Economists only band together when they’re wrong

Last week, we heard yet more from the economic establishment about the supposedly “incontrovertible fact” that Brexit would harm the UK economy.

And yet again the Remain camp tried to suggest that if the overwhelming majority of economists were in favour of staying in the EU, then it was an open and shut case that we should stay in.

It was even argued that those of us who take issue with this consensus are suggesting that there is a conspiracy between all those organisations that warn about the costs of Brexit – including the Bank of England, HM Treasury, the IMF and the OECD.

Such a conspiracy is so ludicrous that it would even look far-fetched in a Dan Brown novel. Accordingly, the people who believe in such a thing must be off their rocker.

Yet of course I do not believe that there has been a conspiracy – and you don’t have to believe in one in order to be unimpressed by the massed ranks of Cassandras. These august institutions come to broadly similar conclusions, not because they have been conspiring, but because their economists come from the same stable, make the same assumptions, use the same methodologies and look in the same, wrong, direction. They have succumbed to group-think.

Should Britain stay in or get out of the EU?Average of last six polls (%), excluding unsure votesRemainLeaveNov ’15Jan ’16Mar ’16May ‘160204060Sunday, Nov 1, 2015● Leave: 48

I am amazed by the confidence, bordering on arrogance, displayed by these various organisations as to what economists know about the future. After all, it is not as if economists have a good record of forecasting. When it comes to the really big questions, their prognostications have frequently been off the wall.

For instance, take the financial crisis of 2008-09. What were the august bodies referred to above saying about the future in 2006-07? Did they anticipate a major financial panic, followed by a huge economic downturn? They did not.

On the contrary, they told us that the world would continue pretty much as it had before. Her Majesty the Queen put her finger on the essential issue when she asked in 2008 why no one had seen all this coming.

In fact, a few mavericks did warn of serious trouble ahead – including Nouriel Roubini and Brian Reading. But the establishment paid them little heed.

It grates to compare the humble business of economics with the great advances in physics, but I have been very struck by an incident in the life of Albert Einstein.

The Nazis were apparently repelled by Einstein’s theory of relativity – and I suppose more repelled by the fact that its originator was Jewish. They assembled a group of 100 purely “Aryan” scientists to disparage the theory. When he learned of this, Einstein said: “Why 100? If I was wrong, one would be enough.”

The economic debate about Brexit has so far concentrated heavily on the single market, and the prospective loss of export business caused by exclusion from it.

I have written repeatedly that being outside the single market does not mean being “excluded”. Yes, British exports might face tariffs, but the EU’s tariffs on manufactured goods imported into it from non-member countries are extremely low.

More importantly, perhaps, there is a widespread misconception that the gains from trade derive only from exports. They don’t. They derive from both exports and imports.

If we were to leave the EU, then we would have the ability to stop levying the EU’s external tariff on the imports that we buy from the rest of the world. This would lower prices in the shops.

There are distinct parallels here with the repeal of the Corn Laws in the 19th century.  Surprise, surprise, repeal was steadfastly opposed by British landowners because the Corn Laws restricted the import of wheat into the country and thereby enabled them to sell their produce at higher prices.

corn
British landowners opposed the repeal of the Corn Laws in the 19th century CREDIT: ALAMY

It has long been recognised in economics that customs unions – such as the EU – can represent a move towards freer trade or a move away from it.

By reducing tariffs between member countries, they promote trade. But they also divert trade from countries outside the union to countries inside it. And if they impose higher tariffs from outside the union than existed before, then this can reduce imports. What the balance of these factors is differs between different cases and may change over time.

If a small country joins a customs union with a very large economic bloc, then this is likely to be beneficial since the gains from enjoying tariff-free access to this bloc are likely to outweigh the losses from imposing the bloc’s tariff on imports from the rest of the world. The larger the customs union is, the larger its share is likely to be of your total trade.

What would a Brexit mean for the City?Play!01:15

 If the EU continues to grow very slowly, as I suspect, while the rest of the world grows much faster, then the EU’s share in our trade will continue to fall. This will alter the balance between the advantages of tariff-free access to the single market and the losses from having to impose the EU’s common external tariff on our imports from the rest of the world.

You haven’t got to take my word that there isn’t an irresistible economic case for remaining in the EU. Ashoka Mody has given a similar verdict. What makes his view so interesting is his provenance. He was formerly deputy director of the International Monetary Fund’s European and research departments. He recently said: “The official consensus on the economic costs of Brexit has crossed the line into group-think.

A numerical illusion is masquerading as a ‘fact’. And when those in authority distort facts, they also subvert the cause of democracy.”

Roger Bootle is executive chairman of Capital Economics. The new, referendum, edition of his book, The Trouble with Europe, has just been published by Nicholas Brealey.

Facebooktwitterredditpinterestlinkedinmail

Leave a Reply

You must be logged in to post a comment.