Brexit and the analysis of its economic consequences: iteration 2

Alberto Nardelli at Buzzfeed broke the story that government economists have undertaken a new analysis of the consequences of different variants of Brexit.  And come up with the unsurprising conclusion that they would all be costly.

In one sense, this should not be news.  Nothing has changed.  A few economists have studied the same question and got the same answer as before.  Apart from a few on the fringes, everyone who has looked at this accepts the basic logic.  For a brief recap, the story goes thus:

Except from Brexit In Name Only [in which we stay members of the single market and the EU’s customs union] leaving will raise non-tariff barriers and perhaps tariff barriers too with the EU.  Unless something happens to overturn the iron logic of trade ‘gravity’ – the tendency for us to trade much less with countries far away from us, of a given size – striking new Free Trade Agreements will not replace lost trade with the EU.  Add to that the observation that the deal with the EU is very deep – it created a market with very few frictions indeed – and deals with other 3rd parties are likely to be much shallower and thus even less likely to replenish lost EU trade.

Indeed, because of the Brexiters’ distaste for submitting to mutually agreed and neutrally enforced regulations – it’s the loss of ‘sovereignty’ that our doing just this with our nearest trade partners in the EU that bugs them –  it’s inevitable that such deals will be shallower.  Shallower deals leave us with more ‘freedom’ in the Brexit lexicon.

So less trade, and, invoking another empirical regularity, therefore lower income per head.

However, the leak does seem to be being treated as news.   Why?

No doubt one reason is that the studies are embarrassing.

The old Treasury analysis from before the referendum could be dismissed as cooked by arch Remainer Osborne [albeit meaning that we have to make the silly accusation that Charlie Bean would have signed up to such cooking].  Outside expert analysis could be dismissed as just that;  also part of the Remainer establishment.

This new analysis has been done under the piloting of a government committed to a Brexit that means Brexit [now partially translated as Brexit means less £] and ‘making a success of it’.  So it’s harder to set aside.

Doing so would involve creating new distance between the policy makers with the power, and those sponsoring the sceptical analysis:  cleaving from the unrepentant Remainer ministers who stand by it and perhaps from the senior economists who produced it.  Just as this government was not embarrassed by the analysis of the old Treasury, a new one could renew and purify itself to avoid  blushes [‘all our options are worse than the status quo!’] caused by the thinking of the economists in the former, contaminated government.

Given that answering the same question with the same evidence and logical tools is bound to lead to getting the same answer, one has to ask why anyone bothered?

Perhaps the idea was that some part of the May government thought the old studies [and all the outsider work] was cooked, so to make sure they needed to have another look.

Or was it a calculated move by the moderate government members:  new analysis can’t be so easily dismissed, and will help tilt the agreement sought to Brexit In Name Only, or dare the Ultras to break with us and try to form their own leadership.  That tactic only works if the analysis is leaked, of course, or there is a credible threat of leaking it.

Another possibility is that new information has come along, either about the economics, or what the Government might want, or what the EU might put on offer.  But this seems unlikely.  There’s no new economics I am aware of.  And the other matters are at the level of detail that would not affect the higher level debate that has still not concluded [hard or soft?].

As a result of the leak, social media has filled up again with the confusion about conditional and unconditional forecasts that sullied the pre-referendum debate.  [I suppose one could have seen that coming].

This from Iain Martin, editor of ReactionLife, and Times columnist:

Screen Shot 2018-01-30 at 10.54.27

If you can’t think why this might be a misguided thing to say:  it’s as though you are sceptical of all the past evidence linking pizza and beer over-consumption and lack of exercise to weight which moved your doctor to advise you to go teetotal, cut back on the pizza, and take up jogging, and all because all kinds of other things could happen to you along the way.

Christian May was also at it:

Screen Shot 2018-01-30 at 11.01.27

One of the ironies of all this is that Brexiters seem to reject the idea that you should do policy analysis based on conditional forecast thought experiments.

Yet this is precisely what they are doing all the time.   Contemplating that Brexit might be beneficial involves all kinds of such thought experiments:  That new FTA’s with far away countries will more than make up for lost trade;  that breaking out of the EU will reshape the EU itself around a more minimalist FTA, loosening the elements of political union and redistribution.

And often, shaky unconditional forecasting creeps in, for example predicting that technology will revolutionise trade and national border bureaucracy, eliminating the need for people in uniforms stopping lorries and searching them, or making the distance between economies that used to depress trade irrelevant [which it has not so far, incidentally].


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8 Responses to Brexit and the analysis of its economic consequences: iteration 2

  1. BRaven says:

    It is ironic that you claim to be as certain that leaving the EU is as bad as eating pizza and drinking beer given the woeful nutritional advice accepted as best practice for decades only to be later reversed.

    How much higher is EU gdp because of the reduced trade barriers?

    • Tony Yates says:

      I think you misread me; the point of the analogy was to clarify the meaning of a conditional forecast, and why this is not to be taken as lightly as unconditional forecasts. Estimates of the effect of raising trade barriers on the UK are going to be uncertain, for sure, but we have a lot of past experience to draw on, and I think the pre-referendum studies [of the long term impact] were reasonable. The CEP study by Van Reenen and others is a good starting point, so have a look at that.

      • BRaven says:

        but it isn’t data from repeatable experiments, they’re not much more than glorified parameter fitting and then extrapolation. add to that the data set is really tiny yet the certainty of the proclamations is enormous. if the benefits of integration were so high, it should really leap out of the data for the EU over the last few decades and it doesn’t.

        repeating the outputs of gravity models that suggest the UK would have been better off joining the euro are never going to win a political debate when they clearly don’t pass a sense check. nor are arguments couched in gdp terms per household when there are clearly large distributional effects that aren’t being measured properly. it’s as tone deaf as haldane being surprised that inequality rose during a qe fueled asset boom.

      • Tony Yates says:

        I think your assessment of the gravity model is way off. These are probably amongst the most robust and well explored results in econ. You won’t find a serious trade economist who disputes them. Incidentally, the effects of EU membership do leap out at you. [Rather single market creation]. On trade/GDP that is. As to what is tone deaf, that is at least arguable. But it’s important to context false economic analysis that is out there with the evidence. And – optics aside – for governments to be aware of the economic price tag attached to choices which come with political benefits and costs. Incidentally my reading is that neither income nor wealth inequality has risen much since the mid 90s. It’s a common meme that QE has somehow made this worse, but I think that is also rubbish, and applaud those that get out there and set the facts straight. The alternative is to cave into narratives that are just not right.

  2. AdrianD says:

    I’d be very interested to hear how you (or any other Remainer economist for that matter) think that the possibility of a second GFC or at least EU-wide banking crisis might fit into any of this? As far as I’m aware (and I’m happy to be corrected on this) no one has attempted to address this in their modelling.

    Why is what was probably the most significant ‘condition’ of the last few decades routinely excluded from these analyses?

    It’s not the immediate post-Brexit scenarios that will determine our long-term performance as much as it is the immediate post-next-crash recovery. For what it’s worth, I think it very highly likely that the EU will repeat their disastrous post-2008 Crash policies when the next one hits and the tools at our disposal outside the EU (specifically capital controls, PQE, targeted government intervention and unrestricted nationalisations)…) makes Brexit worthwhile, no matter what the short-term BAU forecasts may look like.

    • Tony Yates says:

      I’m not a ‘Remainer economist’! I’m an economist who has read the empirical trade econ literature. Leaving the EU won’t insulate us from the crisis. We had no need of PQE – which I think a step too far – and more stimulatory fiscal policy, possible in as well as out of the EU, would have sufficed. Note that we did and could nationalise our banks as we see fit and EU regulations did not hinder our financial stability interventions. And we also do macro pru, which as you know is a form of capital control. So these are the reasons I would leave out a financial crash from the calculation, since they are not relevant to it. In fact, because leaving will shrink the tax base, one can plausibly argue that it will leave us less placed to deal with one. On the other side of the calculation, I expect if there is anything other than Brexit In Name Only, the financial sector will shrink, so that may dampen the size of any crash, depending on from where it emanates.

  3. . says:

    Do you know if there’s been much study of what happens when econpmic intergration is reveresed? And if so, how does this fit the standard gravity model? Might it be that we kind of keep a lot of our trade gains from integration with the EU, but gain from getting better deals else where?

    I presume there’s no evidence of this kind of effect – but that could be ‘no evidence’ because there’s evidence that to the contrary, or that there’s simply no evidence either way (perhaps because ecopnomic intergration tends not to be reversed?)

  4. am says:

    Project fear mark1 with its failed predictions on vote leave was signed up to by now discredited economists who are no longer experts. Part of their lack of credibility is that they just repeat the same. This is a sign of trolling not expertise.

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