Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 9 February 2017

How Brexit advocates intend to smear economics

Those who are devoted to Brexit have only faced one real enemy: economics. It is in the DNA of economics that trade is good, and so anything that makes trade more difficult will be costly. On top of this basic insight on which so much of society is built is a host of detailed evidence on the impact of trade agreements and the effect of more trade on the economy. This knowledge had become received wisdom among most MPs, probably as much if not more through their contacts with business.

What Brexit advocates had on their side was the huge advantage of fanatical support from most of the Tabloid press as well as the most widely read broadsheet . It is a schoolboy error to say that because newspaper circulation is declining its influence is also declining. More people may get their news online, but newspapers remain a primary news source online, either directly or indirectly. The broadcast media also tends to take their lead from newspapers. This is why Leave wanted a referendum, because they thought they could win, not because they had any great belief in this form of democracy. [1]

In the referendum itself economists were largely sidelined, and when their arguments did appear via the predictions of organisations like the IMF they were generally accompanied by a matching segment from the tiny band of “economists for Brexit”. For this and other reasons I have discussed at length in earlier posts, the Brexit advocates won, narrowly. But the advocates of Brexit still face a problem. If the news as Brexit happens is all bad, then maybe people will begin to hear about what the overwhelming majority of economists have been saying.

And sure enough, that has been happening. Sterling crashes the moment markets hear about the vote, and this will gradually reduce consumers’ real incomes. The Bank has to cut rates to their lower bound and restart QE. Forecasts of the public finances deteriorate, most recently here. So they needed some way of smearing all these negative medium term economic predictions. When the Bank of England revised up their forecast of UK GDP growth in 2017 from 0.8% in August to 2% in February (see this post), they saw their chance.

They will now claim that economists are completely discredited because they all thought GDP would collapse as a result of the Brexit vote and it hasn’t. Therefore anything they say about the public finances or growth in the medium term can be discounted. Now of course among those that know anything about economics this is nonsense. But most people do not know much about economics, they do not read the FT or Economist, so this kind of propaganda is effective. Don’t be surprised to hear it from political journalists in the broadcast media before long.

So for the record, before this happens, here is why it is nonsense.
  1. (And most important) Short term unconditional macroeconomic forecasts are extremely unreliable: always have been and I suspect always will be. They are slightly better than guesswork, but for a central bank that slightly better is well worth having. Predictions about the long term impact of Brexit mainly come from the non-macro part of international trade: gravity equations and all that. Their empirical foundation is strong. The idea that lower immigration will hurt the public finances is also common sense once you recognise that immigrants are young, and therefore will pay taxes that finance their use of the NHS and other public services with plenty to spare. This has nothing to do with macro forecasting!

  2. Actually it is not the case that economists universally thought GDP would collapse. Here is the FT survey: most thought it would collapse, but it was not universal. The FT survey focuses on City economists, not academic economists. One prominent academic economists, Paul Krugman, has always been very dubious about talk of a recession. What is true is that economists universally think Brexit will have bad long term effects.

  3. As I wrote here in June last year, the macro impact of Brexit involves counteracting forces. The depreciation is partly in anticipation of the loss in trade Brexit will bring, but in the short term it could boost net trade. Consumers could beat (for now) the increase in the prices of imported goods by buying durables immediately. Most forecasters thought these effects would be counteracted by negative effects, and it was reasonable to do so, but a sharp downturn was never a one way bet. In contrast, there is no upside to making trade more difficult with your nearest neighbour. The only question is how bad will it be.
If you think this is all so obvious that the propaganda about economists being hopelessly discredited will not work, I think you need to get out more. The line 'they all got the immediate impact completely wrong so we cannot take their medium term predictions seriously, and who can forecast until 2030 anyway' will be repeated ad nauseam in the press and by Leave advocates. Most political journalists will not know this line is rubbish and full of elementary confusions, because they do not talk to academic economists either directly or indirectly. The one group who could puncture this bubble is business, but at present its voice has been fragmented and therefore weak.  



[1] For those who still doubt the power of the tabloid media, imagine there is a car market with a single best selling car, call it car R. A new rival is launched, car L. It is independently assessed to perform worse, but this assessment is not widely available. But car L gets a year of pre-launch publicity in 80% of the tabloid press, followed by a period of 6 months non-stop adverts for this car coupled with stories about the failings of car R. All discussion of the technical merits of the two cars in the broadcast media involve debates between advertisers for both cars. Now, honestly, are you going to tell me that under these circumstances car L would not capture a lot, perhaps a majority, of the market?

44 comments:

  1. Depressing but bang on. The only weakness of the Leave argument is that it simply cannot deliver. It is a project of no benefits and spiralling and unbounded costs.How could anyone ignore that 50% of Uk economic growth in last decade came from immigration? (They did). How could anyone think that new trade agreements with Khazakstan could replace forty years of local EU trade? (they do). But look at the Richmond By election and have hope.

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  2. "Sterling crashes the moment markets hear about the vote, and this will gradually reduce consumers’ real incomes."

    I've repeatedly seen Brexiters (e.g. Farage) argue that the sterling crash was a good thing, because they'd thought for a long time that sterling was overvalued. I've always wanted to see someone point out that this means that the speaker thinks that the average Brit is paid too much. However the discussion always seems to be focussed on exports rather than the effect on real wages.

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  3. Anything that makes trade more difficult will be costly? Costly for whom? You have (again I’m afraid) paid too little attention to the distributional effects of the kind of free-trade that the EU dictates.

    Worse still,- where is your evidence that this enhanced trade is ever enough to offset the destructively pro-cyclical effect of the free-movement of capital?

    The UK’s per capita GDP growth has become hugely more volatile since we joined in the seventies (dropping by over a third in average year-on-year terms). I think a valid ‘economic’ Brexit case could be made solely on the basis that we will have the option to introduce capital controls at some point after GFC2 (or after GFC3 or 4 which would likely occur in the time between a remain win and the next referendum vote).

    Also have you considered that the free-movement of capital might be much more of a boon to rent-seekers than ‘entrepreneurs’?

    I know you’re trying to keep the economic case simple and succinct, but I think you’ve overdone it here.

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  4. To be fair Simon, the economics industry whether academic or in the FS sector has given them plenty of ammo over the years.
    I’m not even sure blaming the tabloids has much in it – you can’t escape the fact that a large part of the population only wants to read about celebrities and sport and to be told there are simple solutions to difficult problems. Preferably they want to hear someone else is to blame. I suppose that’s a coping mechanism if your life is shit – I dunno. But I’m sure that if that narrative is not supplied by the tabloids it will be supplied by something/someone else.
    Regards Phineas Redux

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    1. I completely disagree with you. There are plenty of simple solutions out there. So why should people only get to hear about the ones the suit the interests of 4 very rich Newspaper owners.

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  5. If I understand correctly (I'm not an economist - merely interested and not just because I'm a EU citizen living - temporarily? - in the UK) the point most, if not all, the economists are doing is that, after Brexit, the economy will still grow, but not as much as it could have if the UK had remained in the EU.
    Grossly simplifying, it's very likely we'll see a growth of about 2% over the next few years, but that could have been 3.5%.
    If this is correct, then there is the issue for the Remainers.
    All the public will know is that the economy is doing well - it's still growing. It's going to be very difficult to explain, in a believable and simple way, that the UK is better off, but it could have been even better, because people won't feel any pain that is directly relatable to Brexit.

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    1. I agree, although if the EU area starts growing consistently faster than the UK that is difficult to ignore. What is also extremely depressing is that Brexit will not be reversible for a very long time.

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    2. I voted Remain, but once we're out I will not vote to return if, as now, it requires agreeing to join the straitjacket that is the eurozone.

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  6. Alexander Harvey9 February 2017 at 06:10

    What were the assumptions made for pre-vote forecasts?

    1) Prime Minister would stay in office?
    2) Bank of England wouldn't do much?
    3) Article 50 letter to sent the next day?


    If so, none of these occurred, and if BoE anticipated (3) then they may have overreacted a tad with the stimuli. But I am somewhat guilty of hindsight bias.

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  7. The source you quote regarding the public finances is from the Guardian and that mentions Brexit and an aging population as the source of the deterioration.

    You lay huge emphasis on the consequences of Brexit as if it's the only game in town but, in my view, it is only one of a number of challenges which are far more important, most notably an aging population and robotics and these will begin to loom much larger in the next few years.

    Furthermore, the growing problems in the EZ may well spell the end of the Euro in the next few years in which case it won't be Brexit but Omnexit and dealing with the fallout from that.

    I suspect that your concerns may have a distinctly parochial ring about them in a couple of years time as Brexit becomes a sideshow in a much larger drama.

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    1. This, if I may say so, is a nonsense argument. Of course there are other important issues around, but that is no excuse for collective national self-harm.

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    2. I'm sure you've read this: http://www.cbr.cam.ac.uk/fileadmin/user_upload/centre-for-business-research/downloads/working-papers/wp483revised.pdf

      It seems to give a balanced view of Brexit and qualifies your characterization of "collective national self harm" as perhaps somewhat extreme.

      It also has some comments on the gravity models you refer to in your piece and as to why the Treasury assessment of loss of trade may be wrong.

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    3. Read the comments here:
      http://www.independent.co.uk/news/business/news/brexiteers-favoured-economic-study-shot-down-by-other-trade-economists-a7519596.html
      and my own observation after just a very quick look through one part
      https://mainlymacro.blogspot.co.uk/2017/01/the-single-market-was-mrs-thatchers.html

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  8. It would help regain confidence if academic economsts sent a letter to the press explaining where they got it wrong in the short run and why they think they should be believed in the medium term.
    The motivated reasoning identified by Krugman has been followed by motivated ignoring. The blogs and tweets, immediately after the vote, that cried recession have studiously ignored PMI's and ONS data since the first bad ones after the vote or said very little about them.
    Also academic economists should revisit the soundness and assumptions of near trade models.

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    1. One more time, academic economists do not do short term forecasts. Forecasters have explained why they got it wrong, as they frequently do. (The OBR publishes pages and pages on its forecast performance.) I have explained IN THIS POST why there is no connection between short term unconditional macro forecasting errors and gravity equations.

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  9. If you think that it is a 'schoolboy error' (donnish!) then explain why Remain is dominant on the Ashcroft exit poll on the 18-45ish year groups, the mostly non-newspaper buying public, but Leave becomes dominant the more you go into the age groups that buy physical copies of newspapers?

    Given that younger people are less well off, it should have been they who went for the baseless grievance of immigrants line, but they mostly have not.

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    1. I don't follow this reasoning at all. The bias to Leave in older voters is surely an argument for tabloid influence.

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  10. Market Fiscalist9 February 2017 at 08:29

    I have learned a lot of good economics from this blog over the years.

    But I'm unconvinced by the arguments in this past.

    Whichever way you spin it 'most [economists] thought it would collapse, but it was not universal' is just another way of saying that most economists got it wrong. And I assume that some of the economists who got it right were actually pro-Brexit?

    We do not yet know what Brexit will look like in most key areas.
    - What trade deals will be worked-out either with the EU or other trading partners?
    - What future levels of immigration will there be?
    - What supply-side benefits may accrue as a result of Brexit?

    I do not therefore see how anyone can predict(based on today's knowledge) that Brexit will have negative long-term consequences. Economists who do so are just as likely to have mis-called this as on the short-term effects.

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    1. Most forecasters got it wrong. Academics don't forecast. Trade deals with others will not compensate - that is what gravity equations are all about. May has said reducing immigration is an absolute priority. What supply side benefits. Your last sentence just ignores all the points in this post.

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    2. Academics should forecast. That would bring some rigour to the pastime.
      If Economics is just looking back in time and picking correlations to support your prejudices, then it is quite right that Economics is disparaged.

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    3. @ Market Fiscalist. You’re right to say that the political outcomes are unpredictable, but given certain political outcomes then the direction of travel for the economy is clear.
      For example we know that advanced economies like the UK (and communities within those economies) adjust very slowly to structural economic change. We also know that trade has to a large degree coalesced around regional trading blocs – because it is marginally more efficient for business to trade this way.
      This means that dis-entangaling the UK economy from the EU will cause economic pain. Nobody really knows to what extent (if any) the UK will dis-entangle so I would say at the moment you could only guess at the quantity of the pain.
      You have to keep an open mind on things because there could be an element of group thinking going on amongst economists. But what are the alternatives? The tax haven global leader of free trade may be a wet dream for some parts of the Tory party but I would prefer to hear something practical.

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    4. StuartP: economists do what medics do - when things go wrong we fix them. You would never insist that medics start forecasting. And most of the time (like medics) what we suggest works.

      Market Fiscalist: Estimates of the impact of Brexit vary widely (hardly groupthink) but they are all negative. We know a large number of those voting believe thought it would have (at worst) no long term impact on them. What is really worrying about Brexit is that people are going for it on completely false pretenses.

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    5. I find your reply to StuartP surprising. Doctors do forecast all the time, for example about the future outcomes of a lifestyle or treament. All scientists "forecast" they predict what will happen given their model of the world. Are you really saying that economists shouldn't be doing this?

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    6. They make conditional forecasts, which is what the medium term impact of Brexit is, but they do not make unconditional forecasts like what will GDP growth be in 2017. An equivalent for medics would be to forecast how long each person will live.

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  11. I found this article quite prescient: https://theconversation.com/article-50-vote-shows-brexit-is-about-politics-not-britains-future-72765?utm_medium=email&utm_campaign=Latest+from+The+Conversation+for+February+9+2017+-+67234912&utm_content=Latest+from+The+Conversation+for+February+9+2017+-+67234912+CID_9a02a450dd08d9410f53dfc99de98a3d&utm_source=campaign_monitor_uk&utm_term=Article+50+vote+shows+Brexit+is+about+politics+not+Britains+future

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    1. I agree. 2 things still surprise me. First, that Ken was the only Tory to vote against giving complete control to May and her team over the terms of Brexit. They know the characters involved, so they should know how dangerous that is. Second, that business leaders who seem quite happy to tell the UK how terrible it would be if we had a Labour government have been largely silent over Brexit. I can think of a simple word that summarises both: pathetic.

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  12. Sir, I believe you are making a fundamental error in your approach. Not to the economics of the situation. I presume you have those correct and anyway, as a non-economist I have enough sense to know you know far more than I do. The error you are making, in my opinion, is treating this as an economics question. Your presumption appears to be that the U.K. should have voted whichever way maximized her long-term standard of living. But surely there are other reasons to decide whether or not to remain in the EU. And when the long term costs of leaving are only on the order of a 2% reduction in GDP 10 years from now (going from my possibly flawed memory of Prof. Krugman's estimate), surely rational people may be willing to incur that expense in return for something else (say, the ability for their own leaders to make the laws of the land). I personally can envision that highly informed, rational people could decide either for or against, depending on their preferences.

    By the way, as an American, if someone gave me a magic wand and said I could change history so that Trump was never elected, but the cost to the US would be a permanent 2% reduction in GDP, I would make that wish immediately. Maximizing GDP is nice, but it is not the only important thing to most humans.

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    1. A large number of those voting Leave are doing so because they think it will reduce immigration and increase there access to public services, a belief that those promoting Leave have encouraged. In reality it will make access to public services worse. That is a serious problem.

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    2. "there access"? It seems you read too many poor grammar sources these days.

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    3. Possibly rubbed off from reading and replying to often-illiterate pro-Brexit bloggers.

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  13. From your time doing Treasury models, could you explain how the GDP deflator might have been applied by the Bank in its latest set of forecasts? Is provision made for different effects caused by currency shocks (like in June 16) as opposed to the ebb and flow of the exchange rate over time? Am I right to suspect that nominal GDP might have been undercorrected, given that the inflationary effects of higher foreign currency input prices lag, and are in any case smoothed into RPI over a year?

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  14. "Those who are devoted to Brexit have only faced one real enemy: economics."

    I disagree. We economists all know the essential role of preferences, and that preferences can only be understood by observation of decisions, not by calculations without involvement of the people.

    The pro-Brexit folks may have a tough enemy in the calculations-centric macroeconomics, but microeconomics if done well recognizes the limit of what calculations can do and acknowledges the importance of preferences and the observation thereof.

    The relevant observation is the result of the referendum, regardless of how deluded or lied-at the voters were. None of those distorting factors are quantifiable.

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    1. So many Leave voters think they will not be worse off with Brexit, but standard micro says they will be, but you are going to ignore their incorrect belief because its 'not quantifiable'. Absurd.

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    2. Surprising. I thought you understand preferences.

      How could you POSSIBLY know that they will be "worse off"? "worse off in services, goods and savings" - very likely. But that doesn't matter in itself, as it's but part of the full picture.

      Emotional needs may be served by Brexit that may be more important for people than being able to afford a bigger car or having a higher figure on the bank account balance.

      Economics cannot quantify those needs, nor monetarise them. Economists can only observe the choices made based on the individual preferences.

      And again, Brexit is the least imperfect choice that we were able to observe on this topic.


      BTW, there might also be efficiency gains due to policies will be done specifically for the UK, not as EU-wide consensus - but that's not what people with a focus on trade tend to pay much attention to.

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    3. Not only do they think they will not be worse off, but they would not have voted for Brexit if they were going to be worse off. Its deception, not preferences.

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  15. Interesting alternative view from an economist (1st from Cambridge) who does not think Brexiteers are "ignorant, uneducated, stupid or racist" and who thinks that the country would be better off outside the customs union :

    http://www.telegraph.co.uk/business/2017/02/08/mervyn-king-mps-attitude-made-brexit-inevitable/

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    1. Interesting that on the one hand Leavers are happy to argue that because economists missed the financial crisis they are all rubbish, and then moments later seem happy to quote the economist who was in the best position to spot the crisis, and failed to do so. There did not seem to be any arguments in the article, so difficult to know what to think.

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  16. Professor, I have a question for you. I am wondering about the distribution of income in the U.K. before and after the exit from the EU. I have in my mind's eye a thought experiment that today the average income is X. I am pretending that the financial sector's employees make substantially more than average and the rest of the country substantially less. Then after the exit the financial sector's employees take a 20% pay cut (just as an example) but still make more than average after this. But let's imagine everyone else gets a 4% increase. I could imagine the net effect is 2% less income for the country as a whole, but a more egalitarian distribution. I could imagine this being a good trade-off for society as a whole.

    I don't know if anything like this will happen? I would love to read your thoughts on how likely it is that Brexit could result in a more egalitarian distribution of income and you think about the trade offs associated with increasing egalitarianism at the expense of reduced efficiency.

    Respectfully,

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    1. It is possible that this could be an outcome, although you have to ask whether the governing party will be happy to see their supporters take the biggest hit. ut as I have said before, it is surely better to deal with inequality directly than by reducing everyones income.

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    2. Fair point, sir. And perhaps the U.K. politically is able to deal with inequality directly than the US is. You would know better than I would on this point. But I can say the US is politically incapable of redistributing internally effectively enough to reduce inequality. In fact, inequality is increasing here over the last 35 years and it seems likely to continue. The winners in this game end up with an increasing amount of influence and seem to use that to further protect their interests.

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  17. Simon, you are ducking the issue of the Treasury's report into the immediate effects of voting to leave the EU. If short term forecasts are so inaccurate, what was the purpose of this report? Where is the caution in the report? Where is the balance in the report? They kindly assessed two scenarios -shock and severe shock. I will respond by grading their attempt as poor or very poor.

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    1. As I have said many times, macro forecasts are little better than guesswork, which makes them better than guesswork. Quite how you can worry about lack of caution when the other side told lies with no caution at all beggars belief.

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  18. On a related issue, it looks likely that any Brexit deal which results in zero tariffs for UK-EU trade will be represented as a major negotiating triumph, equivalent to the single market without the membership fees. Of course the Treasury report and others' economic analysis spell out why economic damage will still occur, but maybe the arguments are too subtle to be persuasive.

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  19. The profession is shocked by the Brexit vote partly because the forecasts about the long-term impact of Brexit will eventually be tested against reality. It was meant as a scare story only. And it will reduce the profession’s reputation among non-economists further.

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