The Past Speaks

A few days ago, a curious advert appeared in my Facebook feed: it was for Brexit-related income protection insurance. In effect, an insurance company was offered me the chance to insure against the possibility that Brexit might cost me my job. The product has been rushed to market in the month since the referendum result by a firm hoping to capitalize on the widespread sense of uncertainty that now pervades many sectors of the British economy. Many people genuinely fear that Brexit could cost them their jobs.

I’m not convinced that this product offers value for money, as I suspect the clever lawyers for the insurance company could concoct plausible arguments to allow the firm to get out of paying out to people who have lost job. One would need to read the insurance contract, and the relevant UK case law, to see what sort of evidence the policyholder would need to produce to prove a casual linkage between Brexit and loss of income. (The company could always argue that the policyholder’s employer went out of business for reasons unrelated to Brexit).

The being said, the fact this policy is being offered at all says something about the political economy of Brexit negotiations. This insurance product is being offered because many people assume that they will not be able to claim back lost income from the government in the event of Brexit-induced job losses.  Effectively, the politicians responsible for Brexit have externalized many of the costs associated with Brexit. Ironically, some of the members of the current cabinet are strong believers in the “polluters should pay principle”. I agree that this is a good principle, because it forces firms to internalize the costs of dumping waste in the river. Maybe the same principle should be applied to Brexit job losses.  If the current government is indeed confident that Brexit would be a clear net benefit to the UK economy and job gains would outweigh any job losses, they should put their money where their mouth is and place a bet on this belief by offering cover the costs that any individual or company suffers as a result of Brexit.

Let’s apply a public-choice lens here: the politicians who are tasked with negotiating some sort of compromise with the EU are wealthy individuals who are going to remain wealthy regardless of whether they take a hardline stance that worsens the impact of Brexit on UK wage earners. Indeed, the politics of the Conservative party may actually incentivize these politicians to adopt positions that end up costing lots of little people their jobs. The UK Treasury would, of course, lose a great deal of money in the event of a job-destroying outcome to the Brexit negotiations (e.g., less tax revenue, more benefits claimed), but many of the costs associated with Brexit would be borne by private individuals, not central government. The externalization of these costs thus enables the policymakers to indulge in the luxury of grandstanding in negotiations with Brussels.

Since 1962, US trade liberalization agreement have been accompanied by the provision of structural adjustment funds to compensate the losers from such agreements. For instance, steel workers how can show that they lost jobs due to a trade deal that reduced tariffs on steel can claim back money from the government under the TAA scheme. Since trade liberalization is, on the whole, good for the economy, this arrangement is win-win.  The wisdom of such structural adjustment programmes can be debated, but there is a clear precedent we can follow here. Given that Brexit is a massive trade deliberalization move, it makes sense for the UK government to be forced to cover all of the costs of Brexiting. Ideally, the compensation paid to the minister responsible for Brexit policy should be connected to the size of the Brexit compensation payouts so that they are personally incentivized to negotiate an arrangement that results in as few job losses as possible. However, I suspect that it is too much to hope for.