Saturday, 21 May 2016

The tears of economists

Simon Wren-Lewis, Professor of Economic Policy at the Blavatnik School of Government, Oxford University, and a fellow of Merton College is upset because nobody listens to economists.
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.
Is that right? Which ones? Patrick Minford is professor of Economics at Cardiff and I wouldn't give you tuppence ha'penny for his opinion and neither would Wren-Lewis.

"Should our expertise be ignored?" he asks.
"Let’s look at some of the evidence [Alistair] 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.
A few problems here. He says "In the case of the Euro every economist would acknowledge (see the Economist article) that there were good arguments for and against." Ok. But, he says, "In the case of Brexit the only matter to discuss is how big the costs of leaving are". Except of course there are economists who don't think that. Wren-lewis knows that. 

There is Ruth Lea and Patrick Minford. Both of them are absolutely wrong. The reason being that they have only a very thin grasp of non-tariff barriers and barely factor these into their fag packet maths and most of what they say is predicated on an unrealistic Brexit scenario, making assumptions on erroneous facts. So as it happens economists do not "know more about what determines trade and foreign investment". What Wren-lewis is saying is that economists he agrees with are absolutely right and they should be listened to. But what are they saying? 

Pick any prestigious economic analysis and you will more than likely see the three straw men. You will see the WTO option, the Swiss Option and the Norway/EEA option demolished. But the very art of debunking in this way is a form of political activism in that it seeks to confuse the issues. An honest Brexit analysis would focus on what will most likely happen. In this you have to look at timescales and complexity and who holds the best cards in that scenario.

The typical view of economists is that the WTO option is unworkable. But what they don't say is that it is so unworkable and so damaging for trade that neither side would even consider it. But they keep it as a pawn in play. We can also knock the Swiss Option out of play because that in itself is an amalgam of custom deals and agreements hammered out over several years and would necessarily be different for Britain because we are negotiating an exit and not an entry. The timescales make a custom agreement impossible. 

So what we are left with is the off the shelf mechanism, leaving most of the peripheral areas of cooperation in tact. Not least because Britain is not presently equipped to withdraw from them having drawn down expertise of fisheries and agriculture. To look at this purely from the perspective of trade ignores the hundreds of areas of integration that will need examining. Something all economists do without exception. I would like to be proven wrong because if there is an economist who is aware of these basic realities then that's a person I would like to meet.

The fact is that as much as there are political and economic assessments to make, there are also practical considerations that have a real world impact. Without being mindful of these you can't possibly be aware of all the threats or the opportunities. Consequently the economists view is an incomplete view. 

And here we bump into the basic problem of trusting economists. They really do think this is about trade. It isn't. There are plenty of Brexiteers who know perfectly well there will be negative economic consequences who will still vote out. Economists see this as a rejection of their sagely advice. What they can't seem to grasp is that some things transcend their bean counting. 

My own view is that the time constraint and complexity of negotiations will ensure there are no negotiations as such. What we will get is an ultimatum. Take what we offer or nothing at all. And what will be on offer is the EEA solution because that's the only means I know of that can come close to limiting the risks for the EU economy as well as our own. With no appetite for Brexit talks dragging on, what other choice is there?

From there Britain sets about the long process of reorienting its structures for self governance. We do not as yet know what that will look like. There are massive opportunities to exploit and being free of the EU's common external tariff we are able to source cheaper components for assembly lines, cheaper food and open up multilateral talks to open up new markets. The EU takes several years to make trade deals happen - many not even relevant to the UK. Britain for once would be free to seek its own fortunes. In that no economist has a crystal ball. 

When I see an economic assessment which ignores the straw men and cuts to the chase on the basis of what will happen then I will take them seriously. So long as they fill the air waves with misnomers on fanciful scenarios I will treat it for what it is. Political activism. And when you get the likes of Wren-lewis whose own work is littered with the word "neoliberalism" I know what the game is.

He has it that "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."

This is either historical illiteracy or total dishonesty. Banking of all things is governed by mountains of regulation and the grubby mechanisms that caused the crash were a symptom of over regulation. You end up with Mr Loophole accountants finding inventive ways to duck regulations. The means of discarding assets then becomes the method that nobody thought to regulate because prior to regulation there was no need to. Unintended consequences are a bitch. The simplistic narrative that the cause is deregulation ignores the blurred lines of accountability and regulatory overlap. To say that the sector is unregulated is comical. 

Whenever you look at economists they show a blind spot for regulation and the consequences of it. On the left, they never marry up intent with real world consequences, and on the right, they view any and all regulation as bad regardless of the red tape that good regulation gets rid of. This is where liberal economists like Ruth Lea get their daft ideas.

As with most economic analysis we get déformation professionnelle. Economists are only useful in terms of very specific scenarios over short terms within a particular specialism. Everything else is just junk science or political opinion dressed in prestigious garb. 

As it happens, Brexit is a discipline of its own and does not favour the latecomer. The economics are important but not central. There are short to medium term sacrifices to make in order to get what we want. And what we want is to redefine our relationship with the supranational entity and enhance domestic control over key policy making. That is entirely a political question and the economics are advisory only.

Economics can be used to justify some pretty hideous ideas. We should be thankful that theirs is not the only advice we heed. This is ultimately about democracy: who has the power and to whom they are accountable. In that regard, it's absolutely nothing to do with economists and we are right not to listen to them.  

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