Friday, June 24, 2016

BRITAIN - Common Sense Looses on EU Vote

IMHO:  The vote by British citizens is a big mistake.  It is a win for paranoia, misplaced nationalism, and prejudice.  Britain was much stronger as a member of the EU.  Having said that, the British citizens have the right to their vote.

"Britain votes to leave the European Union, Prime Minister David Cameron resigns" by News Desk, PBS NewsHour 6/24/2016

The United Kingdom has voted to exit the European Union, becoming the first nation to leave the economic, political and cultural bloc.  The news sent shockwaves through the global economy and led to the resignation of British prime minister David Cameron, who supported the Remain campaign.

“Over 33 million people from England, Scotland, Wales, Northern Ireland and Gibraltar have all had their say,” Cameron said in his resignation speech.  We should be proud of the fact that, in these islands, we trust the people with these big decisions.”

Cameron continued by congratulating the Leave campaign for “the spirited and passionate case that they made.”  The prime minister did not release a precise timetable for his departure, but guaranteed that he would remain in his post for at least three months with an aim to depart by October.

Exit polls show that England and Wales drove the decision to leave, while Northern Ireland and Scotland citizens leaned toward staying.  Scotland prime minister Nicola Sturgeon believes a second independence referendum for her nation is “highly likely” following the Brexit.  Scotland voted 62 versus 38 percent to stay in the EU, according to the BBC.

“It's a statement of the obvious that the option of a second independence referendum must be on the table and it is on the table,” Sturgeon said.

Global markets immediately plummeted in reaction to the referendum results.  The British pound nosedived to its lowest valuation in 30 years, as the nation's stock market — FTSE — reported 8 percent losses within the first few seconds of trading Friday morning.

Economic analysts are predicting the biggest single-day decline since the 2008 financial crisis.  Bank of England governor Mark Carney promised 250 billion pounds ($347 billion) to stabilize the economy.  Other European markets took heavy hits, and the European Central bank pledged to provide liquidity for domestic and foreign currencies to prevent panic, as did the U.S. Federal Reserve for the dollar.

"Brexit: Four reasons it comes as a shock" by Paul Solman, PBS NewsHour 6/24/2016


Shocker, a word you'll hear rarely from someone who, like myself, sizes up the world probabilistically.  But shocker is the verdict on the Brexit vote, for at least four reasons.

First, of course, are the political implications.  As economist Justin Wolfers put it late last night on Twitter, though overstating slightly: “Economists favor more integration, not for the economic gains, but because it fosters peace, which is more valuable.”

"Time for real talk.  Economists favor more integration, not for the economic gains, but because it fosters peace, which is more valuable." - Twitter @JustinWolfers

Second, these are millions upon millions of people who were voting against their pocketbooks.  And they knew it.  That's because, economically, the results were unusually predictable.  Every time the odds of a Brexit “Leave” vote had gone up, the value of the British pound had gone down.  This might not be so bad if the UK were an export-based economy.  A cheaper pound would mean cheaper prices on British goods and services.  What the country loses in buying power it might more than make up for in jobs.  But as Matt Yglesias tweeted late last night:

"Cheap pound would be great for UK exports were the UK not withdrawing from the world's biggest integrated market." - Twitter @mattyglesias

And Wolfers again:

"Upside: Britain is on sale.  Everything, 10-15% off.  Steak and kidney pies for everyone." - Twitter @JustinWolfers

Everyone outside Britain, he means — like me and my wife, leaving Oxford on Monday after 10 weeks here.  I got an email from a vendor this morning telling me where to send a “cheque” for the 65 pound-price we agreed upon yesterday.  In the ensuing 24 hours, I've saved $5.  Maybe I'll stall till tomorrow.  Oh wait, the pound could shoot back up! When should I pay? It's a question every importer from Britain will now be asking — more pressingly than in years, if not decades.  And those $5 my vendor loses will be $5 less to spend on what will now be increasingly expensive goods and services from abroad.  In the time we've been here, numerous Brits have told us they'd like to go to America because it's so much cheaper.  Did they vote for Brexit too?

The third shock is more personal; my apparent over-reliance on the prediction markets, and on economists like Justin Wolfers who do as well.  The two of us conducted a video chat more than five years ago in which we extolled the virtues of markets, mainly with respect to sports betting, but also in politics.  And I have reported on political markets for the NewsHour many times, as recently as February.  Last night, Justin reproduced this tweet:

“To Justin:  I think you need an explanation on gambling odds.  These markets are not full markets where people can bet a lot of money.  They are not as informative as you believe they are.”

Justin's reply:   “I love me a good mansplainer.  Because honestly, I just didn't realize.”

In the defense of the market-dependent, yesterday's Brexit vote drew plenty of money: an estimated £50 million pounds or more on one British prediction market alone.  But what we failed to realize — or more honestly, failed to remember — is that odds are probabilities, not facts.  At 11 pm last night here in England, I tweeted:

"Brexit polls now closed here in UK.  Betting mkts put the odds of Remain win at 85% likelihood.  They were down to 60% before Jo Cox killing." - Twitter @paulsolman

Three hours later:

"Most dramatic swings I've ever seen on the prediction mkts:  Brexit from 12% to 54% when this tweet began now back down to 40% as I finish it" - Twitter @paulsolman

The point is, even at 11pm, with the odds at 85 percent for “Remain,” there was still roughly one chance in six that the UK would vote to leave.  And by definition, such an event will occur, on average, one-sixth of the time.  On the prediction markets, those odds should lead to the right call five times out of six, on average.  And that can lull those who monitor the markets into a false sense of complacency, as it did me with Brexit.  I didn't forget about that sixth time.  But I dismissed it.  I'm shocked that I did.

The fourth shock should perhaps not come as one, as assiduously as we here at Making Sen$e having been covering economic inequality over the years.  It's the gulf (or abyss) between elites and workers in countries like the US and the UK.  That would help explain the confidence of the prediction markets.  Who bets money on elections if not, disproportionately, those who already have enough?  With which side was the Remain side identified, if not the Establishment?  But after the assassination of the aggressively humane Labour MP Jo Cox, would aggressively civil England actually vote for the forces of aggression?  The answer is that it did so, aggressively.

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