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Taking back control does not mean giving in to political temptation

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A hard Brexit would, just as its proponents say, allow us to take back control of trade policy. That has been the almost incessant focus of debate in recent months. It’s a silly debate, of course. The economic cost of withdrawing from the single market and customs union would inevitably, and for a very long time, outweigh any potential benefits from any other possible trade deals.

That is a simple statement of fact and I don’t propose to waste my time or yours going through that argument again. Lost in the fixation on trade, though, have been other areas where we also would have more control over economic policy outside the European Union than inside. We could get rid of some regulations, we could change — or even abolish — VAT on anything we wanted, we could run a much more interventionist economic policy, supporting particular firms or industries.

Of course, different aspects of these potential new freedoms appeal to different political groups. The more right-wing, free-market Brexiteers like the idea of a bonfire of the regulations. Indeed, that was one of their main arguments in the run-up to the referendum. Left-wingers, by complete contrast, would like increased freedom to engage in much more state intervention. Each is horrified by the plans of the other. They may be united in wanting to take back control, but they want control for wholly different purposes.

And then there are the special interests. I am told that the Treasury has been inundated already with special pleading to abolish VAT on a range of specific goods and services, something that is not possible inside the EU but may be possible outside. The lobbyists will be out in force and ministers are not always immune to their blandishments.

That, in a sense, is democracy. It’s what sovereignty, taking back control, is all about. Yet there is reason to fear those freedoms. Attractive as they may look, they are the freedom of the alcoholic presented with a drink. At times, politicians are wise enough to know that they can sometimes act like alcoholics. That’s why they have delegated the setting of interest rates to the monetary policy committee of the Bank of England and public finance forecasting to the Office for Budget Responsibility.

There is bad news for free-market Brexiteers. One thing evident both from our own history and from international experience is that national governments unconstrained by international agreements have a tendency towards more, not less, state intervention. That’s not inevitable, but the irony is that, despite their sense that the EU is overly interventionist, the chances are that membership restrains rather than extends state involvement in the economy. And today, after a decade of truly dreadful productivity growth, there is reawakened interest in a more interventionist approach to industrial policy.

The EU is not going to allow us to continue trading with it on anything like present terms while also allowing us to provide substantial subsidies to sectors with which their industries are competing. You’d want to be sure of some pretty big gains from your new industrial policy to make up for the inevitable losses associated with bigger trade barriers.

In fact, we’d likely suffer a double whammy from more expensive trade and less effective domestic economic policy. Much more interventionist policies aimed at supporting particular industries would likely leave us worse off in the longer term. As Nick Crafts, doyen of British economic historians, says in a new paper being released today, the history of these policies in the UK is clear. They failed. Using so-called public interest criteria in competition policy — in other words, giving primacy to factors such as supporting national champions rather than protecting competition — have had, as he puts it “unfortunate consequences”. Policies in the 1970s and before that often have been characterised as ministers “picking winners” were much more often better described as losers, such as British Leyland, picking ministers.

We know that this approach didn’t work in the past. Government failure was pervasive. The UK economy grew more slowly than almost all its competitors in the three decades after the Second World War and so did the living standards of British workers. Despite the travails of the past few years, the same has not been true of the period since the 1970s.

The failures of our economic policy in recent decades have not arisen from constraints imposed by the EU, they have been our own failures. Our failure to invest enough in infrastructure, our failure to run an effective education system, our failure to design an efficient tax system, our failure to build enough houses in the right places, our failure to support innovation and our failure to improve management capacity.

The fact is that if we do end up, by accident or design, with the sort of hard Brexit that allows us to water down our competition rules and to provide state aids, we should, at least largely, eschew those options. We should, in fact, design a new institutional architecture to tie the hands of government, to place many of the same constraints on it that membership of the EU places.

We do need to learn the lessons of the past 40 years and to use the powers of government more, and more effectively, to overcome market failure and create a wealthier and fairer society. But we also must not forget the hard-learnt lessons of previous generations. Governments can and do fail and politicians work better when they work within constraints. As we know perfectly well from our own lives, sometimes the best way of taking back control is to take temptation out of harm’s way.

This article was originally published in The Times and is reproduced here with full permission. Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist.