Free Lunch: Know-nothing Brexit party

Evidence is such a complicated thing

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Hands up who’s had enough of experts

The campaign for Britain to leave the EU has adopted an anti-evidence attitude to the consequences of Brexit, best captured by Michael Gove’s claim in an ITV interview last week that “people in this country have had enough of experts”. The tactic seems to be modestly successful in that many voters express that they just hear “claims from all sides but no facts”, and that even some serious commentators suggest that because economic models are often wrong, they give us no knowledge at all.

So it is worth restating why, in the case of international trade, economic analysis provides a very solid guide to the overall performance of the post-Brexit economy, even if no prediction will be exactly right. There is no better summary than that of the International Monetary Fund’s Christine Lagarde, who said the question is just where the costs of Brexit will fall in a range from pretty bad to very, very bad.

There are three key points. The first is the analysis that has been carried out by a range of different institutions and researchers is unequivocal. Only one economic modelling exercise has managed to generate a prediction of economic gain from Brexit; that by Patrick Minford from the Economists for Brexit group. That study is riddled with problems, and has been demolished by a team from the London School of Economics.

I will simply add to that comprehensive academic critique that Minford’s assumptions include complete unilateral trade liberalisation, which of course is incompatible with the Leave campaign’s promise that leaving the EU would enable the UK to conclude its own, better trade deals. (If you unilaterally remove all trade barriers, you have nothing to offer others to make them grant access to their markets — and even just normalising the UK’s post-Brexit World Trade Organisation membership would require complicated negotiations and unanimous agreement). Thus Andrea Leadsom, a Tory minister on the Vote Leave campaign committee, has had to disavow Minford’s analysis — the only one that claims a positive trade effect from Brexit — in a BBC Newsnight debate.

Second, and third: there are two reasons why every serious economic study concludes the costs would be “pretty bad to very, very bad”. First, because they predict leaving the EU would lead to less trade than staying. Second, because they predict that less trade is not just inefficient in itself but leads to lower productivity than would otherwise be the case.

Note prediction, not assumption. Leave campaigners resort to the “garbage in, garbage out” claim that these studies simply assume their conclusions. But that is not so. On the size of trade, they rely on strong empirical relationships that both free trade agreements generally and Europe’s single market and customs union specifically have a large effect on how much is traded, controlling for other determinants of trade flows. On productivity, they similarly use established empirical estimates.

The most authoritative disagreement with this analysis comes from Ashoka Mody, a former IMF economist. In a recent op-ed he makes two important claims. One is that if the single market diverts trade that would have happened otherwise, then Britain’s overall trade would not be lower outside the EU than inside it. The other is that there is “no evidence that less trade lowers productivity growth — and there is not even a logical connection between productivity growth and a shift in trade from Germany to the United States”.

The first claim is correct but does not apply. The empirical results — “gravity equations” — already control for the factors that would determine growth in the absence of regional trade agreements. But more importantly, it is clear that a large part of the effect of the single market lies in the regulatory harmonisation it provides, which facilitates new trade by expanding the market size for any one specification of a product or service. A new study of pesticide regulation in the EU, for example, shows that harmonising the rules on pesticide residuals increased trade in affected products both within Europe and with countries outside it — except with those that had even stricter rules than the new pan-European regime. Single market regulation, in other words, creates new trade overall, though the strictness of the standard may affect the relative importance of different trading partners.

(This illustrates why other studies, notably that from Open Europe, which claim negative costs from trade are small and can be outweighed by gains from deregulation, misunderstand how regulation facilitates economic activity.)

Mody’s second claim, dismissing the link from trade to productivity, is odd given that the various Brexit studies all rely on published empirical estimates of the effect. Besides, the theoretical understanding of the mechanisms by which trade improves productivity is now quite sophisticated, associated above all with the work of Harvard professor Marc Melitz and his collaborators. They have shown how trade boosts productivity by squeezing out less productive firms and expanding more productive ones and how this mechanism yields much bigger gains from trade expansion than older models predict.

Economics is not everything, and a voter could care more about non-economic reasons for Britain to leave the EU. The honest argument for Brexit would be to say that the economic cost is worth paying. It is telling that the Leave campaign chooses not to make that claim.

Ups and downs of social mobility

Sarah O’Connor makes an important observation that should be obvious but very few people seem to have taken on board, especially politicians waxing lyrical about social mobility. It is that in a relative sense, not everyone can be upwardly mobile; some have to be moving down as well. Or as O’Connor puts it: “For poor children to succeed, rich ones must fail.” In times of high growth, or high absolute social mobility, the fact that everyone’s situation is improving masks any relative changes of position. Today, however, the angst of the upper-middle class for their children falling down the heap is the inevitable flip side of every celebrated story of a poor child completing the class ascension. Without strong, broad-based growth, high social mobility may therefore exacerbate rather than attenuate any tensions from high inequality. With low growth, in other words, equality of opportunity is no substitute for equality of outcomes.

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