First posted on:
Roger Farmer's Economic Window, 31 January 2018.
“What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so.”
David Smith has a piece in The Times on 30 January 2018that, as always, is worth reading. But David is a little too certain for my taste. I prefer to follow the dictum that prediction is difficult; especially about the future.
David discusses the BuzzFeed leak of the assessment of Brexit prospects by 'experts' at the behest of the Conservative government. Here is David with a defence against the Brexiteers:
"It was a great scoop for BuzzFeed, though no surprise to economists. Overwhelmingly, credible analysis shows a similar picture. It also produced the usual nonsense, of the kind that says that if you cannot forecast next year how can you forecast for 15 years? This, of course, is not standard economic forecasting but conditional analysis, which looks at the relative difference compared with the baseline when you introduce frictions into trade with your largest trading partner, reduce your attractiveness for foreign direct investment and cut the supply of EU migrant workers. It sets that against modest gains, only over a very long period, from non-EU trade deals."
Brexit may indeed be bad for the economy. But it doesn’t help to overstate the case. However you look at it, the statement that remaining in the EU would lead to an 8% larger economy, 15 years from now, than leaving the EU with a 'Hard Brexit', is a forecast. And that forecast has standard errors attached. Those standard errors are very large indeed.
It is also worth remembering that all forecasts assume that we can plan for the future using known statistical probabilities, like rolling a die that comes up heads with a known probability. That is not the real world. The Bank of England famously produces fan charts that show not only the median forecast but the probability distribution of likely outcomes. For several forecasts in a row following the 2008 crisis, all the realised values of projected inflation were outside of the range of statistical projections. They were black swan events.
Some of us will probably be worse off under Brexit in the near future. Perhaps all of us will be. I have no idea what the consequences will be relative to staying in the EU in 15 years’ time and nor does anyone else. "What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so." Fifteen years from now, every outcome is a black swan event.
The Brexit arguments are political. They are not economic. The economics is clear. Trade between countries increases the ability to produce goods and services. But when the relative prices faced by a country change, some people will gain and others will lose.
The gainers from globalisation were those who have skills that are valued internationally and those who own capital that can be combined with cheaper labour abroad. The losers were those who are now competing with cheaper labour in distant lands.
It is not enough to repeat the trite phrase that the gainers can compensate the losers unless we come up with a credible plan of how that compensation will be achieved. That is not a trivial matter. David Autor and co-authors have made a credible case that trade with China caused a loss of US manufacturing jobs and recent research at NIESR by Francesca Foliano and Rebecca Riley finds similar results in the UK.
When the job of the car worker in Northumberland moves to Eastern Europe because his factory was physically dismantled and shipped overseas, that person can be forgiven for blaming EU membership. And that person understands uncertainty better than 90% of experts who, we are told, agree that Brexit was the wrong decision. When you have been let down by politicians on both sides of the aisle, the unknown seems a lot less scary.