Brexiters are stopping Brexit because they need to believe in the fantasy of Global Britain

It now looks like May will not get a chance to put her deal to parliament for a third time today, thanks to a ruling from Speaker Bercow. Yet while some compare Theresa May’s relentless and humiliating quest to get her deal passed by parliament to the Black Knight from Monty Python’s the Holy Grail, and Bercow believes the deal has to change for it to be voted on again, there would have been a critical difference this time.

Previously rejection has meant nothing except that we get closer to leaving without a deal. No deal is what economists might call the ‘bliss point’ of many Brexiters. The outcome most Brexiters want is what they call a ‘clean break’ with the EU. Before parliament agreed to delay rather than crash out, it was obvious the Brexiters would vote against May’s Withdrawal Agreement.

If the Withdrawal Agreement had been voted on today (and May could well have pulled it herself anyway because she believed she would lose again), rejecting it would have almost certainly meant a long delay to Brexit rather than crashing out. That may be a crucial difference for many Brexiters, including the DUP. A few have already said that they would have supported May’s deal this time, and others appear to be looking for ways to change their minds. So the vote would have been closer than last time it it had been held.

Given this, I have never understood why May kept No Deal on the table for so long. It was obvious that most Brexiters preferred No Deal and would therefore inflict embarrassing defeats on the Prime Minister. In contrast the threat of No Deal does not seem to have kept the few MPs on the opposite wing on board. All I can assume is that she really believed the David Davis mantra that the EU would cave at the last minute for fear of the impact of no deal. If so that was a huge misjudgement, to be added to the already long list of huge misjudgements she has made over Brexit.

Now she has finally said a long delay is the alternative to her deal passing, the Brexiters would have a real dilemma if the deal was voted on again. A long Brexit delay does not take No Deal completely off the table, but it makes it much less likely than before. It also increases the possibility of a second referendum. To understand the dilemma the Brexiters would have if May were allowed to and had put her deal to parliament for a third time, we have to enter the make-believe world of ‘Global Britain’. Of course Global Britain appeals to the English nostalgia for empire that runs deep within Brexit, but to most Brexiters it is much more than that.

Conventional economic analysis tells us that leaving the EU’s Customs Union and Single Market will reduce the amount of trade the UK does with the rest of the world. The reasons are obvious, and I think are privately accepted by most Brexiters. Their main line of defence during the referendum was that the EU would give us all the benefits without the costs, which we now know conclusively is not true. While some Lexiters might be attracted by the idea of a less global UK (because they blame globalisation for deindustrialisation), Brexiters do not want less trade. Their idea of Global Britain was to do more trade with non-EU countries to offset, in the longer term at least, the loss of trade with the EU.

The Irish backstop in the Withdrawal Agreement (WA) effectively rules out Global Britain. Most trade deals involve tariff reductions, and if the UK is in the EU’s Customs Union it cannot unilaterally reduce its tariffs to make new trade deals. Theresa May and Liam Fox may pretend otherwise, but most Brexiters know this to be the case. The more May moves to appease the DUP by promising that EU rules in Northern Ireland will also be adopted by the rest of the UK, she restricts yet further the scope of independent (from the EU) UK trade deals. Without tariff reducing trade deals with emerging countries and the US, Brexiters believe there will be a decline in the amount of trade the UK does with the rest of the world, and that will be harmful to the UK economy.

That is why some Brexiters insist that May’s deal is worse than staying in the EU. But others will point out that the WA does allow the UK to move away from many of the rules of the Single Market, which in their eyes is an important part of Brexit. A few may pretend to themselves that the backstop can still somehow be subverted once we have left, or even that No Deal can still be achieved after approving the Withdrawal Agreement by rejecting enabling legislation. They may say that it would be extremely ironic and embarrassing if Brexiters by their own actions stopped Brexit happening. Those still opposed to May’s deal will respond that those who vote for it own it, and if trade and the economy subsequently decline voters will blame those who voted for May’s deal.

Behind all this is the influence of Conservative members. The departure of Nick Boles, who left his Conservative Association before he was pushed, reflects a new mood of militancy among the Tory grass roots. Boles had voted for May’s deal, and his crime in the eyes of party members was that he also campaigned against no deal. With some of the Brexiters hoping to succeed May, their decision is all about pandering to this electorate.

In truth this debate is upside down compared to the real world. I describe Global Britain as make-believe because all reputable studies suggest new trade deals cannot come close to offsetting lost EU trade. A key reason is what economists call gravity. Gravity is the observation that countries trade more with their neighbours than those far away, a robust finding that appears to hold despite falling transportation costs. That means that even if the UK after Brexit could get lots of tariff reduction deals with countries outside the EU (a big if), this would not come close to making up for the lost trade with the EU. The government’s own analysis comes to the same conclusion. By keeping us in the Customs Union, May’s deal actually helps the economy, although as I outlined last week leaving the Single Market is still very costly.

Brexiters always refer to how much faster countries outside the EU are growing. But this is like giving up your solid 40 hour a week day job to work just one hour a week for a rapidly expanding firm for the same hourly pay. Because the firm is rapidly expanding you could be working 2 hours a week within 10 years! This is something few in their right minds would do in real life, so why should we do the equivalent as a country?

Brexiters prefer to ignore the analysis of the overwhelming majority of economists, and instead look to the tiny group of Economist for Free Trade (EFFT). But as Chris Giles has recently shown, if you look at how the GDP forecasts of various groups just after the referendum have been doing recently, those of EFFT have been wildly optimistic compared to others. As the chart shows, EFFT (then Economists for Brexit) did well in the first few quarters after the referendum because many consumers dipped into their savings, but by the end of 2018 EFFT were doing much worse than the OBR, Bank of England and the consensus of private sector forecasters. Giles sums this up by saying “The lesson is simple: listen to economists, but not to those peddling a political line.”

So the only economists who really believe in Global Britain have already been shown to be far too optimistic about the impact of Brexit. No doubt they would say that is because May’s deal prevents Global Britain, but it is clear from movements in sterling that the foreign exchange markets fear No Deal most of all because of the impact this would have on trade. The Brexiters have a wonderful way of avoiding these facts. As the consensus among economists is that trade will suffer if we leave the EU, economists overwhelmingly favour staying in the EU. The Brexiters then conclude that if they favour Remain they therefore must be biased. Ergo only the predictions of economists who believe in Global Britain can be trusted!

There would be a certain horrible symmetry if May’s Brexit deal had passed this week. It would have been a narrow victory, just as the EU referendum result was narrow. It would be a victory tainted with public money used to bribe Labour MPs and the DUP, while the referendum vote was won by the Leave side spending much more private money than the rules allowed. Both victories would have been won against a weak and divided opposition: Cameron unable to talk about the virtues of immigration and Corbyn unable to campaign against Brexit. Both May’s deal and the referendum victory are based on lies designed only to get them across the line. Both are blind, with no clear idea of the kind of Brexit that will follow. Both therefore fail basic notions of legitimacy.

If Bercow prevents May putting her deal before parliament again in the near future, or if she decides herself she would not win anyway, then her failure to pass her deal on 12^th March involves a delicious irony. Brexit failed to happen because of the actions of Brexiters themselves, because they actually believed one of their own lies: the make-believe of Global Britain.

How to predict a crisis

I was sorting through some old papers over the weekend (don’t ask) and I found an article I wrote for the Financial Times on 19th October 1990, which is also the month we entered the European Exchange Rate Mechanism (ERM). The article, based on work I had done earlier with colleagues at the National Institute (final published version here), argues that we were entering at the wrong exchange rate. The final paragraph starts with

“The danger is that the government will attempt to defend the present exchange rate bands at all costs. As a result it may produce, or fail to prevent, a recession on the same scale as 1980-81.”

According the current data vintage, GDP was already falling at that point, yet interest rates were not reduced by enough to prevent a recession because of concerns about pressure on sterling. GDP continued to fall almost continuously until we were forced out of the ERM (Black Wednesday). Leaving the ERM allowed interest rates to be lower and produced a 10% depreciation in sterling, which helped ensure a strong recovery.

I’m sure I wasn’t alone in making this prediction, but we were in a minority and we did produce the best analysis. The Global Financial Crisis (GFC) was of course a much bigger event, and far fewer saw it coming, so quite rightly 10 years later those economists who predicted something like it are getting media attention. They were very different events, so can we draw any parallels between them, or more generally is there anything that links disasters of this kind?

One common factor is using the markets as an excuse to avoid economic analysis. One of the two main excuses to ignore our ERM analysis was to look at the exchange rate at the time as say ‘the market must know what it is doing’.Of course before the crisis too many people who saw the data thought the banks must know what they are doing as they pumped up leverage.

Perhaps another is never let new ideas crowd out the knowledge embodied in older ideas. The other excuse that particularly academics used to disregard our analysis about the ERM entry rate was that the models we were using were a little old fashioned. (I talk more about that here.) Bankers fooled themselves that they had new methods of evaluating risk that meant they could ignore systemic risks. If we think of the other two major UK macroeconomic crises, the same applies. The Treasury predicted the recession of 1980 pretty well, but the analysis was trashed as the work of old fashioned Keynesians by Lawson et al from the Thatcher government. Austerity of course also ignored basic Keynesian truths.

One obvious final question is whether we learn from crises of this kind. Ten years after we left the ERM the Treasury asked me to do their entry rate analysis for possibly joining the Euro, so that at least implies some learning, but maybe being a different government helped. Perhaps Black Wednesday created a general distrust of fixed exchange rate regimes in the UK that helped Gordon Brown argue against joining the Euro.

Have we learnt the lessons of the GFC? Some changes to the banking system have been made, but I think the general consensus is its is not enough, and there still seems to exist a large implicit public subsidy for the major banks. If for no other reason that is why you should take note of what those who predicted the GFC say. In terms of how you recover from a financial crisis we certainly had learnt some of the lessons of the 1930s, but not all. As I argue in my last post, we have hardly begun the process of creating a macroeconomic policy regime that can deal with a future recession, let alone a crisis.

Why does economics get so much stick?

Because the advice of economists is so hopeless, you may say. Well think about the following thought experiment. After the financial crisis. suppose people had done the opposite of what the majority of economists said they should do. We do not need to imagine over Brexit, because most of the 52% who voted for Brexit chose to ignore, or more likely did not hear, the advice of 90+% of economists that Brexit would make them worse off. For those who work that belief was quickly shattered as their real wages fell as a direct result of Brexit.

Immediately after the financial crisis interest rates would not have been cut and austerity would have started in 2009, not 2010. Banks would have gone bust because economists said we needed to bail them out. In which case the Great Recession would have become the second Great Depression. Because the majority of economists did not support austerity you would have had continuing cuts in spending during this new depression.

So comparing this thought experiment with reality, we can see that economists have prevented a rerun of the 1930s depression, and if their majority advice had been taken we would have had a stronger recovery and the UK would not have left the EU. Sounds pretty good to me. But, as I’m sure you are now saying, what about the financial crisis the economists failed to warn of?

That was a mistake, but what are the consequences? Do you really think that if most economists had warned about how fragile the sector was anything would have happened? Banks would have continued to lend because they were making money and they had a guaranteed bail out from the state. Their campaign contributions would have weighed far more heavily in politicians’ minds than warnings from economists. So yes, not warning about the financial crisis was a mistake, but it would not have changed anything if the mistake had not happened. Economists are often told to stop being naive about politics, but the same needs to be said to their critics.

Despite such a strong record in macroeconomics since the crisis, why does economics get so much stick? I think there are three reasons. The first is simple: when the economy goes wrong, economists are easy to blame, particularly because of those forecasts that never predict downturns. In reality virtually no academic macroeconomists are involved in forecasting because they know that kind of unconditional forecasting is a mugs game [1], and furthermore most economists are not macroeconomists, but for some that kind of detail is irrelevant. (There are also plenty of highly successful pieces of microeconomics, but most critics act as if economics was just macroeconomics.)

The second reason is politics. Carlyle in 1849 called economics the dismal science because economists did not support his idea of reintroducing slavery. Ever since then economics has annoyed politicians and their supporters of various colours by pointing out the problems with various political programmes or schemes.

Politics is also at the heart of the third reason for criticism: politicians and ideologies of the right use the aspects of economics that suits their cause. Want to promote markets? Just take the idea from economics that an ideal market is an optimal way of exchanging goods, and ignore all the ways that real markets deviate from this ideal (ways which, incidentally, a great many economists spend a lot of their time studying). Some heterodox economists of the left, rather than use mainstream economics to point out how the right plays fast and loose with economic ideas, prefer to suggest that mainstream economics is much closer to the right wing caricature than it is in reality. It is why, as Noah Smith observes, so much of this criticism can be found in the pages of the Guardian.

This misrepresentation of mainstream economics is either deliberate or reflects ignorance. Ignorance about the fact that a lot of economics has become more empirical and therefore more eclectic in its use of theory over the last few decades, perhaps in part because of the influence of behavioural economics. Ignorance that even in macroeconomics, where ideological influences can be strong, there is more consensus around New Keynesian economics than some mainstream Keynesian economists imagine. (See my survey with André Moreira of post graduate teaching at the top schools here.) Nowadays you will find that in most areas of economics (alas not yet macro so much) there is nothing limiting the analysis to selfish individualistic behaviour. The idea that economics is like a religion is absurd.

But sometimes it is hard not to believe that popular criticisms of economics choose to ignore how far economics deviates from the neoliberal characterture. There is no excuse for ignoring that, for example, the best arguments against health care being left to the market can be found in a paper by Nobel prize winning economist Kenneth Arrow written decades ago. As the recent book by Colin Crouch suggests, the best critiques of neoliberalism come from within economics.

Another ridiculous charge against economics is that economics has a natural bias against state intervention. Indeed it is possible to argue the opposite. In my own field it is typical to assume the existence of a benevolent policy maker, who maximises social welfare. It is essentially just a useful analytical device, but you could argue if you wished to that this device biases those that use it to favour state intervention.

Judging by recent conversations I have had, many heterodox economists attack the mainstream because it uses the distinction between positive (value free) and normative economics. An example of positive economics would be me saying a temporary cut in government spending when interest rates are stuck at their lower bound reduces output. A normative statement would be that austerity is unfair. Heterodox economists like Sheila Dow seem to suggest that everything is value laden, and the positive/normative distinction allows economists to avoid being “morally implicated in the advice they give.”

I think this criticism is either trivial (yes, of course there may be normative reasons for choosing particular research topics) or dangerous. It is dangerous if it suggests that economists should be encouraged to base their analysis on assumptions that reflect their values. Economics, even though it is a social science, should conform to the scientific method: it should be as much like a science as medicine. Indeed I think it would greatly improve the public debate if both economists and their critics realised that economics, even though it is a unique and inexact science, is more like medicine than any of the hard sciences.

Dow writes “Getting policy-makers or the general public onside over a particular argument is therefore, critically, a matter of persuasion rather than demonstrable proof (since that proof is impossible).” But surely the best way of trying to persuade a policymaker not to impose austerity is to say that most models, including the consensus theoretical model, and nearly all the evidence suggests austerity will reduce output. In contrast it is far too easy to persuade a politician of things they want to hear. We do not want politicians to pick advice only if it is given by ‘one of us’ (by those who share their values), or as a result of the rhetorical skills of the academic.

The danger in encouraging plurality is that you make it much easier for politicians to select the advice they like, because there is almost certain to be a school of thought that gives the ‘right’ answers from the politicians point of view. The point is obvious once you make the comparison to medicine. Don’t like the idea of vaccination? Pick an expert from the anti-vaccination medical school. The lesson of the last seven years, in the UK in particular, is that we want mainstream economists to have more influence on politicians and the public, and not to dilute this influence through a plurality of schools of thought.

All this does not mean that economists are beyond criticism. As my last post pointed out, I have fundamental criticisms about current macroeconomic methodology. An important point to note about the microfoundations methodology is that it excludes economists who are not prepared to sign up to what is currently considered (by macroeconomists) acceptable microeconomics, or who do not think microfoundations is where you have to start in doing macro. But this critique has nothing to do with values. The mistake macroeconomics made in the 1980s was not in their desire to look for microfoundations, but in deciding that models that had internally consistent microfoundations were the only admissible models.

The big problem with most criticisms of economics you see in the media is not that economics is beyond criticism: as the paragraph above suggests it in many cases should be criticised, and there are plenty more interesting criticisms of economics available. The problem is that these more important criticisms are not those you find in the pages of the Guardian. The typical criticisms you see in the press are just not very good, and I fear reflect either ignorance or ideological antipathy.

[1] A lot of the criticisms of forecasters are themselves spurious. Someone who writes “economists should not need to pretend that we can predict things that do not really matter to several decimal places” are themselves pretending that there are any serious forecasters who do pretend this.

The impact of austerity in the UK

When they do their forecast evaluation report, the OBR also look at the impact of fiscal policy on GDP. Here is the relevant chart from their report published yesterday.

There is a useful innovation compared to previous years, which comes close to an something I suggested a few months ago. The orange bar shows the impact of fiscal measures implemented in that year. The total effect of fiscal policy is this plus the impact of previous fiscal policy actions unwinding.

Suppose for example that fiscal policy reduced GDP by 1% in year 1, but its impact on the level of GDP was expected to decay by half in year 2. If no fiscal policy was enacted in year 2, then fiscal policy in year 1 would increase growth in year 2 by 0.5%. Why might the impact of fiscal policy on the level of GDP decay over time? The obvious explanation is that monetary policy ensures that it does by stabilising the level of GDP. This assumption is problematic when interest rates are stuck at their lower bound, which is why it is useful to publish the within year estimates as well as the total estimates,

You can see when this matters from 2012 onwards. We have a run of years where the total impact of austerity on growth is zero or positive, but only because of the unwinding of previous austerity. If monetary policy, or anything else, had not been able to offset earlier fiscal tightening, then instead the impact of austerity would be to reduce growth in all those years. In that (extreme) case the level of GDP in 2016/17 would be over 4% below what it would otherwise have been without any fiscal tightening from 2010/11.

As the OBR’s assessment of fiscal impact is in their publication on forecast errors, they naturally talk about whether there is any relationship between the two. This year they included this chart.

It is important to understand what we are looking at here. It is not whether there is a correlation between fiscal consolidation and GDP. As we have seen the OBR assumes there is, and indeed their calculations were the source of my estimate that the average household had by 2013 lost a total of £4,000 worth of resources as a result of austerity. The foolishness of austerity in 2010 was not that the OBR underestimated its impact, but that it left us vulnerable to negative shocks because interest rates were at their lower bound. The shock that hit in 2012 was the Euro crisis and the impact of austerity there.

What the chart above might tell us is whether the OBR have in fact underestimated the impact of austerity i.e the numbers in Chart E are too small. Each year there are hundreds of potential reasons for forecast errors, of which underestimating the impact of austerity is just one. So the best we can expect, if the OBR are underestimating the impact of fiscal policy, is a negative relationship going through zero between the two variables in Chart D but with lots of random variation on top. That is what we see in Chart D.

Does the Bank’s latest forecast mean Brexit has had no effect?

The focus of many (not all) journalists on GDP growth was in evidence again in the reporting of the Bank of England’s latest UK forecast.

Bank of England Inflation Report February 2017 and (in italics) my estimates

Growth rates of	2016	2017	2018	2019	Ave 98-07
GDP	2.0	2.0	1.6	1.7	2.9
Household Income	2	0.75	0.25	0.75	3.0
Savings ratio [1]	5.75	4.5	3.75	3.25	8.0
GDP per head	1.25	1.25	1.0	1.0	2.25 [2]
Household Income p.h.	1.25	0	-0.5	0	na

[1] Level [2] Average 1955-2007

The headline news was Brexit didn’t seem to be having much effect on GDP growth, despite earlier pessimism from the Bank. Leavers have never forgiven the Bank for giving their pessimistic views on the immediate impact of Brexit during the campaign. There is also an attempt to suggest that because many macro forecasters have been surprised by the resilience of the economy since the vote that must mean that the near universal view of economists that Brexit will be bad in the medium term is also now very suspect. Anyone who knows about these things knows that an unconditional macro forecast is very different from a conditional forecast based largely on international trade evidence, but as most people do not know these things (including most political journalists) it is an effective bit of propaganda.

A major reason for the more optimistic forecast now is that consumers so far have decided to reduce their saving, which the Bank had not expected. One possible reason for this is that a lot of consumers have decided to undertake major purchases like buying a car to beat the coming price rises expected as a result of the depreciation. That alone would imply that the decline in the ratio is temporary, but as we shall see, the Bank is now expecting it to continue.

It is hard to forget a remark made to a fellow economist during the referendum campaign by the member of the audience in a public meeting in the North West. After this economist had talked about the beneficial effects of joining the Euro on GDP growth, they said something like ‘it may have helped your GDP but it hasn’t helped mine’. In that spirit I want to make two points that were generally ignored by the media in their reporting of this forecast.

First (as regular readers will know), GDP is the output of the country, not the output of an average member of that country. Although the ONS now releases estimates of GDP per head (or per capita as it is often known) with its GDP estimates, most journalists seem to have not noticed. One reason for the focus on aggregate GDP is that forecasters like the Bank continue to publish only aggregate figures.

The table above is an attempt to adjust the Bank of England’s forecast for expected growth in the population. I’ve basically just taken the average population growth rate for the last few years and projected it forward. That could be on the high side if immigration from the EU falls off substantially over the next few years, but this would probably only increase the numbers by another 0.25%. Growth of 1% in GDP per head does not sound so good, particularly when you note it is less than half the historic average.

Second, over the following few years even GDP per head is likely to not feel like ‘my GDP’. We can see this from the Bank’s forecast for real household income. These fail to get above 1% growth. The reason is something Leavers do not like to talk about, and which therefore many journalists ignore: the impact of the Brexit depreciation in sterling. As this depreciation gradually leads to inflation not matched by higher nominal wages, real income growth will suffer.

Why is forecast GDP growth so much higher than income growth? The Bank now expects consumers to reduce their savings to unprecedentedly low levels. Why would they do that? The Bank operates a model where consumers base their current consumption on anticipated future income, and where expectations are rational. If, as economists universally expect, Brexit leads to slower income growth in the future, consumers should have reacted to that by cutting current consumption because their future income will grow more slowly relative to pre-Brexit vote expectations. This they clearly have not done, in part because many of them do not believe future income growth will be reduced by Brexit. That is at the heart of the recent forecast revisions. But this leaves the Bank without any guide to how the savings ratio will evolve. If consumers continue to believe everything is OK, despite the short term fall in their income growth, then further falls in the savings ratio are possible.

Of course even these numbers for household income are also inflated by likely household growth. (They measure all income going to households, not the income of an average household.) The final row adjusts for the expected growth in households. The average household size has remained constant over the last decade, and I have assumed that continues. As you can see, the income of the average household is at best going to be flat, and may fall slightly. So to say, as some Leavers have, that this forecast suggests Brexit will have no effect before we leave is completely wrong.

So how is the score in the match going between Leavers and economists, where goals are actual events rather than clever soundbites. The last time we looked the Leavers had let in two goals: the depreciation in sterling immediately after the vote, and then the Bank having to bring rates down to their lower bound again and start another round of QE. Nothing since then suggests those goals were invalid. If I’m feeling generous I’d say having to revise up a forecast could count as a shot on goal, but as it reflects a mixture of policy and consumers saving less I think it is also a miss.

But there has been a new goal scored by the Leavers, but unfortunately in their own goal. It is now clear to those not dependent on Brexit propaganda that as a result of Brexit we are going to be a supplicant to probably the most dangerous and right wing US president ever. Truly awful. Should never have been president. Got 5 million less votes, and that’s not counting those stopped from voting. Complete fluke. Only got the votes he did because of a biased media and fake news. FBI is an absolute disgrace. Everyone agrees. He’s got to go. Some people are saying he is unstable. Others that he is a stooge of the far right. Impeach the guy. Truly awful. (Sorry, couldn’t resist)

Which all means, the score is now

Economists 3 Leavers 0

and we haven’t even reached half-time yet. But there may be a lot more goals to come when the negotiations conclude. If the economists keep scoring, we can avoid extra time, which is desirable because that only ends in 2030!

Media, Economics and Brexit

Martin Sandbu at the FT says “It is now fair to say that the debate on the economics has been won by the Remain side.” He was of course talking about what the Bank of England said yesterday, rather than the 196 economists who signed our letter, but together they present an important test for the non-partisan media. The extreme difference between the amount of coverage the Bank got (blanket) and our letter got (practically zero) tells us something important about how media coverage works: the Bank is after all just a collection of economists. [1] (The list of those who signed our letter can be obtained from here.)

The media will not, of course, go as far as Martin and say the economic argument has been won. But what they can say is that all the leading economic institutions and the overwhelming majority of academic economists think that Brexit will involve significant short term and long term costs. That is now a statement of fact, which readers of some very non-partisan tabloids may not be aware of. My guess would be that there are at least 25 academic economists who think Brexit will involve significant costs compared to each one who thinks it will bring benefits. As I said here, that is as close to unanimity among economists as you will ever get. As it is a fact, saying that it appears to be so in no way breaches impartiality.

They could go further. The main response of the Leave campaign has been to say all economic forecasts are hopeless. They are no doubt referring to unconditional macro forecasts of the ‘what will growth be next year’ type. However the assessments made by all these economists and economic institutions are not unconditional forecasts, but conditional forecasts: what difference will Brexit make. They are much more reliable than unconditional forecasts. (This point can be got across with simple analogies: a doctor will tell you that being overweight increases the chance of a heart attack, but not when you will have one.)

So trying to discount the near universal assessment of economists by referring to macro forecasts either represents dangerous ignorance or deliberate obfuscation. But for those with little knowledge of these things, it is a deception that could work. Pointing out the difference does not breach impartiality, but informs the debate.

Brexit in the UK, and Trump in the US, represents a critical challenge to the ‘shape of the earth: views differ’ style of reporting. ‘Balance’ should never involve ignoring facts that are awkward for one side, or not challenging statements that are false. How many journalists (particularly political journalists) recognise this may determine two critical elections for both the UK and the whole world.

[1] Of course letters are not random samples, but it is not often you get letters from 170+ academic economists. The letter is important because academic economists are hardly part of the establishment, and indeed academics are usually able to say what they think without fear of any consequences.

Five small thoughts on the Autumn Statement

I talked about the big picture here and here, but as ever there is a lot of interesting detail. Here are five thoughts that I have not seen expressed elsewhere.

1) Tax credits. As people gradually began to twig, the U-turn on tax credits is only temporary: most tax credits will become part of Universal Credit when it is introduced, and the cuts there remain. As the Resolution Foundation show, those at the lower end of the income distribution are eventually going to be made a lot worse off.

But it’s still a big victory for those opposed to the tax credit cuts, for two reasons. First, a few years without the cuts are worth having. Second, and perhaps more importantly, Osborne wanted the cuts to come in early so that their memory would be diminished by the time of the next election. That will no longer happen, which might mean that when the time comes they too will be dropped/delayed.

2) Apprenticeship levy. One of the problems economists have with budget/autumn statement commentary is incidence - it is generally assumed that a tax on business is different from a tax on wages. But as the OBR point out, the evidence suggests that higher payroll taxes (‘taxes on jobs’), which this levy essentially is, will be largely met by firms paying lower wages. But if the Chancellor had raised the same amount of money by increasing employees NICs, everyone would be making much more fuss about this tax increase (particularly as he had pledged not to do so).

One point I didn’t hear mentioned is that we used to have an apprenticeship levy - it was abolished by Mrs. Thatcher.

3) Democracy. I’m occasionally told that I’m too critical of this government, and some even suggested on Wednesday that this Autumn Statement represented a move to capture the centre ground. But the Statement included a 19% cut in money provided to opposition parties. The Treasury said it was “time for political parties to pull their weight in difficult times.” I think the chief executive of the Electoral Reform Society was nearer the mark when she said it was “bad news for democracy”.

4) Labour. Talking of opposition, there was a lovely moment at the end of Osborne’s speech where he noted that Labour had suggested maybe a 10% cut in money for police was appropriate, only to announce no cut at all. It was just one more example of how timid Labour has become. Would it have dared increase the stamp duty on second homes/buy to let by so much? And then of course there was the higher minimum wage in July.

I normally try to avoid watching/reading political speeches, and only turned the TV on to see how John McDonnell performed. As I have said before, many on the left are their own worst enemies when it comes to the issue of political spin. They despise it, which is healthy in itself, but they actually need to be far better at it than their opponents because of media bias. Of course some things are so blindingly obvious …

5) Fragile fiscal forecasts. The thing I really dislike about occasions like this is all the emphasis on the aggregate fiscal numbers. Some people seemed surprised that the OBR should make such a big change to its tax take forecast, but as a one time forecaster it did not surprise me a bit. Macro forecasts are very unreliable anyway, and one of the hardest macro numbers to forecast is the budget deficit. Yet people obsess over small changes to the deficit in future years, as if this mattered. It does not.

One final comment on comments. This end of austerity meme is silly. Here is a chart.