Brexit and 'the economy'

This post is significantly shorter than I'd originally planned, because the news cycle has... moved on a little. But I still want to say something about the post-referendum stockmarket crash which grabbed everyone's attention for a few days.

You may have heard that the vote to leave the EU caused Britain to cease being the world's fifth-largest economy, falling behind France. Maybe you read that the country lost more money in the day after the referendum than it could hope to save by not joining the EU. Maybe you think the last week has proved that 'Project Fear' about the economic consequences of Brexit was right all along.

No, no and no. I don't want to paint a rosy picture of the post-Brexit economy. Losing (easy) access to the single market will be bad for the UK; the financial sector will probably lose a fair amount of relative significance and the whole country will be poorer over the long-run thanks to less open trade - but in that sphere we're talking about fractions of percentage points over decades. More immediately, the next six months of arguing about what we want and then up to two years of arguing about whether we get it will probably slow investment, and maybe also ordinary consumption spending, quite seriously.

But the main thing that has actually happened since the Leave vote is that a lot of companies' share prices went down temporarily. And only temporarily - the FTSE 100 index is now at its highest level in almost a year. This is not really that surprising: a share price is an indicator of how well you expect a company to do in future, and many of these companies were on the record saying they thought they'd do worse in the event of a Leave vote. But maybe they were wrong, and it'll all be okay! It'll take years to actually find out. In the meantime, the sharemarket is not the economy. A lot of investors suddenly panicked on Friday morning, and that tanked the financial market temporarily, but it didn't constitute an economic crisis in any serious sense.


The reason this is worth harping on, even though Brexit will indeed be bad for the economy, is that treating share prices as a guide to the economic consequences of a policy is bad analysis and deeply anti-progressive. Share prices fall when investors think that the companies in question might be less profitable. Sometimes we want to implement policies that will make companies less profitable: a carbon tax, or a safety regulation. It's not hard to think of examples. If a government produced legislation to seriously crackdown on tax loopholes, many companies' share prices would fall and the markets on the whole might look in bad shape. That obviously doesn't make it a bad policy; in fact it's not even any reason to be concerned about the policy.

Here's a graph of the FTSE100. You can't really tell it from this picture, but the big jump in the index that I've circled occurs in one day, spiking to a high on Friday the 8th of May after a low on Thursday the 7th.

Obviously, this does not provide any evidence that Conservative government is better for the economy than Labour government. If you didn't believe that before you saw this graph, it'd be truly amazing if you were inclined to believe it now. All it shows is that investors prefer it when the companies they invest in are less taxed and less regulated.

Share indexes rise when something happens that's good for large, publicly traded corporations.  (In fact, when something happens that traders think is good for those corporations.) What's good for large public companies is not necessarily good for the country's economy. It's a serious mistake on the part of progressive-minded - not to mention just sensible - people to criticise Brexit on grounds like these.

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