One of the reasons for starting this blog was to counter some of the popular misconceptions associated with economics. Last week, for instance, I pointed out that although the UK economy has posted some decent data releases since the Brexit referendum, it was still too early to draw any definitive conclusions. One of the reasons for making this point was to set down a marker before the Brexiteers began sounding the all-clear. And sure enough, we were regaled with a couple of articles in the broadsheets suggesting that there really was nothing to worry about.
At least Larry Elliot's article in The Guardian acknowledged that much of the hysteria was whipped up by Project Fear (aka George Osborne) and that is still too early to be sure how things will ultimately turn out. However, it was interesting to note that the readers comments section noted overwhelmingly that the UK has not yet left the EU and maybe we should save the optimism for when we have.
But Allister Heath, writing in The Telegraph made the mistake of blaming economists for Project Fear. As Heath put it, economists "need to relearn a little humility, especially when it comes to trying to understand the impact of a gargantuan event such as Brexit ... As recently as a few days ago, something like 90 per cent believed that Armageddon was on the cards merely as a result of the Leave vote."
Now I know and like Allister, but on this one he is just wrong. Wrong, because just about all of the analysis put out by economists on this issue talked about the longer-term implications of Brexit. Broadly speaking, the consensus view is that it will lead to a decline in output of between 3% and 6%, relative to what would otherwise have happened, over a multi-year horizon. This does not mean an outright decline in output of such a magnitude. For example, if the economy grew at 1% per annum for five years rather than 2%, the former case delivers a 5% output loss over the five year horizon relative to the latter. The slower growth case does not necessarily mean that the economy suffers an outright recession but the output loss would be quite significant all the same, and we would certainly feel this in the labour market. It is also worth highlighting that most of pre-referendum analysis was predicated on the basis of the output loss after Article 50 was triggered, not after the Brexit vote.
As for learning humility, most economists I know realise that we cannot forecast the future with any degree of certainty and I am happy to admit that the only thing I know for sure about my forecasts is that they will be wrong. But months ahead of the referendum, I made four predictions regarding the immediate market reaction in the event of a Brexit vote: (i) sterling would collapse by around 10% in the wake of the referendum; (ii) the BoE would cut interest rates; (iii) after an initial collapse, UK equity prices would rally due to the fact that a weaker pound would raise the sterling denominated value of foreign earnings and (iv) UK bond yields would rise. The only one of these which has not happened is (iv), the rest all came to pass. So we are not all completely clueless.
Simon Wren-Lewis in his blog makes the point that "the reporting of economics in a good deal of the UK press is hopelessly biased by politics." This is a view he has held for quite some time, but particularly since the press completely misrepresented the economic records of the Conservative and Labour parties during the last election. And in view of much of what has been produced on the economics of Brexit in certain sections of the media, I can understand where he is coming from.
I know as well as anyone that economists are not able to predict the future, but contrary to Heath’s assertion, we are not ideologues. Indeed we tend to be a pretty rational bunch. After all it was economists who, for their sins, came up with the concept of rational expectations. For some reason, the ideological expectations school failed to take off.
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