With my perfect betting record hanging in the balance, I follow Brexit news to the point of obsession. Out of the many hundreds of stories I’ve read, though, I have yet to hear anyone point to the simplest path to Brexit: Let Britain buy its way out! In Theresa May’s failed deal, the UK was supposed to pay the EU about £38 billion for the “divorce.” Yet there is nothing magical about this price tag. It could just as easily be £40 billion, or £140 billion. Why, then, can’t the UK just tell the EU, “The backstop is a deal-breaker. How much money will it take to make this issue go away”?
If this were any normal business deal, this straightforward path would be on the tip of every Brexiteer’s tongue. It’s the logic of any familiar real estate transaction:
“We won’t buy unless you fix the roof.”
“OK, that will cost me $25,000, so let’s add that to the price. Ready to sign now?”
As far as I can tell, however, there isn’t a single prominent British or European politician who even mentions the possibility of letting the UK pay more to get more, much less advocates it. Instead, we see British politicians demanding better terms for free, and Europeans saying that the current deal is Take-It-Or-Leave-It.
But politics isn’t like business, you say? I know! I’ve been saying so for decades! The very fact that elementary monetary bargaining on Brexit is so unthinkable is yet another symptom of the psychological chasm between the relatively rational, instrumental world of business and the irrational, expressive world of government.
Brexit now hogs the global stage, but politics is packed with look-alike impasses. Why can’t Israelis just pay Palestinians for the land settlers have taken? Why can’t the EU just pay Russian to withdraw from Ukraine? Why can’t the U.S. just pay Maduro to resign – and Russia to welcome the regime change? Indeed, why can’t Bay Area developers just pay local governments to approve a hundred more skyscrapers? In each case, the answer is a multilateral mix of foolish pride and wishful thinking.
Since I think that Brexit is a bad idea, why am I telling its advocates how to proceed? Because I know Brexiteers won’t listen – and even if they did, the EU wouldn’t budge. While I can understand the failures of politics, I have near-zero ability to solve them. Not coincidentally, this is precisely what my view predicts.
READER COMMENTS
Tiago
Jun 25 2019 at 7:50am
I will comment on the text on expressive voting you link to, won’t be offended if the moderator finds my comment does not belong here.
I disagree with Cowen and Hanson’s premise that people do not behave expressively in other areas where they are doing good, like charity. I would classify a lot of the behavior for the greater good as expressive, such as a lot of recycling efforts. You wouldn’t donate a penny to charity but you might donate US$50 dollars “to end world poverty”, which is as effective as a penny.
I am surprised that Robin Hanson is not persuaded by the expressive voting theory, it seems to be just a variation of the signalling model. I could see him writing “voting is not about policy” .
John Alcorn
Jun 25 2019 at 8:41am
Your argument is a valid explanation of many (most?) political impasses. However, it seems likely that some impasses (i.e., some bargaining failures among nation-states) occur because players rationally believe that a deal would create adverse incentive effects. For example, in some circumstances, a deal today predictably would bring more ‘invasions for ransom’ tomorrow. (BTW, I readily admit that I know too little about international affairs to point to a specific ironclad example for my point.)
Compare Anja Shortland’s analysis of orderly kidnap for ransom and ‘the shadow of the future’ in last week’s EconTalk episode.
Joe Kristan
Jun 25 2019 at 9:17am
This brings to mind Lincoln’s proposal for compensated emancipation to end the Civil War in 1862. It failed to attract support even among the slave states remaining in the Union, let alone in the Confederacy. In hindsight, that looks like it would have been a great deal, compared to what happened.
Niko Davor
Jun 28 2019 at 10:47am
Compensated Emancipation was a great solution for ending slavery. It ended slavery in most countries on Earth without a horrible war.
I’d give Lincoln more credit for that if he pushed that before declaring war and waging brutal war for a year.
Ideally, he would have offered the south compromises on having some more autonomy as well
Lincoln also went out of his way before the war to stress that he didn’t intend to end slavery. With the Crittenden-Johnson Resolution the US Congress unanimously declared that the purpose of the war was not to end slavery but to prevent secession. In my view, that is the opposite of moral. Ending human slavery was a noble and moral cause. Preventing secession and squashing an independence movement was not noble or moral. And simply killing your domestic political rivals in a rage is not moral either.
Mark Z
Jun 25 2019 at 9:41am
In ancient times, it was common for Byzantine emperors to pay Balkan nomads (or Persians or Arab raiders) annual tributes not to invade, especially in bad financial times when raising a defensive army would’ve been hard. Of course, this often insulted the pride of the Byzantines (or a new emperor) and tribute would be suddenly cut off, precipitating an invasion that would more often than not be more costly than the tribute.
Of course, as John Alcorn notes, this type of an arrangement can create incentives for bad behavior. I bring up the Byzantine example because maybe a thousand years of recorded interactions between the empire and its neighbors would provide sufficient data to assess whether bribing foreign states not to do harm really does inventivize harmful behavior.
Salem
Jun 25 2019 at 9:45am
While I agree with your general thesis, this is a bad example.
Transaction costs are real, and neither “Britain” nor the “EU” are unitary actors. The problems would be equally real if the domain were business. We may as well ask why in the 19th century, “railways” couldn’t work out a deal with “farmers” on fires. Err, because not all the railways are similarly situated, because not all the farmers are similarly situated, because of holdout problems…
Jo VB
Jun 25 2019 at 9:57am
This post seems to miss the key issue. The UK wants the authority to determine its own import tariffs *and* not have border controls with Ireland (i.e. with the EU). That seems an inherent contradiction. You need to pick one of the two options and the EU is simply waiting for the UK to make up its mind (collectively).
Additionally, the first issue in the negotiations was that the UK wanted to stay in the single market for goods, but not in the single market for labor. The EU, truthfully or not, told them there is no amount of money that would make it agree to this. They are concerned about setting a precedent for other other member states and Switzerland. It does not sound entirely unreasonable to take that option entirely off the table (for example as a bargaining or commitment strategy).
Weir
Jun 25 2019 at 8:14pm
“Additionally, the first issue in the negotiations was that the UK wanted to stay in the single market for goods, but not in the single market for labor.”
Croatia is in the former but not in the latter. Norway is in both without being part of the EU. So there are precedents for everything.
Peter Hurley
Jun 25 2019 at 10:28am
As another commenter mentioned, the Irish border issue relates to an actual physical contradiction that is difficult to impossible to paint over with money.
The UK wants there to be freedom of movement and no customs border between Ireland and the UK. The UK simultaneously wants there to not be freedom of movement, and there to be a customs border between the UK and the EU.
Since Ireland is in the EU, these are flatly contradictory. Absent Ireland leaving the EU, the desires are not reconcilable. I do not think there is a sufficient amount the UK could pay to induce Ireland to leave the EU.
The EU has made it clear that while they prefer the free movement/customs union approach, they will deal with the UK making either of the physically possible choices. The UK must actually choose though, and cannot paper this choice over with money.
Bedarz Iliachi
Jun 26 2019 at 12:39am
Why can’t UK simply remove its border controls at the Irish border? Let Ireland do what it prefers–convenience with UK or inconvenience with EU.
Vegas
Jun 25 2019 at 11:32am
Giving Russia money for invading neighbors is truly perverse incentive. It would buy more tanks and invade someone again and expect to be paid for it.
john hare
Jun 25 2019 at 3:59pm
Once you pay the Danegeld, you’ll always have the Dane.
E. Harding
Jun 25 2019 at 12:56pm
Russia would gladly accept money to withdraw support from Maduro, but the status of its territory is non-negotiable. It’s like thinking Mexico could pay to buy Arizona.
“Indeed, why can’t Bay Area developers just pay local governments to approve a hundred more skyscrapers?”
That’s called bribery. It’s usually not well-liked.
Weir
Jun 25 2019 at 10:30pm
Think of the occupation of Germany after 1945. I guess we look at it as inevitable now, but after their first go round there was no occupation.
The Germans avoided that fate the first go round. They bought it off by pretending to agree to a “punitive” and “crippling” reparations bill they also avoided, in practice, like they avoided having to admit they had started the war, and avoided having to admit to losing the war.
So there’s one example. You can always lie about paying the bill, and lie about not being able to pay it, and get a lot of American investors to pay the fraction of the bill that does get paid. You go on a spending spree instead, buying off the public sector unions with huge wage increases, racking up huge debts right off the bat in 1919 and 1920, even before you find out what your “crippling” bill is going to be. Suspend payments in 1923. Cancel them in 1933.
It was a pretty cheap way to avoid being occupied, and the Germans didn’t want to be occupied. Occupied Belgium had its railway tracks ripped up and carted off to Germany. Occupied Belgium had its factories torn down, stripped for steel. The Germans were still stealing livestock from Belgium even after signing the Armistice. So “occupation” was a nightmare and genuinely terrifying to them.
Avoiding occupation would have been cheap at twice the price. Even if they had paid as much as France paid them after 1871, it would have been worth it, as they imagined it. The French paid off the Germans pretty quickly, and the French paid more in real terms, but you can understand why the Germans would want to talk up the horror and the “humiliation” of having to pay their own fare. From the German point of view it was a perfect deal.
Mark Brady
Jun 25 2019 at 11:26pm
Bryan asks, Why, then, can’t the UK just tell the EU, “The backstop is a deal-breaker. How much money will it take to make this issue go away”?
But the backstop goes away if there is No Deal and the UK leaves the EU on October 31. And the UK would not pay the financial settlement to the EU in a no-deal scenario.
BC
Jun 26 2019 at 4:51am
As many have pointed out, paying the Russians to reverse or stop bad behavior, e.g., leave Ukraine or stop supporting Maduro, can incentivize Russia and other countries to engage in more bad behavior in hopes of collecting a future payday. One thing the US can do, though, is to “pay” countries to not engage in bad behavior to begin with, i.e., reward good behavior instead of reward the ceasing of bad behavior. The distinction is that the former doesn’t require that countries first engage, or threaten to engage, in bad behavior.
Regardless of whether one sees the distinction, the US does pay countries to engage in good behavior, where the “payment” consists of military and diplomatic support. We include friendly countries in formal and informal defense alliances (NATO, Japan, S. Korea, Taiwan, etc.) and those countries generally don’t invade neighbors or support the Maduros of the world. Interestingly, my impression was that Bryan Caplan would be quite skeptical of the US acting as world policeman. I am surprised to see that he implicitly recognizes the Coasean bargaining value of such arrangements.
From this perspective, we can view Russia as a country demanding a price that is higher than the US is willing to pay: Putin would not be satisfied with just being included in a US-led defense umbrella because it would likely not protect him from all internal political rivals. The US doesn’t want to pay Russia more than already-friendly countries to become friendly because that might raise the price of friendliness for other countries too.
We also see that the US may have made a mistake in granting Most Favored Nation (MFN) trading status to China despite China’s dismal human rights record. MFN status is an example of another type of Coasean payment for good behavior. By paying China prematurely without demanding the good behavior in return, the US never received the good behavior part.
BC
Jun 26 2019 at 5:00am
If the US were to threaten revoking of China’s MFN status, then that would restore the Coasean bargaining value of MFN status. Not revoking MFN status is equivalent to offering MFN status, but the threat to revoke needs to be credible.
robc
Jun 26 2019 at 6:45am
Isnt the simplest path to Brexit the one the US colonies used to leave Britain? Just send a letter saying “bye”.
I doubt the EU would go to war to prevent it like Fat George did.
SG
Jun 26 2019 at 9:48am
Bryan,
I’m honestly surprised at how seldom real-life business people resolve their differences with price negotiation. Sometimes that approach works when the sticking point is something with an easily quantifiable value (i.e. replacing a roof) but when that value is hard to ascertain negotiations break down.
As a corporate finance lawyer, I’ve seen many deals die over failure to agree which side should bear a certain risk, but I’ve never seen anyone attempt to bridge the gap by renegotiating, say, the interest rate on a loan in lieu of a given contractual term.
Thaomas
Jun 26 2019 at 11:05am
The buy out approach does not make any sense since it means paying more to a MORE damaging Brexit. The problem is that Brexit is premised on it being a benefit rather than a cost. Sort of like, “Tear off the roof and its a deal.”
nobody.really
Jun 26 2019 at 3:55pm
Does this real estate transaction seem familiar to ANYONE?
When the potential buyer balks at a bad roof, it’s not because the buyer is unaware that there are people willing to fix roofs at a price. It’s because the buyer expects the building, at its current price, to include a functional roof. Now, maybe the buyer is bluffing–and maybe the seller’s response is basically a way to call the buyer’s bluff. But unless the seller advertised the house “as is,” if I demanded that the buyer replace the roof and the buyer responded as Caplan did, I’d take that as a rejection–signally that the deal was dead.
UK Austrian
Jul 20 2019 at 3:57am
Bryan I would love to read a longer piece from you on Brexit and the direction / challenges of the EU and Euro. Could you point me to one if you have already written such a piece?
Most free market Thatcherites (I can’t say ‘libertarians’ in a U.K. context as there is no equivalent movement) and those of an Austrian mindset are pointedly for leaving – Dan Hannan, Steve Baker, the Adam Smith Institute, IEA et al – so I wonder why you think Brexit is a bad idea.
Isn’t the structure and recent history of the EU the archetype of a top-down, subsidy-and-lobbying loving bureaucracy?
The founding aims of the Common Market – free movement of people, capital, etc – have long since been subsumed into a highly regulated, corrupt, technocratic, anti-free-trade racket. And the contortions and skulduggery used to maintain the Euro, the solvency of major French and German banks and the control of Greece’s economy are an outrage. Viz Ashoka Mody’s ‘EuroTragedy: A drama in nine acts’ and Varoufakis’ ‘Adults in the Room’.
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