Join our community of smart investors
OPINION

The political fix

The political fix
June 14, 2016
The political fix

First, let's understand that, whatever the result of the referendum, we may never be able to assess whether the electorate reached the right decision. That's partly because what constitutes the 'right' decision is subjective anyway; partly because there will be no counterfactual with which to compare the outcome; partly because it's almost a given that, whatever the result, the winning proposition won't capture a majority of the electorate so there'll be even more scope for dissension; and partly because - in the event of Brexit - the outcome will be so long drawn out that it will be impossible to connect the consequences to the causes. After all, it may be 10 years before the UK actually leaves the union, by which time the EU is likely to be a very different animal.

That said, I will state three contentions:

■ Whatever the outcome, there will be no discernible benefit to the UK's economy. That's linked to the contention that;

■ Market economies in the developed world are reaching the limits of what they can deliver, given factors such as demographics and levels of debt, both public sector and - especially - private. This means that;

■ Political solutions - such as this referendum - will intrude ever more upon markets and thence upon investment returns.

True - and depending on your beliefs - there is the perception that markets are failing to deliver because they are incapable of allocating resources fairly; or that they are increasingly hobbled by rules, regulations and constraints - constructed for reasons both good and bad - that produce perverse outcomes.

Yet when people say markets can't deliver resources fairly, often what they mean is that they dislike the market's outcome. In the parochial context of the Brexit debate, this means, for example, that UK consumers are happy with the market outcome that delivers cheap UK-grown strawberries to their breakfast table, but are unhappy when a key factor in strawberry production - the cheap Romanian labour that picks them - delivers their own children to overstretched primary schools.

Meanwhile, we can see the effects of perverse consequences in the markets for healthcare and for power generation and supply. Something is badly wrong, for example, when the US spends 17 per cent of its national output on healthcare while nations of similar wealth spend about 10 per cent. Similarly, fostering 'green' power generation in Germany has hacked about £100bn off the stock market value of the country's two biggest power suppliers while making the retail price of electricity Europe's highest.

Of course, it's human nature to confuse pleasant outcomes with what's good and unpleasant outcomes with what's bad. And if the balance between pleasant and unpleasant is swinging towards the latter, then it may be that the demands on markets are growing faster than the markets' ability to meet them.

Throughout Europe - the UK included - thats how it looks. The continent is old and tired. Snapshot data shows that between 1972 - the year that the UK joined what was then the European Community - and now, the birth rate has dropped by 38 per cent (where 100 babies were born, now there are 62) and the proportion of people aged over 65 has risen two-thirds (from 11.6 per cent of a population of 442m to 18.8 per cent of 508m). This older continent is much wealthier - real incomes have doubled to $35,000 in 2011 money values - but people spend more and save less. Consequently, the burden of debt rises and capital formation - the fixed assets from which future wealth will be built - drops off. True, the UK is younger, more fertile and wealthier than the EU average. But not by much and no less grumpy.

Arguably the whole Brexit thing is an example of extreme grumpiness; aimless yet tangible grumpiness that stumbled across its perfect target - an unloved, elitist, remote institution - when David Cameron was careless enough to offer a referendum on the UK's EU membership as a way out of a tight corner. Not even those in the Remain camp have a warm word to say about the EU and it was left to the Archbishop of Canterbury to point out that there just might be a connection between the existence of the EU and a period that "has contributed to more human flourishing and more social care than at any time in European history".

In the current national funk, it is hard to see that; even at the best of times you don't get warm feelings for something essentially bureaucratic. So the EU becomes the convenient scape goat for the absence of growth and the presence of all sorts of things that threaten. Therefore - runs the erroneous syllogism - remove the EU and growth will reappear while the threats will disappear. In other words, the solution must be a political one.

Intuitively, we know that's a misdiagnosis. Sure, we can take the political fix. But the demographics won't change; the rates of spending and saving won't change; the pressures on the public purse won't change; rates of capital spending and productivity won't change; nor - actually - will rules and regulations. Most of all, investment returns won't change. Or, rather, they'll drift downwards as our reliance on political solutions drifts upwards.