Brexit is a denial of economics as knowledge

A well known Brexiters said it was almost worth doing Brexit because of the anger I feel about it. He is right about the anger. The prospect of Brexit has filled me with the same horror as austerity did. The connection between the two is obvious. Both involve subjecting the whole country to a policy that basic economic ideas tell you will do nearly everyone harm.

We have seen nothing like this in my lifetime. The only person to try austerity (by which I mean fiscal consolidation in a recession) was Thatcher, and the policy was reversed (not stopped, but the consolidation was undone) within two years. Every government, and especially Thatchers, has pursued regulatory harmonisation and tariff reductions to increase trade. Now in just one decade we have seen both austerity for seven years and an attempt to dramatically increase trade barriers.

Imagine you were a doctor, and the government had appointed anti-vaxers to key positions who proceeded to reduce the vaccination programme. How would you feel as more children fell ill. Imagine you are a climate scientist and your government says it does not believe in man made climate change and encourages coal production. You don’t have to imagine of course, because exactly that is happening in the US and elsewhere. And you can ask the doctors and the climate scientists how they feel about it.

What we have seen since 2010 in the UK is the equivalent for economics. I would argue that this is no accident, but comes from the same source as climate change denial and anti-vaxers. Some people may not accept that comparison, and argue that economics is not a real science or some-such. And I agree that with austerity they had ammunition from within economics itself. There are still some macro economists around, nowhere near a majority but because they say things right wing politicians like they are ‘prominent in the public debate', who deny the validity of what Keynes wrote after the Great Depression. But we see the proof that Keynes was right today: a Great Recession followed by a limp recovery as the government squeezed demand. A minority of academic economists supporting austerity was no reason to largely exclude the views of the majority of academic economists, and all the evidence is that their views were almost completely excluded from the broadcast media. 

There is no such ambiguity with trade. We know trade between two people benefits those people because otherwise the trade would not happen. The very basis of the economy is trade. Every day we go to work we trade our labour for goods that go to someone else. Our work represents specialisation that allows everyone to benefit. If we had to produce everything we consume ourselves we would be much poorer.

This is why governments try to encourage trade agreements between countries to make trade between them easier. Greater trade is like technical progress, because it allows countries to focus on producing things they are good at producing. Now it is possible that such agreements, although they make the country better off, may not make everyone in the country better off. But every academic trade economist agrees that getting rid of the EU Customs Union and Single Market will make almost everyone in the UK a lot poorer. (Patrick Minford, whose analysis has an uncanny habit of always supporting hard right policies, is not a trade economist.)

Brexiters know this, which is why they came up with the idea of global Britain. It is a farce, which can be refuted in at least two ways. First, every analysis based on academic research I have seen suggests the gains from trade deals with other countries outside the EU come nowhere near the loss due to less trade with the EU. Nowhere near. Second, if you want good trade deals with other countries, the best way to achieve them is to get the EU to negotiate them on your behalf, because the EU is more experienced and has much more clout in any negotiations than the UK. That is why the EU has so many trade agreements with other countries. 

All this knowledge about the impact of trade on productivity and incomes was dismissed by Brexiters with two words: Project Fear. All the knowledge that Keynesians have accumulated for 80 years was dismissed with a few more: the government has maxed out its credit card. Others have dismissed the knowledge of doctors and climate scientists with similar home-spun homilies.

Yet many, including many in the media, still refuse to think of economics as knowledge. People who wouldn’t think twice about saying a fall in the supply of coffee will raise its price say all economics is just dressed up political opinion. People who would not dream of ignoring doctors just because they cannot predict when you get a cold say all economics forecasts are worthless. Of course there are some things, like whether the Euro was a good idea in economic terms, where there are pros and cons and therefore economists’ views may differ or change. But the evidence that making trade substantially more difficult with our immediate neighbours will be harmful is so overwhelming that only 1 in 22 UK economists disagree. I have yet to meet an economist who specialises in trade who disagrees. 

So when a woman on Question Time said we just do not know what will happen after Brexit, she was repeating an idea pushed repeatedly by the Brexit press and implicitly supported by most broadcasters. The BBC accepts that climate change is happening (most of the time) because that knowledge comes from ‘proper scientists’. The BBC does not accept that Brexit will make the UK worse off in economic terms because it is knowledge predicted by economists, and they think economics is not knowledge.

The right in the UK and US are now set on a course where they are prepared to defy science itself for their own interests. But this can only succeed when some of those who think of themselves as in the centre let them. In this case it has been allowed to happen in part because political journalists and those above them at the BBC decided economics where the overwhelming majority of economists agree was not knowledge but just another opinion. As I have spent my working life examining how economics can improve policy choices it is hardly surprising I find that simple ignorance outrageous.

On not taking sides, and forecast uncertainty

                The last time I can remember Chris Giles of the FT writing about fiscal policy, I came down on him pretty hard. It was the phrase “..the area in which Britain still leads the international debate is fiscal policy” that really got to me then. So before taking up something in his latest piece, let me say two things. First, after my earlier critical post, Chris took the time to send me a lengthy email defending his position. It didn’t change my view, of course, but I did appreciate the effort. It confirmed my belief that Chris is serious about trying to get things right. Second, the article today is more sensible. It basically takes the IMF view I described recently here, which is that we need more monetary expansion, and that if things become worse than expected we should have bond financed fiscal expansion. Not as far as I would want to go, and I would disagree with his arguments for keeping to current fiscal plans, but Jonathan Portes takes on that task here. What I can say is that I approve of his direction of travel, and that he is prepared to make it!

                  What I want to discuss now is a remark Chris makes about economists taking sides. The article starts by chiding the Prime Minister when he claims that low interest rates represent the result of his tough decisions. Chris argues, as Jonathan has said many times, that low rates reflect the poor prospects for UK growth. He goes on: “The prime minister must know that what he is saying is silly, so it suggests he holds the intellectual capabilities of his audience in contempt.” I have recently expressed sentiments along similar lines. He then goes on to examine a recent statement by Labour’s Ed Balls. To quote again: “Blaming changes in deficit forecasts on the pace of austerity alone is not worthy of a serious politician.” If you take the statement Chris quotes as implying that the deficit is higher just because of austerity, then that does indeed make little macroeconomic sense.

                It is what Chris says next that is interesting. “In the current hysterical climate, economists should be wary of taking sides. We know that austerity hurts, but we have little idea how much of the current economic pain is caused by deficit reduction.”  If by taking sides he means trying to argue that everything said by one political party is wrong and everything said by another is right, then this has to be sound advice in an age of macroeconomic spin.

                However, I would also argue that in a hysterical climate, economists really should go public with what they believe to be true, particularly if that belief comes from years of study. If their view reflects what is taught to students up and down the land, then I might go so far as to say that they owe it to their discipline to tell the world what they tell their students.  What in my view makes the austerity announced in 2010 a major policy error was that it attempted to deny this knowledge. We do know with reasonable certainty that fiscal contraction in the form of spending cuts will, ceteris paribus, reduce output by a significant amount. We also know that when interest rates are at their lower bound, what monetary policy can do to counteract this fiscal impact is highly uncertain. Not all macroeconomists will agree with these statements, but I would conjecture that the vast majority do. Given this, it was highly likely that additional austerity would reduce UK output compared to what it otherwise would have been, and if this led to weak or zero growth then it was a huge gamble to hope that monetary policy would put things right again.

                It was in part this belief that macroeconomics had important things to say that current policy seemed to ignore that started me blogging some five months ago. I’ve also found that among the macroeconomic blogs I read there is refreshingly little partisan commentary. OK, maybe that is partly self selection – there is a popular US blog that I do not read for this reason – but only partly. There is a bit more ideology in what I read, but unfortunately that reflects the discipline itself.   

                I also agree with the second sentence from Chris that I quote above in the following sense. Although there has been no growth since the coalition started to influence macroeconomic events, we should never claim that we know that this is all due to their fiscal plans. There are too many unknowns here – in particular, it is hard to know how much future austerity might have influenced current expectations among firms and consumers. I hope that in the past I have simply claimed what I said above, which is that austerity has just made things worse. To say that we know precisely what a policy has done to the economy is almost as bad as saying that we can accurately forecast.[1]

                What all macroeconomists know is that forecasting is a very imprecise game. Study after study has shown that macroeconomic forecasts are little better than guesswork. Forecasts are worth doing, because getting things a bit better than guesswork has benefits that exceed the costs. A corollary of being just better than guesswork is that whether you get forecasts right or wrong is largely down to luck. So to infer, as is frequently done – even in blogs – that because the Bank of England has been consistently overoptimistic about inflation this must reflect some kind of incompetence is simply wrong. Equally, to assert that the OBR were overoptimistic about UK growth because they must have been somehow infected by the government’s beliefs is wrong. Both things are possible but, given what I know in each case, highly unlikely. Given the state of our current, and in all probability, future macroeconomic knowledge, forecasts are generally wrong because the economy is too damn unpredictable. That makes it all the more important that we do not ignore the things we do know.

                  

               

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[1] It is only ‘almost’ as bad because conditional forecasting (if something changes by x, then something else will change by y), involves less uncertainty that unconditional forecasting (something will be y). Note that my statement about fiscal policy is much weaker than a conditional forecast, because it just says that if government spending falls, output will be lower. That is why we can be much more certain about this kind of statement.