With debate over Brexit reaching fever pitch, it is easy to miss the lack of evidence used to back up those who oppose a ‘no deal Brexit’.
Variously described as a ‘cliff edge’ and ‘catastrophic’, ‘no deal’ Brexit has become the Hunchback of Notre Dame in British politics. Not so long ago, people said exactly the same things about no deal as they did about Brexit as a whole: that it would harm jobs, decrease trade and impoverish working people. But their warnings and reports turned out to be wrong. Why was this?
In January 2018, a group of Cambridge economists (and one from Ulster) released a working paper entitled ‘How the Economics Profession Got It Wrong on Brexit’ [available here]. Compiled by Graham Gudgin, Kevin Coutts and Jordan Buchanan, the paper slammed the Bank of England, Her Majesty’s Treasury and the OECD for reports they published just before the referendum in June 2016. These reports, they said, had ‘exaggerated the degree of potential damage to the UK economy’ through distortions and errors that should have been clear from the start. All the authors of the paper bar one voted Remain in the referendum and said that they ‘would do so again if given the chance’. The one who voted Leave is Professor Gudgin, a social democrat who co-authored a paper several years ago which claimed that ‘GDP and productivity have grown more slowly since 1979 than over previous decades’ due to neoliberal market policies. Clearly, then, they cannot be regarded as stooges of the IEA or the Adam Smith Institute. These were normal academic economists undertaking unbiased research. So what did the economics profession get so wrong in 2016, and why was it not more obvious?
3 main flaws were pointed out by the authors of the paper.
First was the exaggerated impact of EU membership on UK trade. Since many EU members do most of their trade with each other, it was assumed this was the same for the UK. However, the UK is unique in that slightly more of its trade (56%) occurs outside the EU. This means that a reduction in trade with EU members would not hit as hard as it would France or Germany. It was also assumed that the UK wouldn’t strike any new trade deals after leaving the EU, such as with the USA, Canada or Japan, which is also an unlikely scenario.
Secondly, it was assumed that losses in trade would impact productivity and therefore economic output. However, whilst there is a link between trade and productivity in developing nations, who might not be able to educate or train their population without outside help, this link does not exist in developed nations. The UK already has a well-educated workforce with many sophisticated industries, so does not rely on trade to increase its productivity.
The third assumption was that investment in the UK would decrease in the event of a Leave vote. The idea was that uncertainty would impact investment. However, no one could guess what impact uncertainty would have, so made wild (and exaggerated) guesses. The Treasury report claimed that EU Membership alone increased Foreign Direct Investment by 35%, but assumed that falling investment wouldn’t be taken up by investors outside the EU.
At the end of the working paper, the authors lament the lack of coverage on positive news about Brexit, or even the suggestion that it might not be a total disaster. They point to a 2018 report commissioned by the Mayor of London on the impact of Brexit. It found that per capita GVA (which measures living standards) was predicted to be only very slightly reduced by 2030 in any of the Brexit scenarios (from EEA member to independent trade partner under WTO rules). The population of London would also decrease, but since the reduction in GVA is likely to be less than the reduction in population, this would result in a higher GVA per capita and an overall living standards increase in London. Of course, none of this found its way into the London report’s conclusion, and only the most negative outcomes received any publicity.
The same parties that warned against Brexit have now warned against no deal with the same conviction as before. A vote to leave would trigger a recession, we were warned. But it didn’t happen. We are now being told that no deal will also trigger a recession. We should be equally sceptical of these warnings, not least because they are using exactly the same flaws and distortions that underpinned their previous research. Of course, the Brexit debate has become ideological and cultural rather than rational. This concerns Gudgin, Coutts and Buchanan, as it should everyone. ‘The fact that the flaws we identify all point in the direction of pessimism on Brexit, and hence in the direction that most academics and economists tend to lean ideologically, will increase the scepticism of many.’ Professor Gudgin warned in a talk in November that such distortions will result in public mistrust of ‘professional liberals’ who lie to the public under the cover of ‘expert opinion’. As Gudgin and his colleagues demonstrate, checking the evidence is needed more than ever when signs of a cultural war are becoming all too obvious.