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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you: carol@geraniumfarm.org

Monday, November 14, 2016

Trump's Election and the Health of Middle-Aged White Workers

Back in June, soon after it became evident that Donald Trump would be the Republican nominee for President, we wrote an article discussing one significant aspect of his candidacy: his possible appeal to working class voters who are exasperated by stagnant wages and income inequality.  We didn’t advocate for him, but we did see how he would appeal to those workers, which put his candidacy in a realistic light.  See the piece here:  http://ways-of-the-world.blogspot.com/2016/06/why-workers-might-favor-businessman-for.html.

This general notion indeed played out in the actual election results.  Exit poll results showed that Mr. Trump had relatively strong support from low-income voters, middle-aged and older voters, and those with less education.[1]  He received a larger percentage than Mitt Romney did in 2012 of votes cast by people 45-64 years old, of people with incomes under $30,000, of people with high school or less and college less than bachelor’s degrees, and in particular, white people with no college degree.   In fact, Trump scored 67% of those votes compared with just 42% for Romney.  Thus, Trump’s mantra about bringing jobs back to this country would speak to this group, who would be looking for consistent employment opportunities in production, construction and mining especially, sectors which have been experiencing major disruptions that Trump hopes to mitigate.

This situation of uncertainty for middle-aged people in particular has another, deeply serious component.  In a Wall Street Journal discussion of the election result on November 10 [2], Arthur Brooks, president of the American Enterprise Institute, expresses concern for middle-aged workers, especially men and for white, middle-aged people.  He calls our attention in turn to a paper published last December in the Proceedings of the National Academy of Sciences in which Angus Deaton, the Nobel Laureate in economics in 2015 and professor at Princeton, and Anne Case, also at Princeton, describe the astounding development that the mortality rate of white 45-54 year-olds in this country actually rose from 1999 to 2013.  This is in clear contrast to the mortality rates for all other age groups, which declined, an obvious result of advances in medicine.[3] 

What happened to those middle-aged white people is dramatic.  Mortality rates for diseases in that age range did decline.  But rates for externally caused deaths went up: suicide, drug poisoning and alcohol abuse.  Those specific rates went up for other age groups too, but for the 45-54 year-olds, the increases were so large that the pushed overall mortality higher.  Subsequent release of data by the U.S. Center for Disease Control for 2014 show the overall uptrend continued that year as well.  In addition, Deaton and Case discuss “morbidity”:  the proportion of the population reporting good health and the proportion reporting poor health, including various symptoms of pain and the frequency of difficulty performing simple “activities of daily living” (ADLs).  For this population group between 1997-99 and 2011-13, government data show a smaller proportion reported good health, a larger proportion poor health.  More people had trouble with various ADLs and more people consumed excessive amounts of  alcohol.  There was a significant increase in the share of these middle-aged white persons who were unable to work, which, Deaton and Case point out, may correspond to the unusual decline in labor force participation rates, a phenomenon we have discussed here before.

Deaton and Case suggest that economic insecurity might play into 45-54-year-olds’ increased use of drugs, dependence on alcohol and suicides.  They mention the same economic factors we have been talking about: tepid movement of median wages and income inequality.  They point out that these are especially important for people with just a high-school education.  In addition, they discuss the shift in many employers’ pension arrangements from defined benefit plans to defined contribution plans.  So now it’s up to many employees to see to the adequacy of their own retirement savings, since there’s no guarantee of a specific payout during their elder years, as would be the case with defined benefit plans.  The pressure on these people is thus increased.  They have another reason to be concerned: will they have a steady income through consistent employment and will the economy grow so that their financial assets can grow?

This economic pressure on middle-aged white Americans is obviously not the only reason Donald Trump won and Hillary Clinton did not.  There is a general unease with governments and bureaucracies.  We saw it earlier this year in the U.K., where, also, ordinary people surprised their government leaders as they voted that that nation should withdraw from the European Union, the development known as “Brexit”.  The work to do so is in process now.  The factor of importance in that issue is similar to what Mr. Trump advocates, the reduction in regulation of business and other government intrusion into everyday life.  Brexit highlights people’s frustration with the bureaucratic nature of the EU organization.  In the U.S., Trump is concerned that regulation of business, along with the relatively high U.S. business tax rates, contributes to companies’ moving their headquarters and some operations to other countries, even as they continue to sell their products here.  He wants to change the government setting for business so those companies will stay here and keep jobs here.  It’s a good idea, if it can be implemented in a prompt and orderly way.  That’s a big “if”.  Further, it will go the wrong way if there are trade wars and too much anti-immigration push.  Tough questions.

Overall, the numbers we have discussed here describe considerable unease among a core group of Americans, a population group that rarely gets much attention.  But this election has made us look at them.  Perhaps there’s no genuine link between the pressure they feel and the election of Mr. Trump, but it seems there might well be.

In church yesterday during the Intercessory Prayer, I heard myself offer petitions for “all those who are afraid in the wake of the Election” and for “the new President, that he might govern carefully and wisely”.  We indeed hope Mr. Trump rises to the occasion and we hope our many friends and acquaintances who are upset and distressed will find there is reason they can relax.

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[1] “Election 2016: Exit Poll Results.”  The New York Times.  November 8, 2016 and subsequent updates.  The Exit Poll is conducted by Edison Research and is sponsored by a consortium of ABC News, The Associated Press, CBSNews, CNN, Fox News and NBC News.  The data were collected from  24,537 voters leaving 350 voting places throughout the United States on Election Day including 4,398 telephone interviews with early and absentee voters.  http://www.nytimes.com/interactive/2016/11/08/us/politics/election-exit-polls.html

[2] Arthur Brooks.  “How Trump Filled the Dignity Deficit,“ The Wall Street Journal.  November 10, 2016, page A23.  http://www.wsj.com/articles/how-donald-trump-filled-the-dignity-deficit-1478734436

[3] Anne Case and Angus Deaton.  “Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century,” Proceedings of the National Academy of Sciences, December 8, 2015.  Pages 15078-15083.   http://www.pnas.org/content/112/49/15078 .  You may have seen this referenced in The New York Times as well.  A number of professional health policy publications also contain references.


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Tuesday, November 01, 2016

Praying about the Election

What an Election season!  It’s almost over.  However it comes out, we’ll all feel some relief, won’t we?  Meantime, during this coming week, we can do something important.  Pray.

A few weeks ago, my Bishop, the Right Rev. Lawrence Provenzano of Long Island, issued a formal statement requesting all members of this Diocese to offer daily prayer during the “octave” between November 1 and November 8.  His solemn letter, published on October 10, calls for “those who are able in each parish to use this time for fasting, abstinence and deliberate prayer, and to make use of all the resources our faith provides us to refocus on God's will and purpose.”

Then, last week, on October 26, all of the Bishops in Indiana issued a relevant and helpful press release.  These bishops include the current Bishop of Northern Indiana, two retired Bishops of Northern Indiana, the current Bishop of Indianapolis, and the Lutheran Bishop of Indiana and Kentucky, ELCA.  Their joint press release also urges us to pray, and they quote the Prayer for Sound Government from the Book of Common Prayer 1979 and the Prayer for Responsible Citizenship from Evangelical Lutheran Worship 2006, which follow here:

For Sound Government
O Lord our Governor, bless the leaders of our land, that we may be a people at peace among ourselves and a blessing to other nations of the earth.

To the President and members of the Cabinet, to Governors of States, Mayors of Cities, and to all in administrative authority, grant wisdom and grace in the exercise of their duties.

To Senators and Representatives, and those who make our laws in States, Cities, and Towns, give courage, wisdom, and foresight to provide for the needs of all our people, and to fulfill our obligations in the community of nations.

To the Judges and officers of our Courts give understanding and integrity, that human rights may be safeguarded and justice served.

And finally, teach our people to rely on your strength and to accept their responsibilities to their fellow citizens, that they may elect trustworthy leaders and make wise decisions for the well-being of our society; that we may serve you faithfully in our generation and honor your holy Name. Amen.
The Book of Common Prayer 1979, page 821

Responsible Citizenship
Lord, God, you call your people to honor those in authority. Help us elect trustworthy leaders, participate in wise decisions for our common life, and serve our neighbors in local communities. Bless the leaders of our land, that we may be at peace among ourselves and a blessing to other nations of the earth. Amen.
Evangelical Lutheran Worship 2006, page 77

In addition, we were also reminded recently about the Episcopal Church’s “Prayer for an Election”, copied here from the website of the Episcopal Public Policy Network (EPPN) http://advocacy.episcopalchurch.org/EpiscopaliansVote.

Prayer for an Election
Almighty God, to whom we must account for all our powers and privileges: Guide the people of the United States in the election of officials and representatives; that, by faithful administration and wise laws, the rights of all may be protected and our nation be enabled to fulfill your purposes; through Jesus Christ our Lord. Amen.

Finally, perhaps an obvious statement.  It’s always important to vote.  But it seems more crucial than ever this time.  People are skeptical of the candidates, both of them, regardless of which side they are on.  Thus, we need to do our civic duty with more attention than ever.  Please do vote – and pray.

May God Bless the United States of America . . . . . 


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Wednesday, October 05, 2016

The Social Value of Profits and Wealth

In recent weeks, the Sunday Gospel readings in the Episcopal Church have spoken about issues of business profits and wealth.  Our orientation as a business economist means we take these commentaries seriously, and we might have a different spin on them than theologians and clergy do.

On September 18, the 18th Sunday after Pentecost, we had a passage from Luke 16 about a dishonest manager.  This person was being fired by the rich man who employed him because he had cheated in running the business, so the profits he generated were clearly in excess of what they should be.  The conclusion to the appointed scripture is the familiar, “No slave can serve two masters; for a slave will either hate the one and love the other, or be devoted to one and despise the other.  You cannot serve God and wealth.”

The next week, on September 25, we heard the well-known story, also from Luke 16, of Lazarus, the poor man, who rested on the doorstep of Dives, a very rich person.  Dives evidently refused even to share the scraps from his dinner table with poor Lazarus.  The accompanying lesson from the Epistle is from 1 Timothy 6, which includes the familiar, “the love of money is the root of all kinds of evil.”

Profits and wealth.  It’s easy to use the Biblical readings we’ve just mentioned to disparage those worldly concepts.  At the same time, profits and wealth can be beneficial, and in fact, they can contribute vigorously to the well-being of not just the profit-earners and wealth-holders, but to the life-condition of many other people with whom successful business leaders are associated.

This brief article will just scratch the surface, but we feel like we have to try.  The social value of profits and wealth seems to us to depend on two important factors, how the profits and wealth were earned, and what uses are made of them.

Profits: from Sound Business Operations or from Price-Gouging?
The problem presented in the first Gospel lesson above is that the manager earned profits through cheating.  The news recently has been full of stories about profits earned by Mylan, Inc., through substantial price increases on the Epi-Pen.  According to the Wall Street Journal, Mylan has raised the price 17 times in the nine years they have marketed the allergy reaction first-aid shot injector, totaling more than 500% to a retail cost more than $600.  We can’t say exactly that cheating was involved here, but it certainly seems strange to need such large
increases for a product that is not new.  Indeed, the main medical ingredient, epinephrine, is a generic chemical that has been around for years.

As we note, another criterion for judging the appropriateness of profits is how they are used by the company.  If they are just used to inflate the paychecks of top management well beyond some industry standard, then one might argue that they are excessive.  Indeed, in this case, Mylan executives receive the second highest compensation of comparable managers in drug companies.  But Mylan is not the second largest drug company; to the contrary, it ranked 11th in the U.S. in 2015 by revenue and 16th by market valuation.

Our commentary here is hardly meant to single out Mylan, but this case has emerged as a very timely and visible example of what seems to be price gouging implemented toward less-than-noble goals.

By contrast, we can argue in favor of profits if they result from genuinely efficient business operations, and if they are used toward positive ends.

We might assess a business’s operating efficiency by measuring profits against output or revenue and comparing that ratio to the ratio for a whole industry.  We’d want to raise questions if the company’s result is significantly higher than the whole industry as well as if it is weaker.  Another measure might be output per worker.  In both cases, we’d be looking for competitive pricing and competitive performance results.

Profits Contribute to Growth in Jobs and Business Investment
Profits can make important contributions to business operations in successive periods.  Very simple comparisons of Commerce Department national income data show that for the total of nonfinancial corporations, profits in a given year are highly correlated with employment and with investment in new facilities and equipment the next year. 

Thus, profit growth is a suggestion that our business might be open to expansion.  We can afford to hire more workers and they, of course, would need more operating facilities.  Or, without hiring additional workers, we might still want to invest in improved models of the equipment we use.  The company’s profits are the first source of financing for expansion and investment in capital goods.  Even if funds are raised from banks or investors, those financers want to know that a company has good credit quality and is prospering, so its profits provide an important backdrop for the external funding sources.

In the cases where we’re assessing profits against the performance of overall markets and demand for our products, it would thus be strange to issue advice calling for profits to be reduced.  That recommendation would be reserved instead for special cases when the profits are seen to come from excessive pricing, improper reporting or other anti-market actions.  Like the Epi-Pen situation.

Ministry to Business Managers & Wealth Holders
A book on this whole topic is called Anointed for Business, in which the writer, Ed Silvoso, argues that, just as clergy have a calling to their ministry, business leaders have a calling to their work.  If they see it as a genuine calling to a kind of ministry, perhaps they would be more inclined to do their work with consideration for all the parties involved: their shareholders, yes, and also their customers, their employees and even their competitors.

And what about the CEO or the lead shareholder or anyone who has done well investing in a business and/or stocks?  Should they be required to sacrifice the gains they have made through their contributions to society?  Indeed, if their business is successful in the long-term or their stock portfolio has grown consistently, is their resulting wealth sinful?  This is a huge question, of course, and takes books and books, not just a couple of paragraphs in a blog post.  But our take on it comes from two angles.  First, In Mr. Silvoso’s book, one of the chapters is titled, “God Loves Bill Gates, Too”.  Absolutely.  And God probably loved Bill Gates before he founded the Gates Foundation, as God gave Gates the gifts to develop the Microsoft systems and form the company.  Gates, of course, has carried the principles of corporate structure and operation into his charity; in operating the Foundation, he and Mrs. Gates have focused on the results of their charitable work, not just performing it.  Thus, they try to do their charitable work efficiently so as to get the greatest possible benefit from the resources devoted to it.  This approach has changed the perspective of many of the world’s charities, to the benefit mainly of those for whom that work is done.  This is clearly a good use of wealth and hardly argues for diminishing it.

Second, the other point we would make about wealth comes right out Jesus’ own work.  On September 28 in the assigned Daily Office readings, we had the story of Jesus’ calling of Levi, a tax collector, to be one of His disciples (Luke 5: 27-32).  Levi did leave his desk to follow Jesus and then invited Jesus to his home, where he gave a banquet that included his tax-collector friends.  The Pharisees and scribes saw Jesus eating with tax collectors and asked him what on earth he was doing with those awful people.  Jesus replied that He in fact needed to be with those who are sinners;  they are the ones who need Him, not those who are already righteous and trustworthy.  So if indeed, we are concerned about business leaders and how they lead and how honest they are, then let us minister to them and work with them.  Let us enlist them and show them about using their resources for the common good.

All told, the points about money, income and wealth are concerned with honest, careful and prudent operations and using positive financial results to favorable ends.  The money and the wealth are not evil themselves, but it’s whether we use them constructively that matters.

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Sources:
We consulted several recent issues of The Wall Street Journal for data on Mylan, Inc., as well as websites showing various rankings of pharmaceutical companies.

Ed Silvoso.  Anointed for Business.  Ventura, CA: Regal Books.  2002.


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Friday, September 23, 2016

A Comment on the Riots in Charlotte

We’re working on an article about business profits and whether they are ethical and Christian.  In the meantime, another important issue in society has come to the fore, yea, once again.  Consider:

On Wednesday night, when the rioting in Charlotte was most violent, I was watching on Fox News.  Their reporter Steve Harrigan was, as other networks' reporters, out in the midst of the action.  At one point, a young woman came within range of his microphone and started to shout at him.  She was neatly dressed, with a trendy fluffy hairstyle.  This woman is, however, a really angry person, totally frustrated with her treatment in life.  She exclaimed most articulately that she could be anywhere – on the way to school or work or just sitting in her car – and get shot.  It was a potent statement.  At the same time, she expressed the skeptical opinion that Harrigan wasn’t really showing her directly, but would instead take her words and twist them around to his own satisfaction before quoting her on TV.  Although Harrigan tried, he was not able convince her that she was in fact on live TV in front of millions of viewers right in that moment.  But her very own words and her clear, strong voice helped us understand her feelings quite distinctly.  I heard her.

Where have we been since the mid-1960s?  The first African-American president and numerous others in leadership positions of all kinds tell us that there's clearly some progress – and come take a look at my own Episcopal church congregation on any given Sunday for a multi-racial crowd of good friends – but we've obviously missed out someplace. . . . education, family structure, business investment in their communities.  Better law enforcement, advocated by many, does help, but it treats only the symptoms, not the underlying conditions.  We need to work on it all.  Is there perhaps even a personal outreach we can make?


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Thursday, August 25, 2016

Floods & Fires -- and HELP!

In an eMo earlier this week, Barbara Crafton mentioned Episcopal Relief & Development as a worthy recipient of contributions for aid to people needing help following disasters.  That gives us a particular opening to urge specific contributions toward their Disaster Relief Fund following the flooding in Louisiana.  The flooding was really awful, the worst disaster since Hurricane Sandy in 2012, and the recovery has just started.

On a Fox News program the other evening, we saw an interview with Tony Perkins, the head of an evangelical Christian organization, the Family Research Council.  I don't know exactly what that group does, and the group's work was not the subject of the interview.  Mr. Perkins was featured that night because he lives in Baton Rouge, and he and his family had had to row away in a canoe from their flooded home.  This put a personal feeling to that whole situation.  They went first to a Baptist church, which was actually too crowded to take them in.  But a member of that congregation took them to his home for shelter.  Then we saw a picture of the campus of Louisiana State University - LSU - immersed in water.  What can you say?

Soon, we got an email from Episcopal Relief, urging gifts toward their relief effort.  We replied the next morning.  We like Episcopal Relief a lot, because they come in the midst of the disaster and then they also hang around to help rebuild too.  With no apology, we urge you to pitch in.  Here's a link: http://www.episcopalrelief.org/

Yesterday, we heard again about Episcopal Relief, that they are also working in California with the fires.  They are providing gift cards to people who had to evacuate briefly during the fires themselves or for longer periods because their homes were destroyed.  Our local churches there are providing space for training for people who can provide support in the protracted aftermath: helping the volunteers understand what people feel whose homes have just vanished.

All the more reason to donate.

Or, if you're not Episcopalian, you might think of Samaritan's Purse, which is also doing major work in Louisiana:  https://www.samaritanspurse.org/.  They have teams of volunteers helping with recovery efforts.  Their work was even the subject of a TV commercial asking for donations.  This Billy Graham-founded organization isn't shy about requesting your help for these people.  They sure need it!


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Tuesday, July 12, 2016

A Threesome: Some Prayers, a Prime Minister, and a Parable

Prayers for Police and for Peace
In these tense days of troubles among African-Americans and law enforcement officers, we suggest these prayers from A New Zealand Prayer Book*. 

FOR THE JUDICIARY AND POLICE
God of truth and justice;
we ask you to help the men and women
who administer and police our laws;
grant them insight, courage and compassion,
protect them from corruption and arrogance
and grant that we, whom they seek to serve,
may give them the support and affection they need;
so may our people be strengthened more and more in respect and concern for one another.
We make this prayer through Jesus Christ. Amen.

ON THE 25TH SUNDAY AFTER PENTECOST: For Our World
Universal and unchanging God,
we are one, unalterably one,
with all the human race.
Grant that we who share Christ’s blood
may, through your unifying Spirit,
break down the walls that divide us.
This we ask through Christ our Mediator. Amen.

 __________
*http://anglicanprayerbook.nz/index.html  1988.  Pages 139 and 637.

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Theresa May To Become U.K. Prime Minister
On July 13, the U.K. will get its second woman Prime Minister when Theresa May, currently Home Secretary, assumes that higher office.  As we wrote last week, David Cameron resigned immediately after the Brexit vote on June 23; he will do that formally July 13 by presenting himself and his letter of resignation to the Queen; he will inform her that Ms. May is available and in his view would be worthy of the appointment.  Later in the day, Ms. May will be presented to the Queen.

We give you this follow-up information for a couple of reasons.  Obviously, it is an important step forward in the U.K.’s new sense of itself.  Ms. May favored remaining in the EU, but she seems always to have understood what people wanted in breaking away and will work carefully on that process.  Comments we saw about her indicate that she is a most conscientious worker in government and concentrates on the substance of matters, rather than the perks and personality points of holding office.  “I don’t tour the TV studios,” she has stated.

This brings us to the second reason we want to give specific mention to this development.  We are struck by the “adult” attitudes of the U.K. leaders at this time.  Boris Johnson, who seemed to be a leading candidate early on, and Andrea Leadsom, the other finalist for election as Conservative Party leader, both pulled out to allow the selection to take place with the least controversy possible.  At this point in time, with much uncertainty, having the election process as brief as practicable helps significantly in both domestic and international affairs, and we are impressed that egos have not gotten in the way and that everyone has seemed to be in line to move forward, despite the shock of the Brexit vote outcome.  Concluding the Prime Minister decision promptly will permit more time on the substance of the conditions for the U.K.’s departure from the EU, and Ms. May seems to be someone who will give ample consideration to all concerns in this important step.

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Maybe the 3rd Servant Was Right To Bury his Talent
The Gospel selection assigned for today’s (July 12) Daily Office readings in the U.S. Book of Common Prayer is the parable of the talents, Matthew 25:14-30.  A man of wealth is going off on a long journey and decides to let three slaves manage some of his funds while he is away.  To one slave, he gives 5 “talents”, to a second slave, 2 talents and to a third slave, 1 talent.  The first two make investments or form businesses, and each doubles his money.  When the master returns, he is very pleased with their performances and promises them promotions.  The third slave buries his talent in the ground; he doesn’t lose any money, but he doesn’t gain anything either.  As we know, the master is upset at this action – or non-action – by the third slave; he takes back the talent and throws the slave out on the street, leaving him penniless and homeless.

In some dialogue this morning with Barbara Crafton, she and I both realized that there might be times when the third slave actually did the right thing in burying the talent.  Last week in Japan, for instance, that government issued 10-year bonds with a yield of  -0.243%; that is, there is negative interest on the bonds, so that investors are paying the government a fee to keep their money safe for 10 years and return it to them.  Similarly, in Germany, a recent auction of 30-year government bonds carried a negative yield of -0.76%.  So investors there also are paying the government to keep their money for them and return it at the designated time.

Thus, simply by burying the talent in the ground and returning it to the master at the proper time, the slave might have fulfilled an important function, keeping the master’s money safe and keeping it from eroding in value.

However – you knew there had to be a “however” – the broader economic environment that surrounds these negative bond yields is hardly one that produces many business opportunities that result in doubling someone’s active investment.  So it’s unlikely that the other two slaves would have been nearly as successful in this scenario. The German stock market is down 13% from a year ago, the Japanese stock market 21%.  The U.S. market is up, but by only 1.3%.  Investors would have done all right with gold, at a gain of almost 15% from a year ago, but a broad index of industrial and agricultural commodities is down 13%.

The lesson for investors in these differential results is that we need to assess the whole environment and be aware of the risks.  As Barbara wrote in her own comments on this parable, the underlying issue is not money but risk.  For the three slaves and for us, probably the best answer is a mix of assets with varying risks.  We see that sometimes, burying the talent in the ground can be the best thing.  And perhaps all of the time, at least some of the funds should be in something with a guaranteed outcome.  Otherwise, nothing is totally sure.

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Thursday, July 07, 2016

What the _______ Just Happened Between the U.K. and the EU?

The people of the U.K. voted in a referendum on June 23 that tells their own government they want to disaffiliate from the EU.  This outcome was clearly a major surprise.  Even though, as we pointed out a couple of weeks ago, results of opinion polls had gone back and forth in the months running up to the vote, no one really expected the Leaves to come out ahead.  But they did, 51.9% to 48.1%.

First, why did this happen?  Second, what happens next?  Third, do we know what it all means? What follows is hardly complete, but we’ll try to make some response to these questions.

First, why did people want to leave the EU?
There seem to be two main proximate causes: discomfort with immigration and impatience with EU bureaucracy.  In our commentary on June 20, we noted that many people in the U.K. are concerned about immigration, and we drew a parallel to the interest in Donald Trump in the U.S. elections.  We’re hardly the only observers making this comparison.  Citizens of an EU member country can live anywhere in the EU they want at any given time, and these days, among other implications, this causes nervousness about terror threats.  Notably, however, the U.K. does not have the most liberal border policy it might have; it is not an adherent to the EU’s so-called “Schengen Agreement,” which allows totally free travel, basically passport-less, among almost all the other EU countries.  But EU citizens can move into the U.K. without undergoing any approval process.

In addition, a country’s membership in the EU means that it participates in the EU’s joint regulatory system, which amounts to a huge bureaucracy.  The EU administration consists of seven different bodies, most of which are headquartered in Brussels.  These include the European Council, which is the summit of the heads of each member nation; the EU Parliament & Council of Ministers, which together constitute the legislative body; the European Commission, which is the executive branch; the Court of Justice; the European Court of Auditors; and the European Central Bank.  Since the U.K. has its own currency, it does not participate in the Central Bank.  

The functions of each of these institutions are classified by “competences”, some of which are “exclusive” to the EU, some “shared” with member nations’ governments and some “supportive” of member governments.  A few examples might give some sense of the reach of the EU into each member’s internal affairs.  Clearly, since the EU is a free-trade zone, customs regulations are “exclusive” to the joint organization, and many international agreements are also reserved for the joint system.  Much commercial policy, including antitrust laws, is managed by the European Commission, which has just brought new charges against Google, for instance.

Much of the “shared competence” work also involves businesses, such as consumer protection, energy and the environment and agriculture.  Social policies and public health matters are also managed by the Commission.  Among the “supportive” competences, the Commission helps members with disaster response, tourism and education, among other functions.

Thus, there is a lot of bureaucracy – the Commission itself has 32,900 employees – and many kinds of business decisions are governed or influenced by policies, not made in London, Paris or Madrid, but in Brussels by people who may not be directly associated with the specific country having a particular need.

Again, then, we see the parallel to the Trump model in the U.S.   Many people in the U.K. – more than had been understood – want to “take their country back,” to bring decision-making powers back home.

All this is no small matter.  As you might imagine, trade is very important to the U.K. economy.  Total exports of goods and services were 27% of GDP last year, compared to 13% in the U.S.  Imports of goods and services were 29% of GDP, compared to 16% in the U.S.  Of goods exports, 55% go to the EU, and 47% of imports come from the EU.  If they lose export market share and also have to pay duties on imports that now enter without such fees, that will be costly in several ways.  Of course, one of the goals is to help domestic production by making imports more expensive.  So there are potential offsets.

Further, some private economists estimate that 3 million jobs are presently associated with EU trade, constituting about 10% of total employment.  The stakes are high.

Second, what happens now?
The referendum vote on June 23 was not the enactment of a law, but the expression of a viewpoint.  Now the U.K. Parliament must pass legislation instructing its government to invoke an article of the EU organizing document, Article 50 of the Treaty of Lisbon of 2007.  This will set in motion specific negotiations for the withdrawal of the U.K.; these negotiations could well last for two years and that may be extended.  Even before Parliament acts, however, the U.K. government will need to outline its needs, surely in consultation with a variety of business and other private institutions.  Prime Minister David Cameron has said he will resign to permit new government leadership to execute these very fundamental changes.  Two candidates have emerged in preliminary Conservative Party voting; a final choice will be made in September.

Thus, nothing structural will happen right away.  Surely there has been an immediate and dramatic reaction in financial markets as a result of the shock of the unexpected vote result.  However, where market valuations move from here depends on many factors currently unknown.  Some of the dust has settled, and the best-known stock index, the FTSE 100, is now running slightly higher than prior to the announcement of the vote result.  In contrast, the foreign exchange value of the pound fell immediately, and it has not recovered; it presently down 13%, to about $1.29 from $1.50 on June 23.  These differing market reactions highlight the overall uncertainty.  This exchange rate movement already means the U.K. exports have become cheaper.  The Motley Fool website points out that a trip there for U.S. tourists and business travelers is now already cheaper.  However, it just got much more expensive for U.K. residents to go anywhere else.

Third, do we know what this all means?
Not really.  There is no explicit timeframe for concrete actions, although we note with great interest that the Conservative Party is moving promptly with its election process.  And while the Article 50 authorization for the U.K. to leave the EU supposedly has a two-year time limit, associated negotiations on accompanying trade policies could drag out far longer than that.

Such basic questions mean economic growth, already sluggish, of course, is well likely to be restrained further.  Forecasts range widely, from a roughly 1% hit to growth in the near-term to 3 or 4%.

The effects on specific businesses are also uncertain.  Some analysts believe that international banks might leave London to better concentrate their work in Europe itself.  But other analysts point out that Parliament might take advantage of newfound flexibility to effect tax reductions, making the U.K. more attractive to businesses than locations on the Continent.

These notions apply broadly – even to the Arts.  We were startled to find a commentary in the weekly email from New York’s classical radio station, WQXR, titled “How ‘Brexit’ Affects Opera and the Arts.”  The drop in the U.K. exchange rate has already had a major impact on the value of European singers’ salaries when they perform at the Royal Opera at Covent Garden, for instance.  British conservatories also have two scales for their tuition fees, EU and non-EU, the latter as much as twice the former.  What will happen to those fees when the actual “Leave” takes place and will European students still come to study there?

People from other EU countries who currently live and work in the U.K. face uncertainty.  They will no longer have automatic authorization to live there.  Some of them have already applied to the U.K. Home Office for permanent residency or outright citizenship.  Some may have to leave.

Another issue is that Scotland voted heavily to Remain in the EU, and its government is already trying to figure out if there is a way to handle that.  The “United Kingdom” might then be less “united” if Scotland remains while Great Britain leaves.

Prayer for Healing
The distress over the vote and the nasty campaign ahead of it, marked by the tragic murder of MP Jo Cox, has brought a response from Church leaders.  As we in the U.S. struggle with our own political divisions, we might take note of the following selection from a Church of England litany for these days:

Guide our nation in the days and months ahead
to walk the paths of peace and reconciliation.
Hear us, Lord of life.

Lord, graciously hear us.

Give to our leaders wisdom and sensitivity
to work for unity and the common good.
Hear us, Lord of life.

Lord, graciously hear us.

Mend broken relationships
and restore to wholeness whatever has been damaged by heated debate.
Hear us, Lord of life.

Lord, graciously hear us.

Sustain and support the anxious and fearful
and lift up all who are dejected.
Hear us, Lord of life.

Lord, graciously hear us.

+ + + + +


Sources:
Various issues of The Wall Street Journal and associated website www.wsj.com

U.K. economic data from the Office of National Statistics.  Sourced from Haver Analytics, Inc., databases.

Wikipedia entry: European Union Politics.  https://en.wikipedia.org/wiki/European_Union#Politics

Dominic Webb and Matthew Keep. In brief: UK-EU economic relations.  U.K. Parliament:  House of Commons Library.  Briefing Paper number 06091, 13 June 2016.  www.parliament.uk/commons-library.

Sean Williams.  “8 Ways Brexit could directly affect you and your money.”  June 27, 2016.  http://www.fool.com/investing/2016/06/27/8-ways-brexit-could-directly-affect-you-and-your-m.aspx.  Some of Williams other ideas besides cheap trips to the U.K. also include the fact that anticipated sluggish economic performance will keep interest rates low, making mortgages cheap and keeping credit card rates from rising.  However, the sluggish economies could also keep house prices under pressure.


Fred Plotkin.  “Operavore: How ‘Brexit’ Affects Opera and the Arts.” www.wqxr.org/#!/ July 1, 2016.


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