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Brexit and the analysis of its economic consequences: iteration 2

Summary:
Alberto Nardelli at Buzzfeed broke the story that government economists have undertaken a new analysis of the consequences of different variants of Brexit.  And come up with the unsurprising conclusion that they would all be costly. In one sense, this should not be news.  Nothing has changed.  A few economists have studied the same question and got the same answer as before.  Apart from a few on the fringes, everyone who has looked at this accepts the basic logic.  For a brief recap, the story goes thus: Except from Brexit In Name Only [in which we stay members of the single market and the EU’s customs union] leaving will raise non-tariff barriers and perhaps tariff barriers too with the EU.  Unless something happens to overturn the iron logic of trade ‘gravity’ – the tendency for

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Alberto Nardelli at Buzzfeed broke the story that government economists have undertaken a new analysis of the consequences of different variants of Brexit.  And come up with the unsurprising conclusion that they would all be costly.

In one sense, this should not be news.  Nothing has changed.  A few economists have studied the same question and got the same answer as before.  Apart from a few on the fringes, everyone who has looked at this accepts the basic logic.  For a brief recap, the story goes thus:

Except from Brexit In Name Only [in which we stay members of the single market and the EU’s customs union] leaving will raise non-tariff barriers and perhaps tariff barriers too with the EU.  Unless something happens to overturn the iron logic of trade ‘gravity’ – the tendency for us to trade much less with countries far away from us, of a given size – striking new Free Trade Agreements will not replace lost trade with the EU.  Add to that the observation that the deal with the EU is very deep – it created a market with very few frictions indeed – and deals with other 3rd parties are likely to be much shallower and thus even less likely to replenish lost EU trade.

Indeed, because of the Brexiters’ distaste for submitting to mutually agreed and neutrally enforced regulations – it’s the loss of ‘sovereignty’ that our doing just this with our nearest trade partners in the EU that bugs them –  it’s inevitable that such deals will be shallower.  Shallower deals leave us with more ‘freedom’ in the Brexit lexicon.

So less trade, and, invoking another empirical regularity, therefore lower income per head.

However, the leak does seem to be being treated as news.   Why?

No doubt one reason is that the studies are embarrassing.

The old Treasury analysis from before the referendum could be dismissed as cooked by arch Remainer Osborne [albeit meaning that we have to make the silly accusation that Charlie Bean would have signed up to such cooking].  Outside expert analysis could be dismissed as just that;  also part of the Remainer establishment.

This new analysis has been done under the piloting of a government committed to a Brexit that means Brexit [now partially translated as Brexit means less £] and ‘making a success of it’.  So it’s harder to set aside.

Doing so would involve creating new distance between the policy makers with the power, and those sponsoring the sceptical analysis:  cleaving from the unrepentant Remainer ministers who stand by it and perhaps from the senior economists who produced it.  Just as this government was not embarrassed by the analysis of the old Treasury, a new one could renew and purify itself to avoid  blushes [‘all our options are worse than the status quo!’] caused by the thinking of the economists in the former, contaminated government.

Given that answering the same question with the same evidence and logical tools is bound to lead to getting the same answer, one has to ask why anyone bothered?

Perhaps the idea was that some part of the May government thought the old studies [and all the outsider work] was cooked, so to make sure they needed to have another look.

Or was it a calculated move by the moderate government members:  new analysis can’t be so easily dismissed, and will help tilt the agreement sought to Brexit In Name Only, or dare the Ultras to break with us and try to form their own leadership.  That tactic only works if the analysis is leaked, of course, or there is a credible threat of leaking it.

Another possibility is that new information has come along, either about the economics, or what the Government might want, or what the EU might put on offer.  But this seems unlikely.  There’s no new economics I am aware of.  And the other matters are at the level of detail that would not affect the higher level debate that has still not concluded [hard or soft?].

As a result of the leak, social media has filled up again with the confusion about conditional and unconditional forecasts that sullied the pre-referendum debate.  [I suppose one could have seen that coming].

This from Iain Martin, editor of ReactionLife, and Times columnist:

Brexit and the analysis of its economic consequences: iteration 2

If you can’t think why this might be a misguided thing to say:  it’s as though you are sceptical of all the past evidence linking pizza and beer over-consumption and lack of exercise to weight which moved your doctor to advise you to go teetotal, cut back on the pizza, and take up jogging, and all because all kinds of other things could happen to you along the way.

Christian May was also at it:

Brexit and the analysis of its economic consequences: iteration 2

One of the ironies of all this is that Brexiters seem to reject the idea that you should do policy analysis based on conditional forecast thought experiments.

Yet this is precisely what they are doing all the time.   Contemplating that Brexit might be beneficial involves all kinds of such thought experiments:  That new FTA’s with far away countries will more than make up for lost trade;  that breaking out of the EU will reshape the EU itself around a more minimalist FTA, loosening the elements of political union and redistribution.

And often, shaky unconditional forecasting creeps in, for example predicting that technology will revolutionise trade and national border bureaucracy, eliminating the need for people in uniforms stopping lorries and searching them, or making the distance between economies that used to depress trade irrelevant [which it has not so far, incidentally].

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Tony Yates
Economist. Consulting, lecturing, a book. Ex Prof at Bham, Ex BoE staffer. Macro, policy, monetary econ, occasional nonsense.

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