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?

  

Economists are losers so ignore them on Brexit

That essentially is the argument of the Telegraph’s Allister Heath, expressed as Donald Trump might. Heath says we have a been failures for over a century, “yet they now have the chutzpah to behave as if they should be treated like philosopher kings, an all-knowing “profession” that we are all supposed to bow down to uncritically.”

Actually right now I think we would settle for being heard. Ironically the only people in the media who seem to have noticed our Times letter are those supporting Leave. This matters. Recent polling evidence suggests voters have taken on board the Bank of England’s view that we will be worse off in the short term. But when it comes to the economy in 10 to 20 years time, as many voters think we will be better off by leaving as think otherwise. That the overwhelming majority of academic economists think there are significant long term costs to leaving might therefore be useful information for voters: information many currently do not have. So much for “philosopher kings”.

Of course economists have many faults and do make mistakes. But it remains the case that economists do know more about what determines trade and foreign investment and the impact of migration than most. We certainly know more than political journalists.

Should our expertise be ignored? Let’s look at some of the evidence Heath uses to suggest we nearly always get it wrong. The first is a poll conducted by the Economist in 1999 about whether the UK should join the Euro. Here the split was basically 2 in favour for every one against. But there is a crucial difference from Brexit. In the case of the Euro every economist would acknowledge (see the Economist article) that there were good arguments for and against. In the case of Brexit the only matter to discuss is how big the costs of leaving are. Our trade can only decrease following Brexit. Foreign direct investment can only decrease. Migration, which is also a plus for the economy as a whole, is likely to decrease following Brexit.

The main argument those supporting Brexit use to suggest the economy will do better is that we can get rid of all those pesky regulations that are holding business back. Which was exactly the argument the Conservatives and those in the financial sector made when they championed reducing regulations on finance before 2008. It worked for a few years, and then we had the financial crisis that led to the biggest post-war recession. Mr. Heath has the chutzpah to lay all the blame for that on economists.

But let’s roll the Euro story on to 2003. The government had to make a decision, and this focused on the economics. It commissioned a huge amount of work looking at all the evidence, consulting widely among academics. These studies flagged up some (not all) of the vulnerabilities of the Eurozone that became evident in subsequent years. This persuaded first Gordon Brown and then Tony Blair to say no. I would count that as a definite win for economists.

Of course he mentions what he calls the ‘infamous’ letter from 364 economists in 1981 criticising the Conservative deflationary budget. We are told that the 364 got it wrong because the economy started growing shortly afterwards. This is mediamacro logic, just like when we were told austerity was a success in the UK because the economy grew in 2013. As Steve Nickell pointed out in this speech, unemployment peaked not in 1981 but 1986. The combination of monetary and fiscal contraction in 1981 was overkill, and on that fundamental point the letter was right.

But I will concede this. Mr. Heath and his colleagues on the neoliberal right are much better at PR than economists. They have managed to create the perception in the media that the letter was wrong and Mrs. Thatcher was right. Their strategy is that if the evidence is against you, distort the evidence.

This is the real beef that Mr. Heath has against economists: we mostly follow the evidence and not an ideology. Most economists were indeed wrong about the Great Depression, but that led to the creation of macroeconomics as a separate discipline under the guiding light of Keynes. This helped produce a golden age of growth after WWII, a fact that Mr. Heath ignores. It was brought to an end by stagflation, but that was not the surprise to economists that Mr. Heath imagines.

The irony is that the ideology Mr. Heath follows is itself based on economics: economics as understood by a first year student who only listened to a third of their lectures. For Heath economics is fine as long as it is explaining the virtues of the market and competition, but if economists look at market imperfections then they are “obsessed”.

When I see Heath and his compatriots extol the virtues of the regulation free world that will be possible once they are freed from the shackles of the EU, I am reminded of the Troika and Greece. The Troika has been effectively running Greece for 6 years, yet unlike Ireland or Spain the economy remains in depression with no signs of hope. But rather than question what they have done, they blame the Greeks for not pursuing the prescribed policies rigorously enough. The UK is one of the least regulated OECD economies, and has recently had 6 years of government spending cuts and corporation tax cuts, but productivity growth since the crisis has been painfully slow. Rather than question the efficacy of the medicine, the ideologues blame the EU from preventing them doing even more.

It also reminds me of the Scottish referendum, where those in favour of independence just did not want to hear the bad news about the short term fiscal outlook. Some decided that those bringing that news were part of some Westminster conspiracy, and all preferred to believe the wishful predictions of the SNP. I’ll repeat now what I said then: do you really want to be ruled by people who prefer make believe stories to evidence, and who are so desperate for votes they tell you to ignore an entire academic discipline.