Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 20 August 2016

Brexit, economists and journalists

What does a macroeconomist say when confronted with evidence that output has stopped growing since Brexit, but that retail sales growth is strong and employment is holding up? The first thing they would probably say is that monthly figures are erratic, and we really should wait and see (although the Bank was right to cut rates as a precautionary measure given the negative evidence we already have). Second, they might also say that a short term burst in the consumption of consumer goods made overseas is quite a sensible response to the collapse in sterling, as there is often a lag before an exchange rate fall is passed through into higher prices in the shops. Buy your washing machine now before the price goes up. Third, they might note the collapse in sterling has (for good economic reasons) preceded the negative impact of Brexit on trade, and trading firms might benefit from that in the short term. The real worry about the short term impact of Brexit is a collapse in investment, as firms put projects on hold until the nature of the Brexit deal becomes clear, but it is very difficult to guess how large that effect will be. But finally they would also note that if the depreciation in sterling we saw as the vote was announced is permanent, that means every person in the UK is poorer as a result. That has to be reflected in lower consumption eventually.

What does a journalist say confronted with the same evidence? If they voted for Brexit they say economists forecast Armageddon, and it has not happened. They say “ it is obvious that the sky has not fallen in as a result of the referendum, and those who said it would look a bit silly.”

This is an old trick. Completely exaggerate what the other side says, and then cry victory when that exaggerated fiction does not come to pass. I remember 2013, and how the first sign of UK growth (growth in income per head that was at best on trend, rather than above trend as you would expect in a recovery) was proclaimed as vindication of 2010 austerity. When I pointed out that this argument made zero economic sense, I was referred to statements by someone or other that said growth would never happen under austerity. Of course they did: when governments are doing stuff that is causing serious harm and appear not to be listening it is human nature to overstate your case.

Exactly the same no doubt happened over Brexit. But most economists, most of the time, have been absolutely consistent. The real damage that Brexit will do is medium/long term, and results from the straightforward fact that making it more difficult to trade with our immediate neighbours will harm growth. How much harm varies depending on the type of Brexit (which is still to be determined) and which study you look at, but in most cases the impact is large and permanent, and we will not know exactly how large for years. Economists also said there would be noticeable short term disruption caused by uncertainty about the exact nature of Brexit, but how large that short term impact would be is very difficult to estimate, and it was of secondary importance compared to the longer term costs. They did not talk about Armageddon, and they did not talk about the sky falling in.    

The lesson of all this is that the reporting of economics in a good deal of the UK press is hopelessly biased by politics. Of course academic economists are not immune from this failing (and it is a failing), but most try not to succumb. Any group that is so consistently misrepresented in the press, and whose advice is so consistently ignored, would organise some form of resistance and defence. Just how much harm has to be done to the UK economy before academic economists do the same?
  

47 comments:

  1. Don’t Blame BREXIT for Any Economic and Financial Failure of the UK Economy, Blame the Blair Government for Their Mismanagement of the Nation’s Future and Where Debt Exploded and was Unprecedented in the History of the United Kingdom - https://worldinnovationfoundation.blogspot.co.uk/2016/08/dont-blame-brexit-on-any-economic-and_17.html

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    1. Ever think about the debt ratio in 1812 in GB. If you did, you would not be using the word unprecedented.

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  2. I would guess that the only time government policy changes from ideology to become ruthlessly evidence-based is in time of war. Here's some socialist changes forced on Churchill by World War 2.
    1. He knew he needed the workforce onside to win the war and quickly invited Labour politicians into his Cabinet. He knew that the Conservatives could not continue treating the workforce---if they needed its cooperation---as they had done in the twenties and thirties.
    2. Schools had suffered under the preceding 30 years of Tory government (interspersed with a couple short-lived periods of Labour minority rule). Skilled military jobs like pilots, navigators, radar technicians and marine engineers had to be filled from conscripts, 88% of whom had left school at the age of 14. Industrial-scale IQ testing of conscripts was needed to quickly identify talent which could be trained for these jobs.
    3. A post-war welfare state was needed: a social security system; an NHS; and universal, free secondary schooling. "A country fit for heroes" had been quickly ditched after World War 1, but the British were not going to stand for that again after a second war twenty years later.
    So how deep a crisis will it take for the Establishment to listen to academic economists? A war seems a bit extreme---although it took one to persuade the British to elect its first-ever majority Labour government. (Sweden, as I recall, had elected one in 1932.) The only (thin) advice I could give is: don't stop trying. Keep telling the truth.

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    1. When was the last time Sweden went to war?

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    2. I am not sure academic economists have all the wisdom. The policies you mention would have been considered heterodox at the time, even if they became mainstream then. Academic economists provided everything the Tories and the establishment needed during the 1920s - the age of the gold standard and, in Anglo-Saxon economies, classical economics. Also New Labour, a period of rising inequality, deindustrialisation and policies that led up the financial crisis, was pretty much doing what the core economic orthodoxy with all their sticky price rational optimisation model wisdom were advising.

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    3. Not just the British, and that's the worry. The right are so venal that it may take a war to persuade them to engage with any meaningful reform: the financial crisis hasn't provoked much thinking (nor did the Wall Street Crash outside Sweden and America) and the worry is, that there isn't any existing alternative hegemony to scare the horses as there was in 1945.

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    4. This is an interesting read, and you are right, WWII was a big game changer in the way the government role was viewed in the world economy. In many ways it was the true origin of its redistributive, welfare, and industrial policy functions. However, economics as a discipline was much healthier than it is now - this is pre-Samuelson 1948. Much more engaged with other disci;lines, much less deductive, and much more imaginative.

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  3. I wonder if you and other economists walked in to this by being less crirical than you might have been of some of remain's figures. eg the four grand worse off figure. I think I remember a post of yours saying the presentation of the four grand figure might be a bit misleading to the public in the way it was presented, but this was kind of okay because it was on the right side of the campaign.

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    1. You remember it wrong - please read it again.

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    2. Yes, I do remember it wrong. Apologies

      That said, the presentation of the £4000 figure was, I think, a bit misleading. Particularly to average person. It's not obvious that it includes tax, or that it will depend on how rich you are or that it's less richer rather than poorer compared to now.

      If the boot had been on the other foot, and we were discussing an increase in GDP resulting from brexit, I expect you and others would have pointed some of the above out - "yes, but it's not like everyone's going to have an extra £4000 to spend because...". [assuming there was still good reason to remain]

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    3. On your last paragraph - no, no, no! I do not choose my arguments depending on my biases. Just because other people do, I don't.

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    4. I'm not suggesting for one minute that you deliberately pick your arguments based on your biases. (We all have subconscious biases though.)

      My experience is that friends understood Osborne to be saying that they'd likely be earning four grand less than they do now by 2030. If the argument had been the other way round, I think you would probably have pointed out that's not the case.

      It's a pretty normal thing to focus on rebutting the bad arguments of the other side over pointing out problems on your own (remain, rather than Osborne).

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  4. One can hardly blame the press or media in the way they reported these figures after they had been told by economists that they would be different.

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    1. You can blame the two articles I cite, which is what I do in the post. I also give in the first paragraph an example of how those figures should have been reported.

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  5. The Use Of Initial Capitals Is The New Green Ink

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  6. But isn't one of your criticisms of Corbyn the fact that he refused to predict armageddon thus weakening the Remain cause? I may be misrepresenting you, but that appears to be the gist of many of your complaints. Sounds to me as though you're trying to have your cake and eat it (even though I agree with your analysis here): if that's how the media report (and it is) then no nuanced message will cut through, so it's armageddon or open seas....What exactly was your advice to Corbyn's team?

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    1. You are misrepresenting me. Osborne gave a perfectly reasonable assessment of the long term costs of Brexit, which was similar to the numbers estimated by Van Reenen et al at the LSE, as I said at the time. Corbyn rubbished that, so he in effect rubbished those economists. As far as I'm aware no one on the EAC was consulted before he did that, but our previous discussions had highlighted the large economic risks that Brexit involved.

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    2. Touche, you've misrepresented me often enough!
      It still seems to me as though you're having said cake. What if he'd repeated your advice and lost? What if he'd understood that the economic risk narrative wasn't playing well(and it wasn't)?
      As stated I agree with your analysis, but it seems to me as though said analysis undercuts your previous arguments: Corbyn was damned if he did, damned if he didn't, was he not?

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    3. "What if he'd repeated your advice and lost?"
      I would have no problem with that.
      "What if he'd understood that the economic risk narrative wasn't playing well(and it wasn't)?"
      Then talk about something else. No need to rubbish Remain's main argument. It just showed very bad judgement.

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    4. Surely playing along with Osborne would have shown far worse judgement. You know quite well that the Project Fear narrative had neutralised rational economic arguments. Playing down Project Fear made perfect sense at the time, indeed it may well have been good judgement.

      The Corbyn/Brexit argument just doesn't stack up, the data doesn't support it, and anecdotal evidence from voters suggests that by taking a nuanced view on the EU, he may have actually converted waverers to remain. For someone so fond of data I find it bewildering that you're still blaming Corbyn for achieving the same results as Nicola Sturgeon.

      The economic narrative wasn't playing for the reasons adumbrated in this article, so why continue to attack Corbyn for rejecting it?

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    5. Every time I talk about this I get arguments about why Corbyn was not responsible for losing the vote, WHICH IS NOT WHAT I'M COMPLAINING ABOUT. I'm complaining about the fact that he endorsed the Leave line that the economic costs of Brexit were wildly exaggerated and therefore 'project fear'. It may not have mattered to the result that he did this, but if he believed it he was wrong, and if he didn't then he lied.

      Given this, how do you expect me to have faith that he will make the right judgements over the details of Brexit.

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    6. Why? Once again, you are having your cake, your position is incoherent. Let me put it like this:

      1. You don't like what Jeremy Corbyn had to say though you accept that it may not have materially affected the vote.

      2. You don't like what the 172 MP's have to say but are convinced it will materially affect any future vote.

      3. 1 lacks credibility, but 2 does not.

      How can you have faith the 172 MP's will make the right judgements over anything?

      What bothers me is that you're happy to discuss electoral reality with regard to the 172 (how can Labour win, you repeatedly ask) but fail to apply the same logic to Corbyn's strategy during the referendum.

      Which begs the question, would you still support Corbyn had Remain emerged victorious despite or because of his intervention?



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    7. 1. A politician (any politician) goes against the advice of 90% of economists. As an economist, I have every right to object to that, and be concerned about what that might imply in the future. The result of the referendum has nothing to do with this.

      2. A party leader that has 80% of his MPs voting no confidence in him will do badly in any election. That is a common sense proposition, which no one on this blog has argued against.

      1. and 2. are completely separate and unconnected propositions!

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    8. 1. Well you do if you take a very narrow view of economics i.e. one that doesn't take politics into account.

      2. And, I'll admit to being provocative here: how on earth would you know? It's untested territory just as the whole Corbyn phenomenon is untested.

      So, if you'll forgive me, 1. is naive and 2. is unknowable. There are no common sense propositions when it comes to the Corbyn phenomenon, because no common sense proposition would have him as leader in 2015. You can repeat your assertion till your blue in the face, you know quite well that it's untestable and unknowable: there is no data.

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    9. I've no idea what you mean by (1). But (2) is crucial. You cannot have it both ways. You cannot say that Corbyn's lack of popularity is because Labour is split, and then say that in any General Election it will not matter.

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    10. Who said it will not matter? I said it's unknowable. You may have noted that Labour have closed to within 5 points. The more the public are exposed to Corbyn's ideas (as a result of the leadership campaign generating news coverage), the more sympathetic they seem to be. Meanwhile, you're backing a man whose second referendum plan spells potential electoral suicide for Labour:

      https://www.buzzfeed.com/chrisapplegate/why-a-pro-eu-party-could-be-screwed-in-the-next-election?utm_term=.heLryQkO6#.stRaG8R4A

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  7. Further, your first sentence is weak. You assume accuracy in the niesr figures whereas they were calculated before this week's data. Perhaps they will recalculate based on the new data and so be less pessimistic which will make your first sentence fall down. Indeed, on their site I have asked them do they not need to recalculate because of this week's figures. I hope that they reply.


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  8. "The real damage that Brexit will do is medium/long term, and results from the straightforward fact that making it more difficult to trade with our immediate neighbours will harm growth. How much harm varies depending on the type of Brexit (which is still to be determined)"

    Do i have to say it?: In a long run....
    So, in the medium run, half of us are dead.

    Yet you worry about that. Hmmmm

    If there will be any damage in the medium run completely depends on future government actions. Just as there was benefits to joining EU which is a government action, there will be damadge from government actions if it doesnt take proactive stance.

    If past actions are taken as predictor of future actions, then there will be a large damadge from Brexit, since present governments use any change to further weakens laborers and employee bargaining power. This trend will continue wheather in EU or not. This is what should be talked about, not panicking about democratic decisions.

    WHich is what you do and what is that you did with Corbyn. It is elitistic establishment position to judge and resist democratic decisions which is what you are doing recently with Brexit and Corbyn.

    It is a shame that you do, instead of accepting democratic decisions and adjust policy prescriptions in order to use it to an advantage of people and for people, you want to control them.

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  9. "Second, they might also say that a short term burst in the consumption of consumer goods made overseas is quite a sensible response to the collapse in sterling, as there is often a lag before an exchange rate fall is passed through into higher prices in the shops. Second, they might also say that a short term burst in the consumption of consumer goods made overseas is quite a sensible response to the collapse in sterling, as there is often a lag before an exchange rate fall is passed through into higher prices in the shops. Buy your washing machine now before the price goes up. "
    Do you have substantial documented evidence that this is what people do - anticipate the exchange rate pass - through effect and then act in such a manner. I do not think I am that clever, and I probably know relatively more about exchange rates than most.

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  10. "Second, they might also say that a short term burst in the consumption of consumer goods made overseas is quite a sensible response to the collapse in sterling, as there is often a lag before an exchange rate fall is passed through into higher prices in the shops. Buy your washing machine now before the price goes up."


    Simon. Do economists REALLY think that, come Saturday morning, Mr & Mrs Average sit round the breakfast table discussing currency fluctuations and the likely inertial lag on the price of imported goods , before deciding whether or not to spend 500 quid on white goods?

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    1. Maybe Mr and Mrs Average don't, but Tescos most certainly do before deciding how much stock of foreign goods they should hold. You get a short term burst in the IMPORT of consumer goods more than in their final consumption.

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  11. Another relevant observation is that Brexit has not actually yet occurred.

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  12. I'd question anyone who thinks something like Brexit can be "permanent" in anything like exchange rates, a long term impact maybe. Sooner or later things will change in ways that they couldn't if the change had not happened or other things will happen that make it irrelevant

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  13. I presume your comments are intended to exclude economists working in the private sector who happened to be on the same message regarding Brexit which I find a bit irritating.

    Nevertheless, for me the striking issue in this matter is that there was overwhelmingly consistent economic advice on this widely available to anyone who cared to look for it in a way that I can never remember happening before on any matter in economics – but in spite of that a majority of the electorate still voted to leave.

    Was the message from economists important or relevant or understandable to the leavers? Can economists contemplate non rational behaviour? I've no idea, maybe economists are just not equipped with the skills necessary to deal with issues like this. You can only put your message out as best you can and then get on with life. And on that point I'm off to walk the dog now, bye.
    Regards, clinging to the wreckage

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  14. While I agree that Brexit is likely still a net negative there is one potential major offsetting factor. I am not knowledgable enough to know if this is happening (And I'd be curious to hear from people in the know) but if Brexit entails more friction and costs when it comes to UK people, businesses and banks buying Euros, it may partially shield the UK from the devastating effect of the criminally mismanaged currency.

    That is, UK businesses and banks may find it more alluring to fund projects in the UK instead of hoarding euros.

    Of course the ideal solution would be for the ECB to raise its inflation target and stop trying to destroy western civilisation, but failing that, some weak form of currency capital control perimeter around eurozone countries may help keep the damage inside.

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  15. Could someone please explain why a depreciation in sterling necessarily makes us all poorer? That must depend on certain assumptions. Those assumptions might be reasonable based on past experience; but I'm not sure I understand why they're bound to continue

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  16. In the spirit of Karl Popper can you state clearly here what you would accept as evidence that your assessment of the economic impact of the Brexit vote was wrong.

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    1. I'd like to second this.
      Instead of constant hindsight could you just provide some foresight? What would you accept as evidence?

      (Steve Keens https://www.youtube.com/watch?v=IcNBW9609HM recent appearence on BBC Hardtalk calls out economics and economists up for what they actually are - chartlatans, phrenologists, Modern Day John Dees')

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  17. We are not all poorer from a devaluation. Foreigners who own UK assets are poorer.

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    1. And those overseas holding sterling debt are better off. And vice versa for UK residents holding non-sterling assets/debts. But those wealth effects would have to net out at being pretty large to offset the impact of a permanent terms of trade loss.

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  18. Scientists presented with the same type of issue started various initiatives in Science Communication (with varying degrees of success). Are there any chairs in the Public Understanding of Economics (for example)?

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  19. "Economists also said there would be noticeable short term disruption caused by uncertainty about the exact nature of Brexit, but how large that short term impact would be is very difficult to estimate, and it was of secondary importance compared to the longer term costs"

    I think what you are arguing here is that economists were in general careful to emphasise the uncertainties in, and play down the reliability of, their short term predictions. Which suggests you may not have read (at least) the Treasury's analysis of the short term impact of Brexit (unlike some journalists?). Or, look at what the OECD predicted about the immediate impact on equity prices and borrowing costs, for example. And consider the parallels with other popular manias like the millennium bug.

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  20. The Journalist is under no obligation to be objective,they are in the business of selling newspapers and will write what is appealing to their readership. The economist is more like a scientist, they should be looking at the evidence and drawing a conclusion. Journalists will of course selectively quote their on side economist or relevant expert to support their argument. The issue with Brexit is that nobody could truthfully forecast the effects and in any case we will never really know if leaving was the main cause of any positive or negative effects.

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  21. UK should really be worried meager near zero investment may be further reduced?

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  22. The ~£4000 figure was presented as the amount we'd each lose if we voted to leave EU. Considering how little a large number of the BREXIT voters earned, they much have wanted to BREXIT very, very much – had they believed it.
    On the other hand, the last time we went through an economic crisis, the Prime Minister & his economic advisers said "We didn't see it coming". So why do economists expect to be trusted?
    Or was there some codicil of "except for some nutters we don't credit"? If so, were they the same ones who were part of the Economists for BREXIT group?

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  23. The challenges you state are hardly unique to economics. Anyway debate on climate change gets derailed by commentators cherry picking weather stays.

    Also you flag another big problem which is the dependency on events and particularly political events. The Brexit disaster is ultimately going to be shaped by politics (and what deal both sides can politically do). My analysis is that it will be a poor to very poor deal but that's a subjective judgement based on my fears about the actors involved.
    http://another48percenter.blogspot.co.uk/2016/08/one-of-most-common-statement-post.html?m=1

    I'd love to know how economists factor such judgements into their work and stay politically neutral.

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  24. For journos, everything good is "despite Brexit" and everything bad is blamed on Brexit. Have a look at this round-up of headlines:

    http://markwadsworth.blogspot.co.uk/2016/08/despite-brexit-weekly-round-up.html

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