Brexit: an interminable debate?

David Aaronovitch has a nice piece in the Times on the stories that Trumpites and Brexiters can tell themselves to avoid admitting being wrong*. I’d add another problem – that the ratio of noise to signal is so high that firm evidence is hard to find.

Let’s take GDP per head. Remainers claim that this will be lower under Brexit. NIESR estimates that Brexit will cut GDP by up to 7.8% by 2030, and CEP economists (pdf) by up to 9.5 per cent.

But trend growth is noisy, even over longish periods. For example, in the last ten years the standard deviation of annual growth has been 2.3 percentage points. This implies that even over ten years the standard error of annualized growth has been 0.7 percentage points.

The intuition here is simple. If we take any time period, it’s possible that it contains a disproportionate number of good years. It would be wrong to infer from this that trend growth is high: what’s really happened is that we got lucky. Conversely, if our sample contains some bad years, trend growth will look low when in fact we’ve been unlucky.

Even over periods as long as ten years, luck by no means cancels out.

My chart shows the point. It shows that it’s possible that trend growth didn’t change much from around 2% from the 70s through to the late 90s.

And here’s the problem. Even the worst-case costs of Brexit aren’t much bigger than one standard error. CEP’s estimate of a 9.5% hit is equivalent to 0.9% lower average growth over the 11 years from 2019 to 2030. That’s only 1.3 standard errors. Which is the sort of thing we could get through bad luck.

Or it might be cancelled out by good luck. It’s possible that growth will be higher in the 2020s simply because Brexit is one of only many influences upon growth. Maybe the scarring effect on animal spirits of the financial crisis fade. Maybe we'll get more sensible macroeconomic policies. Maybe the slowdown in world trade will be reversed. Or perhaps some new innovations will boost investment. There are many possibilities.

If this happens then even if the CEP’s worst case scenario is bang right, Brexiters will be able to say in (say) 2030: “you said Brexit would hurt growth, but in fact the economy’s done as well in the last 10 years as it did in the previous 10. You were wrong.” Remainers will reply that things would have been even better had we stayed in the EU. Ex hypothesi, they’d be wholly correct. But this won’t be clear from the facts.

My point here is that it’s quite possible that the economic impact of Brexit won’t be proven, at least sufficiently clearly to persuade Brexiters. This isn’t just because of our reluctance to admit we were wrong. It’s also because a combination of the Duhem-Quine problem and a high noise-signal ratio means that the debate might, in practice. be intractable. I find this a depressing prospect.   

* Scoffers have pointed out that Aaronovitch has himself used such epistemic defence mechanisms in his continued support of the Iraq war. I think that just shows we are all much better at spotting cognitive biases in others than we are in ourselves.

Comments

[Patrick Kirk]

According to economists, by and large, economies seem to progress under their own momentum and government policies seem to have limited effect. Crop failures or disease are far more likely candidates for economic problems than the minutiae of a Brexit deal.

[Guano]

It isn't a question of "the minutiae of a Brexit deal". The UK economy is built around its membership of the Single Market and it has gradually merged that the UK is likely to leave the Single Market as well as leaving the EU.

https://ukpositive.wordpress.com/single-market-brexit-clarity-revisionism/

I haven't yet seen a clear statement of a new model of the UK economy outside the Single Market.

[Dipper]

Typical Remainer article and post; there is a clear question, usually to do with economics, and there is a single answer, usually GDP. In reality there is no agreement on what the question is, and there is no agreement on what constitutes success at the end of the process.

One possible outcome of Brexit is wages for tradesmen go up, and middle class people have to pay more for building work and domestic help. Would that mean Brexit was a success?

[Magnus]

Well, if you double the confidence intervals it seems pretty clear that our capacity to recover from the GFC looks anomalously weak.

And if you look at other (similar) countries' experience then some sort of inference is possible. The inference being that austerity has really not been a success. The saner elements of the Tory party are coming to terms with this.

So, unfortunately, and on the basis that the CEP/NIESR estimates are right, then Brexit will have consequences of similar magnitude to the austerity fiasco. So, using the Tory learning process as a rough template, an optimistic guess would be that it will take about 10 years before say half the 52% realise that Brexit might not have been such a peachy idea.

[Dave Timoney]

I think previous commenters are missing the key point: the success or failure of Brexit may not become irrefutably apparent until most of us are dead, and even then other factors may complicate the picture. After all, historians are still arguing over whether the sclerosis of the Spanish economy in the 18th and 19th centuries was the result of the disruptive impact of South American gold and silver in the 16th.

On a similar theme, it's worth noting that David Aaronovitch is still in denial about the Iraq War, even if his recent columns read like the shrieking of a soul in torment. I fear he is way beyond the point of recantation.

[rogerh]

I voted Remain not because the EU is such a great project but because the UK Parliament has an unerring ability to screw anything up. Indeed Parliament's strategic failures led directly to the Leave vote. They could not make Leave work even if it were possible. Given the uncertainties and inabilities of Parliament why bother to waste time and cognitive bandwidth on something with such measly and uncertain advantages.

I would agree that Brexit has now become boring beyond belief, it seems to the only thing occupying Parliament when there are so many more important things to do. But the difficulty is that in the game of political football the bully boys have got the ball and are terrified of losing control. So they crowd round making a great noise but are unable to play the ball, so the rest of us just stand around until the EU whistle blows.

In the meantime all we have to look forward to are the party conferences in the autumn. Maybe we will get a full on cat fight, more probably that possibility will be managed away. Nothing to laugh at at all.

[Blissex]

«I voted Remain not because the EU is such a great project but because the UK Parliament has an unerring ability to screw anything up.»

You give too much credit to Westminster... I am often amazed that "Leavers" could argue with a straight face that they would rather be "managerially" ruled solely by faceless, unaccountable and very powerful mandarins in Whitehall than put them in modest competition with the far more accountable and transparent and less powerful counterparts in the EU civil service in Brussels.

The scots looked at both and chose the more effective and less intrusive Brussels eurocrats than the Whitehall mandarins and toffs who mostly think of shifting state money to their public school and Oxbridge mates and their relatives in the City.

[Blissex]

«a clear statement of a new model of the UK economy outside the Single Market.»

You haven't been looking, in practice it is "Britannia Unchained": the UK as a low-wage, low-tax, offshore tax haven and sweatshop, with "Free Enterprise Zones" eventually extending to the whole country, the realization of a dream of Pinochet economy, of going back to the 50s, the 1850s. Some of my usual quotes:

http://www.welt.de/english-news/article161182946/Philip-Hammond-issues-threat-to-EU-partners.html
«P Hammond: .... And most of us who had voted Remain would like the U.K. to remain a recognizably European-style economy with European-style taxation systems, European-style regulation systems etcetera. I personally hope we will be able to remain in the mainstream of European economic and social thinking. But if we are forced to be something different, then we will have to become something different.
Welt am Sonntag: We don’t understand: Who or what would force you?
Hammond: Economic circumstances. If we have no access to the European market, if we are closed off, if Britain were to leave the European Union without an agreement on market access, then we could suffer from economic damage at least in the short-term. In this case, we could be forced to change our economic model and we will have to change our model to regain competitiveness. And you can be sure we will do whatever we have to do.»

https://www.ibtimes.co.uk/buyout-boss-says-brexit-will-be-good-his-business-will-mean-30-cut-uk-wages-1602631
«One of the biggest names in European private equity said that Brexit will be good for his business, but will mean a 30% wage reduction for UK workers. ... He added that EU immigration will be replaced with workers from the Indian subcontinent and Africa, willing to accept "substantially" lower pay.»

[Blissex]

The "Leave" referendum was based on a "cake and eat it argument": that England could have all the advantages of EU trade while giving up control over EU policy, by switching from "in with opt-outs" to "out with opt-ins", chosen unilaterally, "because England rules the waves" or at least "because England waives the rules" :-).

It is quite likely that won't happen, and at least some parts of english economy will shrink or grow slower after exit.

The argument now is similar to "better dead than red", in the less dramatic form "better somewhat poorer than blue and stars".

This for me looks like a defensible, realistic argument: some people may indeed put more value on surrendering more sovereignty and control to the USA (and in the longer period to China) even if that costs some loss of economic advantage and loss of control over EU policy.

[rogerh]

I suppose come April 2019 there will not be riots in the streets or runs on the banks. The situation will not be that bad and there will be major efforts from HMG to make sure the illusion of normality continues. But what then, probably a mish mash of transitional arrangements where we are not quite in and not quite out. New trade agreements may be held up because they disturb the status quo. Parliament will dither and wring its hands because then the horrible truth starts to dawn.

The big question is what economic model will we plan to adopt, an American free for all or a French enarch system or some kind of German Social Democratic approach. I suppose the Brexiteers are more tuned emotionally to a free for all, but that implies much freer planning rules and a much more brutal social support model and of course some source of investment. The big question is who will be providing that investment. In the short term the country can be kept going up to the 2022 or even 2027 elections by borrowing and financial fudges but by then unless the economic motors have fired up we will be in trouble - again. Look forward to excuses and more promises.

The awful thing is that we will not fall off a cliff, we will simply slide and stagger down a long muddy path. The political class will be well insulated as will the upper middle classes. But the rest of us.... Seems to me we are being taken along the economic version of a Liverpool Pathway.

[Blissex]

«The awful thing is that we will not fall off a cliff, we will simply slide and stagger down a long muddy path.»

After the end of scottish oil that was going to be the outcome regardless, with "Leave" the price of losing more independence to the USA will a somewhat steeper downslope:

http://mazamascience.com/OilExport/output_en/Exports_BP_2016_oil_bbl_GB_MZM_NONE_auto_M.png

«The political class will be well insulated as will the upper middle classes.»

Not quite: the political class and the upper class will do better, as they are the main beneficiaries of the ongoing rounds of asset stripping.

Like in the north of England the upper-middle classes will instead shrink, because their roles as professionals and supervisors will shrink too.

Every factory, mine, dock, mill on the north of England that closed also put out of business quite a number of upper-middle class people too, not just working class people, and put out of business quite a few small business as well. That's why in the north of England urban areas even relatively well off people are reluctant to vote Conservative: they got shafted too.

[Ralph Musgrave]

Guano wants a “model of the UK outside the Single Market”. I know of one: it’s called “New Zealand”. NZ has a similar land mass to the UK. Its people speak English. It’s standard of living is higher than the UK. It does little trade with any country within 2,000 miles (the average distance the exports and imports to Australia and New Zealand travel is around 6,000 miles).

And the clincher is that NZ’s population is around 5 million. So on that basis, if the UK had no net immigration for decades, and instead had net EMIGRATION, it might eventually enjoy the same standard of living as NZ.

Or perhaps I’ve missed something.

[David]

Thanks Ralph,
I have been trying to work out how to protect myself from the Brexit.
Where can I buy some sheep?

[George Carty]

"Or perhaps I’ve missed something."

One big one -- which countries are you envisaging accepting as immigrants the approximately 90% of the UK population which would be surplus to requirements under a New Zealand model?

Oh well, at least it confirms my suspicion about why the Brexiteers are so obsessed with Australia, New Zealand and Canada! They're not seen as potential trading partners, but as Lebensraum where the excess population of the overpopulated UK can be resettled.

[xiugad]

I would simply add the fact that growth in the 2020s will not be seen in absolute terms only but also in relative terms compared to neighbours. It would be great if you could make the same analysis of SD of growth rates differences between countries. My guess is that SDs are much lower and then the effect of brexit will be more obvious in relative terms. For the average person, 10% difference in real GDP per capita will not be noticed. But for the elite, 10% difference between France and UK for example will be huge gap.

[Guano]

I must have missed Gove or Johnson or Hannan or Farage saying "Vote Brexit so we can be like New Zealand".

Even if these gentlemen had clearly articulated that they want the UK to become like New Zealand, and even of it were possible for the UK to model its economy on the economy of New Zealand, there would be high transitional costs in making the transformation. The UK economy is based around its membership of the Single Market and leaving the Single Market implies significant transformations, with associated costs and risks. This isn't about "the minutae of trade deal".

[Blissex]

Guano wants a “model of the UK outside the Single Market”. I know of one: it’s called “New Zealand”. NZ has a similar land mass to the UK. Its people speak English. It’s standard of living is higher than the UK. [ ... ] NZ’s population is around 5 million.»

All we need is then a magic speel that converts 60 million people in Great Britain into sheep, and the the remaining people in the UK can then enjoy the benefits of having a commodity-based economy too.
:-)