What do Brexit, plastic bags and Vietnamese rats have in com

Charges for single-use plastic bags have triggered a surge in demand for 'bags for life'. Paying rat-catchers a bounty in Hanoi led to an explosion in the population of rats. The resounding rejection of the government's Withdrawal Agreement with the EU by advocates of 'hard Brexit' has made a softer form of departure more likely. All are good examples of the law of unintended consequences in action.

Since 5^th October 2015, large retailers have been obliged to charge 5p for single-use plastic bags. The impact of this small nudge on consumer behaviour has been profound: the use of such plastic bags fell by 83% from a staggering 7.6 billion per annum in 2014 to 1.3 billion in the 2016-17 tax year.

However, the demise of the single-use plastic bag has spawned the rise of the 'bag for life'. The average UK household worked its way through 44 of these bags last year. If they are being used one at a time it implies that a 'bag for life' should be renamed a 'bag for the next eight days'.

The irony of the situation is that by reducing our consumption of lightweight plastic bags and increasing our consumption of heavyweight plastic bags, the change in the law may well have had the unintended consequence of increasing the amount of plastic used.

In 1902, Hanoi was overrun by rats. The French government decided to introduce a bounty for every rodent killed. To provide evidence of an exterminated rat, people had to submit a tail to the colonial authorities in exchange for a small reward.

It wasn’t longer before budding Vietnamese entrepreneurs realised a way to maximise their bounty. Rather than trawling the sewers, they simply bred rats at home and chopped off their tails.

Rats create more rats pretty quickly: they reach sexual maturity in about a month, produce litters of around a dozen at a time and can produce up to five litters a year. Rather than eliminating the rodents, the policy quickly led to an explosion in the rat population across the city.

On the 15^th January, the House of Commons voted on whether to accept the government’s proposed terms of withdrawal from the European Union. The proposal was rejected in the heaviest parliamentary defeat suffered by any British government on record.

Predictions of 'gridlock', 'chaos' and 'constitutional crisis' have followed. But against that backdrop, the pound has been steadily recovering. On a trade-weighted basis, sterling is now close to the strongest level since last May. That implies the market is becoming less, not more, worried about UK’s economic outlook.

Why is that? Are currency traders blind to the storm of political risks in the UK? Do they not understand that the government’s plan is about as popular as a traffic warden at a Top Gear convention?

I’d argue that it has more to do with plastic bags and Vietnamese rats. By voting down the agreement, advocates of 'hard Brexit' hoped to make a clean break with the EU more likely. Instead, they have catalysed parliamentary support for the opposite.

A no confidence motion in the government has been and gone, incentivising the parliamentary majority against 'no deal' to come together. This week, amid a cacophony of amendments and counter-amendments, a parliamentary majority formally rejected "the United Kingdom leaving the European Union without a Withdrawal Agreement".

At this stage, that has no legally binding effect on the government. But if the deadlock continues, we will see a revival of plans for parliament to 'take back control' and force the government's hand. That would transform the debate with the fall-back position of an abrupt crash out of the EU at 11pm on 29^th March taken off the table. By roundly trouncing the government’s proposal for being too 'soft', advocates of a clean break with the EU have made the opposite more likely.

The law of unintended consequences strikes again.

Like all Macro Matters blogs we would like to point out that this blog represents the investment views from LGIM's Asset Allocation team.