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.

Tuesday Links: TPP, Corbyn, Sanders, etc.

Off Guardian (embedded above), Tony Benn speech on the aims of Thatcherite policies.  Via Gaius Publius, via Naked Capitalism, where they are calling it Tony Benn’s “Ten-Minute History of Neoliberalism.” I found it moving, especially his remarks about Thatcher’s demonization of the miners, and that he’d concluded that these fights have to be re-fought each generation. (More on miners below.)


Gaius Publius, What Sanders Can Accomplish by Not ActingThe blogger known as Gaius Publius (the blog is “Down With Tyranny”) has had a series of posts in support of Bernie Sanders that have been picked up at Naked Capitalism. I don’t like the fact that Sanders is running as a Democrat, and I’m sympathetic with the argument (made well by Margaret Kimberley of Black Agenda Report in this Counterpunch podcast interview) that Sanders will thereby be acting as a “sheepdog” bringing left-ish Democrats into the fold and eventually to vote for Hillary or whoever the nominee is).  But I liked this post, which suggests that Bernie could get some traction by promising not to do a bunch of things that Obama has done: push for horrible “trade” deals like the TPP; aim for dismantling or privatizing Social Security; extend tax breaks for the rich; etc. etc. And GP asks us to think of all the time activists wouldn’t then have to spend fighting such efforts.  Our columnist Jerry Friedman will have an “Economy in Numbers” piece in our Nov/Dec issue about Sanders’ economic policies.

Social Europe, Jeremy Corbyn’s Speech On The EU ReferendumMore sensible talk from the new Labour Party leader.  Attempts in the UK press to undermine Corbyn reached a low when the Sunday Express had this dire report (via HuffPo Uk): Jeremy Corbyn’s Great Great Grandfather Mismanaged A Victorian Workhouse, Sunday Express Claims.  Bernie Sanders doesn’t have it so bad; here the New York Times annoyed Bernie fans with an online piece about the few times Bernie had been mentioned in the Times before he was a public figure, starting with coming in 15th in a high school running race (1956: Bernie Sanders, Running Hard).  Besides the triviality and condescension, the original version of the article had young Bernie coming in dead last, when in fact he was just the last among those ranked to get their names in the paper; his time was apparently pretty good.

Lambert Strether, Naked Capitalism, TPP: It’s Not a Deal, It’s Not a Trade Deal, and It’s Not a Done DealHat-tip TM.  I hope he’s right that this can be turned back; he is definitely right that the done-ness of the deal has been wildly over-reported. See also: Joseph Stiglitz and Adam Hersh, The Trans-Pacific Free-Trade Charade;  Robert Reich video, The Problem with TPP Explained in Two Minutes; and our own John Miller’s piece from our July/August issue, The Trans-Pacific Partnership: Corporate Power Unbound.

Bitch Media, Four Things the Government Should Defund Instead of Planned Parenthood. Including “crisis pregnancy centers,” which get funding in at least eleven states.

Washington Post, How Elizabeth Warren picked a fight with Brookings — and won;  Reuters, Brookings fellow resigns after Senator Warren accuses him of conflicts:  Warren criticized a Brookings affiliate, Robert Litan, for writing a white paper against the Labor Dept.’s proposed fiduciary rule, which would require personal investment advisors to act in their clients’ interests; the guy hadn’t disclosed the finance industry funding he’d gotten for the study. As reported a while back at Naked Capitalism (Congressional Black Caucus Still Trying to Hurt Their Constituents By Killing the Labor Department Fiduciary Rule) and in Mother Jones (The Congressional Black Caucus and the Financial Lobby: BFFs), members of the Congressional Black Caucus have been opposing the fiduciary rule, for some reason. I guess for campaign money, but it’s still pretty shocking. Their argument is that less-well-off Black people will have less access to financial advice if the rule goes through–but why should they want advice that is compromised?

The Independent (Ireland): Imagine this: Sweden moves towards a standard 6-hour working day and The Independent (UK): Sweden introduces six-hour workday.  This supposedly makes workers more efficient (but whatever reason they need to give themselves…).  Hat-tip D&S reader Katharine R.

Center for Public Integrity, Johns Hopkins terminates black lung program: This was a unit of the Johns Hopkins Hospital that, in collusion with coal companies, repeatedly failed to diagnose miners with black lung disease, preventing them from getting disability.  Appears to be a result of an expose by the Center for Public Integrity and ABC News, Breathless and Burdened. Will heads roll?

Too Much online, The Real Secrets to Grand Fortune: Sam Pizzigati interviews Sam Wilkin, author of Wealth Secrets of the One Percent: A Modern Manual to Getting Marvelously, Obscenely Rich, which ingeniously parodies get-rich self-help books as a way of explaining how, via monopoly and intellectual property protection (among other tricks) the super-rich really got their wealth.  I ordered the book.