Brexit: The Day We Entered the Eye of the Maelstrom

By Thomas Palley

In years to come, the Brexit referendum may come to be seen as the day we entered the eye of the maelstrom that now promises enormous destruction. The immediate consequence looks to be a possible financial crisis, but even if that is avoided the other costs of Brexit will not be.

The European economy was already on the outer circle of the maelstrom. Brexit has swept it into the eye, accelerating the process whereby social alienation and bad economic outcomes produce bad political outcomes, and bad political outcomes produce worsened economic outcomes and further social alienation.

Economic implications

The leading edge of events will be financial markets. Even if an immediate financial bloodbath is contained, the reasonable expectation is for significant downside turbulence over the coming months that will ripple into the real economy. Moreover, a bloodbath now would not be panic. Instead, it can be rationally justified by the economic and political outlook and the fact that asset markets were already richly valued.

British financial markets and the British economy will be the epicenter. The shock to London’s stock market will hit wealth and household confidence, negatively impacting consumer spending and the United Kingdom (UK) real economy.

Britain’s real estate market (especially London) was already highly priced, and it is now very vulnerable to reduced local and foreign buying. British banks are financed in sterling and a lower sterling exchange rate has unpredictable negative implications for them and their counter-parties.

Business will cut back further on investment in the UK because business dislikes uncertainty. Big ticket investments will be placed on hold until the status of the UK’s access to European markets is clarified.

All these impacts will ramify outward, hitting other economies, including the US. The mechanisms are financial contagion, currency turbulence, and uncertainty, all of which generate negative aggregate demand effects that are then multiplied via the contraction process. The first port of call will be European economy, which is already in a fragile condition and is most integrated with the UK.

Political implications

Bad as the economic news is, the political shocks to come may be worse.

The Brexit electoral outcome map shows all of Scotland voted to remain. That means the UK’s constitutional crisis regarding Scottish independence is likely back on.

In Spain, there is the long-standing issue of Catalonia’s demand for independence, which Brexit further mainstreams and encourages. Now, Italy’s Northern League, which is politically powerful in the rich northern half of the country, is calling for an EU exit referendum.

In effect, Brexit is a green flag for separatisms of all stripe. That has adverse implications for the euro, which is already under the threat of Grexit. Consequently, sterling’s weakness stands to be accompanied by a weakening of the euro, providing an additional currency channel for spreading Brexit’s shockwaves into the global economy.

With regard to US politics, negative economic fall-out from Brexit will injure the incumbent candidate Hillary Clinton and benefit Donald Trump.

Beyond that, Brexit carries vital political lessons for the Obama administration and Clinton campaign, both of which must not give reason for US voters to further disdain the establishment.

Brexit has structural similarities with Trump’s rise. It is the logical outcome of the Conservative Party’s political strategy of the past twenty years. Conservatives used the European Union (EU) as a whipping boy to help smuggle in their “Thatcher – Reagan” neoliberal economic policies. The Labor Party spoke out in defense of minorities, but it did not defend the EU and nor did it adequately confront neoliberalism.

In the US, Trump is the analogue “exit” candidate. His rise is the logical outcome of thirty years, during which Republicans used dog-whistle racism and the culture war to smuggle through their neoliberal economic agenda that has wrought the destruction of shared prosperity. Democrats resisted racism and the culture war, but were complicit in the promotion of neoliberalism.

The lesson for the Clinton campaign is it must move beyond rhetoric criticizing neoliberalism and adopt serious remedies that tackle its legacy of inequality, economic insecurity and loss of hope. Neoliberalism is the ultimate cause of the establishment’s rejection. Racism, immigration and nationalism may be the match for the anti-establishment fire: wage stagnation and off-shoring of jobs are the fuel.

As regards the Obama administration, the lesson concerns the Trans-Pacific Partnership (TPP). On all sides, the US electorate has rejected the TPP, but the Obama administration keeps pushing it. That further discredits the establishment and benefits Trump who is the outsider candidate. Clinton is the insider who has openly touted her links to President Obama, and she still lacks credibility on her opposition to TPP because of her past endorsement.

In this environment, the Obama administration’s pushing of the TPP is recklessly irresponsible politics that send us nose down, into the eye of the maelstrom.

Sanders Is Fighting to Raise the Wages for Most Black and Latino Workers

By Stephanie Luce, Associate Professor, CUNY, and Mark Paul, Research associate at The Cook Center on Social Equity at Duke University, and economics instructor at the University of Massachusetts-Amherst

Cross-posted at Huffington Post

Corporate profits are booming, and U.S. workers remain some of the most productive in the world. Yet tens of millions of workers still earn hourly wages that fall below the federal poverty line. These unjust wages are particularly hitting workers of color. But a simple policy change can fix this — a $15 minimum wage. This would boost income for over half of black workers and 59 percent of Latino workers. But is this a change we can afford?

Put in a historical context, the federal minimum, currently at $7.25, is far below its historic peak and nowhere close to a living wage. In fact, if the minimum wage rose in step with inflation and average labor productivity since 1968, it would currently be $26 an hour.

Workers across the country have been calling for a minimum wage of $15 per hour. Two decades ago, mainstream economists warned that raising the minimum wage would force employers to lay-off workers, but slowly that consensus has shifted. In the past twenty years, over 140 cities and counties have passed living wage ordinances, and dozens of states have raised their state minimum wage. In the last three years alone, more than 30 cities and counties have set citywide minimum wages. This has allowed economists to test their theories, and the results show it is possible to raise the minimum wage and not see job loss. Indeed, higher minimum wages have led to positive outcomes for workers, employers, and communities.

The evidence that minimum wage increases are necessary and beneficial piles up. Now, the debate is more often centered on “how high to raise the wage, and how fast.” It’s time for a federal strategy. Only one candidate — Bernie Sanders — has endorsed the call for a $15 federal minimum wage by 2020 through the Pay Workers a Living Wage Act. Hillary Clinton backs a modest $12 wage, while some Republicans have called to lower or even eliminate the minimum wage altogether.

The research we have available to date suggests that a $15 minimum wage is economically feasibly. Political will stands in the way of lifting incomes for the majority of working families–Sanders’ plan is different. Hundreds of economists have already backed Senator Sanders’ plan on the $15 minimum wage. Even fast-food restaurants, which rely heavily on low-wage labor, would be able to absorb the wage increase without cutting jobs. Other countries have also shown that minimum wages can rise without resulting in the predicted job loss. Germany just implemented its first-ever minimum wage in 2015, and contrary to some fears, employment went up, not down. Similarly, the UK established The UK and Australia have minimum wages significantly higher than the US.

More importantly, a $15 wage would have major impacts on workers and communities. A study by the Political Economy Research Institute estimates that over 64 million workers would benefit if we raised the wage to $15 by 2020. This includes 47 million who would directly benefit from the raise, and another 17 who are earning just above $15 and would likely get a “ripple effect” These 64.7 million people comprise a major portion of the entire labor force (43.5%).

Critics say raising the minimum wage won’t solve poverty, and they are right. The minimum wage is only one tool in a larger set of useful policies that are necessary for addressing racial disparities and building an inclusive economy, ranging from better health care, to stronger enforcement, and a federal job guarantee for those locked out of paid employment altogether.

Raising the minimum wage doesn’t just benefit workers. Research shows that when minimum wages are raised, employers experience lower turnover and absenteeism and higher productivity. Workers are able to pay off debt, start savings accounts, and invest in education and training.

States with higher minimum wages have had stronger job growth in the past few years. When low-wage workers are paid more, they tend to spend most of their earnings, increasing aggregate demand, which can lead to an additional boost in job growth.

In a moment when people are standing up for their rights to a living wage, and asserting that Black Lives Matter, the $15 minimum wage makes sense.