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What every college student should know about Brexit

Beyond the economic impact, students should understand how voting behaviour allows for unexpected results, argues a US college student.

    Zachary R. Wood 's avatar

    Zachary R. Wood

    June 27 2016
    Brexit from the EU


    Last Thursday, more than 17.4 million Britons voted to leave the European Union. Since then, leading economists have conjectured many consequences of the Brexit vote. While there are disagreements about how Brexit will affect market activity, economic policy, currency wars and credit spreads throughout Europe, there is a general consensus among leading economists that because of Brexit, we’re faced with volatile markets, considerable international uncertainties and increased political friction around issues of trade, investment and labour mobility.

    Significant growth deterioration, currency instability and credit crunches are substantial if not serious risks. Britain could even experience a recession beginning in the next 12 months. On the positive end, there will be increased liquidity, a more competitive currency, room and reason for increased government spending, and the potential for substantial policy measures (fiscal more so than monetary, as the Bank of England has already cut the interest rate as much as possible).

    When I spoke to Kenneth Kuttner, distinguished professor of economics at Williams College, he noted that Brexit in essence means that beyond a decrease in the efficiency of labour markets – which allow workers to go where their services are in greatest demand – “England will now have to start from scratch in terms of negotiating trade arrangements. How all of this will play out is uncertain, but for sure leaving the EU will at a minimum introduce a lot of friction in trade between countries.”

    Not only does this impact the principle of comparative advantage that motivates international trade; it also leads to a general decline in productivity and efficiency for Britain. 

    For the US, this likely means reduced demand for exports, increased pessimism and loss of confidence in the pound, which, combined with other factors, could lead to an increase in borrowing costs for England.

    In short, the aftermath of Brexit is bad – but just how bad things will be in months to come is hard to say. No one knows how things will play out, so nobody wants to make any economic commitments – such as investing in English assets.

    When I talked to Robert Shiller, Sterling professor of economics at Yale University, about what he thought every college student should understand about Brexit, he pointed out that: “The vote may be a reflection of a basic incentive problem [in voting]: no one thinks they have any chance to be the ‘deciding vote’, and so they don’t have the proper incentive to vote what they think should happen. Voters didn’t feel that they were pulling the trigger on the EU when they voted for Brexit, since they knew the polls were saying it would lose. So they squelched their doubts about Brexit and voted in an emotional or dramatic way.”

    In fact, this point is largely reflected in the second thoughts being voiced by many after the vote in Britain. 

    Regarding consequences, Shiller told me that he was very worried because he sees this defection as “a first in a cascade” within the EU.

    Eric Maskin, an economist and Nobel laureate at Harvard University, shared similar concerns, arguing that “the political consequences may be worse than the economic ones, dealing a setback to the project of unifying Europe and possibly inducing further disintegration”.

    For a problem such as this – won, unfortunately, by a simple majority – there is no easy set of prescriptive solutions. But from what I gather, there will be an important lesson that my generation – particularly those of us in college – may take from Brexit: there is a constant risk of mental error whenever you play for high stakes under great pressure. We can always regret what occurs, but we should actively resist allowing that regret to get in the way of the hunger for a better world that drives us, the hunger that we channel constructively to address the many problems we face as a society.

    Declines in economic growth and development can have depressing effects, especially for college graduates going into the world looking for jobs, many of whom also have to worry about student loans. Sitting with the notion of uncertainty can be an unenjoyable learning experience. Right now, even though policy experts have the job of thinking through viable strategies, no one has any solutions or answers that satisfy the needs of all parties involved.

    There are no guarantees, no point estimations for next-day outcomes in the market or in the world, and so much of what happens in the coming months depends on political decisions – government spending, recovery measures, multilateral negotiation and the like.

    The state of economies in Europe a month from now is even more uncertain, but, if we think about it, so are each of our futures. In that sense, the takeaway for me (beyond any story the data tell) has little to do with economic outcomes and everything to do with uncertainty and how we deal with it and keep moving forward.

    Perhaps one way is to ensure that every critical decision you make is as well informed as possible.

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