The Power and the Money

Nots on the new Brexit deal

The new Brexit deal seemed like a weird animal.

The old Brexit deal kept the whole U.K. in a customs union with the E.U. since nobody wanted a customs border running down the Irish Sea. The new Brexit deal seems to run a customs border down the middle of the Irish Sea. Surely there is more than that? I thought to myself.

So I read the damn thing. And here is what it says:

1. Article 4 says that the U.K. may strike free trade agreements (FTAs) with third countries, “provided that those agreements do not prejudice the application of this Protocol.” Meaning that the protocol does not guarantee that foreign goods will enter N.I. tariff free. Rather, it guarantees that N.I. goods may be exported to other countries tariff free as long as the U.K. has an FTA with them.
2. Article 5 establishes that the only way you can move a good from the Rest of the United Kingdom (RUK) to N.I. is to prove that: (a) That good will not be processed in any way once in N.I.; and (b) That good is determined to be not-at-risk of entering the E.U. by the “Joint Committee.” There are no clauses about the makeup or procedures of the Joint Committee. At some point, then the U.K. will have to make this determination, either before the good leaves the RUK or when it enters N.I.
3. Article 6 establishes that protecting the U.K. against smuggling from the E.U. is entirely up to the U.K., as long as they do it in the North Sea or the RUK.
4. Article 7 creates a separate “Made in UK(NI)” tag for goods made in N.I.
5. Article 10 requires the U.K. to stick to E.U. rules on state aid for private companies.
6. Article 12 lets European officials monitor the way U.K. officials enforce European law in N.I. It also retains the authority of the European Court.

In short, yes, N.I. stays in the E.U. single market, unless both London and Brussels agree that a particular good can be shipped into N.I. without any problem. 

So this is not some sort of technowonder panacea. It is a deal that Europe offered the U.K. quite a while ago. Leo Varadkar must be pleased that London finally caved, although he can not say so. (Note the title of this post!) 

To be honest, I can see why this might be better from the point of view of a Brexiteer. The Brexiteers seem to have given up on keeping the United Kingdom together as a primary goal anyway. Given that, what is so bad about an internal customs boundary? Article 12 looks a bit squicky, true, but it only applies to Northern Ireland and the Joint Committee (however it is constituted) will give London a bigger say than it has now.  

On the other hand, it seems like a pretty radical plan, separating N.I. from the RUK. But so was Brexit. 

Economic history is hard

Lyman Stone has a post up about population growth in the Caribbean. It’s interesting stuff; worth reading. But it suffers from a historical mistake.

I am hesitant to point out this mistake because Lyman has recently been beaten up by a bunch of rather rude people who appear to be deliberately distorting his argument about the recent American (and French!) fertility decline. So I will endeavor to be neither rude nor deliberately distorting. 

As part of a broader discussion of Caribbean population trends, Lyman uses British migration restrictions to test the effect of migration controls on West Indian population growth rates. He identifies two points where migration was restricted: the date of independence and the Nationality Act of 1981.*

The problem is that neither independence nor the 1981 act had any effect on the ability of West Indians to migrate to Great Britain. 

The U.K. first imposed migration restrictions on the West Indies in 1962. The Commonwealth Immigrants Act said that only U.K. citizens with passports issued in Great Britain or Ireland could freely enter the U.K. If you were a “Citizen of the United Kingdom and Colonies” but your passport had been issued by a Commonwealth government, even one still part of the British Empire, you were subject to restrictions. And those restrictions were pretty draconian: you needed either a work permit or the ability to show that you could support yourself without working.

The U.K. migration data is a mess, but taking the Home Office statistics for annual net migration (in thousands) at face value (page 10) indicates that it was pretty effective. The below chart puts a vertical line at 1962. Net migration from the West Indies surged in ‘61, as people rushed to beat the new law. It then collapsed in ‘62 and ‘63 and remained low thereafter.

Moreover, the Nationality Act of 1981 had no effect on the ability of West Indians to migrate to the United Kingdom! That freedom had been removed in 1962. Rather, all the 1981 act did was take the class of U.K. citizens who were not allowed to live in the U.K. and rename them British Dependent Territories citizens. They could not freely move to the U.K. before and they could not freely move after. (In 2002, the Blair government finally granted all Dependent Territories citizens full British citizenship.)

If you really want to see if migration restrictions affected population growth rates, then you want to use 1962 for your test, not independence or 1981. 

Brexit is over?

There is nothing really new in the piece. I am just laying out my thoughts, because I am a little confused. Which I suppose is standard for anyone trying to think about Brexit.

Specifically, I am confused as to why commentators continue to discuss the future form of Anglo-European trade relations. As far as I can tell, the U.K. just agreed to remain part of the single market and customs union for trade in goods. 

This would be rather more integration than Norway or Turkey currently enjoy. 

Norway is in the single market but not the customs union. It follows European regulations and trades tariff-free with the E.U., but there are customs checks on the borders because Norway imposes its own tariffs on goods from third countries. Turkey is in the customs union but not the single market. It imposes the same tariffs as the E.U. on imports from third countries but it does not follow European regulations. So there are customs checks on its borders to insure that only goods that conform to European law are allowed to enter the E.U.

But the U.K. cannot have customs checks on the Irish border. So unless Northern Ireland agrees to leave the British Customs Area, the U.K. needs to stay in (at least for goods) both the single market and the customs union. And that is what the recent declaration says. The U.K. “will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”

So no customs checks because the U.K. will follow every European rule on every single physical tangible thing that anyone might want to bring into the country. Which also means accepting the decisions of the European Court of Justice about the interpretations of those rules.  

This represents an unprecedented level of economic integration for a non-E.U. country. Heck, I am not sure if there is anywhere in the world that integrated absent some sort of political union. 

London will still in theory be able to stop Europeans from being able to legally work in the U.K. in return for giving up access to the European market for British service exports. But no more “global Britain” signing trade agreements with countries around the world. 

I am surprised that the political reaction in Britain has not been stronger. Where are the Brexiteers? Or have they been yelling and I am just missing it on this side of the Atlantic?

Did the U.K. gain independence with Brexit?

As if poor Prime Minister May didn’t have enough on her plate, here comes another possible complication. (“Poor” may be the wrong adjective, as she is bringing most of the problems upon herself.) Could the U.K. be sued by foreign investors for damage inflicted by Brexit?

Right now, foreign investors in the U.K. have two ways to enforce their rights against the British state. The first is the legal system. That is, you go through British courts and ultimately the European Court of Justice. The second is through the arbitration clauses in British bilateral investment treaties (BITs); that is, via the investor-state dispute settlement (ISDS) mechanism that attracted so much opprobrium during the controversy over the TPP. 

Roger Alford of Notre Dame points out that when Argentina devalued the peso it led to massive arbitration claims. Many of those arbitrations were based on “legitimate expectations,” that is, the idea that foreign investors had the right to expect stable laws and regulations. So Argentina could not just, say, slap price controls on gas without violating its bilateral investment treaties. 

Well, could a foreign investor sue the U.K. if Brexit slams their profits? As Alford suggests, might Nissan sue the U.K. if Brexit causes British car exports to have to pay a 10% tariff to enter the European Union? Or could foreign banks sue over their loss of access to the European market? Heck, might Airbus and Bombardier sue over disrupted supply chains and the need to shut down U.K. facilities?

Scary thought.

But unlikely to happen.

Consider the list of British BITs. Not a lot of developed nations there. In fact, not a lot of E.U. members, save some ex-Communist countries. It is possible that investors in the U.K. carefully shopped around for nations to route their investments through in order to gain legal protection: this is why American oil companies became Dutch for the purpose of investing in Venezuela. But it seems unlikely. It would have taken a remarkable level of foresight. 

In other words, the threat could in theory be huge, but in practice it is not something that Ms. May should worry about. And not just because she is about to have a lot of things on her plate ...

Mercosur and the Malvinas: An Argentine question alone

In the previous post, some readers questioned how the Argentine government could unilaterally offer the Falkland Islands access to Mercosur. The answer is easy: Mercosur recognizes Argentine sovereignty over the islands. The Mercosur parliament ratified the previous declaration in stronger terms in August 2016.

The upshot is that Mercosur-Falklands relations are in the hands of Buenos Aires. If the Argentine government chooses to give the Falklands access to its market, then those goods will be Argentine to all extents and purposes. They can therefore not only be re-exported to the rest of Mercosur, they can be exported directly to other Mercosur ports. There is no need for anyone to recognize U.K. sovereignty ... or even the local government of the Falklands. All that is needed is for Argentina to declare that it will treat exports from the Malvinas as local production and ask Mercosur to do the same.

Now, in fact Mercosur is not so legalistic: the European Union this is not. But no other Mercosur nation has ever given any sign of opposing Argentine claims over the island. They all recognize that to do so would cross an Argentine red line and sound the death knell for the troubled organization.  Given that, and the relative unimportance of squid to those countries, they will follow the Argentine lead.

Argentina, of course, will not give the Falklands access to their market without extracting a pound of political flesh from the U.K. I am not sure what form that pound will take: it could be as little as having London agree to discuss the question.  So do not expect revolutionary change. Do, however, expect incremental Argentine gains in what will be a very long game. 

Radicalism is mainstream

Yesterday, there was a speech. Seven quotes:

1. “Many citizens in advanced economies are facing heightened uncertainty, lamenting a loss of control and losing trust in the system. To them, measures of aggregate progress bear little relation to their own experience.”
2. “When the financial crisis hit, the world’s largest banks were shown to be operating in a ‘heads-I-win-tails you-lose’ bubble; widespread rigging of some core markets was exposed; and masters of the universe became minions. Few in positions of responsibility took theirs.”

3. “High income inequalities are dwarfed by staggering wealth inequalities.”

4. “Trade and technology do not raise all boats.”

5. “Higher uncertainty has contributed to what psychologists call an affect heuristic amongst households, businesses and investors. Put simply, long after the original trigger becomes remote, perceptions endure, affecting risk perceptions and economic behaviour. Just like those who lived through the Great Depression, people appear more cautious about the future and more reluctant to take irreversible decisions. That means less willingness to put capital to work and, ultimately, lower growth. These dynamics are clearly visible in financial markets.”

6. “There appears to be little evidence that stimulative monetary policy makes groups worse off.”

7. “For free trade to benefit all requires some redistribution.”

I put quote #5 in italics, because it is extraordinary: a claim that markets don’t work. Quote #6 also deserves scrutiny: it is a claim that some inflation is good. And #7 speaks for itself.

The author? Well, he heads the Bank of England.

To be honest, I have posted this for a specific audience. It is one that takes as an axiom that Ricardian rents should not be reduced or redistributed. But when the head of the Bank of England starts to doubt that markets work or that finance adds value, it is time to start rethinking basic assumptions. 

Marking my Brexit (and 2016) predictions to market

Yeah, this post (and this one) do not look so good. Mark to market. Lesson: polls can shift, a lot.

But to defend my honor, Sam Wang’s latest projections are making this post look pretty good. If you take a two-percent uniform swing over current polling, both Michigan and Wisconsin turn into toss-ups, with Pennsylvania staying blue. No flipping Wisconsin before Michigan. 

Click the map to create your own at 270toWin.com

Of course, I feel I need to point out that the fact that the polls are so close means that most of the people on my Democratic email chains were entirely wrong in their models about American politics. Fat Crybaby is not bobbing dead in the water.

Say, where is our resident troll? You know, the one who got mad at me for telling someone in a Hitler costume to leave a children’s party? I keep expecting to show up and start chanting about the terrible things that will befall us when the Fat Crybaby wins. 

A counterfactual Ireland

 The history of Ireland after 1920 follows a pattern that’s fairly familiar: anti-colonial struggle results in a flight of capital and a loss of skilled labor as the colonial elites flee. The ideological efflorescence of the pre-independence period quickly disappears, and the new state’s politics are tightly constrained by a narrowly nationalist ideology developed in the aftermath of the colonial struggle. This ideology is not particularly consistent with rapid economic growth, so development stalls for decades.

Many key industries are fully or partially state-owned; while this is not necessarily a bad thing, the new state is not always such a great manager. The former colony also goes through a period of protectionism combined with mostly unsuccessful attempts at import substitution. Trade with the former colonial power continues to be critical, despite repeated efforts to diversify. For decades after independence, the economy remains dominated by agricultural exports.

Eventually, though, the country sets out on a period of rapid economic growth that provides rising standards of living for most of the population. This also includes a belated diversification of the economy along with a concomitant diversification of trade — the former colonial master is still important but is no longer absolutely dominant. Inward investment soars. This exciting period is unfortunately marred by massive corruption among the former colony’s political elites.

Ireland after 1920 — but also a bunch of places in Africa and Asia since the mid-20th century.

* * * * *

— So. Lots of these what-ifs depend sensitively on the initial condition. Let’s assume Home Rule is somehow moved forward by a year, so that the Curragh Mutiny etc. happens in August 1913 instead of 1914. Let’s further assume that the Liberal government, when cornered, suddenly grows a spine. The suppression of the revolt may be bloody, but it’s all over by Christmas. By the time the Archduke heads to Sarajevo the new dispensation is well in place.

Okay, so: avoiding the Civil War and its economic consequences mean that right off the bat, Ireland is a fair bit richer. How much richer is hard to say, but based on modern colonial struggles I’m guessing Irish incomes sank by 10% to 20% — a pretty conservative estimate for a civil war followed by independence. This is complicated by the question of how banged around Ulster has been, and also by the fact that some of that income is actually rents belonging to Ascendancy Protestants in the south (who in this world have not been burnt out or otherwise forced to flee). But still: British Ireland in 1922 is going to be a lot more prosperous than the Irish Free State.

Figure 1 in the paper mentioned in the last post is the go-to on this, but unfortunately it starts in 1921 and not a few years earlier, so it misses most of the effects of the Civil War. Even so, it shows a relative loss of about 5% of per capital GDP (compared to Britain) in the years immediately following the war.

More generally, Figure 1 shows what all of us already knew: that Irish independence was a goddamn economic disaster for almost 50 years, after which things suddenly flipped into reverse and Ireland began growing faster than the U.K. or most other advanced economies. In fact, weirdly enough, Irish growth really took off in the mid-1970s ... right around the time everyone else was saw growth dramatically slow. I’m guessing there are some second-move and center-periphery effects here that could be fun to pick apart.

Probably coincidentally, the 1970s are also when Ireland began to receive prodigous amounts of direct support from the European Community, later Union. (See figure from page 19 here, shown at right.) While large in international terms, however, a net inflow of 3% of GDP is on the order of the net federal transfers received Wyoming or Arizona over the past 20 years and a third of that given to truly poor states like West Virginia, Mississippi, or New Mexico. (Data here.) Flows to Scotland are on the order of 10%; British Ireland would likely receive something on that level, starting well before the 1970s. Note that national insurance likely remains funded by London under Home Rule. 

But anyway: with a point of divergence in 1913 and no Civil War, the Irish economy in 1921 is going to be a lot better off than it was in reality. I said 10% to 20%. Going with that, we have to look at Figure 1 and imagine a horizontal line around 1.1 or 1.2. That’s the default GDP for British Ireland, assuming it simply tracks British GDP growth (which I don’t really believe it would, but hey — it’s a starting point). That horizontal line intersects the real-world Irish relative-GDP around 1995, give or take a couple of years. This leads to the conclusion that an Ireland that stayed with Great Britain would have been much better off until the late 20th century. Then, it would have been worse off for the last 20 years or so.

Obviously this is a grossly simplistic back of the envelope calculation that ignores all sorts of stuff, from monetary policy to E.U. membership.  And yet ...

The importance of counterfactuals

Here is a paper which attempts to assess how Ireland has done since separating from the United Kingdom. It’s title: “The Old Connection Sundered? Ireland and the U.K. since 1916.”

The problem is that the only counterfactuals posed are the expectations of three independence-era economists. Which tells you precisely nothing, save that Ireland became neither a socialist country nor practiced strong import-substitution. There is no attempt to answer the question posed in the title: how would Ireland have performed had it remained part of the United Kingdom?

I am disappointed. 

A European kludge to allow Scotmain?

The last post (quoting Callum’s Craic) pointed out the biggest problem with keeping Scotland and N.I. in the E.U. while letting the rest of the U.K. secede: who would control the U.K.’s representatives in Brussels? Sure, it is easy to say that they would come under the joint control of Edinburgh and Belfast. But in a country based on parliamentary sovereignty, that is hard to do. 

One solution is to cobble something together in the great British tradition: that is, have everyone sit down and agree that Holyrood (or Holyrood plus Belfast, in some weird joint operation) will control the U.K. seat on the European Council. That might satisfy the country’s European counterparts. Or it might not: after all, the British parliament could renege on the deal with a single vote. 

Thus, the second solution, proposed by Brendan O’Leary, would be to remove Britain’s seat on the European Council. Scotland could continue to elect representatives to the European Parliament, since those representatives, once elected, are not beholden to their home government. (The picture in the last post was taken behind the Parliament building in Brussels.) Similarly, Scotland could continue to choose one commissioner on the European Commission, since those commissioners, once selected, are also (supposedly) not beholden to their home government. The Council, however, represents home governments directly. If the Europeans refused to allow the U.K.’s council seat to be filled by a subnational body, then the U.K.’s council seat would have to go.

The problem with both solutions lies on the European side, rather than the British one. Since the Treaty on European Union specifically lists all the associated territories, rather than leaving it as only a broad category, then a treaty change will probably be required. That means unanimity on the European side. (In fact, even if treaty change is avoided in order to circumvent messy ratification referenda, unanimity would be required.) Spain is already likely to be a problem, if for reasons that exist only inside Rajoy’s head. Other countries may be equally reticent, for their own reasons.

Sadly, discussion over at A Fistful of Euros seems in deep freeze, part of the general decline of the blogosphere. I would love to know what the authors and commentators over there think about “reverse Greenland” and the survival of the U.K. after Brexit. What is the real prospect of a kludge to keep the U.K. united and England out?

Is there a very British kludge for Brexit?

This blog suggested that one way around the Brexit issue would be a brief treaty revision that declared England and Wales to be an “overseas territory” of the United Kingdom. That way, the U.K. government keeps a seat at the table  while England and Wales leave the single market. The half-Brexited U.K. would, of course, have its representation at Brussels reduced to reflect only the population of Scotland and Northern Ireland, but it would retain a national veto where one applies.

And therein lies the rub. As Callum points out on Medium: “With Holyrood being a subservient parliament in the constitutional order of this country, it can be overruled. Imagine a scenario where the E.U. wants to do a foreign policy initiative that the UK doesn’t want. London has reserved foreign policy, and Holyrood has no right to make foreign policy decision. Yet, Scotland sits on the council and has to vote some way in the council. Say, about sanctions against Russia, for instance. In theory, London could overrule Edinburgh, and force Scotland to vote for or against it. London would then have, indirectly, a veto in a club it didn’t belong to. The E.U. would, of course, have none of that, and wouldn’t accept this situation.”

One imagines that the U.K. could fudge this somehow. After all, this was the country that invented “responsible” self-government, dominion status and the Irish Free State. The question, I think, is whether there is a way that the U.K. can constitutionally make an ironclad guarantee to both Edinburgh and Brussels that Westminster cannot override Holyrood when it comes to voting in Brussels?

That, I think, is the needle that May needs to thread if she wants to keep the U.K. together without provoking a massive backlash from Brexit voters. Ideas?

The Brexit recession and the cost of self-discovery

I am very hesitant to discuss something that confuses Paul Krugman. Very hesitant. 

There is a great paper by Ricardo Hausmann and Dani Rodrik from 2003: “Economic Development as Self-Discovery.” The basic story is that it really isn’t just what it is that poor countries are best at producing. Are Salvadoreans really making the most of the country’s endowments of human capital and raw materials? Probably not ... but what then should they be doing? That isn’t clear either. Figuring out what industries a country is best at doing is very hard. Moreover, the first people who figure out what a country is best at won’t reap all the benefits: others will imitate their business models and pile in. That reduces their incentive to figure out those business models in the first place. Of course, you could try granting monopolies or some such — a nation-wide version of a patent — but then you have the problem of picking which industries to back. If you back all of them, then investment will flow into monopolies that turn out to be bad bets as well as ones that are good ... and you saddle your countries with lots of, well, monopolies.

Sticky! But what does this have to do with the idea that Brexit will cause a recession followed by slow growth? Well, Prof. Krugman gives the following example:

Let’s be slightly spuriously concrete. Suppose you think Brexit might have seriously adverse effects on service exports from the City of London. This would mean that investment in, say, London office buildings would become a bad idea. On the other hand, it would also mean a weaker pound, making investment in industrial properties in the north of England more attractive. But you don’t know how big either effect might be. So both kinds of investment are put on hold, pending clarification.

OK, that’s a coherent story, and it could lead to a recession next year.

At some point, however, this situation clarifies. Either we see financial business exiting London, and it becomes clear that a weak pound is here to stay, or the charms of Paris and Frankfurt turn out to be overstated, and London goes back to what it was. Either way, the pent-up investment spending that was put on hold should come back. This doesn’t just mean that the hit to growth is temporary: there should also be a bounce-back, a period of above-normal growth as the delayed investment kicks in.

That makes sense! But there is another way to think about the problem. You believe that Brexit might have seriously adverse effects on service exports from the City of London. This means that investment in, say, London office buildings would become a bad idea. On the other hand, it would also mean a weaker pound, making investment in ... uh ... well ... by gosh, just what is Britain going to become better at exporting? Manufactures from the north of England? Maybe. Wind power from offshore Scotland? Could be. Videogames written up in London exurbs? Possible. Music and are from London? Hmm! Or maybe the U.K. could build giant spaceships, like this one I saw off in the distance in Birmingham back in ‘12? 

The problem is that you have no idea what the best thing to invest in is, if finance does not pan out. You know that Brexit means finance is not the future, but you have no idea what the future is. And failure certainly is an option, as the slow growth of many many countries in many many time periods tells us.

So right now, investment goes on hold, which triggers a recession. (If that is indeed what is happening.) If Prime Minister May somehow stops Brexit, “or the charms of Paris and Frankfurt turn out to be overstated,” then investment roars back into finance!

But if she does not, well, uh ... it slowly trickles back as Britain undertakes that long slow process of self-discovery. There is no countervailing boom once the policy uncertainty is resolved.* Just a slow recovery followed by slow growth.

Somehow I suspect that there must be a giant hole in this logic. 

The U.S. would not have had a better constitution without the Revolution

Dylan Matthews’ third point in his screed about why the American Revolution was a mistake is that without the Revolution, we would have had a Westminster-style parliamentary government, and parliamentary governments are better.

I grant the point about parliamentary government. The U.S. constitution is a mess, at least as a governing document. It sets up multiple veto points and is quite unsuited to disciplined, ideological parties. The Canadian constitution, as it currently stands, works quite a lot better.

But the United States would not get the current Canadian constitution if we had not fought the Revolution.

Consider the Canadian constitution as it stood in 1867. It possessed this giant monstrosity called the Senate: an appointed chamber deliberately set up to represent the regions and throw sand into the legislative gears. And the Senate did just that! Occasionally, it rejected major reforms: in 1926, for example, the Senate axed Canada’s first attempt at a social security system. 

The Canadian senate, however, soon became remarkably deferential to the lower house. (For example, the failed 1926 social security bill sailed through unchanged the next year.) That is in part because the Prime Minister can appoint more senators, but mostly it is because the institution does not have the legitimacy to use its de jure powers to the fullest. It is not quite the House of Lords, but it’s close.

Now imagine designing a constitution for a British North America that includes a bunch of slaveholding states provinces. One might imagine that you would get an institution rather like the Canadian senate. But does anyone believe that politicians from the slave states provinces would hesitate to use every power at their disposal to protect their control? The end result would be an upper house that would be even more of a dog’s breakfast than our own.

And that assumes that you even get a united British North America without the Revolution! I will admit, it seems likely that the British colonies would eventually federate. But I mostly think that because Canada, Australia and South Africa eventually did federate, even if New Zealand and Rhodesia kept out of the latter two. Blind analogy is probably not a good reason to assume that British North America would go the same way.

Having North America divided into ... uh .... somewhere between 13 and 16 different autonomous entities under the British crown is not a recipe for good government. Give me the Senate instead of balkanization! Hell, give me the even messier constitutional wreck that is the European Union. 

In other words, claiming that North America would have had a better constitution absent the Revolution is ahistorical smoke blowing. Wasn’t gonna happen. 

Even fiction writers have trouble showing how the British Empire could have abolished American slavery

In 1973, a business historian named Robert Sobel published a highly entertaining book entitled For Want of a Nail. It is an incredibly detailed faux history book from a world where the British defeated the American revolution, all the way down to a plethora of fake footnotes. It is a fun read, enough to inspire me and some friends to make a long foray into fanfic back in the early 2000s. 

One of us, Johnny Pez, has received the rights from the Sobel estate to rewrite the book. Johnny intends to fill in a lot of gaps in the original as well as bring it up to 2016. He is off to a great start, which you can read here. 

The problem is that major parts of Sobel’s alternate history are simply broken. 

Take, for example, the way his imaginary British North America. At first, in his world, things are different because the slave trade is not stopped: rather, it continues until the 1830s. Then, in 1835, he has a financial crisis hit London. Cotton prices drop and slave prices go down with them. As a result, with an unspecified amount of financial support from the British government, the Southern Confederation (coterminous with our slave states of the same period) bails out the planters with a payment of £35 per slave in 1840, twice their market value. 

Well. There are a few problems with this scenario. First, take Sobel’s slave population compared with the real actual United States: 

How does a world where the slave trade remains open — itself a most improbable development — wind up with fewer slaves than in real history? Sure, the victorious British manumitted a bunch, but not that many. 

Then there is the price of those slaves. When Sobel’s financial crisis hits, the slave price he lists is roughly the same as the price of a young male slave in New Orleans in the real world. They then crash by an incredibly implausible amount by authorial fiat. He just waves his hands. The below chart shows the extent of the hand-waving; I have deliberately included data from the real 1840s to show what a punishing price decline actually looked like:

Sobel does not say how the manumission bonds are paid for. There are two possibilities. First, that the U.K. government bore all the cost. That seems weird, as he has the bill being passed by the Southern Confederation. But it could be. Only if it was, then you have a situation in which the U.K. just agreed to transfer roughly 11% of its GDP to the Southern planters with no political concessions in turn. I suppose that is possible, but it seems unlikely. 

More likely is that the Southern Confederation agreed to finance the bonds itself and then managed to transfer the cost of paying those debts to the Northern Confederation after the British agreed to unite the two small dominions into one big one in 1842. In return, the Northern Confederation gets a big protective tariff around all of North America. I can imagine that ... although one imagines a slightly more interesting convention than the one Sobel describes. After all, the new united North America is going to be born with a manumission debt worth 17% of its GDP.

But that is fixable. What seems unfixable, at least at first glance, are the following:

1. Keeping the slave trade open until 1840 is very implausible;
2. If it remained open, there would be a lot more slaves in North America, with unknowable effects on the price and even larger fights over the spread of the institution into Indiana (our Northwest Territories);
3. If it was closed, then the slave population should still have been much larger;
4. It is hard to imagine why the slave price would have declined so much and be seen by the planters as a permanent decline. A temporary depression is not going to convince slaveowners (or any asset holder, for that matter) to sell at the bottom. You need to create some sort of contrived situation involving bankers and bankruptcies and even then Sobel has painted a situation in which all the Southern banks are going under, so who cares whether you can repay your debts?

How you can square all of those circles, I do not know! If you can find cases of reputable books from the 1960s with equally bullshit numbers, then you can say the numbers are wrong and give a story for why they are wrong. (Although ... man, the number of slaves is not a state secret, even if slave prices were hard to find. Ditto the statements about the slave trade being open seem pretty damn clear.) But that puts you in a situation where the new country has to finance a manumission cost that is more on the order of 48% of GDP and convince the planters to take the deal. 

In short, Mr. Sobel pulled a magic price decline out the air to tell his optimistic story about the British Empire. Take that away and it gets much dicier.

Rajoy is not making sense on Scottish secession

What else would you talk about in Alabama besides Brexit?

Well, lots of things, actually. Like airplanes! But I did spend a lot of time talking about Brexit with the mavens at the Air War College here at Maxwell AFB. My big contribution to the discussion resulted in this tweet: 

Scottish secessionists need to watch Spanish politics very carefully if they expect to remain in the E.U.

— Noel Maurer (@noel_maurer) June 25, 2016

It seems as though the Scottish government is exploring ways to remain in both the E.U. and U.K. simultaneously, although European officials were reluctant to so anything as simple as declare England an overseas territory of the U.K. Their reasoning makes sense: it is early and they do not want to get drawn into an internal British dispute. 

Unfortunately, the Spanish premier, Mariano Rajoy, is dead set against letting Scotland remain. He is afraid of giving the Catalans more ideas. But that seems stupid. After all, Scomain is intended to keep the United Kingdom united, even if it results in a customs barrier running a little bit north of Hadrian’s Wall. Refusing to comprise on the issue raises the chances of Scottish secession, which is the real precedent that Rajoy should be refusing to set. 

I do not pretend to understand the People’s Party.  They started the current support for Catalan secession by opposing the Statute of Autonomy, going so far as to petition the Constitutional Court to declare it unconstitutional. (The court obliged.) I understand wanting to keep Spain together; I even understand refusing to countenance any sort of secession referendum. But I do not understand the resolute opposition to extending quite reasonable grants of autonomy ... and I certainly do not understand what Rajoy thinks he will accomplish by opposing any Scottish attempts to remain in the E.U. without formally seceding from the U.K.

Colonize England! Or, a brief word on Brexit and Scomain

 The Kingdom of the Netherlands consists of several countries and a few overseas municipalities. Only one of them, the eponymous one sitting on the northwest shore of the European peninsula, is part of the E.U. The rest are overseas territories, including the special municipalities. 

So lets look at those special municipalities and the E.U. They consist of the islands of Bonaire, St Eustatius and Saba. Dutch citizens on those islands vote in Dutch national elections. But they do not live in the European Union. What does that mean?

First, there are border controls between the special municipalities and the European Netherlands. Land at Schipol, go through customs and immigration just like any European citizen returning from a foreign country. 

Second, they are not in the single market. They can export duty-free to the E.U. (see Article 43) but with limits: (1) Re-exports can only be sent duty-free if the overseas territory imposes trade taxes at least as high as European tariffs (Article 45); and (2) services are not included (Article 51).

Third, they can establish employment restrictions on non-Dutch citizens. (In point of fact, they can also restrict Dutch citizens born elsewhere in the Kingdom.)

So all Parliament needs to do is declare England to be an overseas territory of the United Kingdom! The English could still vote for Parliament. In fact, they would still be E.U. citizens, strictly speaking. But Parliament could restrict non-British (or even non-English) from working in England.

Of course, England-based financial firms would no longer be able to sell financial services across Europe ... but British firms based in Scotland certainly would. Moreover, the U.K. would remain an E.U. member, and thus retain its voice in Brussels debates over financial regulation. As my GWU colleague, Christopher Mitchell, has pointed out in the Washington Post, retaining that voice is vital for the sector to thrive.

Now, I do not want to minimize the problems: other than retaining duty-free access to Europe, English manufacturing firms would face all the same non-tariff barriers faced by, say, Turkish companies. The dislocation of having financial firms move to Scotland is not nothing. And you would need to institute a customs boundary along the line between England and Scotland. 

But it keeps Scotland in both Unions and keeps Britain at the European table, although its voting weight would drop considerably, given that English residents would no longer count.

There might be a problem with doing this unilaterally, however. Annex II of the consolidated Treaty on the Functioning of the European Union explicitly lists the overseas territories; London may not be able to add to them unilaterally. But it would be a legal mess if it tried; I have no idea how the European Court would rule. 

Somehow I do not think this will happen, but I am not sure why I do not think it will happen. After all, something much weirder just did happen. 

Another modest proposal

 This blog is already on record supporting the accession of Jamaica to the United Kingdom in lieu of reparations for slavery. Sadly, that does not seem to be in the cards.

But should the United Kingdom decide to secede from the European Union, then an obvious opportunity presents itself: once Scotland goes its merry way, join Canada! No worries about American gun laws or presidentialism, surely the NHS can be integrated into the Canada Health Act. The Act, in fact, already allows provinces to opt out, although doing so would place an undue burden on the taxpayers of the provinces of England, Wales and Northern Ireland. (Call them the PEWNI, pronounced as spelled.)

Someone should calculate the fiscal burdens! I am not sure what they would be, but a back-of-the-envelop calculation should be pretty easy. First, figure out what teh PEWNI would pay into the federal fisc. Then assume it cuts provincial taxes by the same amount. Use that figure to calculate the transfer payments it would be due under equalization and add an estimate of its social and health transfer receipts. (Canadian federalism is so simple compared to its American counterpart!) Voila!

For additional benefit, calculate savings from economies of scale. I mean, come on, you could generate massive savings from combining the two militaries alone! 

Now think of the benefits for the PEWNI! First, your home market just grew by 36 million people! Yes, that is a lot less than the population of the European Union, but the economic union will be a lot closer. Second, you are now in NAFTA! No new negotiations, no wrestling with Congress, just poof, you’re in. , Third, you get into the Canada-E.U. trade agreement, also with no need to negotiate. Finally, you get to keep your own flags and adopt a very cool national banner! 

But won’t the English take over the Canadian Confederation? They will have more than half the population of the expanded country!

As it turns out, no. The drafters of the Canadian constitution were wise. First, no province can have fewer MPs than it has senators. Second, no province can have fewer seats than it had in 1985. Third, no province can lose more than 15% of its seats in any given redistribution. Add those together, and the Province of England will have only 36% of the seats in an expanded 543-seat House of Commons, no more than Ontario has today! 

Obviously, England will get 24 senators, same as Quebec. Or less. What the hell. Less.

So all good! England, you should jump at this.

As for Canada, well, there are myriad multiple many benefits. Since those benefits are so obvious, I am sure that readers will be happy to list them in the very long comment thread that I expect to follow.

Bueller?

Lessons from Irish economic history?

 There is a great new paper that links inequality in infant health to later outcomes across 19th and 20th century Irish history.

I wonder if one could use the paper for other countries to back out the impact of direct and indirect discrimination? By direct, I mean discrimination that effects the recipient as an adult; by indirect I mean an unequal division of public investment that affects the individual as a child. 

History happens more than once

 In the realm of economic history, I have come across a few recent papers that take on the view that far-off history explains everything. 

The first argues that Catholicism had a causal effect in holding back Irish development. That sounds controversial, but the paper does two additional things. One, it establishes plausible mechanisms: lower illiteracy and savings. Two, it shows, as you would expect, that the effect has been dramatically weakening over time. Moreover, read the conclusion: it is probably not what you would expect. (That said, I would not call the paper outstanding; right now, it is just interesting.)

Outstanding is a paper by Jeremiah Dittmar (LSE) and Ralf Meisenzahl (Federal Reserve) called “State capacity and public goods: institutional change, human capital and growth in early modern Germany.” Let me go to the abstract:

What are the origins and consequences of the state as a provider of public goods? We study legal reforms that established mass public education and increased state capacity in German cities during the 1500s. These fundamental changes in public goods provision occurred where ideological competition during the Protestant Reformation interacted with popular politics at the local level. We document that cities that formalized public goods provision in the 1500s began differentially producing and attracting upper tail human capital and grew to be significantly larger in the long-run. We study plague outbreaks in a narrow time period as exogenous shocks to local politics and find support for a causal interpretation of the relationship between public goods institutions, human capital, and growth. More broadly, we provide evidence on the origins of state capacity directly targeting welfare improvement.

They do not push the analysis to the modern day, but they do cover a 300-year span. In a sense, they are rehabilitating the idea that culture matters and pushing back (a little) against the idea that European state-building was all about war and the preparation for war. 

Interesting stuff!

Two of these places are not like the others

 So the intrepid data team at the Economist collated all internet mentions of the term “51st state” and came up with the following map:

Don’t ask me to explain the references to existing states. But for most of the foreign countries, I get it. Australia, Britain, Japan, very close treaty allies. Canada and Mexico, in NAFTA. (Canada’s also a very close treaty ally.) Taiwan, special relationship. Caribbean, Philippines, Ireland, lots of emigrants to the U.S. (Bora Bora and Brunei, that’s just weird, but whatever.) 

In fact, I’m surprised that more Latin American countries didn’t crack the top ten: Colombia, El Salvador and Panama have a right to feel slighted. 

But what are Russia and North Korea doing on this list?? Who refers to them as America’s 51st state? And why?

Could Irish independence and the civil war have been avoided?

 Ireland celebrated the 100th anniversary of the Easter Rising on March 27th. (The rising actually started on April 24th, 1916.) The Rising started the process of gaining Ireland its independence from the United Kingdom. The revolt was not popular in Ireland and the British easily suppressed it, but the heavy-handed British response after the violence mobilized Ireland in favor of independence. The rest was history.

But was it inevitable? There was a Home Rule deal on the table in 1914 that was highly favorable to Ireland. Moreover, the U.K. was in the process of creating the modern welfare state; the bill kept National Insurance in U.K. hands. Ireland could take it back ... but why would it want to? It was a pretty good deal. Ireland would have kept fiscal stabilizers, a full banking union and access to centrally-funded social insurance. 

On the other hand, history. The U.K. was slow to enfranchise Catholics, it tolerated discrimination until the bitter end, and the Famine. Memories of wrongs on that scale run deep. Moreover, the final 1914 home rule bill excluded northern Ireland for six years, which would have likely become permanent and become a running sore. It is entirely plausible that at some point after 1916 the United Kingdom would have split up despite any advantages for the residents of Ireland. 

So here is my question: had Britain been more intelligent in the aftermath of the Easter Rising and avoided the idiotic Conscription Crisis of 1918, would Ireland have remained part of the United Kingdom through the Second World War? Or was Home Rule destined to fail once the First World War postponed its implementation? 

P.S. I have read Fatal Path: British Government and Irish Revolution 1910-22, by Ronan Fanning. He makes a solid case that partition was inevitable but does not really address the question of whether southern Irish independence was inevitable. He argues that no British government would have implemented the act (even without the war) but I do not quite grok why he believes that. Since I do not unfortunately regularly talk with Irish historians, this post is an honest call for schooling.

Powerful

 Watch this.

The U.N. did not just give the Falklands back to Argentina

 There seems to be some confusion about a recent U.N. decision to let Argentina expand its territorial waters. Some correspondents seem to think that the U.N. stripped away the Falklands’ exclusive economic zone. That’s not what happened.

What happened: In 2009, Argentina filed a claim to its continental shelf under Article 76, paragraph 8, of the United Nations Convention on the Law of the Sea (aka, UNCLOS). The Obama administration gently reminded the U.N. that the United States does not recognize Argentina’s Antarctic territory, and so the U.N. did not consider it. (The Russians did the same.) The U.N. agreed.

The U.K. also rejected Argentine claims to Antarctic waters but went a little further. It pointed out that the Falklands lie on the same continental shelf, and so the U.N. had better not apportion out any territory adjacent to the Falklands’ maritime zone, because, you know, the Falklands might also want to expand its claim. This map shows the total Argentine claim (absent Antarctic waters) and divides that claim up into the parts that the U.K. was okay with and the parts to which it strenuously objected:

If you want to see a map with all Argentine claims on it, see this post. A dagger pointed at the heart of Antarctica.

The U.N. just made a preliminary advisory ruling granting all of Argentina’s claims. So nothing is settled. But for reasons unclear in this age of low oil prices, British observers are quite upset that the U.K. might possibly be locked out of the bonanza that is the South Atlantic. The Falklands will be encircled! Or something. It isn’t clear. 

But there you have it. I wonder what Donald Trump thinks?

When Britain took back Newfoundland

 Lot of traffic from Facebook looking for socialist beer and the British Empire. Weird. 

This post is a brief comment on a weird episode in North American history. Basically, the Dominion of Newfoundland went bankrupt at the beginning of the Great Depression. The U.K. sent over an investigatory commission (its full report is here) which bizarrely ignored the fact that the country was, you know, hit badly by the Depression. Unsurprisingly, it recommended against default, since no part of the British Empire had ever defaulted. But it also recognized that Newfoundland could not pay. So it recommended that British taxpayers should assume future deficits ... in return for which the Dominion of Newfoundland would suspend democracy by putting the Governor (for some reason there was no “General” after Governor in the Dominion of Newfoundland) and a six-person Commission in charge of the country.

I managed to cobble together some statistics from various sources. (The link goes to the main one.) Looks like the Commission managed to reform bloody little.

First, British aid essentially matched Newfoundland’s interest payments: $20 million in aid against $21 million in interest. That was not a coincidence. Basically, Newfoundland ran at a primary surplus, just as it would have done had the country just up and defaulted. 

Second, the territory’s finances began to recover in 1935. (Page 390.) It would be nice to think that this was due to putting steely-eyed incorruptible Britons in charge of the financial system. Instead it seems to have come almost entirely due to an increase in customs revenue ... less than the increase in trade. Customs revenue went up 32% because imports went up 74%. That is, the economy recovered and so did revenues.

And what drove the economic recovery? Well, iron exports started to increase in 1935 and skyrocketed in 1937 ... driven by exports to Germany. Oh boy. More seriously, Newfoundland’s exports recovered because of  the U.S. devaluation in 1933-34. (Newfoundland used the dollar pegged one-to-one to the U.S. dollar; see comments.) The dollar plunged from £0.28 when Roosevelt took office in March 1933 to £0.20 when it finally settled down at the beginning of 1935. 

Third, public services did not really get better. Infant mortality skyrocketed from 106 per 1,000 in 1933 to 123 by 1937, before suddenly (and weirdly) plunging to 93 in 1938 and then rising back . (Page 258; it was 40 in the United States.) School enrollment went up a bit, from 67% in 1933 to 69% by 1940. (Page 67.) I think it would be unfair to blame the Commission for the first but also find it hard to credit them for the second. Would a self-governing country have done worse?

In short, the episode seems bizarre and pointless. I can understand why Newfoundland might have preferred British aid to default. And I can understand why Britain did want a Dominion to default and go off with its own unilateral devaluation. But the Newfoundland government had to spend as if it had defaulted and recovery happened because the United States devalued. And having British bureaucrats take over the government appears to have accomplished little. So as a lesson in the merits of modern-day imperialism, it is not.

Any implications for the European Union are left as an exercise for the reader.

How socialist beer destroyed the British Empire

 A long time ago, an internet forum that I was involved with considered how the world would have been different had the settler colonies of the British Empire been able to hold themselves together into some sort of federation. Imagine a 125 million-strong country consisting of Canada, the British Isles and Australasia. A federated Commonwealth might not quite have gotten out of World War 2 as a superpower but it would have been much more of an equal to the United States. 

To a casual observer, in fact, it seems a bit mysterious that the U.K. allowed colonies whose initial settlement came overwhelmingly from Britain (save Canada) to just drift away. Why not give them seats in Parliament and keep the new territories in the fold? 

Well, one thing that surprised me is just how early Britain began allowing the settler colonies to impose their own tariffs. Even before responsible self-government, for example, New South Wales began taxing imports from Great Britain. Up until 1843 imports from the U.K. received preferential access ... but they still paid tariffs. And after 1843, tariffs had to apply equally to imports from everywhere in the Empire. That had the effect of ratcheting up tariffs on British goods, rather than (as London seemed to hope) lowering rates on imports from India. 

One of the things that made Imperial Federation a nonstarter was that the Dominions, by the late-19th-century generally democratic and self-governing (I am going to ignore the abominable Union of South Africa) had little desire to fight the political battles necessary to create a common Imperial economic space. Moreover, the U.K. had pledged to defend them and was seen as unlikely to renege on that commitment. So why pay more for Imperial defense when the U.K. taxpayer was going to pay for most of your defense for you? Even in retrospect that proved to be a pretty good deal: sure, the U.K. failed to defend Australia in any serious way in WW2, but it seems unlikely that an Imperial Federation would have been able to devote more resources to the south Pacific than our far-less-organized British Empire actually managed. 

But how did those Dominions come to have their own trade policies? Well, here it gets strange: London seems to have actively encouraged them to tax imports and set up local industries.

Consider Australia. New South Wales (NSW) started taxing alcohol imports in 1800; alcohol was the obvious thing to tax and most booze was imported, so the tariffs were also, in fact, the first taxes in the country. (Raised to pay for a pair of jails, which seems somehow ironic.) The import taxes rapidly gave rise to import substitution ... directly financed by the government in London. “The introduction of beer into general use among the inhabitants would certainly lessen consumption of spiritous liquors,” wrote the colonial secretary in 1802 (page 7). “I have therefore in conformity with your suggestion taken measures for furnishing the colony with a supply of ten tons of Porter, six bags of hops and two complete sets of brewing materials.”

Sadly, the subsidized importation of brewing equipment by the authorities back in London failed, so the colonial government set up its own brewery in 1804. In 1821, the British Parliament cut the alcohol tax on alcohol distilled in NSW from £0.50 to £0.13 while leaving the tax unchanged on imported spirits. 

You got that right: parliamentarians in London kick-started import substitution in New South Wales. In 1827 they added insult to injury by taking a 5% duty on manufactured imports from places other than Britain and extending it to Britain. 

Er?

Eventually the Australian colonies gained self-government, but by the then the urge to protect was well-established. South Australia separated from NSW in 1836; by 1846 it had ad valorem tariffs on even more goods than NSW. Victoria separated from NSW in 1851; by 1859 it had an organized “Tariff League” and in 1866 there came an openly protectionist Customs Act designed to promote the local manufacture of textiles, hats, leather goods, woodenware, furniture, toys, woollen blankets and rugs, glass and glassware, earthenware and porcelain. (Page 9.) Cigarettes soon followed. 

By this point, Australia was clearly on its own economic policy path. Even had London been able to get its act together about inviting Dominion representatives into the Parliament, the negotiations would have been difficult. It is more surprising that the Australian colonies managed to knit themselves together into the Commonwealth of Australia than that they failed to build lasting economic links to Britain.

One has to wonder if things would have been different had British bureaucrats been more proactive about keep Oz and Albion in the same economic space. More concretely, I have to wonder why those self-same bureaucrats put Australia on the road to economic independence, to the point of passing an Act of Parliament. It seems strange and goes beyond simply wanting to make the Dominions self-financing. (Which they never were, if you count the cost of imperial defense.) 

I understand why once you had local booze, independence was near inevitable. What I don’t understand is why London wanted them to have their own booze. But either way, the first sign of the inevitable end of the British Commonwealth came when that first Ozzie cracked open that first locally-brewed government beer. 

A modest proposal: reparations for Jamaica

 Prime Minister Cameron has rightfully faced questions about reparations for slavery during his recent trip to Jamaica.

How much is owed? Well, that gets controversial, but let’s take a stab at it. Slavery seized the wages otherwise due the slaves, minus the cost of keeping the slaves alive. Since slaves were considered an investment, the price of slaves reflected the value of that stolen income. 

One rough estimate of the value of Jamaica’s slaves in the late 1820s, before Parliament started seriously debating abolition, comes to £14.0 million. 

There is a problem with this method, which is that slaves were tortured into working far more hours at far higher effort than any free worker would have agreed to. (The best work on this comes from Roger Ransom and Richard Sutch on the American South.) This measure only captures the damage inflicted by that torture inasmuch as it created higher value for the torturers. It does not capture the damage the torture inflicted on the tortured.

It also captures only the value of the wages to be stolen from enslaved Jamaicans who were alive in the 1820s. It does not take into account the value of the wages stolen from enslaved people who had the bad luck to die before abolition. In fact, it does not account for wages already stolen from the people alive at abolition. 

But let us start with the number we have. How do we convert that into a 2015 value? One possibility is to simply adjust for inflation. That would give us £1.3 billion.

Wow! That is not a lot of money. Add in the rest of the West Indies and you get only £4.3 billion. In 2013, the U.K. spent £11.5 billion on overseas aid. Come on, Cameron! Cut a check and go home. 

Or at least that is what a reasonable government would do if it believed that the above was the correct and unassailable calculation. Of course, it is not. The value extracted from the slaves was invested in other things. One quick-and-dirty assumption is that the value of those investments increased with the value of the United Kingdom’s GDP. Use that assumption, and you get a current value of £53.3 billion, which is a substantial amount of money ... and still does not account for all the costs of slavery. 

If you think that £53.3 billion is the correct amount (or possibly something even higher) then I can see why you might be reluctant to admit to even £4.3 billion in damages. At current long-term rates, it would cost the U.K. about £1.5 billion per year to compensate Jamaica for that. 

Maybe the Jamaicans should demand to become part of the United Kingdom. Why not? Let Scotland go and replace it with Jamaica! Consider that in 2014 the United Kingdom subsidized the Scottish budget to the tune of £10.9 billion. (That figure allocates North Sea oil and gas revenues to Scotland.) Jamaica would be much cheaper! Public spending per person in England is about £8500. The price level in the U.K. is 2.2 times higher than in Jamaica, so equalized real spending would cost the exchequer only £3900 per person; roughly £10.6 billion per year. 

But Jamaica already generates tax revenues around £2.3 billion. And helpful people at the IMF (see pages 16 and 26 here and page 44 here) have calculated how much could be collected with better enforcement brought to you courtesy of the good people of Her Majesty’s Revenue and Customs, which would up the amount to £3.1 billion. Add in the £300 million collected by brining Jamaican VAT rates up to U.K. levels, and you have  £3.4 billion, for a net cost to the Exchequer of only £7.0 billion! (Rounding explains the discrepancy.) 

Take off the part of that due as reparations for slavery, and Jamaica requires only £5.5 billion to join the U.K! Moreover, considering that Jamaica has a GDP of only £8.6 billion, you would need to phase that subsidy in over at least two decades. Include the phase-in, and you get a net present cost of bringing Jamaica into the U.K. of only £66.7 billion over 20 years, scarcely more than the £53.3 billion reparations bill! 

Plus savings if Scotland walks out in the meantime. 

And then there are the growth effects on Jamaica. If Jamaica became as rich as French Guiana (the poorest overseas department of France), its nominal GDP would increase to £36 billion. 

What is not to like about that? Sure, it would still be a net drain on U.K. coffers, generating taxes of £14 billion against expenditures of £23 billion, but now you are quibbling. It is still cheaper than Scotland! 

So the solution is obvious. Cameron should offer membership in the United Kingdom to Jamaica.

Two Wednesday links

 Department of accents: Cockney is leaving London, replaced by something horribly called “London Multicultural English.” I don’t mean that it sounds horrible: not at all. I mean that the name is horrible. The transition strikes me as much the same as the way that the very misnamed New York Latino English is replacing the old-style New York accent. Misnamed, of course, because the accent is not spoken only by Latinos (in fact, in my experience, New Yorkers of Latin descent are more likely to preserve the old-fashioned accent) but has clear links with the old accent. For good examples of the new New York accent go to this BBC link and scroll down to the second video, labeled “Eyewitness accounts of NY crash.” Or listen to this.

Department of Donald. If you do a third-party run, sir, do it right. Fund people for Senate and Congress. Go on, do it. “You’re a man of vision, Mr. Trump, so I know you won’t be content to preside over a government controlled by your opponents. You’re also a man with vast monetary resources at your command, so I know that you can recruit and fund 469 congressional candidates while running an independent presidential campaign. You probably won’t win them all — you may not win any of them — but you ought to be able to draw enough votes away from the Republican candidates to cost most of them their seats, and that’s what you really want, isn’t it? To make the GOP sorry for how unfair they have been to you. Because that’s the kind of man you are.”

Scotland, befuddling

 It looks like the United Kingdom will not be sending a women’s soccer side to the 2016 Olympics. The reason? The Scots have thrown a hissy fit over the idea of a single British side, but current Olympic rules only allow for countries with U.N. seats to participate. (Before 1996 the rule was more flexible and non-U.N. countries have been grandfathered in: thus we have teams from Puerto Rico and Bermuda.) 

And so, the British women, despite their amazing performance and heartbreaking finish, will stay home next year. The bad guy is an asshole named Stewart Regan. Here he is: “A significant proportion of Scotland fans have made their feelings very clear on the matter – they want to stay under the Scotland banner. We don’t believe football should be played under a Great Britain banner and the sovereignty issue has always been a threat. The decision that was made surrounding London 2012 was a one-off decision as London was hosting the Olympics. There was never any plan to have a permanent British team and we made that very clear, as did the Welsh and Northern Irish.”

That is just completely fucking ridiculous. Sure, the Olympic rules should be changed. But absent that, you’re going to fuck over a bunch of hard-working athletes because it somehow threatens the sovereignty of Scotland? That makes no sense. FIFA is not going to eliminate English and Welsh membership because Britain fields a female Olympic side. London is not going to refuse Devo-Max because Britain fields a female Olympic side. It is a hissy-fit that certainly shows “a cramped nationalism that is too close to tribalism for comfort.”

 

So I would like to thank England for providing an excellent match last night, and give a giant raspberry to everyone in Scotland, Wales and Northern Ireland who is preventing that side, leavened with even more excellent players from the other three nations, from playing next year. Pfft!!

Still not worried about Brexit

 Well, the Labour Party will not save you. (In a weasel defense, let me state that the prediction at the link was that Labour will win if Scotland walks. But see below: we did think that Labour would win anyway, and we was wrong.) 

Still, I am not worried. First, the polls augur well. The blue dots show support for the E.U. The green dots show support when asked, “Imagine the British government under David Cameron renegotiated our relationship with Europe and said that Britain’s interests were now protected, and David Cameron recommended that Britain remain a member of the European Union on the new terms. How would you then vote in a referendum on the issue?”

As long as David Cameron can finagle something out of his European partners, these numbers make it seem like it would be an easy sell to the British public. As long as “something” does not involve a treaty change, I suspect that the rest of Europe would be quite willing to go along. Unless he humiliates himself, he should be able to get a pro-E.U. majority without breaking a sweat.

Now, should we trust the polls? After all, they got the recent general election fairly wrong. But I would make three points. First, constituency polling is much harder than national polling. That said, there is evidence that the polls actually blew the national vote share, so that might not be as much consolation as you would hope.

Second, the reason the national vote shares were off appears to have the last-minute collapse in Liberal Democratic support. That is tactical voter behavior consistent with the model that Victor Menaldo explained in comments: try to create momentum for your party by telling pollsters how you want to vote,  but then bail out for whichever leading alternative you dislike less when election day rolls around. In a two-option referendum, tactical voting is not an issue. The polls should be more accurate as a result.

Finally, the general election trend was against the Liberal Democrats and in favor of the Conservatives. (Click on the vote forecasts tab.) If the numbers turn around in the next few years, then we will revise our forecast, of course.

But what could destroy the pro-E.U. momentum? It is hard to see anything. UKIP would have to make some pretty damned convincing arguments to sway these margins. Or Cameron would have to royally botch things up in Brussels and Berlin. Even a recession would not do it; people are less likely to take risks in bad times.

In short, much ado about nothing.

Unless the above is wrong. What could make Brexit a contender?

Duverger’s law passed in England!

 I’m at a conference in California. (My boy is on the Mall with his uncle, watching the bombers fly low overhead. I would rather be there. “Shall we go to the airplane store and buy a B-24?” ) My colleague, Victor Menaldo, a Queens native currently resident in Seattle, bemoaned the state of party politics in the U.K. 

Victor: “Political science has given one insightful rule to the world and those damned Brits have to go and break it.” 

The rule to which Victor refers is Duverger’s law, which states that democracies that vote by geographical district where the biggest vote-getter wins will have two-party systems. The reason is that voters won’t want to waste their votes on no-hopers, so third parties will struggle.

Canada and India had already weakened the law, although political scientists could finagle them in by claiming both were characterized by regional duopolies, the exceptions being when one duopoly was replaced with another. (As may be the case in the recent Alberta election, for example.) But the damned U.K. persisted in having more than two major parties.

But now the voters have had their say, and they wiped out the third parties in England! (In Scotland, they appear to have wiped out the second party as well.) The Conservatives won 41% of the vote and 60% of the seats. Labor Labour got 32% of the vote and 39% of the seats. That is 99% of the seats between them.

As for smaller parties? UKIP got 14% and one seat, the Greens 4% and one seat, and the Lib Dems 8% and 6 seats. 

The first real question is whether the Liberal Democrats can survive. My guess is yes, they have a de facto duopoly in their surviving constituencies, but they have also hit their high-water mark. 

Consider the following data. Of 2.1 million Liberal Democratic votes across England, only 112,913 of them were cast in constituencies where the Liberal Democrat won. 95% of votes were wasted. Now, they remain competitive in many of the 47 constituencies that they lost, so their English voters may not decide the party is a lost cause. But they have been hit. And flip side of a potential return to office in 47 constituencies is that they are quite vulnerable in four of their remaining seats: to Labour in Leeds NW and Sheffield Hallam; to the Conservatives in Southport, Norfolk North and Carshalton and Wallington. Which means that they are vulnerable to a swing towards either party unless they can re-energize their base elsewhere.

Unless they can find a way back into government in 2020, then Duverger’s law predicts the long-term decline of the Liberal Democrats.

For UKIP, the numbers were even worse: of 3.6 million UKIP voters nationwide, only 19,642 voters cast ballots for the one winning candidate in Clacton: 99% wasted votes. Moreover, at least the Lib Dems have a history of showing that they can win outside their current 6-seat English redoubt. UKIP does not have that. 

Duverger’s law therefore predicts that the UKIP vote should melt down by the next election.

The same logic holds for the Greens. If Duverger’s  is correct, then they should have hit their high-water mark.

And of course the defectors should be going to the two major parties. So their share of the English vote should rise from 72%.

So let this blog take a risk and vote for Duverger’s! We say that England returns to two-party politics. (To be honest, I am actually doubtful that Duverger’s is correct, but I will take a stand for my buddy Victor!)

Hold us to account, readers! Or tell us why we’re wrong.

Why does everyone overlook history when discussing European defense?

 European Commission President Jean-Claude Juncker recently called for a unified European Army. Jane’s then pointed out that the real efficiencies would come from a single European Air Force. An official U.K. spokesperson then predictably said no, even though London really can’t stop other countries from going ahead: “Our position is crystal clear that defence is a national, not an E.U., responsibility and that there is no prospect of that position changing and no prospect of a European army.”

There are many fine arguments against a united European military. But, perhaps predictably, a British analyst advanced what is quite possibly the stupidest. “There’s no point in talking about an army unless you're talking about a federal state.”

Oh, for f--k’s sake. Back in 1952, six governments wrote 86 goddamned pages explaining exactly how you could build a single army without a federal state. It would be useful to explain why it would be a bad idea to take the 1952 treaty off the shelf and apply it today. (Article 10, for example, would need extensive rewriting.) It would be useful to explain why the treaty creates a federal state by stealth. (AFAICT it doesn’t, but if Mr. Keohane thinks it does I would be fascinated to hear why.) It would be useful to explain why the idea is a political nonstarter in 2015. (It is, but I do not understand the reasons.) 

But we just get some handwaving. The fellow doesn’t even seem to realize that Europe came within a few French votes of a single military 63 years ago.

The ignorance of history is breathtaking.

Anyway, a call to our friends at AFOE: why does a resurrection of the EDC appear to be off the table?

Not worried about Brexit

 Grexit, yes, still on the list. (And were I a Greek minister, I suspect I would prefer capital controls followed by Grexit to sucking an additional 1.5% of GDP out of my economy this year and 3.0% the next.) But Brexit? Nope.

First, the polls do not favor it now. Second, I suspect that David Cameron will campaign against it, just as he did against electoral reform. With the election behind him, he would be insane not to do so.

Not a Greek tragedy, really

 The Greek situation is near incomprehensible. These posts are just me thinking out loud, sometimes in the hope that somebody wiser will chime in. (In this case, someone did! But where is the old SHWI crew? Insights wanted.)

To start, let me make my previous post clearer. It is not about the money: even a full default would net the Greeks only 0.7% of GDP per year in additional spending. This is the same number that Tom Warner calculated for the Greek primary surplus. (Go read the link.) 

So the imbroglio is not about enabling a spending spree in 2015. There is no money for that. What then is it about?

I think of it this way: (1) What do the Greeks want? (2) Why do they need European cooperation to get it? 

What do the Greeks want? Simple: they do not want to have to hit an impossible fiscal target in 2015 and beyond. Their economy has been absolutely crushed, much harder than Ireland or Portugal. And the Greeks have implemented more austerity. It is entirely reasonable for them to want to avoid sucking an additional 1.5% of GDP out of their economy over the rest of 2015. 

Why can’t they get it without European cooperation? Two reasons. First, Greece doesn’t just owe interest this year. It has to make a whole lot of principal repayments. That debt needs to be rolled over or refinanced. Some of it is due the IMF, which might be cooperative; it was with Argentina in 2003. Some of it is due private creditors. That debt would be need to be restructured unless official finance was forthcoming. Mitu Gulati is the expert, and I have every intention of asking him his thoughts on the matter, but I think that should be doable. 

And if neither refinance nor legal restructuring for private debt is an option, then Greece can just default. What are they the private holders of Greek bonds gonna do? Sue? Good luck with that.

But the IMF and private parties are not the main creditors: most of that money Greece’s public debt is owed to the European Union in one way or another. So Greece would need to get the Europeans (read: Germany) to agree to a rollover. 

Why not just default on the Europeans? Well, here is the second reason the Greeks need European cooperation: Greek banks depend on special finance from the ECB. Pull that, and the Greek banking system collapses. 

The question seems to be, then, would the Europeans actually send Greece spiraling into another depression, even before the country emerged from the last one? I was extremely doubtful a month ago. My opinion is changing, however. Not because the  Germans are proving more intransigent than I expected. Rather, the center-right governments of Portugal, Ireland and Spain are proving more intransigent than I expected. In the words of Noel Whelan: “Centre-right governments have no interest in seeing this new left-wing Greek government succeed.” 

Whelan argues mostly for Ireland (it is worth reading) but the logic applies to Portugal and certainly to Spain, where both the People’s Party and the Socialists have an interest in heading off the rise of Podemos.

That said, I still think this will be resolved with a haircut and without Grexit. Here is the French finance minister, Michel Sapin: “It is a problem of wording, although the legal tool cannot be anything else than an extension of the program. What [Greek finance Minister Yanis] Varoufakis has told us, what I have understood, is that he agrees in principle with the extension of the program. Everyone agrees on this: you have a 1.5 percent primary surplus, you cannot do anything in this period that worsens that surplus.” There are also some pro-Greek noises coming from the Italian finance minister, Pier Carlo Padoan. 

If the Europeans can agree to call a violation of the bailout program a new program, rather than insisting that it be called an extension, then everyone should be able to strike a deal.

Unless J.H. is right.

The British Commonwealth lives on

 The British Privy Council just handed the opposition in St. Kitts and Nevis (SKN) a huge victory. Basically, the Labour government altered electoral boundaries on January 16, one month before the next general election. The fragmented opposition cried foul. (There is something quite amazing about the idea of a “fragmented opposition” in a country of only 55,000 people.) So they sued.

A judge immediately granted an injunction. The problem was that she granted it too late. Governor-General Edmund Lawrence signed the redistricting law at 6:20pm, whereas the judge issued her order at 7:38pm. Since you aren’t supposed to be able to injunct an action that’s already been taken, the injunction was discharged on January 27th.

But that was not the end of that!  SKN, you see, is a part of the Organization of Eastern Caribbean States. The OECS has a common judicial system, so the SKN opposition took the case to the Eastern Caribbean Supreme Court in St. Lucia. The opposition argued that Section 119, Article 1 of the Constitution of the Federation of SKN defined “proclamation” as “a proclamation published in the Gazette.” Since the law had not been published in the Gazette, they argued, the injunction was valid.

The Eastern Caribbean Supreme Court found for the government. “The Constituency Boundaries Commission reviewed the boundaries of the constituencies in the Federation and recommended alterations to the constituency boundaries; a draft proclamation giving effect to the recommendations of the Commission was thereafter approved by the National Assembly; the Governor General then signed a proclamation which (according to the evidence of the Attorney General) was published in the Official Gazette. All of this happened on Friday, 16th January 2015, and though one may say that the process was hurried through by the relevant authorities to gain an unfair political advantage, that is an issue of political morality and not constitutional validity, which is not suitable for judicial enquiry.”

But that was still not the end of that! SKN, like most of the Commonwealth Realms of the Caribbean (save Barbabos but including Trinidad), still uses the British Privy Council as its highest court of appeal. And so, the case went to London. Where the opposition won! 

I can’t wait to read the final decision.

Anyway, this is not a huge piece of news. After all, SKN is just a small group of islands with only 55,000 people. But it is a striking example of how the microstates of the Caribbean survive by contracting out so many state functions to other polities and organizations, be it the OECS, the CSME, or the United Kingdom.

The extraterritorial British empire

 The U.K. goes a little bit further than the United States in letting people use its courts against foreign sovereigns. The basic law is laid out in the State Immunity Act of 1978. First, the British law does not require that any state-owned property must have some sort of economic connection with the activity that gave rise the underlying claim. (E.g., there is no equivalent of Section 1610(a)(2) in the British law.)

Second, in general it is a little easier to “pierce the corporate veil” and go after the assets of state-owned companies. For example, 2006 a British company went after the Congolese Republic for unpaid debts. The Congolese government tried to sell oil through the  state0owned Société Nationale des Pétroles du Congo (SNPC), which then sold it through a web of holdings. The British courts held that SNPC was an “organ of state” because:

1. The board of SNPC could delegate powers to a chairman appointed by the President of Congo;
2. SNPC had unaudited and unverifiable financing arrangements with the state; and
3. SNPC neither declared dividends nor returned profits to the state in cash. Instead it made expenditures normally made by government.

Other than maybe the first half of the third clause, that would certainly apply to PDVSA.

Now, that case did not involve sovereign debt per se, but a similar one did in 2005. That year, a British vulture fund managed to grab the revenues from Congolese oil sales. Now, the Congolese had done a good job of protecting themselves. SNPC established a subsidiary, Cotrade.  Cotrade sold oil to the Africa Oil & Gas Corporation (AOGC), incorporated in Canada. AOGC then sold the oil to a company called Sphynx, which in turn sold it to Glencore. The vulture fund successfully intercepted the money that Glencore owed Sphynx by arguing that SNPC and Cotrade had no independent existence from the Congolese state and AOGC was nothing more than a convenient front. (This is the best link for the story.) That seems rather more direct than what happened in Texas! 

Now, to be fair, a similar attempt to go after a joint venture part-owned by the government of the Democratic Republic of the Congo failed in 2012. So while easier than in America, it is not a sure thing.

Finally, there is the global Mareva injunction. British courts can freeze assets in advance of a judgment. No sneaking things out of the country here! 

I AM NOT A LAWYER! I have no idea how difficult it would be to wield these tools against Venezuela in the advent of a default. I kinda think it would be hard, since the bonds were issued under New York law and Citgo assets are in the United States. But Mareva injunctions can be global. So I suspect U.K. courts will play a role in whatever happens.

Which will be default --> legal mess --> restructuring. Hold on to your hats.

More evidence that U.S. shale will not collapse in 2015

 In October, we predicted that one of the reasons why U.S. tight oil production would not collapse in the face of low oil prices is that “when prices slump, so does the demand for all the specialized inputs that oil operations need. Geologists, rigs, roughnecks, all will cut their prices.”

Yesterday, the Financial Times reported that the oil majors were cutting the rates they paid contractors by 10%. An oil services company cut wages for 1,300 workers. And the majors have slashed their internal pay by 15%. 

The data comes from the United Kingdom, not the United States, but the same trends apply. We do not expect American tight oil (aka, “shale”) to fall significantly next year.

Vox fails World War 2 history

 Vox is a very useful website. I admire what they are trying to do. But sometimes they just completely screw things up. This time, they did so in their grandiosely-named “40 maps that explain World War II.”

The big problems start with Map 10: “The amphibious invasion of the United Kingdom that never happened.” All you need to know about the problem is in the last line of the caption: “As the British advantage in the air grew, Hitler was forced to shelve his invasion plans.”

Christ almighty, no. No. No no no. Nazi Germany had no way of successfully invading the British isles regardless of the outcome of the Battle of Britain. First, the Royal Navy was in the way, not just the Royal Air Force. Second, on four occasions the British military waved away the entire Royal Navy and Royal Air Force in order to game out an invasion ... and in all four exercises the invasion collapsed with days. Click the link for Alison Brooks’ classic essay.

After that, the other problems are minor. Map 13 is about Operation Barbarossa. It is true that the Germans failed to take Moscow before winter set in, which was a serious problem ... but the order of the sentences in the caption implies that the Germans failed to take Moscow because winter set in, which is not what happened: 

The Nazis were able to drive hundreds of miles east and reach the outskirts of Moscow by October. But then Stalin was saved by the bitterly cold winter. The Soviets had more experience operating in cold weather and were better prepared than the Nazis. German equipment was not designed for below-zero temperatures, German soldiers were under-dressed, and they lacked essentials such as antifreeze. Germany never took Moscow.

And while Map 1 points out the Allied economic advantage (meaning really the U.S., U.K., and USSR) the point gets lost in all the later discussions. Here are two examples. First, Map 19 recounts Free French victories in Africa and provides a much-needed antidote to the image of French fecklessness. The problem is that the caption says that the victories “deprived Hitler of much-needed resources,” which is not true. The Axis did not draft African soldiers and the  area did not provide any strategic raw materials. (Frex, Gabonese oil production did not start until 1956.)  

Second, Map 28 describes the Battle of Midway as a turning point, which it was in the sense of beginning the U.S. offensive ... but was not in terms of being key to a U.S. victory. By the summer of 1943 the U.S. had a wave of new carriers. Japanese-occupied Midway would be right on the doorstep of the main U.S. naval base. It would be thousands of miles away from Japan’s. The U.S. would be able to bomb it at will (as we did Wake Island) and rather rapidly starve out the survivors. The Marianas campaign might be pushed back to 1945, but by then the U.S. would have overwhelming superiority. And then the atomic bombs are ready by August.

A later Marianas campaign might give the Soviets the time and inclination to occupy all of Korea instead of just the northern half ... which would make the Battle of Midway the turning point of a war that hadn’t even started. You could call the South Korea the big winner of that battle. 

But honestly, the implication that Operation Sealion could have worked is the real error. Not to take anything away from the Battle of Britain, which accomplished much, but keeping the Nazis out of London was not one of them.

Devo Max 1.0, circa 1914

 This is a bit of a shaggy dog post about Ireland a century-ago and Scotland today, but I want to put it up anyway.

In 1914, the British government finally passed a Home Rule bill for Ireland. Unfortunately, World War I intervened and London never fully implemented the law. That helped fuel the Easter Rising of 1916. Britain and Ireland still might have remained united even with London’s botched response to the revolt but for the government’s misbegotten decision to extend conscription to Ireland in 1918. My understanding of Irish political history is limited, but finally put paid to the possibility of a peacefully united British Isles seems to have been the combined one-two-three-four punch of (1) suspend Home Rule; (2) put down the Rising with brutal force; (3) shoot the leaders of the rebellion; and (4) finally try to draft the Irish who had in fact already volunteered in large numbers . 

How many Irish volunteered during the war? We know that 140,456 enlisted in the armed services over the course of the conflict. Of those, 55% gave their religion as Catholic, according to Keith Jeffrey in Ireland and the Great War.  That would come to a little under 15% of the 1911 Catholic male population aged 15-35. To that one should add the rough 58,000 Irishmen who were already serving the armed forces in 1914, but religious figures for them are hard to come by. A random guess of half would place the number of military-age Catholic men in the war at 20%.

That is not small. It is twice the percentage of military-age male Americans who served during the Vietnam War, and that war involved conscription and a far far lower risk of death. In fact, less than half of all military personnel actually went to SE Asia in 1965-73. 

Anyway, to the point: many have argued that had Home Rule been implemented, then Ireland would still be part of the U.K. today. Which makes it surprising that the actual text of the act is so hard to track down! But I finally did. So what were the provisions of the Home Rule act and does it provide a model for Scotland?

Irish Home Rule, circa 1914:

Trade: Ireland would be part of the United Kingdom for commercial and customs purposes. 

The West Lothian question: Home rule cut the number of Irish MPs from 103 to 42. That cut Ireland from being overrepresented (15% of seats against 10% of population) to underrepresented (6% of seats), but those MPs still had full voting privileges. Nothing EVEL here. 

Tax collection: U.K. bureaucrats would continue to collect and administer all taxes. The funds collected in Ireland would then be remitted to the Irish parliament. This would save autonomous Ireland from the need to set up an internal revenue service.

Courts: The Privy council would remain the chief court of appeal, but it would now be the only court of appeal. In this, Ireland would become like the nominally-independent countries of the modern West Indies.

Services: The bill kept the U.K. in charge of the following: old age pensions, national insurance, post office banks and friendly societies. (But not the actual post office, which would fall under Irish control from the start.) The Irish parliament could take the reserved services over whenever it wanted with a one-year warning. The Royal Constabulary would move to Irish control after six years, although local police, prisons and courts would come under Dublin immediately.

Infrastructure: One service, however, would never be devolved: road-building. Under Article 19, Irish petrol taxes and car license fees would continue to go into the all-U.K. fund and Irish projects would be funded just as elsewhere under the Development and Roads Improvement Fund Act of 1909. The thing is, in practice the Road Fund simply returned car taxes to the county where they were collected. In other words, not a hidden subsidy.

Finance: This part got complicated. Basically, under Home Rule the imperial government (that is the phrase used in the act) would pay Ireland the cost of all Irish services as of 1912 plus £500,000. (Measured as a % of the British GDP, that would be the 2013 equivalent of £340 million.) The surplus was then slated to fall to £200,000 within six years. The Irish government could vary tax rates or impose new ones; if it cut taxes, the transferred sum would fall commensurately and if it raised them it would rise. The £500,000 was in addition to the existing net transfer of £1.5 million, for an initial subsidy of £2 million.

So far, so simple. But there were a few catches. First, £2 million was a realtively small amount of money even for the time. It came to 16% of all government spending in Ireland and only 1.5% of Ireland’s nominal GDP in 1912. (From Ó Gráda, Ireland: A New Economic History.) 

Second, if Irish expenses grew for any reason, then Dublin would have to finance them from new taxes or by borrowing. Increases in the revenue from existing taxes (say from economic growth) would go to London. Ireland could borrow on the markets, but that was a limited recourse and under an implicit British veto. Of course, the arrangement also provided security against a fall in revenues. The problem, really, would have been that the transferred sum was neither linked to economic growth nor inflation. It would not therefore have provided much of an automatic stabilizer for the Irish economy. 

Third, the whole set-up was transitory. Article 26 stated that once all combined Irish and imperial tax revenues collected in Ireland exceeded all combined Irish and imperial expenses in Ireland over three consecutive years, then Parliament would revisit the finance question. In short, once Irish tax revenues exceeded expenses, then London would have a license to cut all subsidies. On the other hand, if revenues fell further behind expenses, then Ireland would be on its own unless Parliament acted.

Of course, Ireland would still have representation in the national parliament, so it might be able to defend (or even expand) its subsidy. Absent faith in the political influence of its representatives in London, however, the Irish parliament in Dublin would have to be nuts to take over the reserved services from the U.K. 

Defense: Note that defense was not included. Ireland would pay nothing for the protection of the British army and Royal Navy.

Scottish Home Rule, circa 2014:

Under modern Home Rule, with some adjustments for scale and context, Scotland would see its current fiscal relationship swapped for a lump sum equal to the amount of current U.K. non-defense spending in Scotland plus 4%, presumably adjusted for inflation. 

That is really not all that different from the current set-up, under which Scotland gets a block-grant for devolved functions set at 10.03% of English spending on those functions. The big difference is that under a Home Rule-like proposal the grant would no longer be effectively indexed to U.K.-wide economic growth ... and who would want to accept that?

In addition, a modern equivalent of the 1914 Home Rule act would cut Scottish seats in Parliament from 59 to 36. That is less than a solution to the West Lothian question. Moreover, Scotland is barely overrepresented at Westminster in 2014, whereas Ireland was massively overrepresented in 1914. 

The current status of Scotland, then, looks a lot like Irish Home Rule with a more generous funding formula. Devo Max, which cuts Scotland off entirely from the U.K. fiscal regime, is rather more autonomy and not a whole lot less insurance. There are better arrangements than Devo Max (consider either American or Canadian fiscal federalism) but the Home Rule proposals of a century ago are not one of them.

Of course, nobody is saying they were! I just ran across a copy of the bill and got curious as to why the precedent never seemed to come up in the modern debate. And now I know.

Long live united Britain

 So far, we feel pretty confident in our long-standing prediction that the Kingdom will remain United. Hooray!

Now, can we get some more unifications up around here? I mean, seriously. All this country-splitting is getting a bit boring. Bring back Czecho-Slovakia! Unite the West Indies! Heck, unite the West Indies as part of Canada!

If we must get rid of the United Kingdom, why not have it join Canada? I would get behind that.

And why not have Iceland join the United States?

Still going to bet on No

 The polls are still not pointing in the direction of Yes. And Sam Wang agrees! I think. Actually, I am not sure what Sam Wang thinks; he is a little cryptic when it comes to Scotland.

Slovakia and Scotland

 Over at Charlie’s place, a fellow named Cdodgson brought up the split between the Czech Republic and Slovakia as an example of a  “peaceful secession from more or less democratic states which the people involved don’t regret and don’t want to reverse.” The context, of course, was Scotland.

The basic description is true. The Velvet Divorce was peaceful and the countries were more-or-less democratic. But the Velvet Divorce holds few lessons for Scotland. 

The history of the Velvet Divorce does however hold lessons for the Velvet Divorce: namely that it was a sleazy breakup of a perfectly functioning country that benefitted no one save the two politicians who arranged it and forced it through: Vaclav Klaus and Vladimir Mečiar. Neither of them did their country any good, before or after the split.

Did the January 1, 1993, division of Czechoslovakia reflect popular opinion? Of course, the answer has no bearing on the benefit of small states or the morality of breaking up democratic polities, but it is interesting ... because it didn't! In 1991, polls showed only 9% of Czechs and 15% of Slovaks favored a split. (Page 252.) By December 1992, support had risen ... to only 36% of Czechs and 37% of Slovaks. 

Moreover, Czechoslovakia already showed a rather impressive level of decentralization: in 1992, the federal government controlled only 22% of public spending. (See Table 6.1.) An additional 0.5% of spending went through the federal government to the two states via federal grants. (Table 6.5.) It is true that fiscal grants from the federal government had dried up as an almost accidental response to de-communization. That might have annoyed some Slovaks ... only the polls didn't show it.

The deal was hashed out between Klaus and Mečiar with no popular input. Neither politico was a particularly admirable person. Both leaders refused to hold a referendum because they believed that they would lose.

A continuing federation would have eventually led to more fiscal transfers. It also would have ended Mečiar's ambitions. So Klaus threw out the poorer chunk of the country and Mečiar escaped the limits of the federal system. Win-win for them.

Did the split leave anyone else better off politically or economically? On the Slovak side, the answer is pretty clearly “no,” although the country managed to survive the Mečiar years. It came close to some ugly outcomes, though. (See Hungary for a bad but-still-not-worst-case example of the bullet that Slovakia dodged.)

Lose-lose for everyone else. Trade collapsed despite a customs union, and both countries went through a painful adjustment. (Page 60.) It worked out OK in the end, but at grave risk to democracy and the gratuitous sundering of a political community. The Czechs and the Slovaks certainly seem to feel that it was pointless: two decades later, only 41% of Czechs and 29% of Slovaks think the Velvet Divorce was the right thing to do. Given status-quo bias, those numbers are astoundingly low.

There is a value in democratic political communities. They bind people through something more than impersonal market exchanges. It is hard to see why they should be broken up unless they are turning undemocratic (which would include systematized ethnic discrimination) or have such histories of intercommunal hatred that they cannot be made to work without violence.

It may be the case that some members of a democratic community have so soured on the others that they wish to share none of the responsibilities of being in a community. But that is parochial and cramped.

To return to Scotland: the breakup of Czechoslovakia was nothing like the proposed breakup of the United Kingdom. It had no popular support (unlike Scottish independence), led to great economic dislocation for both new countries (unlike Scottish independence, which will likely have no impact on England), occurred in a situation of low fiscal transfers (unlike Scottish independence), led to a near-breakdown of democracy in one of the countries (unlike Scottish independence), and did not occur after several decades of divergent policy preferences (unlike Scottish independence). 

Comparisons between Scotland and Slovakia are best avoided, I think, unless the discussion is solely focused on short-term economic effects.

More on why Scottish secession does not mean Tory dominance of the U.K.

 Over at Charlie’s place, two fellows named Tim and Barry raised the old canard that Scottish secession will lead to unending Conservative control of not-as-great Britain. They were unconvinced by (or ignored) the evidence contained in the previous post. 

Are they right? After all, U.K. elections are decided using first-past-the-post. National vote shares matter only inasmuch as they translate into victories in individual constituencies. In the United States, for example, Democrats can win the national House vote by almost 2% and still lose the chamber, which is what happened in 2012. Is the U.K. similar?

Short answer: no. 

Longer answer: losing Scotland knocks Labor down to 217 seats, versus 306 for the Tories. Parliament shrinks from 650 to 591. That means Labor needs to capture 45 seats to outsize the Conservatives and and 79 to gain an outright majority.

Is that doable? Well, the way to find out is to look at Tory constituencies and ask how much of a swing would be needed to flip the weakest 45 and the weakest 79. If the required swing is huge, then the Tories would indeed have a lock on the 2015 election sans Scotland.

And whaddaya know? The Conservatives are facing at least 82 swing seats. See here and here and here. Translation: It won't take much of a swing to knock the Tories off their perch. The polls are already showing a 7-point swing even if Scotland walks away. If the Liberal Democrats remain the number-three party, then Labor will not a hard time putting together a winning coalition in 2015. The rise of UKIP, of course, is more worrying ... but only if it wins enough seats to put together a majority with the Conservatives.

To sum up: the U.K. parliament is more responsive to the popular vote than the U.S. House of Representatives. Even without Scotland, Labor would be able to win a parliamentary majority as long as it remains ahead in the popular vote. And right now, it is ahead in the popular vote in England and Wales.

This is amateur psephology, of course. I welcome data that shows why the above analysis is wrong. (And I think I now need a British Isles tag.)

If Scotland leaves the U.K., then the U.K. will not leave Europe

 If Scotland votes to leave the U.K., then Brussels has made it clear that it will also leave the European Union. Scotland would need to apply like any other potential member state.

But what about the rest of the U.K.? Would it vote to leave the E.U. without Scotland? Many observers are worried.

I do not think that they should be. 

The Tories will be up for reelection in 2015, unless there is a vote-of-no-confidence. That election will be weird. The Scottish government wants to wrap up the independence negotiations by March 2016, so Scots might still be able to vote in the U.K. election. 

That said, it would entirely reasonable for Parliament to disenfranchise Scottish voters before then. Would that swing the 2015 election to the Tories?

Probably not. I played with the crosstabs from this poll. Here are the results:

	Weight	Weight w/o Scotland	% Tory	% Labor	% UKIP
London	13%	14%	37%	36%	9%
South	32%	36%	35%	28%	21%
Midlands/Wales	21%	23%	37%	33%	15%
North	25%	27%	29%	48%	13%
Scotland	9%	--	18%	34%	4%
Total U.K.			33%	36%	15%
Without Scotland			34%	36%	16%

My general impression from the literature is that the district boundaries in England (I mean England England) generally favor Labor, even after the recent redistricting. So Labor is likely to win. Labor opposes holding a referendum on the European Union. That would make Brexit moot.

Moreover, my gut feeling, which could be entirely wrong, is that allowing Scotland to secede will kill Cameron and hurt the Tories at the election. After all, Cameron allowed the election to happen and Cameron took off the option of giving Scotland the powers of your typical Canadian province. So he really will be to blame.

Absent some sort of black swan, Labor will be more likely to win, and Brexit will be moot.

This analysis fails if the Tories pick someone popular to replace Cameron. But I have no idea who such a person would be.  

On the other hand, if the Tories pull off reelection, then Britain is likely out of the E.U. The above analysis, from this poll:

	Weight	Weight w/o Scotland	% Brexit	% E.U.
London	13%	14%	34%	50%
South	32%	35%	42%	37%
Midlands/Wales	21%	23%	45%	37%
North	24%	26%	39%	40%
Scotland	9%		30%	65%
Total U.K.			39%	41%
Without Scotland			40%	39%

Any Cameron-replacement is likely to demagogue the Europe issue and the voters south-of-the-border will be pissed. The momentum will be towards withdrawal and the polls will likely move that way.

But I would bet against a Tory election victory in the wake of Scottish secession, and thus against Brexit. Investors and bankers relax! The Labor Party will save you.

On the other hand, I think that the Spanish government is going to be much bolshier about letting Scotland in than I did a few months ago … they won’t veto, but they will drag things out, and Scotland is going to hurt. 

I will still bet against Scottish secession

 There was that shock poll, yes. But we saw something similar in the Mexican presidential campaign. The official stance of this blog is unchanged. Although the gap is closing, we would still strongly bet against a Yes vote for secession. 

Calling Sam Wang!

Anyway, there is another discussion to be had about whether Scotland should secede. Charlie Stross tries to draw some conclusions about the general desirability of small states here; I show incredulity and confusion about his argument here and here. 

Sadly, Charlie has disabled Livejournal commenting, but I would encourage more participation, if only to help me understand what it is exactly that he is arguing.

The Monkey Cage goes slatepitchy on political polarization

The Monkey Cage was an awesome group blog. It brought serious political science research into the mainstream. It was all good.

And then it became part of the Washington Post.

Which gets us to an odd series of posts that attempts to convince the reader that American political polarization ain’t so bad. We can start with a post entitled “Gridlock is bad. The alternative is worse,” by Morris Fiorina of Stanford. Great scholar, great work ... but the argument is strange.

First, it assumes that the political parties would behave as they currently do under a more parliamentary-like electoral system. That makes no sense. One overreach followed by electoral disaster and that would be the end of that.

Second, to make his case that the parties left unfettered would do crazy things he writes, “The 2012 Republican platform plank stated essentially: never, no exceptions. The Democratic platform plank stated the opposite: any time, for any reason.”

Hmm. The GOP platform wrote:

1. We oppose using public revenues to promote or perform abortion or fund organizations which perform or advocate it and will not fund or subsidize health care which includes abortion coverage (page 14);
2. Prohibit the barbaric practice of partial-birth abortion;
3. Criminal penalties on healthcare providers who fail to provide treatment and care to an infant who survives an abortion;
4. Ban sex-selective abortions;
5. Protect from abortion unborn children who are capable of feeling pain;
6. We urge enactment of pending legislation that would require parental consent to transport girls
   across state lines for abortions (page 34);
7. We oppose school-based clinics that provide referrals, counseling, and related services for abortion and contraception (page 36).

Not a platform that I would support! And I would agree that point (5) effectively bans all abortions. But I would, no? Read objectively, this is to the right of median public opinion, but it is not off the charts. Of course I believe that it’s folderol, given the enthusiastic anti-abortion and anti-contraception actions of GOP-controlled state legislatures. But it sure is a sign that the national party understands the dangers of getting too far out in front of public opinion.

And the Democrats? Even less:

1. The Democratic Party strongly and unequivocally supports Roe v. Wade and a woman's right to make decisions regarding her pregnancy, including a safe and legal abortion, regardless of ability to pay;
2. President Obama overturned the “global gag rule,” a ban on federal funds to foreign family planning organizations that provided information about, counseling on, or offered abortions;

And that’s all she wrote.

So where does Fiorina’s characterization of the party platforms come from? You got me. He is a great scholar with a great book on polarization. But this was not written as a serious post. It has a slatepitchy feel: let’s devil’s advocate against the conventional wisdom. That has a place, I have been known to do it myself ... but it belongs not on the Monkey Cage that I used to love.

A worse post is Rob Ford’s “In America, polarization is a problem. In Britain, it could be a solution.” (This is the Rob Ford of the University of Manchester, not the other guy.) I have much to say about this, but I would rather make a public call for Alex Harrowell to come over here and fisk it for us. I will say simply that even if Ford is correct (Alex, we need you!), then I am not convinced that you have a problem if the only by-products are falling voter turnout and the rise of a rather silly buy aggressively anti-racist bunch of twits.

Now, as befits that great nation, the Canadian entry into the series is sober and serious. Richard Johnson of UBC limits himself to pointing out something that non-Canadians may not have realized: Canadian parties have become more polarized, whereas Canadian voters have not. That is the Monkey Cage I used to love: rigorously confirming the conventional wisdom (as AFAIK the above is the conventional wisdom in Canada) is a worthwhile initiative, Canadian or otherwise.

Anyway, earlier posts in the series are not slatepitchy, and some in fact argue against the American and British arguments mentioned above. And I do not want anyone to take this as a criticism of Fiorina or Ford. Like I said, I have done the same thing. And many counterintuitive pitches are indeed correct. But these two are odd.

The E.U. just put the nail in the coffin of Scottish independence

I have been bemused at the debates over Scottish independence at Crooked Timber. I mean, uh, well, there is this:

So it isn’t likely to happen.

And now it is less likely to happen with E.U. Commission President José Manuel Barroso saying what we all knew already, which is that an independent Scotland would have to apply for E.U. membership, just like Iceland or Norway. The negotiations will not be easy, even through Madrid will likely agree to allow the application.

I am opposed to Scottish (or Catalan or Texan or Québécois or Regiomontano or Camba or whatever) independence because I am opposed in-general to secession from democratic states. First, secessionism generally requires a cramped nationalism that is too close to tribalism for comfort. Second, it smacks of democratic failure: you don’t like national policies, but instead of trying to build a majority to change them you pack up your marbles and leave. Finally, it is (albeit probably not the Scottish case) selfish, a way for richer people to dissolve their historic bonds of community with poorer ones.

I read the Crooked Timber thread. The positive arguments for smaller states boiled down to (1) We do not like the way that the U.K. votes as a whole, so screw it; or (2) nationalism, just because. (By that definition, I should be a huge proponent for the Republic of New York and New Jersey Only with the Annoying Bit of New York Removed and Maybe Horse Country Too.)

If there are unreconciliable historical wrongs in play, then I could be persuaded to support the partition of a notionally-democratic state. For concrete examples, see Ireland circa 1922, Algeria circa 1961, or Kosovo circa 2008. But those are extraordinary cases that involved a horrible combination of long-standing ethnic discrimination and very recent bloodshed. Moreover, electoral democracy in the modern sense was a recent arrival to all three mother states: the U.K. in 1918, France in 1958, and Serbia in 2000.*

Absent that, however, I say no. Secession should be off the table.

But I might be wrong to say no! Counterarguments very welcome.

* The Fourth Reform Act of 1918 introduced more-or-less universal suffrage to the U.K., although female suffrage remained limited until 1928. The French Constitution of 1958 granted full voting rights to all Muslim residents of the Algerian departments. Slobodan Milošević fell in 2000, after which Serbia (which remained notionally united with Montenegro until 2006) has held basically free elections.

Las Malvinas no serán ... oh, just read the post

President Kirchner has recently tried to raise a ruckus about the Malvinas. The reasons have to do with domestic politics, but recent changes have done two things: they have made the islands far more tempting for Argentina and made it far less likely that the country could retake them.

The first thing is oil. On May 6, 2010, Rockhopper discovered oil on its infelicitously- named Sea Lion block just north of the islands. (Then again, Sea Lion was impossible, so maybe it’s a good name.) So far, seven of nine Rockhopper appraisal wells have come up positive. Production will start in 2017; estimates are that Sea Lion will eventually produce somewhere between 85,000 and 120,000 bpd. At $80 per barrel wellhead and $10 lifting cost, that would be about $3 billion per year in rents to scrap over. (Even fully costed at $50 per barrel, that would be a cool $1.3 billion.)

So there is something to fight about besides national pride. Of course, Argentina would need to have international backing if it was to sell that oil ... but the country has a big enough domestic market.

Nonetheless, any planning for a war would need very careful diplomatic preparation these days, much more than in 1982. Back then, Argentina was following a long line of actions that held that the “1945 line” did not hold for European overseas territories. Morocco could invade the Spanish Sahara, India could fight a war with Portugal for Goa, Indonesia could march into East Timor and Dutch New Guinea. Given this history, it was not (completely) crazy for the Argentine generals to think that the world would accept their victory. (And to be honest, I suspect that they were right: if they had won, las Malvinas hubieran sido argentinas.) 

But that is not the case today, even though plenty of countries support the Argentine claim. So problem #1 would be to secure enough backing to prevent the imposition of U.N. sanctions.

And problem #2? Well, military technology has advanced:

You got it. The Exocet, so devastating in 1982, is not worth much against a modern British destroyer. It gets worse. The U.K. keeps four modern Typhoons on-station at the Mount Pleasant air base in the islands; Argentina would need to take it out somehow with an air force consisting mostly of outdated Mirages and Super Etendards. (The Mirages are scheduled to be withdrawn from service this year, leaving a few Skyhawks ... a 1954 design acquired in 1997.) Add to all that the 1,200 men at the airbase and British access to intelligence. The result? No chance of success.

Well, there are always people ready to concoct James Bond-like plans where Argentina packs in a bunch of special forces into a civilian airliner, assaults the base from the ground and then dares the U.K. to take it back without access to an aircraft carrier. That scenario is silly. And even if it happened, expect the Argentines to be pounded from the sea and air.

In other words, even if Argentina assembled the necessary diplomatic support, a war will not happen because a war could not be won.

Occidental, Iraq, France, Britain, travel, my wife (♥) and whatever else

 The short answer to Bernard's question about Oxy is that they bid too high. They were the minority partner in a field with Eni, Sonangol, CNOOC and Kogas ... and they lost.

The rest of the final post in the Iraqi oil series is going to be held up for a bit. The reason is left for an exercise by the reader, but it is a good one. The worst case scenario is that you will see it here fast.

This month begins a horrendous travel month during which I will go from Boston to Los Angeles to New York to Tulsa to Shamrock TX to Burlington to New York to Miami to Atlanta to home and my wife!!! (Who will be visiting me in both New York stops, thank the Lord.) France was much more fun. Oddly enough, I'm really only looking forward to the Tulsa-Shamrock bit of the trip, although I will enjoy smoking cigars in New York and Miami with my hermanos if I get the chance.

As someone who has a great affinity, even a love, for both Britain and France (maybe it's a color-combo thing, or a losing land wars in Asia thing, or some else ... thing) I present you with the following:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Sarkozy Visits the U.S.
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Reform

I eagerly await the Ranter's informed commentary.

Iceland, European empire, deposit insurance, and terrorism ... really

 Why is the Icelandic taxpayer on the hook, asks Jonathan? The short answer is: blame Europe!

 
Everyone knows about the European Union, the big confederation (with some federal characteristics) of countries sitting there on the Old Continent. Fewer people know about the European Economic Area. The EEA is basically an agreement under which Iceland, Norway, and ... er ... Liechtenstein get access to the European market in return for adopting some E.U. laws and regulations. (Switzerland has basically replicated the same arrangements without formally signing on to the EEA.)  The EEA required its members to adopt European law on deposit insurance in return for granting EEA banks the right to branch into the E.U. As a result, Iceland adopted a deposit-insurance scheme in 1999.

Click the link on the Icelandic scheme. (Or keep reading.) Scroll down to Chapter 5, Article 10. It reads: “This amount shall be linked to the EUR exchange rate of 5 January 1999.”  The reason is quite simple: the E.U. law required countries to create schemes that insured deposit accounts with a value of at least €20,000. Ergo, the Icelandic scheme guaranteed €20,887. Now, the scheme was financed by a 1% levy on bank deposits and was rather vague about what would happen if it could not meet its obligations. Was the government then responsible? Were savers then on their own? What?

The 300,000 British depositors who fell in love with the 6% rates that Landsbanki offered through its “Icesave” accounts did not seem troubled by these distinctions. They deposited £5 billion. In an Icelandic bank. A bank they had never heard of before 2006 based on a tiny island of 300,000 people. Any resemblance to Barbados is entirely coincidental. Barbadian banks do not do this sort of thing. This may be because Barbadian bankers have banked for some time, while the Icelandics were pretty green.

 
Maybe the Britons thought that Iceland was in the Caribbean? More likely they were taken in by a message that Britain’s financial regulators allowed to stand on its website:  “You can also rest assured that with Icesave you are offered the same level of financial protection as every bank in the U.K.” 

Well, when Iceland finally went kablooie, worried Britons began a run on Landsbanki, which led to a rather remarkable conversation between Iceland’s finance minister, Árni Mathiesen, and Chancellor Alistair Darling of the United Kingdom:

Darling: “Do I understand that you guarantee the deposits of Icelandic depositors?”

Mathiesen: “Yes, we guarantee the deposits in the banks and branches here in Iceland.”

Darling: “But not the branches outside Iceland?”

Mathiesen: “No, not outside of what was already in the letter that we sent.”

Darling: “But is that not in breach of the EEA treaty?”

Mathiesen: “No, we don’t think so ... Since we can’t cure the domestic situation, we can’t really do anything about things that are abroad.” 

Darling:  “See, I need to know this in terms of what I tell people. It’s quite possible that there is not enough money in [Iceland’s depositor guarantee] fund. Is that right?”

Mathiesen:  “Yes, that is quite possible.”

Darling:  “You have to understand that the reputation of your country is going to be terrible. It really is a very, very difficult situation where people thought they were covered and then they discover the insurance fund hasn’t got any money in it.”

After hanging up the phone, Darling did something even more remarkable: declare Iceland a terrorist state. It was the easiest way to freeze Landsbanki assets inside the U.K. (Sadly, most of Landsbanki’s assets were not in the U.K.) He then guaranteed that British depositors would be repaid in full. Good politics, of course, and probably needed to prevent crippling bank runs in Britain, where a lot of foreign banks operate.

At that point, Darling went back to Iceland — which desperately needed financial support from other Nordic countries to prevent runs there and obtain IMF money — and convined them to pass a bill that would pay Britain back for the money it spent supporting the deposits of its citizens who had placed their money in the banks of a terrorist state. Icelandic voters, for some reason, were miffed by that ... and the result was the referendum.

 

 
What happens now is anyone’s guess, although I am fairly confident that my most excellent proposal will not be adopted. Answer your question, LT?

Margaret Thatcher and island-buying in 1979: less than it seems

 Did Britain and Australia really propose to create a new Hong Kong in the Philippines to be populated by Indochinese refugees?  The Guardian says yes.  The documents from the National Archives say no.  Unless there is more than the Archives made available, or I missed the juicy stuff in my long skim, nobody seems to have really considered the creation of a new Crown Colony in 1979.  I can’t find any references to an entrepreneurial city or opposition from Lee Kwan Yew; I certainly can’t find any references to an actual transfer of sovereignty.

Judging from the documents, the story does have a grain of truth.  There was a bilateral meeting between Australia and Britain, although little seems to have been discussed other than the possibility of a joint position at the U.N. conference.  (Both countries had already tried and failed to get the main Western powers in for a sit-down before the U.N. meeting.)  The British ambassador to Jakarta did raise the possibility of buying an island from Indonesia for an expanded refugee camp capable of housing up to 200,000 people.  The thing about that is that the report about the British suggestion and the Indonesian response is phrased in vaguest possible terms.  It isn’t clear who exactly would have put up the money.  (I suspect that the British were thinking about the UNHCR, not HMG)  It certainly isn’t clear that the use of the term “buy” meant “transfer sovereignty” as opposed to a simple land purchase. 

The rest of the stuff in the Guardian story is easy to find, from the worries about riots to the weird decision to try to make it harder for immigrants to bring their spouses into the U.K.  But the island-buying and rival Singapore?  Can’t find it. Maybe I’m not reading carefully enough. 

The full story, best as I can tell, is below.

On June 15th, 1979, the U.K. cabinet sat down to discuss the refugee problem, after receiving from hysterical letters from Thailand and threatening ones from Malaysia.  The Thais bluntly stated that they believed that the Vietnam intended to displace or kill the entire Cambodian population and “replace them with Vietnamese immigrants.”  The Singaporeans were more limited in their assessment:  they believed that the Vietnames aimed at expelling a potential Chinese fifth-column.  The Malaysians didn’t care about the reason; they simply stated that they intended to start sinking refugee-laded ships. 

This prompted a lot of worry back in London.  There was some discussion about allowing some into Britain, if only to convince other countries to take them, but Margaret Thatcher ixnayed that.  “Sir Murray Maclehose said that … he hoped that the U.K. would feel free to make a bid of her own.  The Prime Minister explained the difficulties created for the British government by the pressure of 2 million immigrants on our large cities.” (1)  I assume that meant two million existing immigrants, and not the possibility that Britain would accept two million Vietnamese refugees.

On June 22nd, the Malaysian foreign minister, Tan Sri Ghazali, stated that he believed that the Vietnamese were determined to expel their entire Chinese population.  He also believed that if the refugees were not allowed to depart by sea, the Vietnamese would push them over the border into Thailand—interestingly, and accurately, he no longer bothered to refer to Cambodia as a separate country.  He therefore proposed upping the capacity of the proposed Galang facility to 200,000.  “He commended this idea to HMG and … hoped that it would receive HMG’s support.” (2)  The British believed that the total number of additional refugees would not exceed 800,000; I have no idea where that number came from.  (3)

On June 26th, France put some pressure on London. “Since the tragedy of refugees from Vietnam, Cambodia, and Laos has begun to assume the character of a veritable transfer of population … the President of the Republic has decided that France will welcome 5,000 additional refugees … for every 1,000 inhabitants of France, there is one refugee from Indochina … France urges all states able to do so to add their efforts.” (4)  By that point, France had accepted 51,500 refugees; proportionately about the same as 230,000 who had arrived in America and far above the 2,316 that had arrived in Britain. (5)  The southeast Asian countries were losing patience.  The Indonesians had agreed to set up a 10,000-person processing center on Galang Island, but the U.K. suspected that their plan was to shunt the refugees they had already accepted to Galang, rather than take more.  Of course, that would imply packing 32,000 people into a facility built for 10,000 … ugh. (6)  Britain, meanwhile, had given £3.5 million to the UNHCR in 1978, and expected to give £4.75 in 1979.  That, however, still left the UNHCR underfunded to the tune of US$67 million … assuming that the problem didn’t get any worse. (7)   

On July 6th, Belize agreed to accept 1,000 refugees, as long as the U.K. provided funds for their “health, education, and welfare.” (8)  One July 12th, Britain pledged another £5 million for the UNHCR. (9) The next day, Britain’s ambassador in Jakarta reported that they had approached the Indonesian government “about the possible purchase of an Indonesian island,” and had been rebuffed. (10) The same day, the FCO reported that Britain would be on the hook for US$7.503 million for refugee aid and resettlement. (11)

The Malaysian government then reiterated its proposal for a 200,000 person settlement on an island, somewhere. It proposed that the United States set up a “United Nations Processing Centre for Vietnamese Refugees,” preferably on its own territory, but also possibly Hainan (!), Okinawa, Darwin, or New Caledonia.  All the refugees would then be transferred to the Centre, and “security and other matters affecting sovereignty and ownership of the land should be determined by the government of the United States of America … but ways must be found to overcome difficulties in the municipal law, e.g., the writ of habeus corpus … in order that these U.N. processing centres are immune from the process of local laws.”  (12) It is too bad that the Malaysians didn’t have better lawyers, or they would have known that the Constitution already did not apply to America’s Pacific territories, save Hawaii.

And that seems to be pretty much it.  Unless I missed something, which is quite possible. 

Thoughts?

(1)  J.S. Wall to Stephen Wall, “Vietnamese Refugees,” 15 June 1979. Reference PREM/19/130.
(2)  Telegram 204, “Vietnamese refugees,” 22 June 1979.
(3)  Telegram 644, “Your Telno 284:  U.N. Conference on Indo-Chinese Refugees,” 20 June 1979. 
(4)  Telegram 268, “France : Council of Ministers : Indo-Chinese Refugees,” 26 June 1979.  Reference PREM/19/130.
(5)  Lord Carrington to the Prime Minister, “Vietnamese refugees,” 25 June 1979, p. 6.  Reference PREM/19/130.  Canada had accepted 15,000.  The FCO didn’t have up-to-date Australian numbers, but stated that the country had taken in 19,500 as of May 1st.
(6)  Ibid, p. 9.
(7)  Ibid, p. 14. 
(8)  George Price to Margaret Thatcher, “6 July 1979.
(9)  JS Wall, “Indo-China Refugees,” 12 July 1979. 
(10) JS Wall to Brian Cartledge, “Possible State Visit by President Suharto of Indonesia,” 13 July 1979. 
(11) Telno 318, 13 July 1979.
(12) Tan Sri Ghazali Shafie to HMG, “The Vietnamese ‘Boat People’—An Outline of Malaysia’s Proposal to Resolve the Problem,” 14 July 1979.  Reference PREM/19/130