Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 4 August 2016

If only someone had warned us

The title is pinched from a tweet by Tony Yates, who was one of many economists who did warn of the impact of Brexit. Of course we economists need to ask ourselves if and why our message was ignored, but that is no reason to stop us feeling angry that it happened. This post from the economist who did more than most to try and get the message across, John Van Reenen, expresses that anger better than I could.

What John’s work showed, backed up by similar analysis in the Treasury and elsewhere, is that Brexit would not just cause a short term economic downturn: cutting wages and increasing unemployment for just a year or two. By making it harder to trade with our immediate neighbours it will reduce UK trade overall, and the evidence suggests that this will permanently reduce people’s living standards. The markets clearly agree, which is why sterling fell immediately and substantially after the Brexit vote. In terms of people’s living standards that was not a ‘might be bad, might be good’ event: it makes everyone in the UK poorer. (Never start from a price change, but ask why prices changed.)

The tricky thing to do now is know how much the current downturn is just a foretaste of that, and how much is something over and above that. To the extent that it is the latter, how much
of that is offset by some short term benefit to exporters (before the impact of actual Brexit kicks in) as a result of the depreciation? That is initially the Bank of England’s problem.

Their response today, a cut of 0.25% plus more QE, tells us it is not just their problem. We are back at the lower bound for nominal interest rates, which is why the Bank is doing more QE. Because the impact of the QE is extremely uncertain, and in the absence of helicopter money, we now need fiscal action to back up this interest rate cut. That is what Labour’s fiscal credibility rule, and the academic work by Jonathan Portes and myself, utilising textbook and state of the art macro, tells us we should do. When interest rates are at the lower bound, forget about the deficit and focus fiscal policy on avoiding a recession. As the Bank’s QE action makes clear, there is no good reason to delay this: it should happen now.

But Brexit was not the first time economists have been ignored. For some years now the clear consensus among academic economists is that, when rates are at their lower bound, you need fiscal stimulus. Although Conservatives have disowned 2015 Osborne austerity, they appear not to have backtracked on his 2010 version. If they do nothing now, we will know that they are wedded to pre-Keynesian 1930s economics.


  1. I have no wisdom to add on the art of calculating which parts are short-term and which are long-term effects.

    On the topic of how economists were ignored, it might be valuable to study the history of a prominent Brexit economist, e.g. Andrew Lilico. Here's some salient details from one of his bios online:

    "Andrew received his first degree from St. John’s College, Oxford, and his PhD from University College, London, where he also lectured in macroeconomics and in monetary theory. - See more at:"

    This doesn't look like the bio of a crank or outsider. How does the profession create someone with such an opposite view of the effect of something like Brexit?

  2. I entirely agree with your conclusion that immediate fiscal action is needed to avert recession. But the Treasury and other analyses do not show that Brexit makes everyone in the UK poorer. What they show is that Brexit will reduce mean GDP, but that is quite compatible with some people gaining, or even that the median person might gain (i.e. more winners than losers). It all depends on how the mean loss is distributed.

    Pre-referendum economic projections were notably lacking in any analysis of distributional impacts. I campaigned for Remain but some people might have voted Leave out of an accurate perception of self-interest, rather than being misguided.

  3. I have always been a supporter of, given the Nazification of discourse these days, bringing austerity and the austerians back to their origins, the Bruening austerity that led directly to Hitler (unlike the 1923 hyperinflation which was due to WW1 and Versailles). Adam Tooze has a nice summary of all this in his Wages of Destruction (2006).

    It is in this light rather than comparisons with Lord North and the loss of the American colonies that I judge Cameron and Osborne's tenure: the worst Prime Minister and Chancellor, given their room for manoeuvre, this country has produced.

  4. Mark Carney has today noted that one of the predictable results of Brexit is a quarter of a million people losing their jobs; do you believe that the programme set out will keep it to a 'mere' 250K?

    More generally, what are your views on today's announcements? There was a time when Labour would have fought against Brexit precisely because it would lead to massive job losses, but that seemed not to be the case with Jeremy Corbyn; his desire to trigger Article 50 on the day following the result suggests that he doesn't actually care about this.

    I am baffled by people claiming that Corbyn is old school Labour; old school Labour would never dismiss a huge increase in unemployment as not even worthy of mention...

  5. Please clarify if and when you are expecting two successive quarters of negative growth. Do you expect it in the short run before actual brexit or after actual brexit, or indeed both.

  6. For fiscal stimulus to stand a chance, you have to turn the dial up in the inflation targeting regime. And if you can do that why not just do that? And avoid the risky side effects of demand side stimulus?

  7. You need to have a chat with the people at NIESR:

    "NIESR called on the monetary policy committee to act decisively by cutting interest rates and resuming its bond-buying programme, known as quantitative easing."

  8. Sorry but in my view economists have been ignored for two good reasons:

    1. the profession has shown itself to be completely useless altogether. It is a miracle that this inward-looking discipline based on hiding absolutely hilarious assumptions and the lack of relevancy in mathematical fog had retained its credibility for so long.

    2. Honestly, and I say this as someone who wanted the UK dearly to remain within the EU, no one can have any clue about the long term consequences of Brexit. There's just no framework to analyse it. Brexit's success or failure will not be judged upon the few years of transition after the vote but by the state that transition leads it to. And no one on earth can have any idea about that given that not only is it not known what deal the UK will strike with the EU (and hence the effect on trade) but also and foremost because the UK will need to kind of reinvent itself and determine a kind of new 'grand strategy' for itself. And there are several options for that.

    So in short, Brexit's effects, anything other than for 2-3 years are as incalculable as anything on earth and to that extent I believe British voters were right to ignore economists. They rightly listened to their hearts and I do regret their hearts gave the answer that they did.

    1. Come on, of course we 'can have a clue' about the long term consequences. That they are uncertain and difficult to calculate does not mean we can't know, with reasonable certainty, that they will be bad. How quickly can you run a race of a given length? How quickly can you run it with a stone in your shoe?

    2. Point 1: how can anyone make any prediction on effects when absolutely no-one seems to have a hint whether the UK-EU agreement will be Norway / Switzerland / Canada / WTO style / some completely new type of arrangement?
      Point 2: even assuming you have the answer to the above question AND calculate the effects correctly, that would be just one side of the equation. It would show what the UK loses versus the status quo but it would not incorporate the gross positive effects of Brexit resulting from UK policy makers making use of their new options and possibilities.
      In terms of trade alone, there's the intention to have a free trade agreement with the U.S. who are apparently receptive to the idea - how do you factor that one in?
      And I’m sure there will be a good number of ideas how to benefit from not having to adhere to EU rules in all the various industries. Finally, the many questions of tax policy, industrial policy and so on.
      Add in that these strategic decisions are highly political and more or less interconnected and you get a complete fog on what the UK and its relationships will look like in five years (at least I haven’t seen anyone brave enough to make the slightest of predictions, but if you have a clear view please share it).

  9. I do not see that it has become harder to trade with our closest neighbours since June 23rd.
    Apart from the exchange rate making €uro imports more expensive.

    If we have any sense, we will keep the 'four freedoms' by agreement, and it will never become harder to trade with our nearest neighbours. Who would want it to be?

  10. simon, enjoy your work and agree with you on all this. but I don't think I've seen a good response from you or others on the following points.

    maybe, in the longer run, the permanent decrease in living stadards matters less than some of the less tangeble benefits people might get

    maybe, in the longer run, there will be less immigration and that will be good for people towards the lower end of the income scale because they'll be relatively better off comared to the UK average

    happyness depends alot more on the relative than the absolute

    a related point: perhaps this hghlights a difference between indyref and brexit. for Scotland to be poorer relative to Britain is probably more of a concern to Scottish people, than the UK being poorer relative to EU is for British people.

    (I actually think the main difference was that Yes was essentially left, Leave was right, older people are more right and older people vote)

    1. "older people are more right and older people vote."

      Quite so. It was the triumph of the Colonel Blimps.

  11. "work by Jonathan Portes and I..."

    Between you and I and the doorpost, that's wrong.

    1. Oh dear - me've never made that mistake before. I blame Jeremy Corbyn.

  12. As your blog has shown for almost 5 years, macroeconomics is to madness near allied. So it is understandable if people without experience of life or knowledge of affairs were willing to ignore economists.

    Of course, the Brexit vote was a staggering monument of silliness, and that includes the prime minister whose name should be consigned to deepest oblivion.

  13. yes. We were warned. But the referendum was not a quiz to choose the best short term economic policy, it was about the way we are governed. Like many leavers I took the view that our long term interests were best served by making the UK parliament sovereign once again rather than sign up for the EU superstate.

    The economic arguments come down to avoiding uncertainty and maximising integration. So presumably the best economic policy is to join the Euro and remove any significant decision-making capability from the UK parliament. Is that what you are advocating? And if not why not?

  14. You're exaggerating how much influence the EU has on UK policymaking. Education, health, housing, policing, defence, fiscal measures, monetary policy and more are all 90-100% in Parliament's hands and would've stayed there had we voted Remain. Environmental and trade policy are key exceptions, but I'm perfectly happy to address them at a supranational level.

    See any number of Simon's past posts on why the Eurozone is badly designed and in need of reform. But the referendum was never about voting Remain meaning we join the Euro eventually; Cameron's deal made that point explicit. Instead we have/had the best of both worlds, with influence in Europe without the Eurozone issues.

    For what it's worth, I think Brexit may well leave us better off economically over the long run IF handled much better than I currently expect. But I also think this me me me attitude of many Leavers leaves a lot to be desired. You and others harp on about democracy and sovereignty, but how do you square saying Europe doesn't listen to us with Scotland and NI's protests falling on deaf ears in Westminster? They are nations being dragged out of Europe against their will. Smacks of hypocrisy to me.

    1. thanks for the reply.

      You missed immigration. There were predictions of the UK population rising to 80M by 2050. Whilst we were in the EU there was nothing anyone could do about that other than make the UK a worse place to live. Of course we may still end up at that number, but then the UK government will be accountable. Immigration has significant knock-on policy implications to how we invest in our young people which is something I hope can now properly be addressed.

      There were two points about the Euro. Firstly, many of the arguments used to justify staying in the EU were the same ones used to justify why we should join the Euro - lack of transaction cost, removing the risk of the exchange rate. So why aren't economists suggesting we join the Euro? The second point is that every time Cameron said "vote to remain in a Reformed EU" Juncker popped up saying "there will be no reform to the EU". My view was that Juncker would have regarded the vote as a mandate for him to pursue further integration - after all that's what he said he would do, and we voted to remain - and we would be unable to threaten to leave if we didn't like being strong-armed into agreement. So I don't buy the line about the best of both worlds and think we would have been forced into the Euro eventually.

      I think many in the UK underestimate how determined many in Europe are to construct a superstate. Take the European army; how can nations in Europe go to war with each other if they don't have their own army? If you think war between nations is the problem, then that looks like a good answer which I think will be implemented.

      One aspect of the debate was that different people have different views on what the primary political entity entity they inhabit is. For me and I guess many others its the UK. But Scotland and Northern Ireland have a reasonable claim to be regarded as separate states and so are free to vote in such a way if they wish. Personally I would hope they get a better deal being in a political union with England than the EU but that is up to them.

      Your final point about the long run is a key one for me. We seem to have lost a lot of self-confidence about our ability to run a successful nation that is a major force in the world. My hope is that out of the EU we can regain this. As others have pointed out, our long-term economic prosperity is something we create ourselves. Better to put our faith in our own abilities than to delegate all this to the EU and sit around moaning.

    2. "I think many in the UK underestimate how determined many in Europe are to construct a superstate."

      I think many in Europe, and especially in the UK underestimate how utterly absurd it is at the moment to even think about a European superstate.

  15. Hello again, DorsetDipper. I'd like to share some follow up thoughts if I may.

    I understand immigration is a key concern for many Leavers, but I believe they went about addressing it in the wrong way. We should be investing heavily in upskilling Brits, including the young; the net positive contribution of existing migrants would help fund this. But instead people chose to make us poorer, which makes upskilling harder, and unleashed a wave of hate crime to boot. Moreover, we will see state-level xenophobia to get immigration into the tens of thousands that many Leavers desire. So much for Britain 'welcoming the world'!

    On the Euro, many economists do not advocate joining because a one-size-fits-all monetary policy does not work when fiscal policy is fragmented. We are much better off with our own currency but in an environment with no tariffs and little non-tariff barriers I.e. in the EU. On your second point, I again point to Cameron's deal, which included a treaty change saying that the UK is excluded from 'ever closer union'. I also reiterate that it made explicit that the UK will not be forced to adopt the Euro. Unlike what some papers said and people parroted, that deal was very much of value! Unfortunately, it is now shredded.

    I agree there is a strong desire for a European superstate in some quarters. But I was heartened by the President of the EU Council's recent speech on the matter (see

    I also agree in hoping that Scotland and NI choose to remain in the UK.

    On your final paragraph, I guess it depends on perception. My view has long been that Britain is a powerful and influential player on the world stage, which contrasts with what you describe. My fear is not that we will suffer economic catastrophe from Brexit but that we will become less important politically. For example, the US will no longer see us as a key ally in Europe (yes, some will argue that is perhaps a good thing!). Many of the key decisions in Europe will be discussed without us; in many cases we will be reacting to decisions by others rather than leading. I see our influence diminishing rather than increasing from Brexit. I hope I am wrong.


  16. still going ... a slightly different tack.

    I voted Leave, but I was there for the taking for Remain when the renegotiation process started. The whole process from decision to hold the referendum to renegotiation to referendum was a giant cock-up. snatching defeat from the jaws of victory. Or was it?

    For me and many others the core of the question was around the trade-off of sovereignty against the benefits of membership of a larger organisation. As implemented, membership of the EU allowed business to cherry pick workers from cross the EU and leave millions of people in deprived areas of the UK on the scrap heap with no hope. The Remain campaign refused to acknowledge any issues over sovereignty or how we could solve many issues within the framework of EU membership but simply said "accept this or you will be punished." It became clear to me a vote for Remain was a vote to refuse to address any of the critical issues so I voted leave. Teresa May stood on the steps of Downing Street and said she understood the concerns and would do something about it, so as far as I'm concerned thats Leave 1 Remain 0.

    But was this a cock-up? I think Merkel and Juncker saw the opportunity to get rid of the main obstacle to continued integration and took it. It was win-win for them. Give nothing in the renegotiation and take a Remain vote as a vote to force integration, and a Leave vote leaves the way clear for their policies. I think they are quite happy with the outcome.

  17. Economists are largely not listened to because they try to predict an unknowable future and by and large get it wrong. They also contradict each other. Even the events of the past cannot be consistently analysed and agreed answers found - still there is no consensus around what policies work in what circumstances or even what caused the 1930s depression, why it lasted so long and why it ended - as many theories as there are economists


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