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. 

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. 

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. 

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.

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.