June's Brexit vote brought an avalanche of predictions that leaving the European Union would wreck Britain's economy. But what if, for most British workers, Brexit turns out to be a net plus?
Despite a big (but hardly cataclysmic) drop in the value of the British pound, experts are already walking back predictions that Brexit would lead to an immediate recession. Things may still change, as Britain is still negotiating exactly how it will disentangle from the Continent. But so far the country's economy has kept chugging along.
And really, the argument that Brexit would do immediate short-term damage never made much sense. The more plausible explanation is that it would do slow, long-term damage. If Britain does leave the EU's single market, which looks increasingly likely, its economy could grow slower going forward: Twenty years from now, Britain's economy would still be bigger than it is today, but it may well be a smaller than if Brexit never happened.
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All other things being equal, that would be bad. But all other things are not equal. Another thing Brexit could do is reshuffle Britain's economy by expelling some high-paying jobs while invigorating lower-income and blue-collar work, leading to a more equal economy overall. If the long-term damage isn't too bad, that redistribution of incomes could wind up helping lots of British workers more than the aggregate slowdown hurts them.
So how would that scenario play out, exactly?
Let's start with who Brexit will undoubtedly be extremely bad for: London's massive finance industry. When Britain first joined the EU's predecessor in 1973, an arrangement was struck that allowed the country to regulate finance more lightly than other members while still letting the city of London easily hawk its services across the continent. London's financial sector thus boomed over the last three decades, becoming a classic example of an industrial cluster: The success of some firms in a given field attracts others, leading to a geographically intimate sharing of knowledge and talent, and a positive feedback loop that drives the scale of the cluster ever higher. Today, London rivals New York and Hong Kong as the world's financial center.
But if Britain loses access to the single market, it could wreak havoc on the city. For financial firms located in Britain, the costs and regulatory hurdles for doing business in the rest of Europe could rise substantially, driving much of the industry to simply pull up stakes and leave.
Wouldn't that be bad, given that finance alone accounts for 8 to 10 percent of the British economy and a whopping 29 percent of service exports?
Not necessarily. There's something in economics called "Dutch disease," named after the woes that befell the Netherlands when it discovered massive gas reserves in 1959. You'd think such a windfall would help an economy. But the enormous exports of Dutch gas meant everyone else in the world needed to get their hands on more Dutch currency — the guilder at the time — to buy the gas. That international demand drove the value of the guilder way up, making the rest of the Dutch economy less competitive internationally. Unemployment actually rose and investment fell. In fact, there's a storied history in international economics of countries finding out they're sitting on a natural resource the rest of the world wants, and promptly going through a boom-and-bust cycle. Point being, it's good to diversify your national economy.
As Paul Krugman pointed out, you can easily swap the Netherlands for Britain, and the gas industry for the financial industry. It's the same situation. As a share of the economy, and especially as a share of exports, London's financial behemoth is so large it's likely warping the rest of the British economy.
The pound may have fallen, but it's still more valuable than nearly every other major currency out there, including the U.S. dollar. That high value makes British exports more costly, resulting in a persistent trade deficit. Trade deficits, in turn, sap aggregate demand and make it harder for a national economy to produce enough jobs for everyone — and the sectors hardest hit are usually the middle-wage and blue collar ones that rely more heavily on exports.
If Brexit breaks up London's financial cluster and lowers the value of the pound enough to close a lot (or all) of the trade deficit, it could lead to a national economic rebalancing. That would most likely benefit British workers in other industries and areas.
So who knows? Maybe Brexit isn't so bad after all.
