In the long run ... our children are adults

One of the annoying aspects of the Brexit debate is that every piece of macroeconomic news, every survey or data point, is interpreted as evidence one way or another about the economic costs of Brexit. The problem with this is partly that Brexit has not happened yet, but more fundamentally the important costs of Brexit were always long term. The Treasury’s analysis of the permanent costs of Brexit looked 15 years ahead, because that is the kind of time period over which the full impacts will be felt.

That has another annoying implication, which is that it will be very difficult to ever know what the actual costs of Brexit will have been. GDP being 6% lower after 15 years (the Treasury’s central estimate based on a bilateral trade agreement) will have a noticeable impact on economic growth, but who knows what the counterfactual is? As I have noted many times, the trend growth in UK GDP per capita was a remarkably steady 2.25% until the financial crisis, but since then productivity growth has collapsed, so who knows what it might have been without Brexit.

It is true that with rational expectations the future will have an impact on the present. That is why the exchange rate fell sharply on news of the vote. As I keep pointing out, unless those in the markets change their minds, that depreciation makes every UK resident poorer, perhaps forever. Equally if everyone anticipated that their future income will be lower they should reduce consumption now. But one reason the vote went the way it did is that many people did not believe that Brexit will have a long run negative impact on their standard of living.

We can make the same point in a more concrete way by thinking about the problem facing the OBR as it makes its forecast before the Autumn Statement in November. Those expecting to see something dramatic in these forecasts may be disappointed, partly because Brexit is likely to actually occur in the middle of the OBR’s 5 year forecasting period. Where the OBR will have to come clean about their view on the long term impact of Brexit will not be until next summer, when it does its 50 year ahead projections.

While these long term costs were always what really mattered, I have the impression (see also Paul Krugman) that the campaign spent much more time talking about short run impacts. As I have argued, these could be significant but are much more uncertain because they are more complicated. (How much will the depreciation boost net exports, for example?) So why was there so much focus on the short term in the campaign, and why did some (mainly politicians) start talking about Brexit creating a short term crisis?

I suspect (and this is just a guess) that one reason is that talk about long run costs had little impact in the media and on voters. (This is what the polls suggest: voters seemed more prepared to agree that there might be short run costs to Brexit.) To an economist that seems odd, because the economics behind the long term impact is much more solid than what might happen in the short run. Of course Keynes had a famous phrase about all being dead in the long run, but as Simon Taylor points out he made that comment to counteract a tendency for some to dismiss problems like unemployment caused by recessions as unimportant because it will disappear in the long run.

One suggestion I have seen links the lack of traction over long run costs to the fact that Leave voters tended to be older, and therefore that they did not care too much about the long run. I think this is unfair: most of those older voters also have children who they care about.

I suspect the problem came from a basic misunderstanding that was deliberately encouraged by the Leave campaign, which is to see all economic analysis as an unconditional macroeconomic forecast. The retort ‘who knows what will happen in 15 years time’ resonates if that is what you are familiar with. Too many people who should have known better, or perhaps chose not to know better, failed to make the distinction between conditional and unconditional forecasts. We had the ridiculous charge that the Chancellor should not have said people will be worse off in 15 years time, because with normal growth in absolute terms they probably will not be.

To see how nonsensical this framing is, think about the advice any doctor will give you that by smoking you will be worse off. Society does not collectively shrug that off by saying who knows what will happen in 10 or more years time. Except of course some teenagers do say this and come to regret it. Nor, by the way, do people tell medics that they failed for decades to predict that smoking would kill people so why should we take any notice now. We are completely familiar with doctors giving us conditional forecasts, but for some reason some in the media kept trying to view any analysis of long term Brexit costs as another unconditional macroeconomic forecast. [1]

One implication of this is that the consequences of Brexit may never become obvious, particularly to those who voted to Leave. Of course economists will do the best they can with the data, but I doubt very much that their analysis will get through to most people. One of the many sad aspects of the Brexit decision is that those who helped make it possible will never be held responsible for their actions.

[1] Note also that these long term Brexit costs essentially came from empirical studies with fairly common sense theoretical content well grounded in evidence.