat the whole cycle as if there was a single equilibrium level between w and u, that depends on the level of the fixed demand, that again for simplicity is the fixed government spending G:

            1.2 w = f(G)
            1.3 u = f(G)

            2) But this works only because the government is different from other economic actors and can exert a countercyclical influence. The story changes when we look at international competition:

            Let’s say that there are Country1 and Country2, with parameters such as w1, u1, G1 and w2, u2, G2.
            Businesses that produce stuff that is traded internationally will invest in the country that gives the higher profits, which ceteris paribus depends on negatively on w (the higer the wage share, the lower profits). This depends also on the different productivity of the two countries, and on other parameters such as what percentage of businesses in each country produces internationally tradable goods, O1 and O2. Thus real wages (not the wage share) W1 and W2 at the equilibrium level depend all these parameters:

            2.1 W1,W2 = f(G1,G2,O1,O2,p1,p2)

            for simplicity let’s group all the parameters that are somewhat independent (O1,O2,p1,p1) in a single parameter OS (Other Stuff), thus we have that

            2.2 W1,W2 = f(G1,G2,OS)

            and also that the equilibrium unemployment level in the two countries depends on the same parameters

            2.3 u1,u2 = f(G1,G2,OS)

            In this situation, if Contry1 reduces G, u2 will rise and w1, but then exports to Country2 will rise and imports from Country2 will fall, so some of the austerity of Country1 will be exported to Country2.
            Then Country2 has a choiche: It can increase government spending to keep low u2 and high W2, but in this way some of the stimulus will trickle back to Country1, and all the additional government debt will fall on Country2. OR it can lower G2, so u2 rises, w2 falls, and Country2 nullifies the effect on the trade balance of the austerity from Country1. In my opinion, what we call “neoliberalism” is the tendency of countries since the 80s to lower G in response to competition from other countries, in search of “competitivity”. But because of 2.2 and 2.3, we have increased unemployment (or underemployment) and lower wage shares almost everywhere, as all governments tend to decrease G.

            3) Let’s go back to migration. Suppose that W2 is much lower than W1, so people from Country2 migrate to Country1. Initially, this causes u2 to fall and u1 to rise, and conversely w2 rises and w1 falls. But ultimately, if we assume that the two countries follow similar policies about G, this just causes Country1 to become a net exporter and Country2 to become a net importer, so Country1 booms and Country2 goes into recession, until the two unemplyment levels go back to 2.3 and the two wage levels converge again to the equilibrium level 2.2.
            In other words, in my model, migration is mostly not influent on wages and unemployment. This is the reason that I’m baffled when I hear the Brexiters are more concerned with immigration than with the UK being a net importer.

            4) Finally, the minimum wages. Since the wage level is determined by G1 and G2, as long as the minimum wage in a country is below that equilibrium wage level the effect is mostly to compress the dispersion between wages in the same country. If the minimum wage is higher than (or just close to) the “equilibrium” wage in 2.2 this actually causes unemployment in the country, because net imports rise and wages cannot fall in order to go back to equilibrium. However this happens in a very specific situation where wages are already “too high”, so do really Brexiters want wages to fall further in the UK? Plus this again would ask for the depreciation of the Pound, that might make sense for “mercantilist” reasons but apparently the Brexiters don’t want this either.

            5) conclusion:
            The equilibrium wage level in both countries depends mostly on G1 and G2, and the real solution would be to increase G in both countries.
            This in the EU means that either all EU countries create big (and I mean really big) protectionist barriers and start increasing their own G in the hope that it doesn’t tricle to other countries, or the EU as a whole increases G. The EU as a whole is actually doing the opposite, and this is really a big problem, but (contrary to JW) I think that in the end is easier for the EU to change policies than for all the EU countries to leave the EU, build up huge trade barriers, and then all follow expansionary policies.

      2. I don’t agree with this. Even in the 19th century when migration was basically unrestricted there were large and persisten wage differentials across countries, and plenty of successful efforts to raise working class incomes. I think liberals greatly overstate the readiness of most people to leave their homelands – I think the push of war and acute misery is more important than the pull of higher wages. I think a regime of tightly controlled money and finance flows, and completely unrestricted migration, would probqblh see less movement from the poor countries to rich ones than we have now.

        1. So workers who say that immigrants drive down their wages? They’re just making stuff up? And your abstract argument about the 19th century (when transport was costly and difficult) overrules their concerns?

          1. Read what I wrote. I said nothing about the effect of immigration on wages. I said that in a hypothetical world where migration was unrestricted but capital flows and trade were strictly limited, migration might be less than it is today.

          2. I should add that I think the eff t if migration on wages is greatly exaggerated. People sometimes believe things that aren’t true. And not all working people blame immigrants for low wages.

          3. Your attitude is one of classic leftist paternalism where the immediate experience and needs are workers are put below abstract goals. I strongly dislike such attitudes.

            Working people are absolutely correct. Immigrants do take jobs and drag down wages. Most of the left — Sanders, the Labour Party, the TUC — take a constructive approach to this question. They realise that there must be balance to prevent detrimental effects on workers and the increase in racist sentiment that results. Some extreme leftists seem to oppose this based on abstract arguments and high moral principles. I hope they are not listened to, as their ideas are dangerous and, ultimately, neoliberal.

    2. Peter-

      I basically agree with this. As you know, it was Keynes’ view as well. I’m skeptical on point 3, tho – I don’t see any international body that can credibly enforce labor standards. Embracing the idea of international constraints on domestic policy seems more likely to provide cover for neoliberalism. I’d rather avoid the race to the bottom through trade restrictions. But I am not convinced this is a big problem. The reality – as we are seeing clearly in Europe – is that “the market” does not in fact punish social democracy and egalitarianism, it takes deliberate political agency to do this.

  4. But… but… it’s full of weird jargon and random mathematical symbols! I mean it’s SO SCIENCY! Why don’t you like it?

    However my opinion is:

    1) Countries have a boom and bust cycle. During the bust cycle the economy falls because of underconsumption, so the government can put a floor to the bust via spending. For this reason, on average on the business cycle, I believe that “big government” leads to higer wages and lower unamployment.

    2) But when countries trade with each other, high wages are a disadvantage, so countries with small government are able to export to countries with big government, and the countries with big government either run high deficits (that ultimately help small government countries) or have to shrink their own government.

    So in my opinion “neoliberalism” means that all countries try to become net exporters by shrinking government, but, as all countries shrink government, on the whole unemployment rises, wages fall, crises become worse for everyone.

    3) Thus the problem of low wages doesn’t depend on the “free movement of people”, but on the “free movement of goods”, and in fact not directly on the “free movement of goods” either but on the perverse incentives it gives to governments.

    4) As a consequence, I don’t think that migration is really the cause of unemployment and low wages in the UK, in fact the whole economic situation is putting pressures on UK wages, and therefore creates unemployment, but even if there are no migrants, either the UK government runs very big deficits or unemployment in the UK will go on until wages fall: in pratice the capitalist system creates the “reserve army of the unemployed” in order to bring down wages to a level that is consistent to the “low wages” equilibrium that is present elsewhere in the EU (and in the rest of the world for what matters). Thus in my opinion migrants are just scapegoats.

    1. MisterMR-

      Again, I think the “automatic” operation of markets in this respect is greatly exaggerated. It’s ideological cover for the deliberate political effort to impose more capital-friendly regulation. Worth remembering that Germany and the other most successful exporters in Europe have the biggest states, most extensive. welfare systems and strongest unions. It’s not the “market” that is forcing austerity on Greece, it’s the ECB.

      1. Thanks for the answer.

        About the “automatic” thing, well, maybe you’re right, I can’t really tell.

        But about the ECB, while I agree tht the ECB is culpable, I don’t think that we can say “It’s the ECB fault, so f’ the ECB”. I’ll use this example to explain my point.

        Suppose that there is a mad doctor who hates blonde people, so he inoculates a bad virus in blonde people. He is clearly culpable.
        Suppose that there is another doctor, who also hates blonde people. One day, a blonde guy with a bad illness goes to this doctor, and asks for help. But the doctor says: “I hate blonde people, I won’t heal you” and the guy dies. This second doctor also is culpable.
        But there is a big difference: in the first case, if we jail the mad doctor we solve the problem.
        In the second case, even if we jail the doctor we don’t solve the problem, we have to find a replacement who actually does his job.

        I write this because this is a post about Brexit, and I think that many pro Brexit people mistakenly think that the EU is like the first doctor, but in my opinion the ECB, the EU (and also the IMF in the case of developing countries) are like the second doctor, not like the first, and this changes everything.

        1. This is a good analogy. I think the EU fits both stories depending on the context. I think what was done to Greece is closer to active poisoning — there’s no question that shutting down the Greek banks was a deliberate choice and not the result of bad institutions. On the other hand, for smaller European countries, there really is a problem of managing trade flows and coordinating macro policy, that has to be done by somebody. That’s what makes this so difficult — it’s a judgement call whether the more urgent problem is that the doctor is a dangerous madman, or that you do need a doctor.

  5. Your attitude is one of classic leftist paternalism where the immediate experience and needs are workers are put below abstract goals. I strongly dislike such attitudes.

    You don’t know me Phil. You don’t know anything about me. I’m not a lifelong academic, I’ve spent quite a few years of my life doing on the ground political work. I don’t need you to lecture me on the “immediate experience and needs of workers.”

    1. Rather than personalising it why not discuss the issue? Why don’t you explain why your position isn’t one of liberal paternalism that forces the views and needs of working people below your own abstract goals? That would be more constructive.

      A nod to the empirics of the case would be helpful too.

      Here’s how I see it. Middle class left-wingers see no impact of immigration on their wages. But there are impacts on working peoples’ wages. See:


      “UK research suggests that immigration has a small impact on average wages of existing workers but more significant effects along the wage distribution: low-wage workers lose while medium and high-paid workers gain.”

      Middle class leftists also want to think that migration causes no problems because they like migration. They like migration because it benefits them. They know people who have migrated, they have migrated themselves (as I have) or they are in relationships with migrants (as I am). So they tend to support migration because they like it and they don’t see the effects.

      But the general public have a different experience. They realise that low-end migration impacts their wages while high-end migration does not. See:


      “Despite the clear opposition to overall immigration, more specific polling questions reveal that attitudes depend on the type of immigrant in question. For example, a 2011 Migration Observatory/IpsosMORI study found that attitudes toward low-skilled labour migrants, extended family members, and asylum seekers were much more negative than attitudes to high-skilled migrants, students, and close family members.”

      So the public’s opinions are closer to fact than those of what I call ‘paternalist leftists’. I’m open to hearing why the public are, in fact, wrong and the paternalistic leftists are right. Give me a solid argument and I’ll sign up. After all, being a migrant that would be a much more comfortable position for me to defend. But I just don’t think it squares with the facts.

      Open to being proved wrong. But I must be PROVED wrong. Not given arguments from authority.

    2. The real experience of the British working class, as Brexit has just demonstrated, is that open borders and mass immigration are deleterious from an economic and social perspective, and just another part of the vicious neoliberal program of the past 30 years.

      Historically speaking, this has been a *major* concern of working class people — certainly in the US, Canada, Australia, New Zealand — and historically the labour-based parties were strongly against mass immigration because it was rightly seen as a weapon of class war.

      It is now a weapon of class war today, but the left and leftist elite have utterly betrayed their own potential supporters on the issue.

      Unless the left wakes up to this issue now, the left in Europe and indeed in other parts of the world will implode.

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