Bonkers Brexit economics

A report by “Change Britain” is the latest in a long line of flawed forecasts.

Paul Krugman, the Nobel prize-winning US economist and (these days) New York Times columnist, once described the three kinds of economics: the “Greek letter” variant beloved of contributors to academic journals, with articles stuffed full of impenetrable equations; the “up and down” economics of the forecasting and instant comment industry; and the “airport” economics found in the latest best-selling economics books.

To this collection we should, in this post-truth era, now add “bonkers Brexit” economics, characterised by daft assumptions, sloppy empirical work and untenable conclusions. During the referendum campaign we had claims and counter-claims galore about how the economy would or would not fall of a cliff, with spuriously precise figures from the Treasury about how every household would be worse-off after Brexit by £4,300. There were outright lies about the £350m per week windfall from ending payments into the EU budget, figures by the Confederation of British Industry about gains of £3000 per year for British households from EU membership that seemed plucked out of thin air, and so on.

Sadly, the trend persists. The claim from Change Britain, “the campaign to make a success of Britain’s departure from the EU,” that leaving the EU customs union could generate 400,000 new jobs is the latest in a long line of striking, but in my view empirically unfounded assertions. Cunningly, the “analysis” uses data from a study by the European Commission written to support the striking of new deals between the EU and a number of other trading blocs. However, the reasoning and the empirical work undertaken is so flawed that is surprising it saw the light of day. Critics from all sides, “Leavers” included, had a field day, pointing to the glaring weaknesses in it.

The claim is that by striking deals with parts of the world growing more rapidly than the EU—be it India, Canada, the United States or China—the UK will be able to increase its exports and, as a result, jobs will be created in exporting companies. True, but pause for a moment: what about the jobs in companies which will now face increased competition from our new trading partners? The hard fact is that opening up trade cuts both ways, such that looking only at the growth of exports tells only half the story.

Certainly, the long-standing economic proposition, from the early 19th century writings of David Ricardo onwards, is that by allowing countries to specialise in what they do best, trade deals benefit both sides. Moreover, as the European Commission paper cited by Change Britain correctly notes, the gains from trade liberalisation stem not just from demand for exports, because increased trade “also benefits growth via the supply-side of the economy.” The straightforward logic is that, to be globally competitive, companies have to innovate and boost productivity.

But free(er) trade also means that, in the industries in which other countries perform best, companies competing with imports will lose ground. If workers can move seamlessly from one industry to another no-one loses and there is an aggregate gain. However, Donald Trump is by no means the first to recognise that the wrong kind of trade arrangement can cost jobs, while a lack of adaptability in the economy often leaves a legacy of rust-belts and redundant factories.

Can we, then, look forward to better economic analysis of Brexit? The honest answer is in three parts. First, it is important to recognise that we are largely in unknown territory because there is no real precedent for a change on the likely scale of Brexit and, thus, a lack of relevant statistical evidence. This is exacerbated, second, by the ambiguity about not just what sort of Brexit (hard, soft, orderly, chaotic) can be expected, but also the specific terms of new deals, be it with the EU or other trading partners.

Third, there is political propensity to distort and cherry-pick results. The Change Britain posting attributes quotes in support of its work to Michael Gove and Digby Jones, redolent with phrases such as “great trading nation” and “beacon of global free trade.” As a former trade minister, Jones at least should know better.

Let’s just recall the definition of an expert: “x” is the unknown factor and a spurt is a drip under pressure.

By Professor Iain Begg, senior fellow at The UK in a Changing Europe. This piece originally featured in Prospect Magazine.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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